Can a board say no when shareholders say yes? responding to majority vote resolutions

INTRODUCTION

The past twenty years has witnessed a significant increase in the number of shareholder proposals submitted to American public corporations and, even more importantly, in the level of shareholder support that such proposals have achieved. As a rough measure of that change, consider that in the early 1980s it was possible for a commentator to argue for the abolition of Rule 14a-8, the shareholder proposal rule, in part on the grounds that “in the entire history of the rule [up to that time,] only two [shareholder] proposals [that] were not supported by management ha[d] ever been approved by shareholders.” (1) Today the landscape is vastly changed and certain types of proposals, mostly those related to anti-takeover measures such as shareholder rights plans (commonly known as poison pills) and classified boards, routinely obtain majority support during shareholder meetings. In the 2003 proxy season, for example, 166 majority votes were obtained, a record 68 percent increase from the previous peak of ninety-nine majority vote resolutions in 2002, while in 2004 so far the number of majority vote resolutions is 132. (2)

Companies have reacted to the growing phenomenon of the majority vote resolution in various ways. Some have responded by implementing the proposals or reaching settlement with the proponents, while a significant number of companies have not adopted the changes suggested by these resolutions. The refusal of companies to adopt such suggested changes, even when doing so after careful consideration by the board of directors, has in turn led some activist shareholders to employ pressure tactics against such companies. Such pressure tactics include running “Vote No” campaigns, submitting binding bylaw amendments, lobbying for regulatory change, such as the proposed Securities and Exchange Commission (SEC) rules on shareholder access to the proxy for board nominations, (3) and engaging in various other forms of public and private persuasion. In the aftermath of the high profile corporate scandals of the past few years, and the increased regulatory focus on issues relating to corporate accountability, the mere threat of such pressure tactics is being taken seriously. (4) As a result, many companies and their boards have become more responsive to majority vote resolutions, in part to avoid the negative consequences in publicity and shareholder relations that often follow a decision not to adopt the recommended course.

The title of this Article asks whether directors may resist the adoption of shareholder proposals that receive majority shareholder support, in light of the current corporate governance climate and the shareholder pressure tactics being deployed against companies that refuse to adopt such majority vote resolutions. The short answer that we give is “yes”–that directors not only may, but should, at times, come to the conclusion that the change sought in a majority vote resolution is a bad idea for the company While majority shareholder support for precatory proposals is an important consideration for directors, it should not be the only one that they take into account when making decisions as fiduciaries, which they are required to make in the best interest of the company and all shareholders as a whole. State law requires that directors exercise their independent business judgment in considering majority vote resolutions, and directors will be protected if they determine, as a matter of their business judgment in exercising their fiduciary duties to the company, not to take actions recommended in majority vote resolutions. But while the short answer is yes, we also note that the changed corporate governance climate makes it essential for companies and their directors to treat majority vote resolutions seriously and to enhance their procedures for considering and acting on such resolutions.

This Article is divided into five parts. In Part I, we briefly review the recent increase in the number of submitted shareholder proposals and, in particular, the success enjoyed by some of these proposals in achieving majority shareholder support. We also discuss the possibility that recent regulatory rules that require mutual funds to develop proxy voting policies and to publish their proxy votes, may lead to an increase in shareholder support for certain proposals. In Part II, we seek to explain some of the factors that are causing the increase in shareholder support for certain proposals, finding that standardization of voting policies by leading proxy voting advisors and many institutional investors, at the expense of case-by-case analysis, is a significant factor in explaining this development. In Part III, we explore the federal and state law that is relevant to directors in considering the effect of majority vote resolutions. First, we review the language and purpose of Rule 14a-8 and highlight the important point that shareholder precatory proposals are meant to be recommendations and are not tantamount to binding referendums. Second, we review the state law considerations that directors evaluating majority vote resolutions should take into account, concluding that directors have the final say in taking action on majority vote resolutions in accordance with their fiduciary duties to the company.

We then address, in Part IV, the variety of possible shareholder and regulatory responses that companies that do not adopt majority vote resolutions may face, including “Vote No” campaigns, the submission of binding bylaws by activist shareholders, and the possibility of regulatory backlash. Although many companies have resisted these pressure tactics, doing so has become harder in the current corporate governance climate. Finally, in Part V, we show that contrary to the rhetoric often heard from certain shareholder activists, companies are in fact engaged with shareholders and are taking majority vote resolutions seriously. Many companies have adopted the changes requested by majority vote resolutions while others have responded with innovative solutions designed to balance expressed shareholder concerns with other company interests. We conclude by urging directors to continue, or even augment, their efforts to stay informed and carefully consider the merits of majority vote resolutions, and to be proactive in communicating their decisions and policies to shareholders. Some companies may even decide to voluntarily adopt procedures for addressing majority vote resolutions, such as communicating or meeting with the proponents of such resolutions. At the same time, directors must bear in mind that they, not shareholders, have a fiduciary duty to the company to act in what they believe to be the best interest of all shareholders, even in the face of escalating tactics designed to pressure the directors into rote adoption of all majority vote resolutions.

Throughout this Article, we particularly focus on proposals that call for the redemption, or submission to shareholder vote, of poison pills, both because such proposals are among the most successful in achieving high levels of shareholder support, and also because they address significant legal issues about board responsibility in managing the business and affairs of the corporation and are thus a good medium through which to focus attention on the issue of how boards should respond to majority vote resolutions.

PART I: THE RISING TIDE OF MAJORITY VOTE RESOLUTIONS:

THE GOLDEN AGE OF SHAREHOLDER PROPOSALS?

Under Rule 14a-8, the shareholder proposal rule, shareholders of a public company have the right to include proposals in the company’s proxy, subject to procedural limitations and substantive grounds available to companies for excluding such proposals. (5) For the first three decades of the rule’s existence, most resolutions were submitted by small individual shareholders and the rule was used generally as an opinion forum on issues mostly related to internal corporate governance. (6) In the 1970s, the focus of shareholder proposals shifted to social-responsibility proposals, which became increasingly numerous throughout the 1970s and 1980s, but failed to receive substantial support. (7) By the late 1980s, and then in the 1990s, shareholders increasingly began to use the shareholder proposal rule to urge companies to eliminate takeover defenses. (8)

The number of proposals submitted under Rule 14a-8 has been rising steeply over the past few decades. From 860 total resolutions submitted during the 1950s, that number increased to over 2,600 resolutions during the 1980s and to over 7,000 during the 1990s. (9) In 2003, for the first time since the adoption of Rule 14a-8, shareholder proponents submitted over 1,000 shareholder proposals in a single proxy season. (10) The trend of increasing shareholder proposals seems to be continuing in 2004, with over 1,154 proposals submitted as of July 30. (11) Leading proxy advisor Institutional Shareholder Services (“ISS”) has attributed this increase to recent corporate scandals, noting that “[i]n the wake of corporate scandals, shareholders channeled their frustrations through the shareholder proposal process, filing in excess of 1,000 proposals on both corporate governance and social and environmental concerns.” (12) Proposals seeking rescission of, or shareholder approval for, poison pills topped the list in 2003 with the highest number of resolutions submitted–107, of which eighty-four came to a vote and sixty-three received majority support–and were again a popular topic during 2004. (13) Board declassification continued to attract the highest levels of support in 2003, with an average level of support of 63 percent and with forty-one proposals receiving majority support out of forty-eight that came to a vote, with even higher levels of support during 2004. (14) Executive compensation proposals were the single leading category of proposals for the first time in 2003, with 163 such proposals in 2003, up from only twenty-five in 2002 and thirty-eight in 2001. (15) The 2003 proxy season also witnessed very strong shareholder support for social and environmental issues, which historically rarely receive more than 20 percent support. (16) The 2003 proxy season saw almost 18 percent of such proposals receive support in excess of 20 percent, and also recorded the first instance of majority support for a social issue opposed by management. (17)

Although the shareholder proposal rule was adopted in 1942 and the number of proposals has increased over time, the phenomenon of majority vote resolutions is a more recent development. By 1981, only two proposals that were not supported by management had been approved by shareholders. (18) The trend toward majority resolutions has grown since then and has accelerated during the past five years. According to the database maintained by the Investor Responsibility Research Center (the “IRRC”), the number of shareholder proposals receiving majority support rose from thirty-three in 1998 to 166 in 2003, with 132 counted as of October 29, 2004. (19) Majority vote resolutions rose from 8 percent of total proposals in 2000 to 15 percent of total proposals in 2003 and so far 11 percent for 2004. (20) Also notable in recent years is the extent of the support obtained for majority vote resolutions. The proportion of majority vote resolutions that receive over 70 percent shareholder support increased from about 17 percent in 2000 and 2001 to about 25 percent in 2002 and 2003. (21) Despite the overall increases, the incidence of majority vote resolutions remains, for the time being, concentrated to only a few issues. Almost 80 percent of the majority votes during the period 2000-03 were related to proposals in three categories–classified boards, poison pills, and supermajority voting–that collectively accounted for only 15 percent of the volume of proposals overall. (22)

FOCUS ON POISON PILLS

Since the mid-1980s, a large number of public companies have received shareholder proposals seeking rescission of, or shareholder approval for, poison pills. Until 2002, the high point of the anti-poison pill campaign in terms of numbers of proposals was in 1990-91, when shareholders voted on forty-one anti-poison pill proposals. (23) By 1995, that number had declined to ten proposals, but increased steadily in the mid-1990s, increasing dramatically in 1999 to twenty-seven proposals. (24) More recently, the number of anti-poison pill proposals has continued to rise at a fast clip. In the 2000 through 2003 proxy seasons, IRRC tracked 263 shareholder proposals regarding poison pills, of which 183 went to a shareholder vote. (25)

Support for anti-poison pill proposals witnessed two big jumps, in the late 1980s and mid-1990s. In 1988, the average level of support jumped to 39 percent from 29 percent the year before, and in 1994, the average level of support was almost 54 percent, a ten-point increase from 1993. (26) Such proposals continue to be among the most successful shareholder proposals in achieving shareholder support and have regularly achieved majority votes in recent years, as demonstrated in the following chart.

WILL THE TIDE KEEP RISING?

In the aftermath of the corporate scandals of the recent past, Congress, the SEC, and the self-regulatory organizations adopted enhanced rules and standards of corporate governance, requiring companies to adopt many measures, such as board independence requirements, that were previously the subject of shareholder proposals. In addition, the 2004 proxy season witnessed an increased willingness on the part of companies to negotiate with proponents in order to avoid including proposals in their proxies. (28) Nonetheless, there are factors that may continue to fuel the growth of shareholder proposals and majority vote resolutions. One such factor is the adoption by the SEC, in January 2003, of new rules that require mutual funds to adopt voting policies and to disclose voting records. These new rules have the potential to increase shareholder activism by mutual funds, a segment of the institutional investor base that has traditionally been less inclined than most other institutional investors to engage in such efforts. Another factor pointing in the same direction is the growing ease with which shareholders can communicate with each other, especially over the Internet.

In January 2003, over the objections of the mutual fund industry, the SEC adopted a rule that requires mutual funds to disclose publicly through filings not only their proxy voting policies but their voting records as well. (29) A second adopted rule requires investment advisers with voting authority to adopt proxy voting policies and to provide to their clients information about such policies and the actual voting of the proxies. (30) As adopted, the final rule requires funds to post voting records on their websites, link to the voting records on the SEC’s website, or provide copies to shareholders upon request. (31)

The potential for the new rules to increase shareholder proposal activism stems from the transparency that such rules will add to the mutual fund voting process. Although the rise of institutional investors and their voting power has been one of the key factors that explains increased shareholder activism in the form of shareholder proposals, mutual fund activism has lagged behind that of its pension fund and union counterparts. (32) Over the past ten years, institutional investors have become large owners of public companies in the United States, and the percentage of such shares held by mutual funds has grown from 7 percent in 1992 to 18 percent in 2001, making them the largest holders of stock among institutional investors. (33) Commentators have observed that institutional investors are not a monolith and that voting patterns differ among them. (34) Some observers have also concluded that mutual funds have historically supported management in most cases, even when contrary to their own voting policies, explaining this tendency by citing a number of self-interested reasons that motivate fund managers, including fear of retaliation in areas of information access or the loss of future finance or investment banking business of their affiliates. (35) In its 1980 study of institutional investors, the SEC found that mutual funds prior to the 1970s “almost universally exercised [voting authority] in accordance with the ‘Wall Street Rule,'” the traditional rule that a shareholder can sell stock as a means of expressing dissatisfaction with a company’s policies. (36) The new mutual fund rules acknowledge this concern by including a cautionary footnote in the investment adviser rule that warns that “an adviser could not, consistent with its duty, adopt a pre-determined policy of voting proxies in favor of the management of companies with which it does business.” (37)

Two key trends have been identified as being likely to develop as mutual funds and investment advisers bring themselves into compliance with the new rules: (i) the appearance of centralized voting as funds pull back voting authority from investment advisers to ensure that all proxies are voted and to enable the fund to vote all shares the same way, and (ii) the appearance of enhanced voting policies. (38) Mutual fund insiders are also making the same observation, with Vanguard Group, Inc. founder John C. Bogle, for example, noting that “[d]isclosure is the first step in bringing mutual funds back to acting like responsible corporate citizens and behaving like owners.” (39) In fact, while Vanguard historically has voted for nine out of ten slates for directors up for election in companies where it held stakes, in 2003 it ratified only 29 percent of the slates, withholding votes from at least one nominee in 71 percent of the cases. (40) While the effect of the new rules will be properly observed only after several proxy seasons in operation, the early experience suggests that management support on corporate governance issues may diminish as a result of the new rules. The Center for Financial Integrity at Baruch College has tabulated the proxy voting policies of the largest fund groups that have recently been made public following the enactment of the new rules, and have concluded that the policies strongly oppose anti-takeover defenses, the category of shareholder proposals that is responsible for most majority vote resolutions. (41)

One other factor that promises to increase shareholder activism is the development and increasing accessibility of the Internet, which has greatly enhanced the ability of shareholders to communicate in support of shareholder proposals. (42) The rise in increased access to the Internet for investors and shareholder activists has coincided with liberalized proxy rules for communications among shareholders. Shareholders can now communicate with each other, and with management, at little cost and without having to comply with onerous proxy filing requirements. (43) This can be particularly significant in light of the five hundred word limit imposed by Rule 14a-8 on shareholder proposals. Although initially there were doubts on the issue, the SEC has recently made clear that most web addresses may be referenced in a supporting statement without counting the content of the website for purposes of the five hundred word limit. (44) A number of shareholder groups and activists, such as the Council of Institutional Investors (“CII”), now maintain websites, on which shareholder proposals and their status are tracked. (45) Some large institutional investors have started publicizing their voting policies and practices on their website prior to shareholder meetings. (46) As the number of users of the Internet grows and as shareholders turn increasingly to the Internet to communicate with each other, the power of the Internet to generate increased shareholder activism by means of shareholder proposals is likely to grows. (47)

PART II: EXPLAINING THE RISING TIDE

While the growth in majority vote resolutions has been noted, it is useful to view such growth through the prism of several factors that help explain it. As an initial matter, we note that the growth of majority vote resolutions, while significant, is often overstated by proponents and some shareholder activists in their public statements and pressure campaigns. More fundamentally, we note that the growth of institutional investor activism, coupled with the emergence of influential proxy advisory services and standardized voting policies on corporate governance issues, are important factors in explaining high shareholder support for certain shareholder proposals in the recent past.

A MAJORITY IS IN THE EYE OF THE BEHOLDER

Shareholder support for shareholder proposals is often overstated by proponents and other shareholder activists when they ignore the company’s methodology for determining the vote necessary for a proposal to pass. State corporate law, and in some cases charters and bylaws, provide for the vote required to approve a proposal. States have adopted different approaches that differ mostly on how abstentions and broker non-votes are treated. (48) A majority of state corporate codes are based on the Revised Model Business Corporation Act (“RMBCA’), which states that a proposal passes if the votes in favor of a proposal exceed the votes against it, so long as a quorum is present. (49) In these states, therefore, abstention and broker non-votes have no effect on the outcome of the vote. (50) Most of the remaining states, including Delaware, provide that, so long as a quorum is present at a meeting, a proposal passes if it receives a majority of the votes participating in the matter considered at such meeting. (51) In these states, therefore, abstentions are treated as votes against a proposal and broker non-votes have no effect, thus making it more difficult for proposals to pass in such states as compared to the RMBCA states. A third approach–to require a majority of the quorum to vote in favor of a proposal, and therefore render abstentions and broker non-votes as votes against the proposal–has occasionally been adopted by some companies in charters and bylaws, but is rarer. In fact, most state statutes permit companies to modify the statutory presumption in their charters or bylaws and many companies include provisions for higher votes on all or certain proposals.

In publicizing the results of voting on shareholder proposals, including majority vote resolutions, shareholder activists rarely account for the different methodologies of counting votes that might apply to the particular company. Thus, most majority vote resolutions are defined to be a majority of the votes cast, as in the RMBCA states described above, even though in many cases, under state law or the company’s charter or bylaws, abstentions and/or broker non-votes may need to be included. This is the methodology also adopted by the IRRC, the leading tabulator of voting results on shareholder proposals, although the IRRC includes footnotes in its reported results where a company’s treatment of abstentions and/ or broker non-votes would lead the proposal to not pass. (52) According to the IRRC, of the 397 majority vote resolutions from 2000 through 2003, approximately forty, or 10 percent, failed to pass because of different counting methodology used by the company. (53) Similarly, sixty-three anti-rights proposals obtained majority votes according to the IRRC criteria during 2003, but only fifty-nine of them would have passed under the companies’ own voting criteria. (54)

While a single criterion to report majority vote resolutions may be appropriate for a tabulation service such as the IRRC, due to the need for consistency and year-to-year trend comparisons, it is less justifiable for shareholder activists to ignore the company’s actual vote-counting methodology. (55) Some proponents and institutions have made it a practice to point to the percentage of “yes-no” votes that a particular resolution has achieved in the past, even when that measure has no legal effect for the company and even while also using the more rigorous “votes outstanding” measure to describe the votes against the proposal. (56) Also rarely heard from proponents or shareholder activists is the fact that many companies have supermajority voting requirements on certain issues, such as amendment or repeal of classified board provisions. The Eastman Kodak Company had four consecutive shareholder proposals to repeal its classified board, which garnered between 50 percent and 71 percent of the vote, leading to immense institutional pressure and a “Vote No” campaign to withhold votes from its directors. (57) Less publicized was the fact that Kodak had a charter requirement mandating an 80 percent shareholder vote to repeal a classified board and the level of support for the precatory resolutions was not enough to authorize the actual repeal even if they had been binding. In fact, after a number of years of majority vote resolutions on the issue, Bausch & Lomb, Inc. offered a &classification proposal and opposed the resolution. Bausch & Lomb had a supermajority vote requirement, requiring 80 percent shareholder approval, and the proposal failed to pass, garnering only 60 percent of the vote. (58)

THE DECLINE AND FALL OF CASE-BY-CASE VOTING

A good starting point from which to seek explanations for the emergence and growth of majority vote resolutions is the rise of shareholder activism by institutional investors. While it may be conventional wisdom today to assume that institutional investors will vote against management on shareholder proposals that raise issues of corporate governance, it was not always so. In fact, in the 1970s, one commentator observed that “[m]ost shareholders tend to vote with management, and … institutions … are especially prone to support management.” (59) Today, institutions control over 60 percent of the stock in American public companies and have become active in the shareholder proposal process. (60) One reason for such increased activism is that the “Wall Street Rule” of selling stock to express unhappiness with a company is a less attractive option for institutions that have come to hold large stakes in public companies, because such institutions are unable to exit their investments without significantly affecting the price of the stock. (61) In addition, with the growth of indexing strategies of investing and the recent emergence of exchange-traded funds, (62) fewer institutions have flexibility in disposing of stock when they disagree with company policies. (63) Some of these managers have decided that the only way to seek higher returns is not through trading but by exercising their rights as shareholders, (64) thus ushering in what some have called the era of “relationship investing.” (65) Finally, a number of mutual funds that are “socially responsible” in orientation have emerged over the past few years, and generally have adopted aggressive activist voting policies. (66)

Another explanation for rising institutional investor activism is the escalation of labor union activism. Labor unions have now become a powerful force in the area of corporate governance. (67) Because labor unions are more likely than other institutional investors, such as public pension funds, to submit shareholder proposals first rather than approach companies quietly,, the number of shareholder proposals that have been submitted by labor unions, and that have come to a vote, has correspondingly increased. (68) Labor unions were responsible for over a quarter of the shareholder proposals that received majority support in the 2003 proxy season and submitted 48 percent of all shareholder proposals dealing with corporate governance matters. (69) In addition to submitting shareholder proposals, labor unions have also put pressure on others to back labor union proposals. (70) Statistical studies support a link between institutional investor ownership and voting on shareholder proposals, and there is also evidence showing that shareholder activists are capitalizing on the correlation by using institutional ownership as a criterion for targeting a company with shareholder proposals. (71) The fact that institutional investor power has grown does not, however, by itself provide a sufficient explanation for the rise of majority vote resolutions. Instead, the link between the rise of institutional investor power, on the one hand, and the increase in majority vote resolutions, on the other hand, seems to be the concurrent increase in the power of proxy voting services and the development of issue voting to the exclusion of case-by-case analysis. Proxy voting advisors, such as ISS and Glass, Lewis & Co., are hired by institutional investor clients to provide analysis with respect to shareholder votes and publish proxy voting guides setting forth voting policies on a variety of issues that are often the subject of shareholder proposals. Proxy voting advisors are also engaged in other related businesses, including news publications relating to pending votes, fee-based advice targeted to specific votes, and providing corporate governance metrics services for companies. As a result of its services, and the fact that many institutional investors have decided that it is simply not economical or practical to make case-by-case decisions on proposals outside contested takeovers, proxy advisors have attained considerable power over proxy voting outcomes. (72) Some have estimated that a recommendation from ISS can make a 15-20 percent difference in the outcome of a vote on shareholder proposals. (73) Indeed, ISS has been described as having a “pervasive influence” in the area of corporate governance. (74) As a result, proponents often tailor their proposals to meet ISS’s guidelines, and both shareholder proponents and management often devote substantial effort to convincing ISS to support their position with respect to a shareholder proposal. (75)

The experience of practitioners and companies has borne out the conclusion that many shareholder votes are foreordained either by voting policies of institutions that are applied to all companies without reference to the particulars or by reference to a third-party recommendation, such as that of ISS, that is in reality as inflexible as an irrevocable voting policy. (76) Accordingly, the company’s proxy solicitor is able to predict how the company’s shareholders will vote on the most popular categories of proposals, such as governance and compensation proposals, and will also likely conclude that solicitation will not change that expected result. (77) In November 2003, surveys of members of the Business Roundtable and the American Society of Corporate Secretaries (the “November 2003 Surveys”) found that, on average, the votes of 40 percent of a public company’s shares are cast by institutional investors (including ERISA plans) that follow ISS proxy voting guidelines. (78) The November 2003 Surveys concluded that benefit plans and other institutional investors rely heavily on these proxy voting guidelines, often refusing even to discuss the merits of particular proposals with management. (79) “These investors typically do not review individual shareholder proposals on a company-by-company basis and do not consider the effectiveness or ineffectiveness of a company’s proxy process when casting their vote. In fact, they Irately] deviate from ISS or other voting guidelines, regardless of a company’s [particular performance], circumstances, or responsiveness to shareholders,” (80) leading some to conclude that ISS voting guidelines “often are the driving force behind institutional investor approval of shareholder proposals at public companies.” (81) “According to Georgeson Shareholder Communications, Inc. (“Georgeson”), a [leading] proxy solicitation firm, standardization of shareholder proposals and ‘automatic voting’ by institutions ‘mean that certain proposals are certain to achieve majority support whenever the company’s ownership is dominated by institutions that have adopted a policy to support the issue in question.'” (82) “In these cases, it does not matter how much attention the company has paid to [shareholder value or] governance [fundamentals].” (83)

VOTING ON POISON PILLS

Institutional investor ownership appears to be a key factor in predicting vote outcomes on poison pills because much of institutional voting is guideline-driven, and many institutions support anti-poison pill proposals regardless of company-specific factors, such as susceptibility to takeovers, likelihood of management entrenchment, performance history, or even whether the target company has a poison pill. In fact, many companies that have redeemed their poison pills and may not be particularly likely takeover targets nevertheless continue to receive anti-poison pill proposals. (84) Whereas a board, in adopting a poison pill, examines a number of company-specific factors–such as the company’s historic and recent stock price, vulnerability to takeovers, and other anti-takeover defenses in place-most institutional investors do not consider any company-specific factors in deciding whether to support anti-poison pill shareholder proposals. Even the prospect of management or board entrenchment, which has traditionally been the single biggest objection to the poison pill, is not taken into account. (85)

In 2001, the IRRC conducted a survey of institutional investors on the topic of shareholder proposals to redeem poison pills and proposals to allow shareholders to vote on poison pills. The study found that 57 percent of institutions said they would vote for a shareholder proposal to redeem a poison pill, while 72 percent of institutions said they would support shareholder proposals asking to have a poison pill put to a shareholder vote. (89) Significantly, only 13 percent of institutions would examine the issue on a case-by-case basis. (87) Similar findings have been observed by commentators who have focused on mutual fund voting guidelines, including those recently adopted in response to the new SEC rules, (88) noting that the largest mutual funds have policies overwhelmingly against takeover defenses, including poison pills. (89) In a study of eleven large funds that announced policies on the poison pill, seven had policies generally opposing poison pills unless approved by shareholders, whereas only four had policies committed to a case-by-case analysis, and none had policies in favor of poison pills. (90) Furthermore, of the seven that had policies generally opposed, four deferred to ISS, (91) whose voting guidelines on poison pills call for a vote in favor of all resolutions calling for rescission of, or shareholder approval for, poison pills regardless of company-specific factors. (92)

PART III: THE LEGAL FRAMEWORK FOR CONSIDERING MAJORITY VOTE RESOLUTIONS

With the emergence and growth of majority vote resolutions, and the accompanying pressure from shareholder activists on boards to take action, companies are coming under increasing pressure to adopt majority vote resolutions. Despite this pressure, directors faced with majority vote resolutions would do well to begin their deliberation with a reminder of the basic legal framework that governs majority vote resolutions.

FEDERAL Law: WHEN DID NON–BINDING PROPOSALS BECOME BINDING?

Rule 14a-8, the shareholder proposal rule, was promulgated under Section 14 of the Securities Exchange Act of 1934 in 1942. The rule has been revised numerous times since 1942, most recently in 1998. (93) One of the primary purposes of Rule 14a-8 was to create a means to permit shareholders to communicate their views, both to management and to each other. (94) Some commentators have described Rule 14a-8 as creating a “consultative” model of participation for shareholders. (95) The language of the rule itself, and SEC no-action precedent issued under the rule, support the “consultative” model of participation, rather than the “direct democracy” model of participation. In 1942, the SEC adopted the predecessor of Rule 14a-8(i)(1) as the sole substantive basis for exclusion under Rule 14a-8. The purpose of this exclusion is to prevent shareholders from proposing action on matters that are not proper subjects for shareholder vote. The SEC drew a sharp distinction between precatory proposals, which it said would likely be permitted under most state statutes, and binding ones, which it suggested would not. (96) The Note to Rule 14a-8(i)(1), which was added in 1976, further explains the binding-precatory distinction observed by the rule:

Depending on the subject matter, some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise. (97)

An SEC Staff Legal Bulletin on Rule 14a-8 issued in 2000 made the same point: “When a proposal would be binding on the company if approved by shareholders, we may permit the shareholder to revise the proposal to a recommendation or request that the board of directors take the action specified in the proposal.” (98) The Note and Staff Legal Bulletin formalize the SEC’s interpretation that has prevailed for over twenty years in no-action letters issued under Rule 14a-8. (99) As a result, most proposals are submitted in precatory form, with the only general exception being binding bylaw amendments. (100)

The fact that Rule 14a-8 was intended to offer shareholders a venue to submit precatory, rather than binding, proposals has also been widely acknowledged by commentators, who have generally focused on the benefits of the rule while acknowledging the limitations of precatory proposals. One commentator observed that “[s]hareholder proposals serve the important function of placing the board of directors on notice of shareholder expectations.” (101) Another, writing in 1971, stated that “[w]hile the proposal, on whatever subject, will almost assuredly fail, this need not mean that the shareholder expression has been meaningless. Any indication of dissatisfaction from a significant shareholder minority is a cause for management concern” (102) and “[t]he mere making of the proposal forces management to prepare a reply, and in the process, to give some consideration to why it took the position on the issue in the first place.” (103)

In today’s environment of greater and more aggressive shareholder activism, the history and purpose of Rule 14a-8 described above are being ignored by the new breed of shareholder activists, who routinely treat precatory resolutions as if they were binding referendums and express indignation that directors would “render majority votes meaningless.” (104) While Rule 14a-8 has undergone numerous revisions since its adoption in 194-2, nothing has changed its fundamental character as a rule of communication–among shareholders and between shareholders and the company. The law and practice under Rule 14a-8 support that view, and despite the rhetoric heard from some shareholder activists, it is clear that a precatory resolution is only a recommendation

FIDUCIARY DUTIES AND STATE LAW

Although state law supports the right of shareholders to make precatory proposals to the board, even outside the context of Rule 14a-8, there is no justification under state law for directors to reflexively adopt majority vote resolutions. (105) Under state law, a company’s board has a fiduciary duty to make its own determination as to whether adoption of all or any part of a shareholder proposal is in the company’s best interests. Mechanical compliance with the results of a shareholder vote–regardless of the level of support–would violate the board’s fiduciary duties.

For companies incorporated in Delaware, which is the largest state of incorporation, with close to 60 percent of Fortune 500 companies incorporated there, (106) directors are not permitted to substantially limit, by delegation or otherwise, their ability to make a business judgment on matters of management policy. (107) There have not, to date, been any decided cases in which the board was sued for failing to follow the recommendations contained in a shareholder proposal. In the seminal duty of care case, Smith v. Van Gorkom, (108) the Delaware Supreme Court held the directors of TransUnion personally liable for having sold a company without adequate process. (109) The court rejected the directors’ defense that the transaction was overwhelmingly approved by the company’s shareholders based on a proxy statement that was challenged and found by the court to have met all disclosure standards. (110) Among other things, this case stands for the proposition that directors must exercise their own business judgment properly and that a shareholder vote will not exonerate them if they do not exercise such judgment. The board of directors must exercise its business judgment in making decisions regarding shareholder proposals and, pursuant to the business judgment rule, the directors will have no personal liability for a decision made in good faith, on an informed basis and With no conflict in loyalty to the company’s shareholders. (111)

Former Vice-Chancellor Berger of the Delaware Court of Chancery expressed this principle in a 1984 case:

Nor am I persuaded that it is a per se breach of fiduciary duty for the Board to act in a manner which it may believe is contrary to the wishes of a majority of the company’s stockholders. If the Board has such a belief it would be expected that the stockholders’ opposing views be given due consideration by the Board. However, I do not believe that stockholder opposition automatically overrides the other factors that the Board considers in exercising its business judgment. (112)

Further support for this notion comes from the leading case of Paramount Communications Inc. v. Time Inc., (113) in which former Chancellor Allen stated: “The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.” (114) On appeal, the Delaware Supreme Court upheld and stated:

[The plaintiff’s] contention stems, we believe, from a fundamental misunderstanding of where the power of corporate governance lies. Delaware law confers the management of the corporate enterprise to the stockholders’ duly elected board representatives…. The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders. (115)

In Delaware, directors are not permitted to delegate to others their decision-making authority on matters as to which they are required to exercise their business judgment. (116) In contrast to directors, who must act on behalf of the company and all shareholders, under state law shareholders may vote selfishly or altruistically as they choose. (117)

The idea that boards must make decisions on majority vote resolutions as fiduciaries and may not delegate such decisions to shareholders is well illustrated in the area of poison pills. Delaware law may be understood to impose an affirmative obligation on a board to deploy a poison pill or other anti-takeover device to protect what the board believes are the shareholders’ best interests, even against the wishes of a clear majority of shareholders. (118) If the board determines that an unsolicited offer is not in the corporation’s best interests, it has a duty to use all lawful means to resist it. (119) A board’s ability to adopt a poison pill in the context of a sale of the corporation is a fundamental matter of management policy that cannot be substantially limited under Delaware law. In Quickturn Design Systems, Inc. v. Shapiro, (120) a case that dealt with a “dead-hand pill,” the Delaware Supreme Court held that a future board’s ability to redeem a poison pill implicated a fundamental matter of management policy and, therefore, could not be substantially restricted under Delaware law. (121) Similarly, in Carmody v. Toll Bros., Inc., (122) the Delaware Court of Chancery found that a “dead hand” provision of a poison pill impermissibly interfered with a current board’s authority under section 141 (a) “to protect fully the corporation’s (and its shareholders’) interests in a transaction [for the sale of a corporation].” (123)

Although this Article focuses primarily on Delaware law, the principle that directors must consider the best interests of the corporation when deciding how to respond to the wishes of majority shareholders is not confined to Delaware. (124) Today, a majority of state corporate codes explicitly provide for a system of delegation of broad power to the board of directors to manage the business and affairs of the corporation, some of which the board of directors may delegate to agents that it selects and supervises. (125) Courts in a number of states other than Delaware have rejected the proposition that directors should make their decisions on the basis of what a majority of shareholders wants. (126) In addition, over half of the states have passed constituency statutes permitting, or even requiring, directors to consider the interests of stakeholders other than shareholders when making decisions. (127)

PART IV: REFORM AT GUNPOINT

The increase in majority vote resolutions has generated significant shareholder pressure on companies to adopt such resolutions. Notwithstanding the fact that the recent increase in majority vote resolutions is due in large part to the rise of rate policy voting in lieu of case-by-case analysis, and seemingly oblivious to the distinction between binding and precatory resolutions, many shareholder activists have come to view majority vote resolutions as near-binding “referendums” that require automatic implementation. Directors considering their options in dealing with majority vote resolution should be familiar with the variety of pressure tactics that they are likely to encounter, especially if they choose not to adopt all or part of a majority vote resolution.

“VOTE NO” CAMPAIGNS

One method that shareholders have used in recent years to register public displeasure with a board of directors is to run “Vote No” campaigns designed to withhold votes from one or more nominees for director. Alan Hevesi, onetime New York City Comptroller and currently New York State Comptroller and a key sponsor of recent “Vote No” campaigns (also known as “withhold vote” campaigns), explained the rationales as follows:

With majority support for non-management proposals on the rise, entrenched self-serving boards of directors will no longer find comfort in ignoring and disenfranchising shareholders behind the technicality of the “non-binding” proposal. The directors’ blatant disregard for the majority vote and the resultant shareholder frustration will engender increasing “vote no” initiatives. (128)

In a 1990 speech to the CII and in an article in the Stanford Law Review in 1993, former SEC Commissioner Joseph Grundfest urged CII members and other big investors to withhold voting authority–a practice he dubbed “just vote no”–as a means of sending a message to the incumbent board. (129) Because directors are generally elected by a plurality of votes, and there are generally the same number of nominees as slots for director, the nominees will be elected even if a large majority of votes are withheld so long as the nominee receives a single vote. (130) Nonetheless, a large number of “withheld” votes is embarrassing to companies and the affected directors (131) and evidences a lack of confidence in the directors and sometimes even the mere threat of a “Vote No” campaign may influence companies to adopt the requested changes. (132) A number of amendments to the proxy rules in 1992 have made such campaigns more effective by making most such solicitations exempt under the proxy rules and by permitting the sponsors to publicize the withheld vote as well as the reasons for doing so without violating the proxy rules. (133) Such campaigns are also likely to be strengthened through shareholder conference calls, sponsored by proxy advisors, such as ISS and Glass, Lewis & Co., that have recently begun to be organized. (134) Such campaigns are low-cost alternatives to traditional proxy contests, and can rely on letters, Internet publicity and targeted calls to select shareholders by proxy solicitors. (135)

The “Vote No” campaigns in the context of majority vote resolutions first gained traction in 1999, when CII acted on its threat to urge retaliation against companies that had not implemented majority vote resolutions in past proxy seasons. (136) That year, CII used its website and newsletter to urge its members to withhold votes from directors at such companies. (137) The 1999 season proved a mere foreshadow of what came in the 2000 proxy season, however, when the New York City Employees’ Retirement System (“NYCERS”), with the help of a proxy solicitor, targeted several companies that had not adopted previous majority vote resolutions. The companies targeted that year by NYCERS’ campaign were Cooper Tire & Rubber Company, Great Lakes Chemical Corporation, and Louisiana-Pacific Corporation, all of which had not responded to past shareholder proposals that had received majority votes. (138) The campaign resulted in a 27 percent level of withheld votes against the directors running for reelection that year at Great Lakes Chemical and subsequently led to the repeal of the classified board that had been the object of the “Vote No” campaign. (139) At Cooper Tire & Rubber, 13 percent of the shareholders withheld votes for management’s nominees, and shareholders at Louisiana-Pacific withheld approximately 15 percent of the votes from management’s slate. (140)

In 2001, all three New York City pension funds–NYCERS, the New York City Police Pension Fund, and the Teachers’ Retirement System of the City of New York–joined efforts to target Freeport-McMoran Copper & Gold and Louisiana-Pacific with a “Vote No” campaign. These two companies were chosen as targets for “Vote No” campaigns because the New York City funds “felt their performance was subpar, and they [had] demonstrated an intransigence with respect to meeting requests that shareholders [had] put to them.” (141) At Freeport-McMoran, 19.5 percent of the company’s shareholders withheld votes from management’s slate of five directors (142) and at Louisiana-Pacific, 7.1 percent of the shares were withheld from management’s slate of four directors. (143)

The 2001 proxy season also saw the Service Employees’ International Union (“SEIU”), together with the California Public Employees’ Retirement System (“CalPERS’) and the New York city pension funds, launch a prominent “Vote No” campaign at the Eastman Kodak Company after the company failed to take action on a classified board proposal that had gained majority votes four years in a row. (144) Although it does not seem to have made a difference to the activists’ decision to wage a “Vote No” campaign, it is significant to point out that during the entire period of 1997-2001, Kodak’s certificate of incorporation contained a provision that required 80 percent shareholder approval to repeal the classified board, and therefore the level of shareholder support would not have been enough to actually repeal the classified board had management introduced such a proposal. (145) In furtherance of its campaign, SEIU had sent out letters to large investors urging them to withhold votes from directors who had not acted in response to union-sponsored shareholder proposals that had received majority votes for several years, and more than 16 percent of shares voted at Kodak’s 2001 annual meeting were withheld from two of the directors targeted by SEIU’s “Vote No” campaign. (146) Despite this pressure, Kodak retained its classified board structure and in 2002, Kodak’s Chief Executive Officer made a presentation at a CII meeting in which he defended Kodak’s decision to do so. (147)

The threat, effectiveness and frequency of “Vote No” campaigns as a tactic to pressure companies to act favorably on majority vote resolutions may increase substantially as a result of new regulations recently proposed by the SEC. In October 2003, the SEC published for comment a proposal to amend the proxy rules to give shareholders the ability to run a director election contest through the company’s proxy statement if one of two triggering events occur. (148) The first proposed triggering event is a 35 percent withhold vote result in relation to a single director and the second is the approval by 50 percent of the votes cast of a shareholder proposal to make the company subject to the new director nomination procedure. (149) Although there is some question about the timing of adoption and ultimate substance of the proposed rule, (150) if adopted, this proposal will raise the importance of “Vote No” campaigns and make them a more effective pressure tactic for shareholder activists, creating pressures on directors to accede to the demands of shareholder activists even when doing so may not be in the best interest of the company and its shareholders. 151 In addition to these two proposed triggers, the SEC also previously considered, and in the October 2003 release sought comment on, the possibility of making the board’s failure to abide by a majority vote resolution an additional trigger for shareholder access to the proxy and also on whether a company that implements all majority vote resolutions should be exempt from the application of the shareholder access rules. (152)

Another factor that makes the threat of “Vote No” campaigns more serious than previously, especially in combination with the shareholder access triggers described above, is that proxy voting services and other institutional groups have begun to recommend the withholding of votes for director nominees based on a company’s response to majority vote resolutions. ISS recommends withholding votes from directors who ignore a shareholder proposal that was approved by a majority of the votes cast for two consecutive years or who ignore a shareholder proposal approved by a majority of the shares outstanding during any one year. (153) In a recent letter to the SEC, CalPERS stated that “there is no better evidence of a corporate governance breakdown than a company ignoring a shareholder proposal voted for by more than 50% of the ‘votes cast’. CalPERS, as a matter of policy, votes against all directors of a company that has failed to take such action.” (154) The mutual fund company Calvert has joined this effort and has adopted a policy that it “may oppose slates of directors in situations where the company failed to take action on shareowner proposals that passed in previous years.” (155) Similarly, Christian Brothers Investment Services has declared that it “may withhold approval from all nominees when the Board failed to act on shareholder resolutions that passed in the previous years” (156) and the State of Connecticut Pension Plan has a policy that it may vote against a slate of directors if “no action [was] taken by the board in response to shareholder proposals that received a majority of the votes.” (157) In 2000, the CII amended its Shareholder Bill of Rights to recommend that boards take action on non-binding proposals receiving a majority vote (of votes cast for and against) and that if the proposal requires shareholder action, such as would be the case in a proposal to declassify the board, that the board submit it at the next meeting of shareholders. (158) Prior to that time, the CII policy was less stringent and required boards to take action upon a majority vote (of votes for and against) “unless the board communicates compelling reasons for not doing so” and also required submission to binding vote but only after two years of majority votes. (159)

In the shadow of the shareholder access proposal and the adoption of withhold vote policies by shareholder groups, the 2004 proxy season witnessed a number of high profile withhold vote results–most notably at The Walt Disney Company, Safeway Inc., MBNA Corporation, and Federated Department Stores, Inc. (“Federated”). While most such efforts were aimed at corporate governance issues and did not relate to majority vote resolutions, a number of the campaigns were aimed at companies that had not taken action on previous majority vote resolutions. (160) In a record-setting vote, the shareholders of Federated withheld more than 61 percent of the votes cast from the four directors up for election that year after Federated had not taken action on a number of consecutive majority vote resolutions relating to classified boards. (161) Ironically, the withhold vote at Federated was obtained without an organized “Vote No” campaign, prompting some commentators to attribute the high vote to Federated’s unusually high level of institutional shareholdings and the fact that the absence of an organized “Vote No” campaign also led to an absence of a management counter campaign. (162) The 2004 proxy season also witnessed a “Vote No” campaign from the pension fund of the American Federation of State, County and Municipal Employees, which targeted ten companies that it believed to be unresponsive to shareholders. (163)

Despite the adoption by ISS and others of policies that recommend a withhold vote related to majority vote resolutions, the rising incidence, success, and publicity of “Vote No” campaigns has been mostly confined to corporate governance issues (such as director and committee independence) and corporate control contests, rather than issues relating to majority vote resolutions. (164) In fact, over the past few years, there has been a sharp increase in the willingness of institutional investors to support “Vote No” campaigns related to issues of corporate governance and many institutional investors have adopted voting policies to that effect. (165) In contrast, fewer institutional investors have adopted comparable withhold vote policies relating to majority vote resolutions. While the threat of “Vote No” campaigns, especially in light of the possible effects under the SEC’s shareholder access proposal, should not be minimized, directors should judge the likely success of such campaigns in light of factors particular to the company and its shareholder base, including any voting policies on the issue and whether ISS and others would likely recommend a withhold vote under their criteria. (166) In addition, the embarrassment factor previously associated with withhold vote results is likely to diminish as “Vote No” campaigns become more routine and as even such well-regarded directors as Warren Buffet are subjected to such campaigns. (167) The rising incidence of “Vote No” campaigns has also led some companies to successfully fight back by reaching out to their shareholders to make a case for rejecting withhold vote recommendations from ISS or other groups. (168)

BINDING BYLAW AMENDMENTS

While most shareholder proposals are submitted in the form of precatory resolutions, shareholders have also in some cases submitted resolutions under Rule 14a-8 that are phrased in the form of binding bylaw amendments. While, as we have seen, the SEC generally requires shareholders to change binding proposals to precatory ones, the SEC has permitted an exception for binding bylaw amendments because the laws of most states grant concurrent authority to boards and shareholders to adopt bylaws. (169)

Some shareholder activists have embraced the tactic of submitting binding bylaw amendments. (170) The most obvious advantage of submitting a binding bylaw amendment rather than a precatory resolution is that the company is legally permitted to disregard the “request” that is the subject of a precatory resolution, while the bylaw proposal will be self-executing, provided it is adopted by shareholders in a manner that is in compliance with state law and the company’s charter. (171) The use of binding bylaw amendment proposals indicates “that shareholders are willing to escalate the battle when companies ignore nonbinding resolutions receiving majority votes.” (172) A review of binding bylaw amendment proposals related to poison pills during the period 2000-03 shows that a large proportion were submitted by shareholders who claimed that the targeted companies had not responded to their previous precatory resolutions. The IRRC counted submissions of eight binding bylaw amendment proposals to redeem or to require a shareholder vote on poison pills from 2000 to 2003. (173) Six of these eight proposals were preceded by majority vote resolutions that the proponents felt were ignored by the board. (174)

Although binding bylaw amendments present a powerful tool for shareholder activists, there has not been the same type of growth of such proposals over the past few years that has been observed with other pressure tactics. Binding proposals hit a high point in 1999, when shareholders threatened to offer about fifty binding bylaw amendments, which was double the number seen in 1998, and almost half of those that came to a vote that year received majority votes. (175) The number of binding bylaw amendments submitted has been lower and fairly consistent over the period 1999-2003. According to IRRC data, ten such proposals were submitted to companies in 2000, eight in 2001, nine in 2002, and twelve in 2003. (176) Only five such proposals during 2000-03 have received majority support. (177) Preliminary data for the 2004 proxy season suggests that binding bylaw amendments may be gaining in popularity, with nineteen such proposals submitted to companies as of October 29, 2004 and four of the ten for which voting results are now available receiving majority support. (178)

Part of the reason for their lack of popularity in recent proxy seasons may be that binding bylaw proposals face extra legal uncertainty In the wake of several no-action letters issued in the early 1990’s that cast doubt on the use of binding bylaw amendments, and subsequent conflicting no-action letters, institutional investors have come to look on binding shareholder bylaws amendments as time consuming and risky. (179) On several recent occasions, the SEC has accepted the view that implementation of a binding bylaw proposal that would prohibit adoption of a poison pill without prior shareholder approval “would be an improper subject for shareholder action under Delaware law” with the first such letter issued to Novell, Inc. in 2000. (180) Novell submitted an opinion of counsel that concluded that such a proposal would violate Delaware law because, among other things, it “purport[ed] to delegate to shareholders authority over a rights plan which Delaware law provides is within the exclusive province of the Company’s board of directors.” (181) Similarly, Mattel, Inc. was also able to exclude an anti-poison pill bylaw in 2002 on state law grounds, whereas in 2003 a similar proposal that was submitted in precatory form was required to be included. (182) The SEC summarized this view in its recently issued Staff Legal Bulletin:

When drafting a proposal, shareholders should consider whether the proposal, if approved by shareholders, would be binding on the company. In our experience, we have found that proposals that are binding on the company face a much greater likelihood of being improper under state law and, therefore excludable under Rule 14a-8(i)(1). (183)

The main reason for this uncertainty stems from the fact that binding bylaw proposals are in tension with most state corporate codes, making it unclear whether such proposals are permitted under state law and therefore whether they would be excludable under Rule 14a-8(i)(1), as an improper subject for action by shareholders under state law, or under Rule 14a-8(i)(2), as causing the company to violate state law upon implementation. The majority of states permit shareholders to initiate and approve bylaw amendments directly without board approval. For example, Delaware clearly contemplates bylaws adopted by shareholders. Section 109(a) of the Delaware General Corporation Law (“DGCL”) provides that shareholders may adopt bylaws and section 109(b) of the DGCL provides: “The bylaws may contain any provision, not inconsistent with the law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” (184) On the other hand, section 141(a) of the DGCL contains an equally broad and unqualified statement supporting the board’s authority: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” (185) Although the apparent ambiguity between the two sections has been described by some scholars as a “recursive loop,” (186) it raises the question of why, if the bylaws could contain a limitation on board authority (due to the “except as may otherwise be provided in this chapter” phrase in section 141(a)), section 141(a) would make explicit that such limitation may be placed in the certificate of incorporation, but not make it explicit that it can also appear in the bylaws. Professor Lawrence Hamermesh thinks the statute can be read without any ambiguity or “recursive loop” by interpreting the limiting language in section 141(a) to be a reference to the statutory departures from board power that are provided for specifically in the DGCL, such as management by trustees, custodians, receivers, or shareholders. (187) An additional concern would be that if section 109(b) could be interpreted to limit section 141(a), the authority could be limitless and section 109(b) could then be read to permit shareholders to regulate any aspect of the business and affairs of the corporation. (188)

In order to avoid that conclusion, some scholars have gone to great lengths to find dividing lines over permissible and impermissible bylaw limits on board power, even though nothing in the DGCL or the case law identifies such limits. For example, Professor John Coffee suggests a dividing line between shareholder-adopted bylaws limiting director authority over “ordinary” and those limiting authority over “fundamental” matters, with the later being more defensible. (189) Professor Hamermesh, however, has pointed out that directors routinely take action on fundamental matters, such as the selection and firing of officers, major acquisitions and divestitures, stock issuances, and other significant transactions. (190) In addition, Professor Hamermesh has argued that Delaware courts have construed the phrase “business and affairs of the corporation,” which defines board authority in section 141(a), to include a number of director-adopted measures that have actual or potential defensive consequences, such as poison pills and self-tender offers. (191) Therefore, Professor Hamermesh argues, it would be unlikely that Delaware courts, “having gone so far to bring defensive actions within the realm of the ‘business and affairs’ of the corporation subject to the directors’ exclusive management authority, would now cede that ground to stockholders on the theory that stockholder-adopted by-laws are valid where they regulate board conduct on ‘fundamental matters.'” (192) Other attempts to find dividing lines between permissible and impermissible bylaws–for example, between negative limitation and affirmative instructions–are also subject to effective criticism. (193)

Another source of legal uncertainty over the use of binding bylaw amendments, from the perspective of the proponent, is the possibility of board action to defeat their effect. Even with respect to binding bylaw amendments that obtain majority shareholder support, the board of directors has a duty to consider the companies’ best interest, and two possible options–failure to give effect to a shareholder-adopted bylaw (including possible litigation in support of that position) and subsequent repeal–may be available to a board of directors, although both options are fraught with legal uncertainty and would be problematic from a public relations and shareholder relations perspective. The first of these was exemplified in 1999, when a shareholder proposal submitted by the Union of Needletrades Industrial and Textile Employees (“UNITE”) to Chubb Corporation seeking to require shareholder approval of poison pills received the support of 71 percent of the votes cast. The company refused to implement the proposal on the grounds that the proposal, if implemented, would be a violation of New Jersey law. (194) UNITE filed suit in 2000 after Chubb indicated it would omit a similar proposal from its 2000 proxy materials, but the suit became moot after UNITE sold its shares of Chubb stock prior to Chubb’s annual meeting. (195)

Even if the shareholder-adopted bylaw is not challenged, a board may try to repeal or amend the bylaw following its adoption. Generally, under applicable statute and a company’s charter and bylaws, the board may amend or repeal bylaws adopted by shareholders or the board. An unresolved issue, however, is whether a shareholder-adopted bylaw can prohibit directors from further amending or repealing the bylaw. In the absence of such a bylaw restriction, the board may simply be able to repeal the shareholder-adopted bylaw. Almost half of the states, including those that follow the RMBCA, have adopted statutory provisions that expressly permit shareholders to limit or prohibit the board’s ability to repeal or amend a shareholder-adopted bylaw. (196) Significantly, there is no such provision in the Delaware or New York statutes. The New York statute contains an explicit provision permitting shareholders to amend or repeal bylaws adopted by the board, but does not contain a converse provision, which, together with commentary and court decisions, has led commentators to conclude that directors would not be permitted to amend or repeal shareholder-adopted bylaws that include a provision limiting a board’s right to do so. (197)

In contrast to New York, bylaw restrictions on amendment or repeal by directors are not likely to be permissible in Delaware. (198) The language of section 109(a) of the DGCL, the section that authorizes directors to amend bylaws if provided in the charter, does not have any language limiting the right to amend or repeal shareholder-adopted bylaws. (199) Commentators have also argued that section 203 of the DGCL provides support for the view that board repeal or amendment of a shareholder-adopted bylaw is permitted

The success of the binding bylaw proposal as a tactic achieved its high point to date in the attempt of the Teamsters union to include a binding bylaw amendment in the 1997 proxy of Fleming Companies, Inc., after a precatory resolution received support from 65 percent of the votes cast. (207) The binding bylaw amendment sought to prohibit the company from adopting or maintaining a poison pill without shareholder approval. In January 1999, the Oklahoma Supreme Court upheld the right of Fleming’s shareholders to adopt a binding bylaw amendment, thus marking the first time that shareholders have successfully enacted a binding bylaw related to the poison pill. (208) The two issues that the Oklahoma court faced were whether Oklahoma corporate law restricts the authority to create and implement poison pills to the board of directors, and whether shareholders may propose resolutions requiring that poison pills be submitted to shareholders for a vote. On the first issue, the court held that there is no exclusive authority granted to boards of directors to create and implement poison pills. (209) On the second issue, the court held that there was nothing in Oklahoma law exempting poison pills from shareholder-adopted bylaws. (210) The court in the Fleming case also took note of the shareholder mandate against the poison pill as evidenced by the large majority victory of the previous precatory proposal in 1997. (211) Although there has not to date been a legal challenge to the binding bylaw amendment in Delaware, (212) the consensus view among commentators is that the Fleming precedent would not be followed in Delaware and that a board of directors’ ability to adopt a poison pill in the context of a sale of the corporation is a fundamental matter of management policy that cannot be substantially limited under Delaware law. (213)

In Quickturn Design Systems v. Shapiro, (214) the Delaware Supreme Court held that a future board’s ability to redeem a poison pill implicated fundamental “matters of management policy”–the “sale of [a] corporation”–and, therefore, could not be substantially restricted under Delaware law. (215)

Although there is reason to think that Fleming-type bylaws would not survive a court challenge in Delaware, shareholder activists may not feel precluded from trying to submit such proposals to companies. Over the past few years, there have been binding bylaw proposals on a variety of topics, many of which do not raise the same legal issues as are raised by the anti-poison pill proposals. (216) Moreover, some have argued that “second-generation” binding bylaws that avoid the pitfalls of “first generation” poison pill proposals would present stronger cases under Delaware law. (217) For the time being, most shareholder proponents prefer to use precatory proposals for exerting pressure and thereby avoid the legal uncertainty, and potential litigation costs, involved in dealing with binding bylaw amendments. As shareholder activists escalate their pressure, however, the binding bylaw amendment will remain a potent tactic that companies may face in the future.

DIRECTOR NOMINATION BYLAW

In the face of legal uncertainty over binding bylaw amendments against poison pills, some shareholder activists have suggested a new tactic of using a binding bylaw amendment that focuses on establishing director qualifications. The director nomination bylaw amendment was pioneered by Herbert Denton of Providence Capital in 2001, when Providence Capital launched a “Poison Pill Campaign” and conducted town hall meetings to explain its new binding bylaw amendment that focuses on director nomination qualification. The bylaw requires the following: following majority shareholder approval of a proposal dealing with a poison pill, a board must respond within 180 days by redeeming the pill or calling a meeting of shareholders to hold a referendum on the pill’s continuation

The director nomination bylaw amendment has enjoyed some success thus far. Navistar International Corporation redeemed its poison pill in October 2001, in response to pressure by Providence Capital, which threatened Navistar with a director nomination bylaw amendment proposal and a proxy fight in 2002 if the pill was not redeemed. (219) In the face of a director nomination bylaw amendment and an alternative slate of director nominees submitted by Providence Capital, Great Lakes Chemical Corporation announced in early February 2002 that it was eliminating its poison pill, noting that “[a] number of our largest shareholders, and several others represented by Providence Capital, told us that they preferred we redeem the rights plan,” and that in response, the board “has decided to eliminate the plan ‘for now.'” (220) In the 2002 proxy season, Providence Capital was also able to claim victories for its director nomination bylaw amendment strategy for eliminating or modifying poison pills at Airborne, Inc., Alaska Air Group, Inc., and Footstar, Inc. (221) In many cases, the mere threat of a director nomination bylaw amendment has been enough to pressure boards into eliminating the poison pill. (222)

The ability of companies to exclude the director nomination bylaw amendment is untested as no company has yet sought exclusion on substantive grounds. (223) Delaware lawyer Michael Hanrahan, who worked with Denton in proposing the first director nomination bylaw amendment, has argued that because the director nomination bylaw amendment does not require or preclude board action, “it avoids the primary legal argument against poison pill bylaws, by relying instead on the very mechanism that pill supporters have cited in defending the pill, the ultimate right of the shareholders to control who serves” on a company’s board of directors. (224) The SEC has generally permitted proposals that establish procedures for qualification generally. (225) Others, however, have questioned whether bylaw-prescribed director qualifications can extend beyond such matters as age, share ownership, and business-related experience, and have argued against the legality of bylaws that require commitment to certain corporate action, such as sale of the company, as a director qualification. (226) Moreover, the SEC does not permit proponents to target particular company nominees, and companies that want to attack the director nomination bylaw amendment could argue that the director nomination bylaw amendment is intended to target particular nominees. In a no-action letter issued to Honeywell in 2000, the SEC permitted Honeywell to exclude a proposal that sought to “[m]ake directors ineligible for election if they fail[ed] to enact any [shareholder proposal] adopted by shareholders.” (227) The SEC agreed with Honeywell that the proposal questioned the business judgment of existing members of the board standing for election and was thus excludable under Rule 14a-8(i)(8) because it related to the election of directors. (228) Honeywell had also advanced, but the SEC did not address, an argument that the proposal was contrary to state law in that it penalized directors (by making them ineligible for election) for exercising their business judgment. While the outcome of the Honeywell no-action letter may be attributed to the specific facts of the proposal involved, which included a supporting statement that criticized the incumbent board members, and although the SEC has permitted proponents to submit proposals if they were clearly cast to apply to future elections only, the precedent may be used by some companies that oppose the director nomination bylaw amendment, especially if the supporting statement refers to prior actions on the topic by such incumbent directors. (229)

REQUESTING COMPANY ACTION ON MAJORITY VOTE RESOLUTIONS

Another tactic being used by shareholder activists is to submit shareholder resolutions–whether in precatory or binding bylaw form–that request companies to take action on majority vote resolutions, ranging from meetings between the board and proponents to outright implementation of the resolutions.

Expressing their dissatisfaction with the perceived lack of response to majority vote resolutions, in January 2003, the New York City pension funds, which were joined by other public pension funds, initiated a campaign to target companies that had not responded to majority vote resolutions. (230) The supporting statement clearly expressed the reason for the campaign: “We believe the reforms have not addressed a major concern of institutional investors–the continuing failure of numerous boards of directors to adopt shareholder proposals on important corporate governance reforms despite being supported by increasing large majorities of the totals of shareholder votes cast for and against the proposals.” (231) The funds submitted a novel shareholder proposal requiring the companies’ boards to establish a process for adopting majority vote resolutions. (232) Specifically, the resolution says that, at a minimum, the process should require the board to “communicate directly with the proponents of such proposals to pursue constructive dialogue and agreement on the proposals.” (233) If no agreement is reached with the proponents, then sixty days prior to the deadline set by the company for receiving shareholder proposals for the next annual meeting, the board would be required either to adopt the proposal or to submit it for shareholder vote if such vote is required. (234)

The New York City pension funds have submitted a similar but less stringent proposal in 2004 that is aimed at encouraging companies to be more responsive to shareholders. (235) The proposal asks the boards at a number of companies to establish an engagement process with the proponents of majority vote resolutions. (236) The proposal directed the board to consider the following two steps in adopting the policy:

(i) Within four months [of] the annual meeting, an independent board committee should schedule a meeting … with the proponent of the proposal, to obtain any additional information to provide to the [board] for its reconsideration of the proposal

(ii) Following the meeting with the proponent, the independent board committee should present the proposal with the committee’s recommendation, and information relevant to the proposal, to the full [board], for action consistent with the company’s charter and by-laws, which should necessarily include a consideration of the interest of shareholders. (237)

In addition to the proposal, the New York City funds’ campaign also called for a national campaign led by institutional investors calling for corporate responsiveness to majority vote resolutions, adoption by boards of policies governing their actions in response to majority vote resolutions, as well as the adoption by the SEC and the stock exchanges of rules intended to encourage adoption of majority vote resolutions. (238)

In addition to the proposals submitted by the New York City pension funds, during the past two proxy seasons the pension plan of AFSCME has filed proposals asking targeted companies to create a majority vote shareholder committee. First submitted to The Kroger Co. in 2003, the proposal has also been sent in 2004 to Sears, Roebuck and Co., The Eastman Kodak Company, Merck & Co., and again to The Kroger Co. (239) The binding bylaw proposal seeks an amendment to the company’s bylaws stipulating that, following a majority vote that is not adopted by the company, the board would create a committee composed of that proposal’s proponent and other interested shareholders that would be entitled to meet with the independent members of the board to discuss the majority vote resolution. (240) The AFSCME proposal states that the purpose of the committee is “to communicate with the board regarding the subject matter of the proposal” and also stipulates that “the committee will not be authorized to act on behalf of the board or to compel the board to take action, and will not interfere with the board’s authority to manage the business and affairs of the company.” (241)

The proposals described above that request company action on majority vote resolutions should also be viewed against the backdrop of the wider movement to enhance communications between the board and shareholders. In both 2003 and 2004, for example, the New York City pension funds submitted a proposal intended to improve communications between shareholders and boards. (242) The 2004 resolution, which the funds say is based on the standards proposed by the New York Stock Exchange, asks the board of directors at the targeted companies to establish an Office of the Board to enable direct communications, including meetings between non-management directors and shareholders, on matters of corporate governance. (243) This entity would report directly to a committee of non-management directors. While in 2003, the SEC permitted the exclusion of a similar proposal (but one that did not limit the subject matter to “corporate governance”) on the grounds that it related to the company’s ordinary business, and therefore, could be excluded under Rule 14a-8(i)(7), in 2004 the SEC did not permit such exclusion. (244)

REGULATORY BACKLASH

In addition to the pressure tactics that may be applied by shareholder activists, companies should also be aware of the possibility of action by governmental entities or self-regulatory organizations. As noted above, the New York City pension funds have launched a campaign to urge boards to be more responsive to majority vote resolutions, and a key part of this campaign is focused on regulatory action. (245) In addition to calling for a national campaign to be led by institutional investors in favor of corporate responsiveness to majority vote resolutions and the adoption by boards of policies governing their actions in response to majority vote resolutions, the campaign also urges (i) the adoption by Nasdaq, the New York Stock Exchange, and Amex of “a listing standard requiring companies to adopt and disclose policies governing their response to [majority vote resolutions]”

In addition, in response to the pressure of shareholder activists, on July 15, 2003, the staff of the SEC recommended that the SEC propose proxy rule amendments that would give shareholders the ability to run a director election contest through the company’s proxy statement, the so-called “shareholder access” proposal. (247) The recommendation contemplated that this right would be available only after a “triggering event,” such as the board’s failure to abide by a majority vote resolution. This specific trigger was not highlighted as one of the two proposed triggers in the SEC’s October 2003 release on the topic, but the SEC has submitted for comment whether this should be an additional trigger for shareholder access. (248) The very fact that it was proposed in the July 2003 recommendation and that the October 2003 release solicited comments regarding the potential trigger shows the extent to which supporters of shareholder access have linked the issues and have sought increased shareholder access to the proxy in part by arguing that companies are not being responsive to the will of shareholders, as expressed in voting results on precatory shareholder proposals. (249) While there is some question as to whether, and in what form, the SEC might adopt a shareholder access rule, the recent experience with the proposed rule shows how shareholder groups are able to effectively mobilize the regulatory process to affect corporate behavior in this area. (250)

THE PRESSURES OF A CHANGED CORPORATE GOVERNANCE CLIMATE

In addition to the specific forms of pressure described above, directors of public companies must also contend with a general change in the corporate governance climate. In the aftermath of the large corporate scandals that first came to light a few years ago, the vastly changed regulatory environment (which includes major changes to the NYSE and Nasdaq corporate governance principles, and the passage of the Sarbanes-Oxley Act of 2002), and escalating pressure tactics on the part of shareholder activists, directors are wary of taking stands that may be perceived, rightly or wrongly, as “anti-democratic” or “anti-shareholder.”

Shareholder activists are embracing this new corporate governance environment and applying more general pressure on directors to act on majority vote resolutions. Directors are concerned about the reaction of shareholders, especially institutional investors that are large, long-term holders of a company’s stock, and are also susceptible to private venues of pressure, such as phone calls to senior management and letters of criticism, (251) as well as more public forms of criticism, such as pointed questions on conference calls, critical press releases, and postings on Internet chat boards. (252) Shareholder activists have also made an effort to “isolate” companies that they deem to be laggards in responding to majority vote resolutions. For example, some shareholder activists have started publicly announcing their proxy voting policies as well as their voting positions with respect to companies they deem to be recalcitrant in adopting majority vote resolutions. (253) Groups such as IRRC, ISS, and CII track and publish databases of company responses to shareholder proposals. (254) As more companies accede to the demands of shareholder activists, thereby “raising the bar” of what is perceived to be shareholder-friendly behavior, it becomes harder for the remaining companies to resist shareholder pressure when it is applied. Some shareholders have recently made clear that they intend to apply “focus list” pressure and the threat of proxy fights on companies that do not respond to majority vote resolutions, especially if the SEC does not adopt shareholder access rules to their satisfaction. (255) Although proxy contests to remove board members who are deemed by shareholder activists as recalcitrant on the issue of majority vote resolutions are now rare, the prospect of such contests will increase if the SEC adopts shareholder access rules. (256)

Another potential source of general pressure on companies is the effect of the corporate governance metrics that have mushroomed over the past few years. (257) Although ISS and others that provide governance metrics services have not to date made detailed disclosure of the methodologies they use in arriving at the corporate governance scores, preferring instead to list categories of factors, ISS has recently disclosed that it will include responsiveness to shareholder proposals in its governance rating, although it has not made clear what precisely “responsiveness” in this context means or what the impact that such responsiveness or lack of responsiveness will have on the final governance score. (258) It is reasonable to expect that if the other governance metrics services follow ISS’s lead and make responsiveness to shareholder proposals a governance metric, companies will feel more pressure to act on this issue in order to boost their corporate governance scores, especially as ratings agencies begin to take corporate governance scores into account and as the perception that such governance scores may be positively correlated with performance takes root. (259) Moreover, because some governance scores are negatively affected by a company’s position on certain of the underlying topics of shareholder proposals, such as its decision to have a poison pill without shareholder approval, (260) directors will also take into account that consideration when deciding whether to implement a majority vote resolution on certain topics that are themselves components of the corporate governance scores.

PART V: COMPANY RESPONSES–PRESENT AND FUTURE

Despite the rhetoric heard from shareholder activists, companies today are increasingly not “ignoring” majority vote resolutions. In large part, the disconnect between companies and shareholder activists on this issue arises because many shareholder activists do not distinguish between a company ignoring a majority vote resolution, on the one hand, and a company deciding, after consideration, not to take the recommended action, on the other. That distinction is an important one and we believe that companies should take active measures to amplify it.

In today’s corporate governance climate, there has been a palpable shift in the level of attention that shareholder proposals in general, and majority vote resolutions in particular, have received from companies and their boards. (261) It companies ever felt comfortable with a largely cursory approach to shareholder proposals, including decisions by executives (rather than the board) or a pro forma review by the board, today’s corporate governance climate has changed that. The rise of institutional investors and increased institutional investor activism, in contrast to earlier dominance of the shareholder proposal field by the so-called “gadflies,” has led companies to take shareholder proposals seriously in recent years. (262) The corporate scandals of a few years ago and the subsequent attention to corporate governance and shareholder communications have hastened this development. The Business Roundtable has noted that in the experience of its members, “boards take majority-vote shareholder proposals very seriously, in keeping with their fiduciary duties to the company and all of its shareholders.” (263) In a survey done by the Business Roundtable in November 2003, thirty-six of 132 responding companies reported that they had majority vote resolutions in the preceding two years and every one of those thirty-six companies considered whether to implement the majority vote resolution. (264) Boards have gone to great lengths and have employed innovative techniques to give majority vote resolutions a serious hearing, including inviting experts advocating each side of the position to have a “debate” in front of the board in order to inform its consideration of majority vote resolutions. (265)

In addition to taking the time to consider majority vote resolutions more seriously, companies have also become more willing to adopt modifications to the status quo, even if it fails short of adopting the entire resolution. Although for many shareholder activists, majority vote resolutions present a binary choice-adopt or ignore–for directors, that choice is a false dichotomy as they must, consistent with their fiduciary duties, consider all options, including partial rather than full adoption of the majority vote resolution. For companies that have a poison pill, for example, there are a number of actions, short of redeeming a poison pill, that such companies can take in an attempt to balance shareholder concerns and the other interests of a company. (266) In certain instances, companies that have received proposals to redeem poison pills have sought to compromise by implementing features that are perceived to be shareholder friendly, such as a Three-Year Independent Director Evaluation (“TIDE”) plan designed to ensure that independent directors periodically review the poison pill, or “chewable” pill features, which would permit a transaction that would otherwise trigger the rights to proceed if it meets certain fair price or similar requirements. (267) A number of companies have also submitted their poison pills to a shareholder vote in response to majority vote resolutions. (268)

Similarly, for those companies that do not have a poison pill but still receive proposals requesting them not to adopt one without shareholder approval, a number of companies have begun to adopt policies regarding adoption of poison pills. Several companies have adopted policies that affirm the company’s intent not to adopt a poison pill without shareholder approval although most such policies, reflecting a concern with the legality of policies purporting to bind future boards with respect to such issues, explicitly include “fiduciary outs” that would permit the board to act without a shareholder vote if the directors so determined in the exercise of their fiduciary duties. (269) There have also been variations on that theme, with several companies including a “fiduciary out” but requiring a shareholder vote following the adoption of the poison pill by directors exercising the fiduciary out. (270) Some policies include a fiduciary out but permit only the adoption of a poison pill that by its terms would expire within a certain time period unless ratified by shareholders. (271) A number of policies containing a fiduciary out require the determination to be made by a committee of independent directors. The popularity of such policies may rise following the 2004 proxy season, during which the SEC issued a number of no-action letters permitting companies with poison pill policies that contained fiduciary outs to omit anti-poison pill proposals on the grounds of “substantial implementation.” (272)

Directors who choose to “compromise” through adoption of only a portion of a majority vote resolution or through a modification of the status quo designed to please shareholders must keep in mind that the compromise may go unrewarded by the shareholder community. As many companies have learned, implementation of shareholder friendly features such as a TIDE provision or “chewable pill” feature does not guarantee ISS approval, does not prevent continued shareholder proposals regarding poison pills, and may have limited, if any, effect on the outcome of a shareholder vote on such proposals. With respect to the pill policies described above, ISS has recently taken the position that unless a pill policy contains a commitment to submit it to shareholder vote within a specified period following adoption of a pill by directors, it will not consider the adoption of the pill policy as implementation of earlier pill proposals and will recommend a withhold vote if the company’s previous proposals achieved the requisite votes under the ISS policy. (273) In addition, the SEC has suggested for consideration as a possible trigger for the proposed shareholder access rule the failure to implement majority vote resolutions, although this was not one of the two proposed triggers. (274) It is unclear whether partial implementation of a proposal would avoid triggering such a provision if it were adopted.

Boards are not only considering majority vote resolutions more often and more seriously, but in many cases are implementing them. While historically both commentators and shareholder activists have bemoaned the lack of responsiveness of companies confronted with majority vote resolutions, that has been changing in the recent past. (275) According to CII, only four out of twenty-nine companies that received majority vote resolutions in 1998 adopted the proposals. (276) According to IRRC, 17 percent of companies with majority vote resolutions in 2002 complied with the demands, as did 28 percent of such companies in 2003. (277) The trend toward more responsiveness by boards is illustrated by the number of companies taking action in response to anti-poison pill proposals. The number of companies that respond to majority vote proposals, either through redeeming the poison pill or modifying it with shareholder friendly features or, for companies without poison pills, through adoption of board policies, has been rising over the past few years. (278) According to CII data, in 1998, there were eight anti-pill majority vote resolutions and no company took action. (279) In 2002, by contrast, of the 28 companies with poison pills that had majority vote resolutions, only twenty companies, or 71 percent, retained their poison pills without change

One additional indicator of how seriously companies are taking majority vote resolutions or the prospect of such resolutions is the success that proponents and companies have enjoyed in “behind the scenes” negotiations over the past few years. Many institutional investors prefer to contact a company and find a compromise solution, viewing the submission of a shareholder proposal a matter of last resort. (284) Companies are often receptive to such an approach because it keeps the negotiation out of public scrutiny and permits the company to take action and appear pro-active rather than succumbing to pressure. (285) In addition, companies have shown a willingness to negotiate with proponents even after the submission of proposals, to avoid a proxy fight. (286) This willingness is reflected in the fact that approximately 20 percent of submitted resolutions during the period 2000-03 were withdrawn prior to the vote. (287) An ISS representative has recently noted that companies have taken preemptive steps to retain the faith of the shareholder community, estimating that approximately 20 percent of the proposals on ballots in 2003 have led to the adoption of new corporate governance standards by companies. (288) The 2004 proxy season seems to have furthered this trend, with ISS concluding that “[t]o an impressive degree, constructive dialogue between shareholders and corporations replaced confrontation.” (289)

Finally, some companies have responded to majority vote resolutions by submitting a proposal to its shareholders for a vote, while opposing it. For example, in 2003, after a number of years of majority vote resolutions on the issue, Bausch & Lomb Inc. offered a binding declassification proposal and opposed the proposal. (290) Bausch & Lomb had a supermajority vote requirement, requiring 80 percent shareholder approval, and the proposal failed to pass, garnering only 60 percent of the vote. (291)

A PROPOSAL FOR DEALING WITH PROPOSALS

For companies that are faced with majority vote resolutions, a few things are worth remembering before taking action. As an initial matter, boards and their advisors should remind themselves of the legal framework of precatory proposals, even those that are supported by a majority of shareholders. In that regard, and contrary to the rhetoric of many shareholder activists, directors should understand that Rule 14a-8, the shareholder proposal rule, was designed to permit shareholders to communicate with each other and with management by making advisory recommendations, rather than to permit them to hold binding shareholder referendums. The text of Rule 14a-8, and SEC precedent under that rule, clearly confirm that interpretation. Moreover, under state law, directors are tasked with making decisions that are in the best interest of the company and shareholders as a whole, and should be protected if they determine, in exercising their fiduciary duties, not to take actions recommended in majority vote resolutions. A written or unwritten policy of automatic adoption of majority vote resolutions is not consistent with a board’s fiduciary duties and should be avoided despite any shareholder activist pressure to the contrary. Governance by referendum, or threat of referendum, is not a substitute for the careful judgment of fiduciaries and would not be a welcome development for American public companies.

Beyond the basic legal framework, however, the changed corporate governance climate makes it essential for companies and their directors to treat majority vote resolutions seriously and to enhance their procedures for considering and acting on such resolutions. Companies should make case-specific determinations on how to respond to individual proposals, but a few general steps are worth considering. First, companies should continue to invest in good shareholder relations throughout the year. The board should regularly review the company’s shareholder relations programs and consider whether it is appropriate for the board to have greater interaction with shareholders. Recent reforms mandated by the stock exchanges and the SEC now require public companies to provide a means for shareholders to reach independent board members and to disclose such means, but each board should consider whether to enhance procedures beyond those that are required. (292) Enhanced contact with shareholders may also have the benefit of preempting shareholder proposals where a company has performance or compliance issues. The company, with board involvement, should also carefully consider whether to oppose shareholder proposals that can be accommodated without significant difficulty, rather than to automatically oppose them.

Second, companies should make a greater effort to communicate to shareholders their approach to majority vote resolutions. (293) Following a majority vote in favor of a shareholder proposal, companies should include consideration of the matter at an upcoming board meeting, generally the next board meeting. Companies should communicate the outcome of the deliberation on such majority vote resolutions to the proponent directly as well as publicly, at a minimum to notify CII, ISS, and other watch groups that the board has considered the issue carefully. (294) Some companies will find it useful to issue a press release describing the outcome of their consideration of majority vote resolutions, whereas others may consider including such disclosure in SEC filings, such as the proxy statement. Some companies may even decide to voluntarily adopt procedures for addressing majority vote resolutions, such as communicating with or meeting with the proponents of such resolutions. For example, the proposal that has been submitted by the New York pension funds during 2004, which would require a committee of independent directors to meet with the proponent of a majority vote resolution and then to present a recommendation to the full board, is one that some companies may decide to adopt or vary for their own use. (295) As companies spend more time and effort to consider shareholder proposals, and especially majority vote resolutions, a policy that formalizes a process for that consideration might make sense. One company, for example, has recently adopted a policy requiring members of its nominating and governance committee to meet with the sponsors of up to three majority vote resolutions within four months of the annual meeting at which the vote occurred, and to report to the full board, which would then consider the majority vote resolution in accordance with state law. (296) The policy also requires the chair of the nominating and governance committee to advise the proponents of the majority vote resolutions, in writing, of the outcome of the action taken. (297) Such a policy can take the form of a standalone policy or, more likely, be a component of a shareholder communication or corporate governance policy.

Taking some or all of the steps outlined above is consistent with notions of good corporate governance and is not tantamount to “bending” to shareholder activist pressure. Boards must not only consider majority vote resolutions in the context of what is best for the company and all of its shareholders, but must also defend their decisions, especially in the face of the kinds of shareholder and other pressures that we have reviewed in this Article. In our view, by paying serious attention to shareholder proposals, and by being proactive in shareholder communications and disclosure, boards are most likely to create the right environment for considering majority vote resolutions even when the ultimate determination may be to reject them. Although some shareholder activists would like to equate precatory resolutions with binding referendums, companies and their boards should resist such attempts by taking action that will show the difference. For boards that implement a strong process for considering majority vote resolutions, there should be no legal or other impediment to letting that process work properly, even if at times it means that boards will say “no” when shareholders say “yes.”

Table 1 (27)

Success of Anti-Poison Pill Proposals

Number of Majority Vote

Anti-Pill Average Number Receiving Proposals as

Proposals Support Majority Vote % of Total

2004 50 62% 39 78%

2003 84 60% 63 75%

2002 50 60% 39 78%

2001 23 57% 17 74%

2000 26 58% 20 77%

1999 27 62% 22 81%

Average: 43 60% 33 77%

(1.) See generally Susan W. Liebeler, A Proposal to Rescind the Shareholder Proposal Rule, 18 GA. L. Rev. 425, 426 (1984) (arguing for the rescission of Rule 14a-8, and citing SEC Commissioner Bevis Longstreth, Address Before the National Association of Manufacturers (Dec. 11, 1981), reprinted in MUT. FUNDS GUIDE (CCH) [paragraph] 11,348, at 14,031 (1982)).

(2.) Investor Responsibility Research Center (IRRC) Online Analyst System [hereinafter IRRC database]. Data for 2004 is as of October 29, 2004. Unless a specific different source is cited, this Article uses the IRRC database and methodology to calculate the number of shareholder proposals and majority vote resolutions. Data used from the IRRC’s database is cited “IRRC database” throughout the Article. The authors note that there is some variation among different sources in reported numbers of shareholder proposals and majority vote resolutions, generally as a result of different company coverage and variations in methodologies used in counting votes. Unless otherwise stated, “majority vote resolutions” refers to proposals supported by a majority of votes cast for and against. See infra notes 48-58 and accompanying text.

(3.) Security Holder Director Nominations, 68 Fed. Reg. 60,784 (proposed Oct. 23, 2003) (to be codified at 17 C.ER. pts. 240, 249, and 274) [hereinafter Proposed Shareholder Access Rule].

(4.) As Martin Lipton recently noted,

After the Enron/Worldcom scandals, the New York Stock Exchange corporate governance proposals, Sarbanes-Oxley, SEC regulations, and so on, there’s a much different attitude in the boardroom. Directors today are very concerned about the reaction of shareholders and much more reluctant to accept the advice of management, the advice of lawyers, even the advice of totally independent lawyers who have no connection with the corporation. Basically, they are saying “Well, this is what the shareholders are saying, and I don’t want to face a withhold-the-vote campaign.” Directors today are very, very concerned about the impact on their reputations if one is singled out as the culprit on one of these precatory resolutions….

Martin Lipton, Remarks at the Harvard Law School Symposium on Corporate Elections 6 (Oct. 3, 2003) (on file with The Business Lawyer, University of Maryland School of Law).

(5.) See generally BROC ROMANEK & BETH M. YOUNG, SHAREHOLDER PROPOSAL HANDBOOK [section] 1.03 (2002).

(6.) A survey of 286 shareholder proposals between the years of 1948-51 found that 137, or 47 percent, were made by two brothers, Lewis D. Gilbert and John J. Gilbert. Frank D. Emerson & Franklin C. Latcham, The SEC Proposal Rule: The Corporate Gadfly, 19 U. CHI. L. REV. 807,830 (1952).

(7.) Stewart J. Schwab gr Randall S. Thomas, Realigning Corporate Governance: Shareholder Activism by Labor Unions, 96 MICH. L. REV. 1018, 1044 (1998).

(8.) Beth M. Young, Shareholder Proposals Regarding Takeover Defenses, 5 M & A Law. 13 (2002).

(9.) These are pre-1997 figures from W Trexler Proffitt, Jr., The Evolution of Institutional Investor Identity: Social Movement Mobilization in the Shareholder Activism Field 128-29 (2001) (unpublished Ph.D. dissertation, Northwestern University) (on file with authors), who compiled them from IRRC data, Gilbert Annual Reports, and company proxy statements. Figures after and including 1997 were provided directly by the IRRC.

(10.) See Patrick McGurn, ISS, 2003 Proxy Season Review & 2004 Preview 2.

(11.) IRRC database.

(12.) SUZANNE FALLENDER, INSTITUTIONAL SHAREHOLDER SERVICES, POSTSEASON REPORT: A DYNAMIC SEASON FOR SOCIAL AND ENVIRONMENTAL PROPOSALS (Sept. 19, 2003) (on file with The Business Lawyer, University of Maryland School of Law).

(13.) MARIA CARMEN S. PINNELL, INVESTOR RESPONSIBILITY RESEARCH CENTER, IRRC GOVERNANCE RESEARCH SERVICE 2004 BACKGROUND REPORT E: POISON PILLS 1 (Feb. 2004) [hereinafter PILL BACKGROUND] (on file with The Business Lawyer, University of Maryland School of Law). In 2004, as of October 29, there were 101 anti-pill resolutions, fifty of which came to a vote and thirty-nine of which received majority support. IRRC database.

(14.) ROBIN MAYNS COWLES, INVESTOR RESPONSIBILITY RESEARCH CENTER, IRRC GOVERNANCE RESEARCH SERVICE 2004 BACKGROUND REPORT C: CLASSIFIED BOARDS 2 (Feb. 2004) [hereinafter CLASSIFIED BOARD BACKGROUND REPORT] (on file with The Business Lawyer, University of Maryland School of Law). In 2004, as of October 29, shareholders voted on thirty-eight resolutions against staggered boards, of which thirty-six obtained majority vote with a 71 percent average voting level. IRRC database.

(15.) See GEORGESON SHAREHOLDER, ANNUAL CORPORATE GOVERNANCE REVIEW: SHAREHOLDER PROPOSALS AND PROXY CONTESTS 3 (2003), available at http://www.georgesonshareholder.com/pdf/2003 WrapUp.pdf (2003) [hereinafter GEORGESON SHAREHOLDER]. Leading categories in 2003 were expensing of options, with twenty-five proposals passing out of a total of sixty-seven

(16.) FALLENDER, supra note 12, at 1.

(17.) Id. In 2003, shareholders of CBRL Group, Cracker Barrel Old Country Stores’ parent company, voted 58 percent in favor of a resolution seeking to bar sexual orientation discrimination. Robert Trigaux, Corporations Start to Listen as Shareholders Find their Voices, ST. PETERSBURG TIMES, Feb. 17, 2003, at 1E.

(18.) See Liebeler, supra note 1, at 426.

(19. IRRC database. See ISS, PRELIMINARY 2004 POST SEASON REPORT: A NEW CORPORATE GOVERNANCE WORLD: FROM CONFLICT TO CONSTRUCTIVE DIALOGUE 1 (on file with The Business Lawyer, ” University of Maryland School of Law) [hereinafter ISS 2004 PRELIMINARY REPORT]. The number of majority vote resolutions was fifty-five in 1999, sixty-four in 2000, sixty-six in 2001 and ninety-nine in 2002. A significant portion of the drop in majority vote resolutions during 2004 seems to be attributable to a greater willingness by companies to negotiate a resolution prior to submission of proposals to a vote. See DAVID CASSERLY, ISS, 2004 PROXY SEASON TRENDS (June 4, 2004) (on file with The Business Lawyer, University of Maryland School of Law).

(20.) IRRC database.

(21.) IRRC, Shareholder Ire Spurs More, Higher Majority Votes in Proxy Season 2002, CORP. GOVERNANCE BULL. NO. 2, June-Aug. 2002, at 3-4

(22.) From 2000-03, the IRRC database tracked 543 proposals in these categories, out of 3,619 in total (15 percent). Of the 543 proposals, 317 received majority votes. This represents eighty percent of the 397 majority votes in all categories tracked by IRRC during this time. 1RRC database.

(23.) PILL BACKGROUND, supra note 13, at 20.

(24.) Id.

(25.) IRRC tracked 107 submitted proposals in 2003, eighty-one in 2002, thirty-seven in 2001, and thirty-eight in 2000. Id. at 2.

(26.) Id. at 20, Fig. 1, 30

(27.) PILL BACKGROUND, supra note 13, at 20. Data from 2004 based on IRRC database.

(28.) See ISS 2004 PRELIMINARY REPORT, supra note 19, at 1. Percentages in Table 1 are not weighted averages.

(29.) Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, 68 Fed. Reg. 6564, 6564 (Feb. 7, 2003) (to be codified at 17 C.F.R. pts. 239, 249, 270, and 274).

(30.) Proxy Voting by Investment Advisers, 68 Fed. Reg. 6585, 6586 (Feb. 7, 2003) (to be codified at 17 C.ER. pt. 275). This rule requires investment advisers to meet three requirements by July 1, 2003: (i) adopt written policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of clients

(31.) Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, 68 Fed. Reg. at 6584.

(32.) See infra Part II, especially notes 67-70 and accompanying text.

(33.) SEC. INDUSTRY ASS’N, SECURITIES INDUSTRY FACT BOOK 71 (2002).

(34.) One recent study, for example, found that managers of pension funds behave very differently on issues of corporate strategy from their counterparts who oversee investment funds, in part because pension fund managers hold stocks longer than investment managers and have the patience to wait for long-term developments. In contrast, investment managers often face short-term pressures for results and so will seek support for quick returns. See Robert E. Hoskisson et al., Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategzes, 45 ACAD. MGM$. J. 697,700 (2002).

(35.) Burton Rothberg & Steven Lilien, Analysis and Implications of the New Proxy Voting Rules for Mutual Funds (Nov. 19, 2003) (on file with The Business Lawyer, University of Maryland School of Law).

(36.) DIV. OF CORP. FIN., SEC. & EXCH. COMM’N, STAFF REPORT ON CORPORATE ACCOUNTABILITY 339 (Sept. 4, 1980) (prepared for S. Comm. on Banking, Housing and Urban Affairs).

(37.) Proxy Voting by Investment Advisors, 68 Fed. Reg. 6585, 6588 n.24 (Feb. 7, 2003) (to be codified at 17 C.F.R. pt. 275).

(38.) ISS, 2003 POST-SEASON PROXY REPORT: THE END OF THE ROUTINE PROXY 35-36 (2003) (noting also that “Gone are the days when funds and advisers had blanket policies of voting with management.”) (on file with The Business Lawyer, University of Maryland School of Law).

(39.) David Henry, Mutual Funds: Tossing Out the Rubber Stamp, BUS. WEEK, Nov. 17, 2003, available at http://www.businessweek.com.

(40.) Id.

(41.) Burton Rothberg & Ned Regan, A Seat at the Corporate Governance Table, WALL ST. J., Dec. 17, 2003, at A22.

(42.) See Internet Spurs Shareholder Activism: Web-Based Proxy Voting and Communication Between Investors Increase, INVESTOR RELATIONS BUS., Nov. 1, 1999, available at LEXIS, News Library, Investor Relations Business file

(43.) Regulation of Communications Among Shareholders, Exchange Act Release No. 31326 [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) [paragraph] 85,051, at 85,051 (Oct. 16, 1992) (exempting shareholder communications that do not involve the solicitation of voting authority). In a recent case, Mony Group, Inc. v. Highfields Capital Management, 368 F.3d 138, 146-47 (2d Cir. 2004), the Second Circuit ruled that shareholder opposing a merger cannot mail a duplicate of the company’s proxy card without complying with the proxy rules.

(44.) Div. of Corp. Fin., Sec. & Exch. Comm’n, Staff Legal Bull. No. 14, at 13 (July 13, 2001).

(45.) See, e.g., Council of Institutional Investors, Corporate Governance Initiatives (on file with The Business Lawyer, University of Maryland School of Law).

(46.) See, e.g., CALPERS, Global Proxy Voting Principles (March 19, 2001), available at http:// www.calpers-governance.org/principles/default.asp (proxy voting record and policies)

(47.) See IRRC, Shareholders Use of Internet Could Signal Future Actions, 11 CORP. GOVERNANCE HIGHHGHTS 6 (2000)

(48.) See Fred White III& Peter E. Greene, Gramra-Leach-Bliley Update: New Regs, New Problems, New Opportunities 45, 82 (PLI Corp. Law & Practice Course, Handbook Series No. B0-00ZO, 2001), available at WL 1232 PLI/Corp 45 (“Generally speaking, a broker ‘non-vote occurs when a registered broker-dealer holding securities in street name has not received voting instructions from … the beneficial owner of such securities, and therefore is barred by [stock] exchange rules from exercising discretionary authority to vote on any ‘nonroutine’ or controversial matters.'”).

(49.) See MODEL BUS. CORP. ACT [section] 7.25(C) (1999).

(50.) The New York statute has been interpreted to reach a similar result as under the RMBCA states. See N.Y. Bus. CORP. LAW [section] 614 (McKinney 1998)

(51.) See, e.g., DEL. CODE ANN. tit. 8, [section] 216 (2001).

(52.) Telephone Interview with Virginia Rosenbaum, IRRC (Jan. 29, 2004).

(53.) Id.

(54.) PILL BACKGROUND, supra note 13, at 1.

(55.) This Article adopts the IRRC methodology because the IRRC is the leading data provider on matters relating to shareholder proposals and the use of its database is therefore the best means to maintain a consistent approach in reporting and evaluating trends relating to shareholder proposals and majority vote resolutions.

(56.) See, e.g., Supporting Statement in Mattel, Inc., 5EC No-Action Letter, 2004 WL 351785, at *4 (Feb. 23, 2004)

(57.) IRRC, Shareholders Keep Up the Heat on Executive Compensation, CORP. GOVERNANCE BULL. NO. 1, May-July 2001, at 9.

(58.) Bausch &: Lomb, Notice of Annual Meeting and Proxy Statement, at 25 (Mar. 21, 2003), available at http://www.bausch.com/us/vision/about/investor/pdfs/2003proxy.pdf (last modified Apr. 29, 2003) (“Given shareholders’ views on the classified board issue, the board has determined to put the requested amendments to the company’s by-laws and certificate of incorporation before the annual meeting for a shareholder vote. Adoption of the proposed amendment to the certificate of incorporation and by-laws will require the affirmative vote of eighty percent (80%) of the outstanding shares of the company, not including shares owned by the company”) Shareholder proposals to declassify the Bausch & Lomb board received 62 percent support in 1997, 58 percent support in 1998, and 77 percent support in 2002. The 2003 proposal, however, received only 60 percent of the vote (and was opposed by the company). See CLASSIFIED BOARD BACKGROUND REPORT, supra note 14, at 4.

(59.) Stephen Schulman, Shareholder Cause Proposals: A Technique to Catch the Conscience of the Corporation, 40 GEO. WASH. L. REV. 1, 36-37 (1971) (noting, however, that the trend was changing in the years preceding the date of the article).

(60.) SEC. INDUSTRY ASS’N, supra note 33, at 66.

(61.) See Jayne Elizabeth Zanglein, From Wall Street Walk to Wall Street Talk: The Changing Face of Corporate Governance, 11 DEPAUL BUS. L.J. 43, 46 (1998).

(62.) The value of securities owned by exchange-traded funds increased from less than $1 billion in 1995 to $83 billion in 2001. SEC. INDUSTRY ASS’N, supra note 33, at 64.

(63.) Noting that some mutual fund managers have little discretion on the choice of which stock to own, two commentators observed that “it]his is especially true for index investors, who have no choice on which companies to own. It is notable that a large percentage of actively managed institutional investors are suspected of being ‘closet indexers,’ so that this group may be as much as [eighty percent] of total institutional assets.” See Rothberg & Lilien, supra note 35, at 3.

(64.) Alan R. Palmiter, Mutual Fund Voting of Portfolio Shares: Why Not Disclose?, 23 CARDOZO L. REV. 1419, 1428 (2002) (citing John C. Bogle, Creating Shareholder Value: BY Mutual Funds … Or FOR Mutual Fund Shareholders?, Address Before the Annual Conference of Investor Responsibility Research Center (Oct. 26, 1988))

(65.) See Jill E. Fisch, Relationship Investing: Will It Happen? Will It Work?, 55 OHiO ST. L.J. 1009, 1010 (1994) (defining “relationship investing” as a “long-term financial commitment by an investor to a portfolio company in exchange for a say as to how it is run”). The term “relationship investing” was not extensively used until 1993, when it appeared in several legal articles. See, e.g., Lawrence A. Cunningham, Conversations From the Warren Buffett Symposium, 19 CARDOZO L. REV. 719, 744 n. 11 (1994)

(66.) See Domini Social Investments Becomes First Mutual Fund Company to Provide Public Access to its Current Proxy Voting Decisions via the Internet, Bus. WIRE, Apr. 6, 1999, available at LEXIS, News Library, Business Wire file

(67.) Commentators have suggested that union activism is due to their “outsider” status and the fact that employees, unlike other shareholders, are less diversified and are more invested in the company. See Stewart J. Schwab & Randall S. Thomas, Realigning Corporate Governance: Shareholder Activism by Labor Unions, 96 MICH. L. REV. 1018, 1036-42 (1998).

(68.) Shareholders Target Governance: Executive Comp, Poison Pills Are Top Issues on Investors’ Radars, INVESTOR REL. BUS., Dec. 22, 2003, available at LEXIS, News Library, Investor Relations Business file.

(69.) IRRC database

(70.) Robert L. Rose, Executive Pay (A Special Report): Pay Checks Call to Action: Labor Has Discovered the Perfect Issue for Galvanizing Workers: CEO Pay, WALL ST. J., Apr. 9, 1998, at R8 (describing role of AFL-CIO in pressuring money managers into following AFL-CIO voting guidelines).

(71.) Willard T. Carleton et al., The Influence of Institutions on Corporate Governance Through Private Negotiations: Evidence From TIAA-CREF, 53 J. FIN. 1335, 1338-39 (Aug. 1998). In a study of shareholder proposals between 1987-94, Stuart Gillian of the SEC and Laura T. Starks of the University of Texas found institutional ownership was correlated with the outcome of votes on shareholder-sponsored proposals. See Stuart L. Gillian & Laura T. Starks, Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors, 57 J. FIN. ECON. 275,295 (2000) (noting that magnitude of link is relatively small). Other studies show similar results. See Lilli A. Gordon &John Pound, Information, Ownership Structure, and Shareholder Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals, 48 J. FiN. 697, 713 (1993).

(72.) See Charles M. Nathan, Shareholder Democracy Often an Illusion, DAILY DEAL, Feb. 7, 2000, available at LEXIS, News Library, The Daily Deal file (“The reason is that underneath the veneer of responsible voting, most institutions have concluded it is just not economic to consider each proxy vote on the merits. There are simply too many portfolio companies and too many shareholder proposals to cope with on a case-by-case basis.”).

(73.) See Bernard S. Black, Shareholder Activism and Corporate Governance in the United States, 7 CORP. GOVERNANCE ADVISOR 14, 16 (1999) (on file with The Business Lawyer, University of Maryland School of Law)

(74.) See Burton Rothberg & Ned Regan, A Seat at the Corporate Governance Table, WALL ST. J., Dec. 17, 2003, at A22 (“ISS is a leading proxy-voting consultant and has its own set of voting guidelines, which virtually all [mutual] funds use as a reference. Some [funds] went so far as to strictly adhere to the ISS guidelines.”).

(75.) Id.

(76.) Nathan, supra note 72.

(77.) Id.

(78.) Comment Letter to the SEC from the Business Roundtable, The Proposed Election Contest Rules, File Nos. 7-19-03, at 28-29 (Dec. 22, 2003) [hereinafter Business Roundtable Letter].

(79.) As the Business Roundtable observed, this trend is exemplified in the case of employee benefit plans, which are among the largest investors in the securities markets, with total holdings valued at close to $5 trillion:

As a consequence of positions taken by the Department of Labor, managers of these plans regard the ability to vote proxies as a plan “asset” that they are required to exercise by virtue of their duties as plan fiduciaries. For plans to vote proxies on all matters submitted to shareholders of the companies in which they are invested, however, is an enormous undertaking–tens of thousands of matters are submitted every year to shareholders of public companies. And because most public companies are calendar-year companies whose annual meetings generally are held in a six-to eight-week period in the spring of each year, these benefit plans would need to evaluate thousands of proposals in a very, short time period. Therefore, for most institutional investors, the close examination of the individual matters to be voted on in company proxy materials contemplated by the proposing release is simply impracticable. Instead, most institutional investors adopt voting guidelines, either independently or by using the guidelines of [ISS] or another proxy advisory service.

Id. at 28. 80. Id. at 29.

(81.) Id. at 34.

(82.) Id. at 29 (quoting GEORGESON SHAREHOLDER, supra note 15, at iii).

(83.) Id. at 29.

(84.) See, e.g., Mattel, Inc., SEC No-Action Letter, 2004 WL 351785, at * 1 (Jan. 9, 2004)

(85.) The IRRC has suggested that shareholders can tell whether a poison pill is being used to entrench management, with one such indicator being that the poison pill is one of a cluster of takeover defenses in place. See Corporate Governance: Fewer Precatory Proposals Does Not Mean Less Shareholder Pressure, Experts Suggest, BNA SEC. Law DAILY (Mar. 9, 1998), available at WL 3/9/98 SLD dS.

(86.) PILL BACKGROUND, supra note 13, at 46 (reporting on the IRRC study conducted in 2001).

(87.) Id. at 46, Table 6.

(88.) See supra notes 29-31 and accompanying text.

(89.) See Rothberg & Lilien, supra note 35, Table 4-B.

(90.) Id.

(91.) Id.

(92.) ISS, US Voting Manual Ch. 4, available at http://www.issueatlas.com/content/subscription/ usvm.html. Interestingly, although ISS eschews the case-by-case approach on shareholder proposals regarding poison pills, ISS recommends a case-by-case approach on management proposals in favor of adopting poison pills, stating that ideally such poison pills would include a 20 percent or higher threshold, a two-three year sunset provision and other “shareholder friendly” provisions. Id.

(93.) Amendments to Rules on Shareholder Proposals, 63 Fed. Reg. 50,622 (Sept. 22, 1998).

(94.) “Since its early releases in the 1940s, the SEC has made clear that the rule is designed to prevent management from using discretionary voting authority to effectively shut out shareholders from being able to propose alternative courses of corporate action. In addition, the shareholder proposal rule has served as a vehicle for shareholders to inform management of their concerns and as a means for shareholders to communicate with each other.” ROMANEK &: YOUNG, supra note 5, at 1-3.

(95.) See, e.g., Eric A. Welter, Note, The Shareholder Proposal Rule: A Change to Certainty, 60 GEO. WASH. L. REV. 1980, 1998 (1992).

(96.) According to the SEC,

Proposals by security holders that mandate or direct the board to take certain action may constitute an unlawful intrusion on the board’s discretionary authority under the typical statute. On the other hand, however, proposals that merely recommend or request that the board take certain action would not appear to be contrary to the typical state statute, since such proposals are merely advisory in nature and would not be binding on the board even if adopted by a majority of the security holders.

Securities Exchange Act of 1934, Exchange Act Release No. 12,999, 1976 SEC LEXIS 326, at * 20-21 (Nov 22, 1976).

(97.) Adoption of Amendments Relating to Proposals by Security Holders, Exchange Act Release No. 12999, 41 Fed. Reg. 52,994, at *7 (Dec. 3, 1976). In adding this Note in 1976, the SEC indicated that:

Most states do not, for the most part, explicitly indicate those matters which are proper for security holders to act upon, but
instead provide only that “the business and affairs of every corporation organized under this law shall be managed by its board of directors” or words to that effect. Under such a statute, the board may be considered to have exclusive discretion in corporate matters absent a specific provision to the contrary in the statute itself or the corporation’s charter or by-laws.

Id.

(98.) Div. of Corp. Fin., Sec. & Exch. Comm’n, Staff Legal Bull. No. 14, at 21 (July 13, 2001).

(99.) See, e.g., Storage Technology Corp., SEC No-Action Letter, 1996 WL 91879, at *3 (Feb. 29, 1996) (proposal requiring that the company reduce the number of directors excludable as an improper subject for shareholder actions

(100.) See infra notes 169-217 and accompanying text.

(101.) See Welter, supra note 95, at 1994-95.

(102.) Stephen Schulman, Shareholder Cause Proposals: A Technique to Catch the Conscience of the Corporation, 40 GEO. WASH. L. REV. 1, 34 (1971).

(103.) Id.

(104.) Alan Hevesi, a prominent shareholder activist, expressed this sentiment as follows:

If majority votes are de facto meaningless when they are cast for non-management proposals, the shareholder proposal process itself is reduced to a futile, resource-consuming exercise. Indeed, SEC Rule 14a-8 and its resubmission thresholds, no-action letter process, and other provisions are reduced to foolish child’s play if the process ends with boards of directors ignoring the ultimate expression of the wishes of the shareholders–the majority vote.Letter from Alan Hevesi, Comptroller, City of New York, to the Editor, PENSIONS & INVESTMENTS, Mar. 6, 2000, available at LEXIS, News Library, Pensions and Investments file [hereinafter Hevesi Letter].

(105.) See Auer v. Dressel, 118 N.E.2d 590, 594 (N.Y. 1954) (establishing the right of shareholders to address precatory recommendations that the board take action, which the shareholders could not compel or bring about themselves).

(106.) Lucian Ayre Bebchuk & Alma Cohen, Firms’ Decisions Where to Incorporate, 46J. L. & ECON. 383, 389 (2003) (“Delaware has by far the largest stake of incorporations: 58 percent of all firms, 59 percent of Fortune 500 firms, and even a higher percentage–68 percent–of firms that went public in the period 1996-2000.”).

(107.) See, e.g., Chapin v. Benwood Found. Inc., 402 A.2d 1205, 1211 (Del. Ch. 1979), aff’d, Harrison v. Chapin, 415 A.2d 1068 (Del. 1980) (finding that the court could not “give legal sanction to agreements which have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters”) (citing Abercrombie v Davies, 123 A.2d 893, 899 (Del. Ch. 1956), rev’d in part on other grounds, 130 A.2d 338 (Del. Ch. 1957))

(108.) 488 A.2d 858 (Del. 1985).

(109.) Id. at 893.

(110.) Id. at 889-90.

(111.) See, e.g., Gagliardi v Trifoods Intern. Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996).

(112.) Am. Int’l Rent-a-Car, Inc. v Cross, No. 7583, 1984- WL 8204, at *3 (Del. Ch. May 9, 1984).

(113.) Nos. 10866, 10670, & 10935, 1989 WL 79880 (Del. Ch. July 14, 1989), aff’d, 571 A.2d 1140 (Del. 1990).

(114.) Id. at *30.

(115.) Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1990).

(116.) See Rosenblatt v Getty Oil Co., No. 5278, 1983 WL 8936, at *18 (Del. Ch. Sept. 19, 1983), aff’d, 493 A.2d 929 (Del. 1985)

(117.) See DuPont v DuPont, 251 E 937, 944 (D. Del. 1918) (stating that a shareholder is “free to exercise his own judgment, and to act in accordance with selfish rather than altruistic motives”), aff’d, 256 E 129 (3d Cir. 1919), cert. denied, 250 U.S. 642 (1919)

(118.) John C. Coates IV & Bradley C Faris, Second-Generation Shareholder Bylaws: Post-Quickturn Alternatives, 56 Bus. LAW. 1323, 1330 n.38 (2001) (noting that “[t]his proposition is implicit in the board’s duty ‘to determine whether [an unsolicited] offer is in the best interests of the corporation”) (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)).

(119.) Id.

(120.) 721 A.2d 1281 (Del. 1998).

(121.) Id. at 1292-93. The opinion held as follows:

While the [contested provision] limits the board of directors’ authority in only one respect, the suspension of the Rights Plan, it nonetheless restricts the board’s power in an area of fundamental importance to the shareholders–negotiating a possible sale of the corporation. Therefore, we hold that the [contested provision] is invalid under Section 141(a), which confers upon any newly elected board of directors full power to manage and direct the business and affairs of [the] Delaware corporation.

Id. at 1291-92.

(122.) 723 A.2d 1180 (Del. Ch. 1998).

(123.) Id. at 1191 (footnote omitted).

(124.) HENRY WINTHROP BALLANTINE, BALLANTINE ON CORPORATIONS 122 (1946).

(125.) See MODEL BUS. CORP. ACT [section] 8.01 cmt. (Supp. 2000q)2) (reviewing statutes).

(126.) See, e.g., Ellerman v Chicago Junction Rys. & Union Stock-Yards Co., 49 N.J. Eq. 217, 232 (N.J. Ch. 1891) (“Questions of policy of management … are left solely to the honest decision of the directors … To hold otherwise would be to substitute the judgment and discretion of others in the place of those determined on by the scheme of incorporation.”)

(127.) JAMES D. Cox & THOMAS LEE HAZEN, 1 CORPORATIONS 172 (2d ed. 2003). These statutes allow directors to consider the effects of their actions on nonshareholder groups such as employees, creditors, bondholders, suppliers, communities, and sometimes even national economic and social interests.

(128.) Hevesi Letter, supra note 104. Mr. Hevesi also compared precatory resolutions to binding referendums, analogizing to the political arena in the process:

The premise is reasonable: Those who exercise power should be accountable to those who are affected by it. In the same manner that elected officials are accountable to the electorate, boards of directors are accountable to the shareholders. Accountability legitimizes the directors’ delegated authority Without it, abuse is unbridled. Whether you agree or disagree with the corporate reforms sought by the New York City Pension Funds’ resolutions, or the Funds’ decision as to when to pursue a “Vote No” initiative, the fundamental issue remains the double standard which allows directors to render majority votes meaningless. The de facto invalidation of majority votes for non-management resolutions dangerously tilts the proxy voting and shareholder proposal process, making directors the representatives of management and not the shareholders. Until there is a legislative or judicial remedy, the “Vote No” initiative remains the only resource for shareholders.

Id.

(129.) Patrick S. McGurn & Shirley Westcott, Just Vote No Campaigns Gain Clout, reprinted in ISS, 2000 POST-SEASON REPORT: THE NEW MILLENNIUM 9 (2000).

(130.) See Letter from Chief Justice Veasey, Delaware Supreme Court, to Alan L. Beller, SEC Div. of Corporate Fin. (Mar. 11, 2004) (on file with authors) (proposing that directors be elected by majority of the votes cast)

(131.) Public companies are required to disclose the number of withheld votes for each nominee in their periodic reports. See Form 10-K, Item 4(c)

(132.) See McGurn & Westcott, supra note 129, at 9-15. Despite the low votes that early “Vote No” campaigns received, the negative publicity is generally perceived to be damaging and proved to be an effective tool in getting the attention of management. See RALPH D. WARD, 21ST CENTURY CORPORATE BOARD 120 (John Wiley & Sons ed., 1996) (describing the early low-votes received by most “Vote No” campaigns, but arguing that the publicity of such campaigns generally had an effect on the targeted companies).

(133.) In 1992, the SEC created a broad exemption from most of the proxy rules for communication among shareholders that does not involve the actual solicitation of proxy voting authority. See Exch. Act Release No. 31,326 (Oct. 16, 1992), available at 1992 WL 301258. The 1992 amendments to the proxy rules also exempted certain broad-based voting announcements (i.e., those given by public forum, press release, website, etc.) from the proxy rules. See Rule 14a-1(1)(2)(iv) (exclusion of such announcements from the definition of “solicitation” under the proxy rules).

(134.) See David Henry, A Wake-Up Call From Investors: CEOs Are Being Grilled Like Never Before in Conference Calls Run For Shareholders, Bus. WEEK, Mar. 15, 2004, at 33.

(135.) Cornish E Hitchcock, IRRC, SEC Proposal Could Raise the Stakes for Vote-No Campaigns, CORP. GOVERNANCE BULL. No. 3, Oct.-Nov. 2003, at 3 (on file with The Business Lawyer, University of Maryland School of Law) (noting that the cost of “Vote No” campaigns is usually measured in the thousands or tens of thousands of dollars, rather than the millions).

(136.) Outside the majority vote context, “Vote No” campaigns came of age in 1997 when, In addition to withholding votes against director at its focus firms, CalPERS [withheld votes from] nominees in protest of, among other things, a lack of boardroom independence (at ArcherDaniels-Midland Co. and Dillard Department Stores, Inc.) equal employment opportunity policies (at Texaco, Inc.) performance (at Beverly Enterprises, Inc. and Unisys) and laissez-faire compensation practices (at the Walt Disney Co.).

See James E. Heard & Patrick S. McGurn, Corporate Governance Audit for 1998, 11 INSIGHTS 3, 3 (1997). Some of the more prominent examples of “Vote No” campaigns have been outside the context of majority vote resolutions. See, e.g., Carol Hymowitz, Business Leaders Face a Grassroots Demand for a Lot Less Hubris, WALL ST. J., Mar. 9, 2004, at B1 (describing that 43 percent of shareholders withheld votes from Michael Eisner during the 2004 proxy season).

(137.) McGurn, supra note 66, at 12.

(138.) IRRC, SEC’s Proposed Rules for Shareholder-Nominated Board Candidates Will Inspire More Vote-No Campaigns in 2004, 14 CORP. GOVERNANCE HIGHLIGHTS 197, 198 (2003).

(139.) Id.

(140.) Id.

(141.) Jeanmarie LoVoi & Klaus Eppler, Corporate Governance 217, 266 (PLI Corp. Law & Practice Course, Handbook Series No. B0-018D, 2002), available at WL 1286 PLI/Corp 217 (quoting Francis Byrd, special assistant for pension policy for the New York City Pension Funds). “In 2000, a classified board proposal submitted by NYCERS to Freeport McMoran Copper & Gold received 50.7 percent of the votes cast. In 1999, the New York City Teachers’ Retirement System submitted a proposal asking Louisiana-Pacific to adopt a policy allowing shareholders the right to act by written consent… [which passed with] 67.7 percent of the votes cast.” Id.

(142.) Id.

(143.) Id.

(144.) “In 2000, the SEIU proposal received 60.7 percent of the votes cast. “In 1999, the proposal received 53.2 percent of the votes cast, and in 1997, it received 50.3 percent of the votes cast. In 1998, Kodak’s management did not make a voting recommendation against the proposal in the proxy statement, and the resolution garnered 71.4 percent of the votes cast.” IRRC, Heavy Hitters Pledge to “Vote No” at Kodak Meeting, 12 CORP. GOVERNANCE HIGHLIGHTS 65, 65–66 (2001) (on file with The Business Lawyer, University of Maryland School of Law).

(145.) See Proxy Statement of Eastman Kodak Co., Item 6 (1998), available at LEXIS, U.S. Financial Filings, SEC Proxy Statements file (“[E]limination of Board classification requires an amendment to the Company’s Restated Certificate of Incorporation. This requires action by the Board of Directors and the affirmative vote of at least 80 percent of the outstanding shares of the Company The creation of a classified Board and the 80 percent requirement were approved by the shareholders at the Company’s 1987 Annual Meeting.”)

(146.) See IRRC, Shareholders Keep Up the Heat on Executive Compensation, CORP. GOVERNANCE BULL., May-July 2001, at 9 (“‘At a time when most directors are elected with 98 percent pluralities, this vote should send a stern message on corporate democracy,’ said Steve Abrecht, executive director of the SEIU Master Trust pension funds.”).

(147.) See Daniel A. Karp, Chairman and CEO of Eastman Kodak Company, Presentation at the Spring Meeting of the Council of Institutional Investors (Mar. 26, 2002) (on file with The Business Lawyer, University of Maryland School of Law) (“Of course, reasonable people can disagree on some governance issues, like poison pills and a classified board. While Kodak does not have a poison pill, we believe that the ‘institutional memory’ provided by a classified board is important…. We believe that a classified board provides director continuity and stability, a sharper focus on long term performance, and negotiating leverage if the company is confronted with an unsolicited takeover offer.”).

(148.) Proposed Shareholder Access Rule, 68 Fed. Reg. 60,784, 60,784 (proposed Oct. 23, 2003) (to be codified at 17 C.ER. pts. 240, 249, and 274).

(149.) Id. at 60,789-90.

(150.) See infra note 250.

(151.) IRRC, SEC Proposal Could Raise the Stakes for Vote-No Campaigns, CORP. GOVERNANCE BULL. No. 3, Oct.-Nov. 2003, at 3 (on file with the The Business Lawyer, University of Maryland School of Law). The SEC is also considering the elimination of discretionary broker voting, which would likely make it easier to achieve higher withhold vote totals. Ron Orol, SEC Mulls Prohibition on ‘Broker Non-Votes,’ DAILY DEAL, Apr. 15, 2004, at 1.

(152.) Proposed Shareholder Access Rule, 68 Fed. Reg. 60,784, 60,791 (proposed Oct. 23, 2003) (to be codified at 17 C.ER. pts. 240, 249, and 274).

(153.) See Karen Estes, ISS, ISS Changes Voting Policy on Director Nominees, Cumulative Voting, FRIDAY REPORT, Feb. 18, 2000 (on file with The Business Lawyer, University of Maryland School of Law). ISS adopted this policy in 2000. See id.

(154.) Comments of SPan Harrigan, President, Board of Administration, California Public Employees’ Retirement System (Dec. 5, 2003), available at http://wwwsec.gov/rules/proposed/s71903.shtml. In the same letter, CalPERS also stated:

CalPERS’ policy is to withhold votes where a company has not implemented a majority-vote shareholder proposal…. We “vote no” on hundreds of directors per year, not because we want to control a Company, but because the directors are not following what CAlPERS considers best practices in the board room, and because often the directors and Company are unresponsive to the proxy process.

Id.

(155.) See Calvert Proxy Voting Guidelines, at 4, available at http:/www.calvert.com/sri_2733.html (last visited Oct. 25, 2004).

(156.) See CBIS Proxy Voting Guidelines, at 5, available at http://www.cbisonline.com/proxy/index. asp (last visited Oct. 25, 2004).

(157.) See State of Connecticut Office of the Treasurer, Domestic Proxy Voting Policies, at 3 (Mar. 8, 2000), available at http://www.state.ct.us/ott/proxpvotingpolicies.htm Other institutional investors have adopted positions that urge boards to be responsive to majority vote resolutions, but that do not require a withhold vote in the event they are not. See, e.g., State of Wisconsin Investment Board, Domestic Proxy Voting Guidelines (Jan. 2004), available at http://www.swib.state.wi.us/proxyguide. asp (indicating that proxy voting preamble asserts that “the board of directors and officers of a corporation should be cognizant of, and responsive to, resolutions submitted by shareholders….”).

(158.) The CII policy is as follows: “Boards should take actions recommended in shareholder proposals that receive a majority of votes cast for and against. If shareholder approval is required for the action, the board should submit the proposal to a binding vote at the next shareholder meeting.” CII, Council Policies–The Board of Directors, available at http://www.cii.org/dcwascii/web.nsf/doc/ policies_i.cm (Sept. 4, 2003).

(159.) IRRC, Counsel Ask For Responses from Majority Vote Companies, 11 CORP. GOVERNANCE HIGHLIGHTS (2000)

(160.) See ISS 2004 PRELIMINARY REPORT, supra note 19, at 5 (showing withhold vote results at Kohl’s Corporation, 3M Company, The Gillette Co., Honeywell International and Apple Computer Inc. on the issue of failing to take action following majority vote resolutions).

(161.) See Steven Dean & David Casserly, ISS, Withhold Votes at Federated Top Record, FRIDAY REPORT, May 28, 2004 (on file with The Business Lawyer, University of Maryland School of Law)

(162.) See Dean & Casserly, supra note 161 (noting that institutional investors hold approximately 95 percent of Federated’s outstanding stock). In contrast 3M recently decided to fight ISS’s withhold vote recommendation and achieved considerable success. See infra note 168.

(163.) See 1RRC, AFSCME Joins Campaign to Withhold Votes for Directors, 15 CORP. GOVERNANCE HIGHLIGHTS 107, 107 (2004).

(164.) See, e.g., Bruce Orwelli, Disney’s Eisner Steps Down From Chairman Post After Protest Garners 43% of Voted Shares, WALL ST. J., Mar. 4, 2004, at A1. But see notes 160-162 and accompanying text.

(165.) For example, prior to 2002, CalPERS withheld votes for director only if a specific conflict of interest or problem arose. In 2002, it began a policy of withholding votes from audit-committee directors at companies whose books are audited by the same firms that do non-audit consulting work for the company See Aaron Lucchetti, Seeking a Voice on Corporate Governance Issues, Some Withhold Their Votes, WALL ST. J. EUR., Jun. 12, 2002, at M4. See Ken Brown, Vanguard Gives Corporate Chiefs a Report Card, WALL ST. J., Nov. 10, 2003, at C1

(166.) See supra note 153 and accompanying text.

(167.) See Pradniya Joshi, Buffet Taking Heat for Seat on Coke Board, NEWSDAY, Apr. 15, 2004, at A35 (describing ISS recommendation to withhold votes from Warren Buffet as director of Coca-Cola Co on independence grounds).

(168.) See infra note 273

(169.) See supra notes 99-100 and accompanying text.

(170.) IRRC, Shareholders Use Binding Proposals to Send Message to Companies, CORP. GOVERNANCE BULL. (Jan.-Mar. 1999) (on file with The Business Lawyer, University of Maryland School of Law).

(171.) The method and timing of implementation of a precatory resolution is up to a company, and even a company that does implement a precatory resolution is generally able to undo it. But see infra notes 194-206 and accompanying text (discussing limitations on the effectiveness of binding bylaws).

(172.) See Shareholder Proposals Down But Number of Binding Bylaws Up, 25 PENSION & BENEFITS REP. (BNA) 558 (1998), available at WL 25 BPR 558 (citing D. Craig Nordlund, then Chairman of the Securities Law Committee of the American Society of Corporate Secretaries, who also added that “If these efforts are successful, I have no doubt that they will become a trend.”).

(173.) IRRC database.

(174.) See, e.g., Proxy Statement of the Quaker Oats Company (1999) (“At last year’s meeting, shareholders owning a majority of the voting shares supported a resolution recommending that the board of directors redeem Quaker Oats’ shareholder rights plan … the board of directors did not follow this recommendation, a stance that we believe dishonors shareholder views.”)

(175.) McGurn, supra note 66, at 3.

(176.) IRRC database. The number of proposals submitted to vote, and those receiving majority support, has also declined.

(177.) A proposal at Computer Horizons to restore the right of shareholders to call a special meeting received 74.4 percent of votes cast in 2003. Before that proposal, four binding proposals in 2000 were the last to receive majority support. They were: to redeem or vote on the poison pill at Quaker Oats and USG (receiving 64 percent of votes cast and 63 percent of votes cast, respectively), to repeal the classified board at Kmart (receiving 69 percent of votes cast), and to increase board independence at the Lone Star Steakhouse and Saloon (receiving 65 percent of the votes cast). IRRC database.

(178.) Id.

(179.) Henry Lesser & Douglas Sugimoto, Emerging Trends in the Use of Shareholder Bylaw Amendments, 5 CORP. GOVERNANCE ADVISOR 15, 16 (1997) (on file with The Business Lawyer, University of Maryland School of Law) (noting the Exxon and Pennzoil no-action letters issued in 1992 and 1993).

(180.) See Novell, Inc., SEC No-Action Letter, 2000 WL 223715, at *10 (Feb. 14, 2000).

(181.) Id. at *1.

(182.) See Mattel, Inc., SEC No-Action Letter, 2002 WL 833515, at *44 (Mar. 25, 2002) (allowing exclusion of binding bylaw proposal requiring shareholder vote on future poison pills)

(183.) Div. of Corp. Fin., Sec. & Exch. Comm’n, Staff Legal Bull. No. 14, [section] G, at 28 (July 13, 2001), available at http://www.sec.gov/interps/legal/cfslby.htm.

(184.) DEL. CODE ANN. tit. 8, [section] 109(a) (2003)

(185.) Id. [section] 141(a).

(186.) Jeffrey N. Gordon, “Just Say Never?” Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511, 546 (1997).

(187.) Lawrence A. Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws: Taking Back the Street?, 73 TUL. L. REV. 409, 431 (1998).

(188.) Id. at 432.

(189.) John C. Coffee, Jr., The Bylaw Battlefield: Can Institutions Change the Outcome of Corporate Control Contests?, 51 U. MIAMI L. REV. 605, 613-14 (1997).

(190.) Hamermesh, supra note 187, at 433-44.

(191.) Id. at 434.

(192.) Id at 435.

(193.) Id at 435-36.

(194.) Phyllis Plitch, Chubb-UNITE Pill Battle Fizzles on Eve of Annual Meeting, Dow JONES NEWSWIRES, Apr. 25, 2000, available at WL DJNSPLUS database.

(195.) Id.

(196.) See, e.g., MODEL BUS. CORP. ACT [section] 10.20(a)(8)(b)(2)(1999)

(197.) Hamermesh, supra note 187, at 468-69 (citing Petition of Buckley, 50 N.Y.S.2d 54, 55-56 (N.Y. Sup. Ct. 1944) (stating that “It is difficult … to believe that it was the intention of the stockholder to permit the directors to amend the stockholders’ by-laws as to matters limiting the directors’ own powers…. That by-laws adopted by directors should be subordinate to those adopted by stockholders is clearly the legislative intent….”))

(198.) Outside the states that have specific prohibitions and New York and Delaware, case law, while limited, can be read to mostly support the position that shareholder-adopted bylaws cannot preclude further amendment or repeal by directors. See Hamermesh, supra note 187, at 472 (citing Whitman v. N.H. Elec. Coop., Inc., 459 A.2d 224, 225-26 (N.H. 1983)) (observing that if the applicable statute had given directors concurrent authority to adopt and amend the bylaws, it “would permit the directors unlimited authority to rewrite the bylaws and would therefore render largely illusory the members’ power of adoption.”).

(199.) 5ee Hamermesh, supra note 187, at 469 n.249 (citing S. Samuel Arsht & Lewis S. Black, Jr., The Delaware General Corporation Law: Recent Amendments, 30 BUS. LAW. 1021, 1023 (1975)).

(200.) Id. at 471-72.

(201.) See Am. Int’l Rent-a-Car, Inc. v. Cross, No. 7583, 1984 WL 8204, at * 4 (Del. Ch. May 9, 1984).

(202.) See Hamermesh, supra note 187, at 469 n.249 (citing S. Samuel Arsht N: Lewis S. Black, Jr., The Delaware General Corporation Law: Recent Amendments, 30 BUS. Law. 1021, 1023 (1975)).

(203.) See DEL. CODE ANN. tit. 8, [section] 109(b) (2003).

(204.) Centaur Partners 1V v. Nat’l Intergroup Inc., 582 A.2d 923 (Del. 1990).

(205.) Id. at 928-29.

(206.) See, e.g., Novell, Inc., SEC No-Action Letter, 2000 WL 223715, at *10 (Feb. 14, 2000).

(207.) See 1RRC, Shareholders Use Binding Proposals to Send Message to Companies, CORP. GOVERNANCE BULL., Jan.-Mar. 1999, at 5 (on file with The Business Lawyer, University of Maryland School of Law).

(208.) Int’l Bhd. of Teamsters Gen. Fund v. Fleming Cos., 975 P.2d 907 (Okla. 1999).

(209.) Id. at 908.

(210.) Id.

(211.) Id. at 909-10.

(212.) In 1999, “General DataComm Industries sued to exclude the State of Wisconsin Investment Board’s … ‘no option repricing’ resolution from its ballot prior to its annual meeting. When the proposal won support from about 52 percent of the shares cast at its meeting, however, the company … implemented the bylaw.” McGurn, supra note 66, at 3.

(213.) See David W Ware, Shareholders’ Right to Review the Adoption and Continuation of a Takeover Defense Plan: Is the Fleming Decision Dead on Arrival?, 2000 U. ILL. L. REV. 1053, 1054 (2000) (“Delaware courts most likely will not adopt the Fleming analysis or holding any time soon.”).

(214.) 721 A.2d 1281 (Del. 1998).

(215.) Id. at 1292 (“Therefore, we hold that the … [contested provision] is invalid under Section 141(a), which confers upon any newly elected board of directors full power to manage and direct the business and affairs of [the] Delaware corporation.”)

(216.) See, e.g., Citigroup, Inc., SEC No-Action Letter, 2003 WL 328268, at *35-*36 (Jan. 31, 2003) (access to proxy)

(217.) Coates & Faris, supra note 118, at 1337-39 (proposing a “director qualification bylaw” that would permit shareholders to nominate a majority of directors

(218.) See Michael Hanrahan, The Next Poison Pill Antidote: Director Nomination By-Law Amendments, 10 CORP. GOVERNANCE ADVISOR 1 (2002).

(219.) According to Bert Denton, President of Providence Capital, Providence Capital was ready to submit proxy materials to include ‘a mandatory poison pill bylaw amendment as well as an alternative slate of director nominees for Navistar’s 2002 annual meeting.’ PILL BACKGROUND, supra note 13, at 24.

(220.) Great Lakes Eliminates Hldr Rights Plan, Dow JONES NEWS SERV., Feb. 12, 2002, available at WL DJNSPLUS database.

(221.) Tim Reason, Shareholder Activism: Getting out the Vote, CFO MAGAZINE, 2002 WL 7706615 (June 1, 2002)

(222.) Poison Pill Purger Providence Plays for Aetna, Eraider.com (Apr. 12, 2002) (on file with The Business Lawyer, University of Maryland School of Law).

(223.) Alaska Air was able to exclude a director nomination bylaw amendment on procedural grounds. Alaska Air later redeemed its poison pill, however, citing its shareholders Alaska Air Will Eliminate Poison Pill, PUGET SOUND BUS. J. (Apr. 2, 2002) (“A substantial percentage of Alaska Air Group shareholders, including Providence Capital, have recently told us they prefer that we eliminate the rights plan.”).

(224.) Simon Lorne &: Joy Bryan, Shareholder Bylaw Amendments, 11A ACQUISITIONS & MERGERS [section] 7:25 (2003), available at WL SECACQMERG [section] 7:25. Mr. Hanrahan makes a more detailed case for the DNBA in Michael Hanrahan, The Next Poison Pill Antidote: Director Nomination Bylaw Amendments, CORP. GOVERNANCE ADVISOR, Jan.-Feb. 2002 (citing Stroud v. Grace, 606 A.2d 73, 95 (Del. 1992) for the proposition that DGCL section 141 (b) “permits, without limitation, bylaws establishing director qualifications.”).

(225.) See ROMANEK & YOUNG, supra note 5, at 21-14 (“The SEC staff normally does not allow the exclusion of proposals that establish qualifications for the election of directors, as long as the criteria would not disqualify directors or new company nominees up for election at an upcoming shareholders’ meeting.”).

(226.) See Hamermesh, supra note 187, at 483.

(227.) See Honeywell Int’l., Inc., SEC No-Action Letter, 2000 WL 248603 at * 1 (Mar. 2, 2000).

(228.) Id. at * 6.

(229.) See also Rauchman v. Mobil Corp., 739 F.2d 205,206 (6th Cir. 1984) (proposal that citizens of OPEC countries be ineligible for board membership excluded as it would bar a current director from re-election). For a list of valid and invalid director qualification proposals, see Cont’l Airlines, Inc., SEC No-Action Letter, 2004 WL 224514, at * 3-4 (Jan. 27, 2004). For an example where the SEC has permitted proponents to resubmit qualification proposals so long as they applied to future elections, see, e.g., Gen. Dynamics Corp., SEC No-Action Letter (Feb. 5, 1996).

(230.) Press Release, New York City Comptroller William C. Thompson, Jr., Thompson Leads Institutional Investors in Announcing Campaign for Shareholder Majority Voting Rights (Jan. 22, 2003) [hereinafter Thompson Press Release], available at http://www.comptroller.nyc.gov/press/2003_releases/ pr03-01-008.shtm (quoting New York City Comptroller William Thompson, at a January 22, 2003 press conference unveiling the campaign, as follows: ‘Investors must vigorously oppose the blatant disregard that many corporate boards of directors have for shareholder proposals that win majority votes … The accounting and financial scandals of the past year have highlighted the importance of adopting governance reforms across America.’).

(231.) Gillette Co., SEC No-Action Letter, 2003 WL 1560187, at * 2 (Jan. 9, 2003).

(232.) This proposal was submitted to The Gillette Co., The Goodyear Tire & Rubber Co., Wisconsin Energy Corp., Hasbro Inc., and Pacificare Health Systems. See Thompson Press Release, supra note 230

(233.) See, e.g., Gillette Co., SEC No-Action Letter, 2003 WL 1560187, at * 2 (Mar. 10, 2003): Wis. Energy Corp., SEC No-Action Letter, 2003 WL 942707, at * 14 (Feb. 28, 2003).

(234.) The proposal would require the following steps if no agreement is reached with the proponent:

(i) With respect to proposals on corporate governance reforms that would require amendments to the certificate of incorporation or bylaws, the board will propose such amendments, in the company’s proxy statement, for the consideration and vote of the shareholders at the next annual meeting. (ii) If approval of the amendments to the certificate of incorporation or bylaws require[d] more than a simple majority vote, the board of directors will propose, for the consideration and vote of the shareholders, amendments lowering the required vote thresholds to a simple majority of the votes cast for and against. (iii) If the amendments, as presented by the board, are supported by more than fifty percent of the combined totals of the shares voted FOR and AGAINST, the Board, at that annual meeting, will adopt the amendments. (iv) With respect to shareholder proposals that sought the Board’s adoption of governance or social policy reforms that the Board can adopt without violating the company’s certificate of incorporation or bylaws, the board will adopt such shareholder proposals before the next annual meeting of the company.

See Wis. Energy Corp., SEC No-Action Letter, 2003 WL 942707, at * 14-* 15 (Feb. 28, 2003).

(235.) IRRC, New York City Gets Set to Tackle Variety of Governance Issues in 2004 Proxy Season, CORP. GOVERNANCE HIGHLIGHTS 1, 3 (2004) (on file with The Business Lawyer, University of Maryland School of Law).

(236.) Id.

(237.) Safeway Inc., SEC No-Action Letter, 2004 WL 346080, at * 6 (Feb 23, 2004)

(238.) Thompson Press Release, supra note 230.

(239.) In 2002, Kroger was able to exclude, on Rule 14a-8(i)(7) grounds (“ordinary business” exception), a similar proposal that did not limit the subject matter to be discussed between the majority vote shareholder committee and the proponents. In 2003, the proposal was revised to limit the subject matter to the subject matter of the majority vote resolution itself and the SEC did not permit exclusion. See Kroger Co, SEC No-Action Letter (Apr. 11, 2003), 2003 SEC No-Act. LEXIS 542

(240.) Id.

(241.) IRRC, Union Funds Continue to Challenge Companies’ Governance Practices with New Proposals, 15 CORP. GOVERNANCE HIGHLIGHT5 21, 21 (2004) (on file with The Business Lawyer, University of Maryland School of Law).

(242.) Id. (describing resolutions submitted to UnumProvident, Unocal, Amerada Hess, and Kerr McGee) (on file with The Business Lawyer, University of Maryland School of Law).

(243.) Id.

(244.) See PeopleSoft, Inc., SEC No-Action Letter, 2003 WL 1560603, at * 12 (Mar. 14, 2003)

(245.) See supra notes 235-238 and accompanying text.

(246.) Thompson Press Release, supra note 230.

(247.) See DIV. OF CORP. FIN., SEC. & Exert. COMM’N, supra note 239, at n.53.

(248.) See Proposed Shareholder Access Rule, 68 Fed. Reg. 60,784, 60,794 (proposed Oct. 23, 2003) (to be codified at 17 C.F.R. pts. 240, 249, and 274)

(249.) See, e.g., the following comments from CalPERS submitted with respect to the SEC’s shareholder access rule:

CAlPERS believes strongly that the rule should include a trigger based on non-implementation of a shareholder proposal that passes by majority vote. We believe there is no more direct link than the one between the non-implementation of a shareowner proposal and the Commission’s rationale for the proposed rule–providing a mechanism for long-term shareowners to influence companies where there are indications that the proxy process has been ineffective or when there is dissatisfaction with the proxy process. If a shareowner proposal passes but is not implemented-often times year after year–obviously the proxy process is ineffective.

CalPERS Board of Administration, Comments on Proposed Rule: Security Holder Director Nominations, Release No. 34-48626, at 2 (Dec. 5, 2003).

See also the following comments with respect to the SEC’s shareholder access rule from Alan Hevesi, Comptroller of New York State: “A majority vote is a strong directive from the owners of the company to act on a particular issue, delivered by means of the sole mechanism for shareholder initiatives relating to company affairs. There is no justification for a board of directors to disregard that directive.” Alan G. Hevesi, Comments on Proposed Rule: Security Holder Director Nominations, Release No. 3448626, at 3 (Dec. 19, 2003)

(250.) See David Casserly, ISS, Pressure Builds on Stalled Shareholder Access Proposal, FRIDAY REPORT, June 11, 2004.

(251.) John Pound, After Takeovers, Quiet Diplomacy, WALL ST. J., fun. 8, 1992, at A10 (discussing how institutional investors have sought to influence business policies through informal negotiations with management)

(252.) See David Henry, A Wake-Up Call From Investors: CEOs Are Being Grilled Like Never Before in Conference Calls Run For Shareholders, BUS. WEEK, Mar. 15, 2004, available at www.businessweek.com (“These calls are the latest challenge to CEO power. They’re driven by rising shareholder concerns about corporate governance and new or pending regulations. The calls can quickly crystallize shareholder opinion, churn up market-moving information, and shift battles for corporate control. And they’re giving dissidents the chance to hammer home their message directly to other shareholders, rather like a Presidential hopeful challenging an incumbent in a debate.”).

(253.) See supra note 46 and accompanying text.

(254.) In 2003, CII submitted a letter to 140 companies that had majority vote resolutions and received responses from 103. The letter requested information about the board’s response to the proposal and its process for evaluating proposals. It asked whether a committee will review the proposal, and if so which committee and which directors will be involved. The letter also inquired whether the entire board will evaluate the proposal and/or the committee’s recommendation. Letter from Sarah A.B. Teslik, Executive Director, the Council of Institutional Investors, to Andrew S. Grave, Chairman of the Board, Intel Corp. (June 2, 2004), at http://www.cii.org/dcwascii/web.nsf/doc/CL_Corporate Corresponde.cm.

(255.) “The treasurers of several U.S. states including New York and California [recently announced their intention to] launch a concerted campaign to oust directors of about two dozen companies that ignore widely supported shareholder proposals,” especially if they do not get a satisfactory shareholder access rule from the SEC (“I don’t think they will like the alternative that we have…. If we don’t get a decent rule on this, we are going to have to start picking 20 to 25 companies and going at them in a much harder way every year,” said North Carolina Treasurer Richard Moore). Brenda Intindola, Summit-States to Try to Unseat Boards if Access Denied, REUTERS NEWS, Feb. 18, 2004, available at http:// www.forbes.com/reuters/newswire/2004/02/18/rtr126621.html (last visited Sept. 21, 2004). Companies seem to have reacted to “focus list” pressure during the 2004 proxy season, with both ISS and CalPERS releasing streamlined “focus lists” as a result of preemptive company actions to stay off such lists. See Stephen Taub, Proxy Season Quieter in 2004, Says ISS, CFO.com (June 18, 2004), available at http://www.cfo.com/article.cfm/3014675?F=advancesearch

(256.) See GEORGESON SHAREHOLDER, 2003 ANNUAL MEETING SEASON WRAP-UP: CORPORATE GOVERNANCE iv (2004) (“[g]iven the relative expense of time and money compared with submitting a shareholder proposal, proxy fights were generally waged over economic rather than governance matters….”). See also ISS, 2004 Proxy Season Trends, FRIDAY REPORT, June 4, 2004 (noting that the number of proxy fights dropped from forty-one during the 2004 season to ten during the 2003 season). See Delta Improves Standing with Boardroom Reforms, AIRLINE FIN. NEWS (Dec. 22, 2003), available at 2003 WE 56933799 (quoting Patrick McGurn, special counsel to the ISS, as saying that “[f]ailure to respond to a shareholder [vote] would be the leading cause” for dissatisfied shareholders to turn against an incumbent director, and that under a new SEC proposal rejection of a candidate by 35 percent of shareholders ‘is the first phase of an election campaign.'”).

(257.) David S. Drake, Georgeson Shareholder, Are You Ready for the Ratings Game? The Corporate Governance Rating Phenomenon 1-2 (Oct. 24, 2002).

(258.) See ISS Proxy Voting Guidelines, criteria 14, issproxy.com, at http://www.issproxy.com/ institutional/analytics/cgq/cgqvariables.asp. GovernanceMetrics International recently included responsiveness to majority vote resolutions in a sample report, although it is still not clear whether GovernanceMetrics includes it as a criteria. See GovernanceMetrics International, at http://www. gmiratings.com/(vynmvz55xuei0tfvqz2iiray)/Images/HighRatedCompany3.pdf (last visited Oct. 25, 2004).

(259.) See LAWRENCE D. BROWN & MARCUS L. CAYLOR, ISS, THE CORRELATION BETWEEN CORPORATE GOVERNANCE AND COMPANY PERFORMANCE (2004). In addition Moody’s, Standard & Poor’s and Fitch Ratings have stated that they will begin to include corporate governance criteria as a factor in its bond ratings, “noting that weak governance can undermine creditworthiness in several ways and should serve as a red flag to credit analysts.” Michael J. Halloran et al., The Trend to Separate the Positions of Chairman and Chief Executive Officer, 7 M & A LAW. 1, 6 (2003). In addition, “investment banks and [their research analysts] have include[d] in their reports corporate governance ratings of companies that they cover.” Bradley S. Rodos, Commentary: Does Your Company Need a Chief Governance Officer?, No. 26 ANDREWS CORP. OFF. & DIRECTORS LIAB. Ling. REP. 18 (2003), available at WL 18 No. 26 ANCODLLR 18.

(260.) Robin Sidel, Where are all the Poison Pills?, WALL ST. J., Mar. 2, 2004, at Cl (“In addition to yielding to shareholder pressure, deal makers say companies are dropping the [rights plan] takeover defense to win more favorable ratings from organizations that evaluate corporate governance

(261.) For a study finding that companies respond to anti-poison pill resolutions, whether or not they obtain majority votes, see John M. Bizjak & Christopher J. Marquette, Are Shareholder Proposals all Bark and No Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills, 33 J. FIN. & QUANTITATIVE ANALYSIS 499 (Dec. 1998).

(262.) See supra notes 59-66 and accompanying text. Because of policy-driven voting, the large number of proposals from “gadflies” have fared as well among shareholders as those from institutional investors, with the primary determinant of support being topic, rather than source, of the shareholder proposal.

(263.) See the following press releases, cited in the Business Roundtable Letter, supra note 78, at 38 n.165, as evidence they take majority-supported shareholder resolutions seriously: Press Release, Hewlett-Packard, HP Board Declares Regular Dividend, Adopts New Policies (July 21, 2003), available at http://www.hp.com/hpinfo/newsroom/press/2003/030721b.html

(264.) Business Roundtable Letter, supra note 78, at 38.

(265.) See Governance Comm. of the Bd. of Dirs., McDonald’s Corp., Report Regarding the Advisability of Continuing with a Staggered Board 1, 4 (Dec. 18, 2003) (on file with The Business Lawyer, University of Maryland School of Law).

(266.) Alex Frutos, Shareholder Rights Plans: Alternative Responses to Shareholder Opposition, 16 INSIGHTS 11, 18 (2002) (discussing variations on the poison pill that companies can adopt to balance shareholder concerns and maximize shareholder value).

(267.) Typical features of a TIDE provision include (i) customary. “flip-in” (at 15 percent) and “flip-over” (at 30 percent) percentages, (ii) a ten-year term, with mandatory review by a corporate governance committee, consisting of independent directors, at least every three years, (iii) the ability of the corporate governance committee to hire advisors, review relevant data (including shareholder opinions) regarding poison pills, and (iv) recommend to the full board whether it is in the best interests of the company and its shareholders to redeem, amend or keep the poison pill as it is. See PILL BACKGROUND, supra note 13, at 7-8.

(268.) CII, Council Research Service: Alert, Apr. 9, 2004 (describing Praxair’s submission of a “chewable” poison pill with shareholder ratification features to a shareholder vote).

(269.) See, e.g., Hewlett-Packard Co., SEC No-Action Letter, 2003 WL 23148894, at *2 (Dec. 24, 2003) (“Following last year’s annual meeting, the Board announced on July 21, 2003, that it had adopted a policy that the Board would submit any poison pill to a shareowner vote, unless the Board, exercising its fiduciary duties under Delaware law, determines that such a submission would not be in the interests of shareowners under the circumstances …”)

(270.) See, e.g., Praxair Inc., Corporate Governance and Board Practices, at http://www.praxair.com/ praxair.nsf/d63afe71c771b0d705256519006c5eal/(“The Praxair board of directors will adopt or materially amend a Stockholder Rights Agreement only if, in the exercise of its fiduciary responsibilities under Delaware law, and acting by a majority of its independent directors, it determines that such action is in the best interests of Praxair’s shareholders. If the board adopts or materially amends a Stockholder Rights Agreement, it will submit such action to a non-binding shareholder vote as a separate ballot item at the first annual meeting of shareholders occurring at least six months after such action.”).

(271.) See, e.g., Occidental Petroleum Corp., Governance Policies (on file with The Business Lawyer, University of Maryland School of Law) (“In the event that the Board of Directors determines to adopt a Stockholder Rights Plan without prior stockholder approval, then in such event the terms of such Plan shall provide that the Plan shall automatically terminate on the first anniversary of the adoption of such Plan unless, prior to such anniversary, such Plan shall have been approved by the Company’s stockholders.”)

(272.) See, e.g., Hewlett-Packard Co., SEC No-Action Letter, 2003 WL 23148894, at *2 (Dec. 24, 2003)

(273.) 3M: ISS To Recommend Withholding Vote on Director Nominees, Dow JONES NEWSWIRES, Apr. 26, 2004, available at WL FEDFILEPLUS database (also describing the decision by the 3M Company to fight the ISS recommendation with a solicitation of its shareholders).

(274.) See supra note 149 and accompanying text.

(275.) Compare, e.g., Activists Target Board Governance: Some Directors Ignore Majority Support for Shareholder Proposals, INVESTOR RELATIONS BUS. (Oct. 9, 2000) (discussing unresponsiveness of boards), available at 2000 WL 8692652, with ISS 2004 PRELIMINARY REPORT, supra note 19, at 1 (“Boards moved to implement more than 70 majority votes on previous shareholder resolutions calling for such measures as an end to poison pills and declassifying the board … Satisfied that their concerns were being met, shareholders withdrew a number of the proposals they had filed.”).

(276.) CII, 1998 Majority Vote Companies, available at http://www.cii.org/dcwascii/web.nsf/doc/press_1998majvote.cm (on file with The Business Lawyer, University of Maryland School of Law) (“During 1998, 29 companies received majority votes (based on votes cast ‘for’ and ‘against’) on 1998 shareholder resolutions from Council members and other shareowners. The Council of Institutional Investors sent letters to the CEOs of nearly all of these companies, asking for details on how their boards planned to respond to the shareholder-recommended changes. As of March 12, 1999, only four have adopted, or plan to adopt, the shareholder-recommended changes. A fifth company adopted part of the suggested changes.”).

(277.) Ron Orol, As Shareholder Grow Stronger, Companies–Surprise!–Listen Up, DAILY DEAL, Mar. 18, 2004, at 2 (also quoting an IRRC spokesperson saying “We’re seeing more companies responding to shareholder proposals than ever before, and we expect that trend to continue.”)

(278.) See PILL BACKGROUND, supra note 13, at 12 (“The past three years many companies announced that they were terminating their shareholder rights plans or accelerating the expiration date of the plan in response to shareholder majority votes on poison pill proposals.”).

(279.) Council of Institutional Investors, supra note 276.

(280.) IRRC database.

(281.) Id.

(282.) IRRC, On Heels of Majority Votes, Companies Agree to Drop Poison Pills, 15 CORP. GOVERNANCE HIGHLIGHTS 15, 15 (2004) (on file with The Business Lawyer, University of Maryland School of Law) (noting that “Pitney Bowes, Praxair and Ryder System recently announced that they are terminating their poison pills after shareholder proposals on pills received majority support at their annual meetings”)

(283.) Whether such trends, and the categorical institutional voting policies that give rise to them, should reverse in the face of new evidence from a recent ISS and University of Georgia study that demonstrated a positive correlation between takeover defenses, including poison pills, and company performance is an issue that should be considered by companies, institutional investors and commentators. See LAWRENCE D. BROWN AND MARCUS L. CAYLOR, INSTITUTIONAL SHAREHOLDER SERVICES, THE CORRELATION BETWEEN CORPORATE GOVERNANCE AND COMPANY PERFORMANCE 5 (2004) (finding that strong takeover defenses, such as poison pills, to be correlated to higher shareholder returns and stronger profitability among other things). Despite the categorical opposition to poison pills by many institutional investors and proxy advisers, poison pills remain the most important anti-takeover defense measure and numerous studies have shown that poison pills provide increased bargaining power and premiums to target companies. See PILL BACKGROUND, supra note 13, at 36 (finding that median takeover premium paid for companies that had a poison pill was nearly 10 percent higher than for companies that did not have one)

(284.) See STUART L. GILLAN & LAURA T. STARKS, CORPORATE GOVERNANCE, CORPORATE OWNERSHIP AND THE ROLE OF INSTITUTIONAL INVESTORS: A GLOBAL PERSPECTIVE 19 (John L. Weinberg Center for Corporate Governance, Lerner College of Business & Economics, University of Delaware, Working Paper 2003-01, 2003) (“Since 1998, when TIAA-CREF began its campaign to end dead-hand provisions, 56 of 60 corporations approached have removed them, or have removed their pills altogether.”). Carleton et al. studied direct negotiations between TIAA-CREF and targeted companies during the 1992-96 period and concluded that of the forty-five companies contacted by TIAA-CREF, 71 percent reached a negotiated settlement prior to a vote on the shareholder proposal. W Carleton et al., The Influence of Institutions on Corporate Governance Through Private Negotiations: Evidence From TIAA-CREF, 53 J. FIN. 1335, available at 1998 WL 13523599 (Aug. 1, 1998).

(285.) See Howard Stock, SEC Receives Record Requests to Bar Shareholder Proposals From Proxies, INVESTOR RELATIONS BUS., available at 2003 WL 9295209 (Apr. 21, 2003) (TIAA/CREF spokesman Patrick Connor said, “it is generally in the company’s best interest to work with proponents to keep the proposal from coming under public scrutiny, and most companies realize this.”).

(286.) See id. (quoting TIAA/CREF spokesman Patrick Connor saying that “[b]y and large, companies would prefer to talk rather than have a proxy battle. We have always had pretty good dialogue with most companies. A proxy vote is the last resort …'” and adding “that while recent scandals have not led to any radical change in how companies are responding to shareholder proposals, some companies may be more open to discussion in the interest of corporate ethics”).

(287.) Based on IRRC data. In contrast, one earlier study from the mid 1980s, showed a 13 percent withdrawal rate during the 1983-84 proxy season. Marilyn B. Cane, The Revised SEC Shareholder Proxy Proposal System: Attitudes Results and Perspectives, 11 J. CORP. L. 57 60 (1985)

(288.) See Delta Improves Standing with Boardroom Reforms, AIRLINE FIN. NEWS, Dec. 22, 2003 (quoting Patrick McGurn of ISS saying that “[f]ailure to respond to [majority vote resolutions] ‘would be the leading cause’ for dissatisfied shareholders to turn against an incumbent director” and would be, in light of the shareholder access proposals, “‘the first phase of an election campaign'”).

(289.) See ISS, 2004 POSTSEASON REPORT, A NEW CORPORATE GOVERNANCE WORLD: FROM CONFRONTATION TO CONSTRUCTIVE DIALOGUE 3, available at http://www.issproxy.com/pdf/2004ISSPSR.pdf (last visited Nov. 20, 2004).

(290.) Bausch & Lomb, Notice of Annual Meeting and Proxy Statement, at 25 (Mar. 21, 2003), available at http://www.bausch.congus/vision/about/investor/pdfs/2003proxy.pdf (last modified Apr. 29, 2003)

(291.) Bausch & Lomb, Notice of Annual Meeting and Proxy Statement, at 25 (Mar. 21, 2003), available at http://www.bausch.com/us/vision/about/investor/pdfs/2003proxy.pdf (last modified Apr. 29, 2003)

(292.) See NYSE Listed Company Manual [section] 303A.03, at http://www.nyse.com/lcm/1078416930888.html?archive = no (last modified Nov 4, 2003).

(293.) See Corporate Governance: Fewer Precatory Proposals Does Not Mean Less Shareholder Pressure, Experts Suggest, BNA SEC. Law DAILY, Mar. 9, 1998, available at WL 3/9/98 SLD d5 (quoting Kenneth A. Bertsch, director of the IRRC’s Corporate Governance Service, saying: “‘[I]t astounds me’ that some companies do not even talk to shareholders after the shareholders have put forward a pill resolution that receives a majority vote.”).

(294.) See e.g., Governance Comm. of the Bd. of Dirs., McDonald’s Corp., Report Regarding the Advisability of Continuing with a Staggered Board (Dec. 18, 2003) (on file with authors) (describing deliberations of the McDonald’s board, following consultations with an advisory panel, and the reasons for its decision to retain its classified hoard)

(295.) See supra notes 235-238 and accompanying text.

(296.) The full text of the policy, adopted by The Goodyear Tire & Rubber Co. is as follows:

If a shareholder proposal requesting action by the Board of Directors receives the affirmative vote of the shares of at least a majority of the votes cast (excluding absentations) at any annual meeting, the Secretary of the Company shall solicit the sponsor of the proposal for any additional information to provide to the Board of Directors for its consideration of the proposal. Within four months of the annual meeting, the Company will make reasonable efforts to schedule a meeting (which may be held telephonically) between the sponsor of the proposal and the Nominating and Board Governance Committee or the Chair of such committee. The meeting will be scheduled to coincide with a regularly scheduled board meeting. Following such a meeting, the Nominating and Board Governance Committee shall present the subject of the proposal to the full Board of Directors. The Board of Directors shall act upon the proposal consistent with Section 1701.59 of the Ohio Revised Code, which shall necessarily include a consideration of the interests of the shareholders. After the Board of Directors has taken action on the proposal, the chair of the Nominating and Board Governance Committee shall provide prompt written notification of such action to the sponsor.

In order to permit the Board to operate efficiently, no more than three shareholder proposals shall be the subject of a meeting with the Nominating and Board Governance Committee in any given year, with priority given to the proposals receiving the highest positive vote. In all cases, however, all sponsors of proposals receiving the affirmative vote of at least a majority of the votes cast (excluding abstentions) at any annual meeting shall be entitled (i) to submit any relevant information to the Board of Directors for its consideration and (ii) to receive written notification of the decision of the Board of Directors with respect to their proposal.

Goodyear Tire & Rubber Co., Corp. Governance Guidelines, at 5-6, available at http://www.goodyear. com/investor/pdf/corpgovguidelines.pdf (last visited Nov 20, 2004).

Andrew R. Brownstein and Igor Kirman *

* The authors are lawyers with the firm of Wachtell, Lipton, Rosen & Katz. The authors acknowledge the helpful research assistance of their colleague Gordon S. Moodie and also wish to thank their other colleagues, in particular Martin Lipton and Eric S. Robinson, for their review and helpful comments on the Article.