Sixth Circuit Warns Boards Not to Blow Off Notice of Shareholder Proposals
A recent Sixth Circuit decision indicates that company boards should proceed cautiously in providing notice of shareholder meetings, particularly where a dissident shareholder is expected to offer a resolution.
In Gwyn R. Hartman Revocable Living Trust v. S. Mich. Bancorp, Inc., No. 14-186 (March 13, 2014,) a shareholder urged the corporation’s board to amend the bylaws to permit the company to claw back fees paid to directors found liable for breaching their fiduciary duties. The shareholder asked the board to include the resolution in the company’s proxy statement for an upcoming annual meeting. Perhaps unsurprisingly, the board refused. The proxy statement issued instead simply stated that a shareholder planned to propose a resolution urging the board to amend the bylaws and said nothing about the substance of the proposed amendment. The resolution was ultimately voted down at the meeting and the shareholder later filed suit claiming that it had been denied the opportunity to solicit votes.
In an opinion authored by Judge Jeffrey Sutton, the Sixth Circuit held that the company’s proxy statement violated Michigan law by failing to adequately disclose the shareholder’s resolution. The Court noted that Michigan’s corporate code expressly required notice of the purposes of meeting to include “notice of shareholder proposals that are proper subjects for shareholder action and are intended to be presented by shareholders.”
The Court held that it was “hard-pressed” to see how merely stating that there would be a shareholder proposal satisfied the statutory notice requirement. In so doing, the Court rejected arguments that its decision would “force companies to hand shareholders the pen when drafting a meeting notice” or that boards would thereafter be required to include the full shareholder resolution in the proxy materials. Instead, the Court suggested that the proxy statement should have at least stated “which bylaw or what topic the bylaw covered.” (emphasis in original).
At first glance, this decision might not appear to have much impact outside Michigan. Yet, the Sixth Circuit noted that other states, including California and Delaware, require a similar level of disclosure.
What about a state like Tennessee? Unlike Michigan, Tennessee’s corporate code states that notice of an annual meeting “need not include a description of the purpose or purposes for which the meeting is called.” Tenn. Code Ann. § 48-17-105.
Yet, with respect to special meetings, Tennessee corporate code provides that notice of these meetings “must include a description of the purpose or purposes for which the meeting is called.” Id. This provision does not, however, go on to explain what the notice of purpose should contain or state, like the Michigan statute, that it must contain descriptions of shareholder proposals.
The ambiguity in the Tennessee statute might suggest descriptions of shareholder proposals are not required. Yet in Gywn, the Sixth Circuit observed that Delaware courts have required such descriptions even though Delaware’s corporate code does not contain any such mandate. Given that there are no decisions interpreting the scope of Tennessee’s notice provisions and that Tennessee courts often look to Delaware law, Tennessee boards should be mindful in providing notice prior to special meetings.