Bebchuk v. Electronic Arts, Incorporated

Filing 63

OPINION AND ORDER GRANTING MOTION TO DISMISS. Because the 2010 amendments to the proxy rules are not relevant to my conclusion that Plaintiff's proposal divests corporate management of the discretion given to them under those rules, I adhere to my earlier decision to grant Defendant's motion to dismiss. The clerk shall mark Defendant's motion terminated and the case closed. (Signed by Judge Alvin K. Hellerstein on 4/25/2013) (lmb)

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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LUCIEN BEBCHUK,

OPINION AND ORDER
GRANTING MOTION TO DISMISS

Plaintiff,
-against­

08 Civ. 3716 (AKH)

ELECTRONIC ARTS, INC.,
Defendant.

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ALVIN K. HELLERSTEIN, U.S.DJ.:

This lawsuit concerns a shareholder's attempt to change the voting process ofthe
corporation he has invested in. Plaintiff, a shareholder of Defendant, submitted a proposal to
Defendant in 2008 seeking to amend Defendant's corporate bylaws. The proposal sought to
make it easier for future proposals to make it onto the pro]{y ballot submitted annually to
Defendant's shareholders. After Defendant indicated it would exclude this proposal from the
ballot, Plaintiff filed suit seeking an injunction that would have required Defendant to include the
proposal. I granted Defendant's motion to dismiss on November 12,2008, on the grounds that
Plaintiff's proposal was contrary to the proxy rules. Plaintiff appealed and, while the appeal was
pending, the proxy rules were changed. The Court of Appeals, before deciding the appeal,
remanded to me with instructions that I evaluate the change. For the reasons stated below, I rule
that these amendments do not cause me to change my 2008 order, and I adhere to my decision
granting Defendant'S motion to dismiss Plaintiff's complaint.
I.

BACKGROUND
Plaintiff is a professor at Harvard Law School whose work focuses on corporate

governance. Plaintiff owns more than 2,000 shares of Defendant, a developer and distributor of
video games. On February 20, 2008, Plaintiff submitted a shareholder proposal (the "Proposal")
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to Defendant to be included in Defendant's proxy materials for a vote by Defendant's
shareholders. The Proposal, if passed by the shareholders, would have amended Defendant's
bylaws and required Defendant's management to allow shareholders to vote on all "Qualified
Proposals." Under the Proposal, a submission would generally be considered "qualified" if it a)
was made on behalf of shareholders who owned at least 5% of the corporation's shares, b) was
valid under the applicable state law, and c) did not deal with the corporation's ordinary business
operations. The purpose of the Proposal was to prevent management from blocking shareholder
votes on certain issues, and thus make it easier for future shareholder proposals to be included in
Defendant's proxy statements. As Plaintiff said in his statement supporting the Proposal: "In my
view, when stockholders representing more than 5% of the Corporation's common shares wish to
have a vote on a Bylaw amendment proposal satisfying the conditions of a Qualified Proposal, it
would be desirable to facilitate such a vote."
On March 26, 2007, Defendant submitted a No-Action Letter to the Securities and
Exchange Commission ("SEC") stating its intention to exclude the proposal from its proxy
statement. Before the SEC could respond, Plaintiff filed this action on April 18, 2008.
Defendant filed a motion to dismiss on May 30, 2008, stating two bases for excluding the
proposal: 1) SEC Rule 14a-8(i)(3), which allows exclusions for proposals that are contrary to the
proxy rules, and 2) SEC Rule 14a-8(i)(8), which allows exclusions for proposals that relate to a
director election. See 17 C.F.R. § 240.14a-8(i). Defendant also argued that the proposal was
vague and ambiguous.
On November 12,2008, I held oral argument on the motion to dismiss. At the
conclusion of the argument, I held that Plaintiffs proposal was contrary to the proxy rules. I
found that "[t]he purpose of this proposal is to eliminate such discretion on the part of the

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directors. . .. [TJhe inevitable effect of this proposal is to do away with the carefullirnitation on
the part of l4a-8, to eliminate the discretion of the company, because there will be nobody to
exercise it, and to have all of these questions submitted as a matter oflaw, federal law, to the
shareholders." See Nov. 12,2008 Oral Argument Transcript at 49:5-16. I further found that the
elimination of management's discretion directly contradicted Rule 14a-8(i) because that rule
grants corporate managers the power to exclude proposals on thirteen different grounds. Cf.
New York City Emps.' Ret. Sys. v. S. E. C., 45 F.3d 7, 12-13 (explaining that under the proxy
rules, it is a corporation's management which decides whether to include a proposal on the proxy
ballot). Accordingly, I dismissed the complaint. A summary order followed to reflect that
decision.
Plaintiff appealed. While the appeal was pending, on August 25, 2010, the SEC
announced the creation of Rule 14a-11 and an amendment to Rule 14a·8(i)(8). The new Rule
14a-11 required a registered corporation "to include in its proxy statement and form of proxy the
name of a person or persons nominated by a shareholder or group of shareholders for election to
the board of directors ... provided that the conditions set forth in paragraph (b) of this section are
satisfied." Paragraph(b) specified that the nominating shareholders had to hold at least 3% of the
voting shares and must have owned those securities for at least three years. Sec Facilitating
Shareholder Director Nominations, 75 Fed. Reg. 56668, 56782-83 (Sept. 16, 20 I 0). This new
rule was adopted to "require, under certain circumstances, a company's proxy materials to provide
shareholders with information about, and the ability to vote for, a shareholder's, or group of
shareholders', nominees for director." Id. at 56668.
Rule 14a-8(i)(8) was amended to narrow the scope of that subsection. Prior to the
amendment, Rule 14a-8(i)(8) was broadly worded in that it allowed a corporation's management
to exclude proposals that related to a nomination or an election of directors, or for "a procedure

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for such nomination or election." See 17 C.P.R. § 240. 14a-8 (2007) (allowing exclusion of a
"proposal [that] relates to a nomination or an election for membership on the company's board of
directors or analogous governing body or a procedure for such nomination or election"). The
amendment reduced the breadth of the rule so that management could no longer exclude
proposals that related solely to election procedures. The revised rule still allowed some electionrelated exclusions. Under the revision, a proposal can be excluded iiit:
(i) Would disqualify a nominee who is standing for election; (ii) Would remove a
director from office before his or her term expired; (iii) Questions the
competence, business judgment, or character of one or more nominees or
directors; (iv) Seeks to include a specific individual in the company's proxy
materials for election to the board ofdirectors; or (v) Otherwise could affect the
outcome of the upcoming election of directors.
See 17 C.P.R. § 240.14a-8.
In light of the fact that Defendant had relied on Rule 14a-8(i)(8) in excluding
Plaintiff's Proposal, on September 10, 20 I 0, the Second Circuit remanded the case to me to
determine the relevance of the changes to the proxy rules to this case. Prior to briefing this issue,
the parties waited to determine ifthe amended proxy rules would survive a court challenge. On
July 22,2011, the D.C. Circuit struck Rule 14a-ll but left intact the changes to 14a-8(i)(8). See
Bus. Roundtabl<;:;:md Chamber of Commerce of the United States of America v. S.E.C., 647 F.3d
1144 (D.C. Cir. 2011).
On September 28, 2012, Defendant moved to dismiss Plaintiff's action on the
ground that it was moot. I denied the motion on December 18, 2012, and 1 ordered the parties to
briefthe issue at hand: whether the amendment to Rule 14a-8(i)(8) should cause me to reverse
my earlier dismissal of the case.

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II.

DISCUSSION

When I granted Defendant's motion to dismiss on November 12, 2008, I based

my ruling, not so much on Rule 14a-8(i)(8), but essentially on Rule 14a-8(i)(3). Thus, any
changes to Rule 14a-8(i)(8) are not relevant to my decision. Plaintiff acknowledges this in his
brief, stating that "the 20 I 0 Amendments do not impact Prof. Bebehuk's Proposal at all." PI.'s
Memo of Law on Effect of Amendment to Rule l4a-8(i)(8) at 2 (emphasis in original).
In my previous decision, I held that Plaintiff's Proposal violated Rule 14a-8(i)(3).
That rule, which has not been amended in the time since my 2008 decision, states that a
corporation may exclude a proxy proposal "[i]fthe proposal or supporting statement is contrary

to any of the Commission's proxy rules." 17 C.F.R. § 240.14a-8(i)(3). In 2008, I found that
PlaintifFs Proposal was contrary to the proxy rules because it contradicts the discretion given to
a corporation's managers with respect to a shareholder's proposal for a proxy, pursuant to the
several subsections of Rule 14a-8(i). That section describes the bases on which a company
"may" rely to exclude a proposal. Thus, Rule 14a-8(i)(4) allo\.\"S managers to exclude proposals
that relate to a "personal grievance." Yet if the Proposal were adopted, Defendant's managers
would no longer be allowed to exclude a "personal grievance" proposal if the proposal otherwise
met the criteria of a "qualified proposal." See Nov. 12,2008 Oral Argument Transcript at 34:5­
12. The Proposal would therefore eliminate management's discretion to set aside personal
grievance proposals, directly contrary to the discretion given to management to exclude such
proposals. Similarly, Rule l4a-8(i)(13) allows management to exclude proposals in which a
shareholder requests a specific amount of dividends. Under PlaintifFs Proposal, such a request
would have to be included in a ballot if it was deemed a "qualified proposal."

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Plaintiff nevertheless argues that the 20 I 0 changes to the proxy rules show that
the logic of my previous decision was incorrect. Plaintiff notes that in explaining these
amendments, the SEC wrote that "a shareholder proposal that sought to provide an additional
means for including shareholder nominees in the company's proxy materials ... would not be
deemed to conflict with Rule 14a-ll simply because it would establish different eligibility
thresholds or require more extensive disclosures ... than would be required under Rule 14a-ll."
See Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56668,56730 n.764 (Sept. 16,
2010). In other words, the SEC viewed Rule 14a-ll as a floor, and companies were allowed to
impose upon themselves higher standards than those set out in Rule 14a-ll. But Rule 14a-ll,
which has since been invalidated by the D.C. Circuit, was a completely different rule from Rule
l4a-8(i). While thc SEC may have viewed Rule 14a-11 as setting out minimum disclosure
obligations that could be altered, there is no evidence that the SEC had the same view of l4a­
8(i), a provision with different language. There is nothing in the amendments that suggests that
the SEC intended to give shareholders the right to eliminate the discretion given to management
under the proxy rules.
Plaintiff also resurrects one of his flawed arguments from 2008. Plaintiff notes
that the Second Circuit has recognized that "[e]ven if proxy access bylaw proposals were
excludable under Rule 14a-8(i)(8), a company could nevertheless decide to include the proposal
in its proxy statement." See Am. Fed'n of State, Cnty. & Mun. Emns. v. Am. Int'l Group, Inc.,
462 F.3d 121, 130 n.9 (2d Cir. 2006). Under this decision, Plaintiff contends that companies
may chose to ignore the exclusions under Rule 14a-8(i). Plaintiff is correct that managers have
the discretion to allow proposals covered under Rule l4a-8(i) to proceed to a vote. If they chose,
managers may put personal grievance proposals on the proxy ballot, and they may put proposals

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that relate to dividends on the ballot as well. But simply because managers may submit these
proposals to a vote does not mean that managers must do so.

III.

CONCLUSION
Because the 20 I 0 amendments to the proxy rules are not relevant to my

conclusion that Plaintiffs proposal divests corporate management of the discretion given to them
under those rules, I adhere to my earlier decision to grant Defendant's motion to dismiss. The
clerk shall mark Defendant's motion terminated and the case closed.
SO ORDERED.
Dated:

New~;~ew York
APrilJ' 2013
United States District Judge

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