Securities and Exchange Commission v. Transamerica Corp.

United States District Court for the District of Delaware · Corporations

CorporationsShareholder votingProxy regulationBylawsCorporate governanceDelaware lawRule X-14A-7Rule X-14A-2

Facts

Shareholder Gilbert sought to present three matters at Transamerica's annual meeting: a resolution requiring management to send stockholders a report of what occurred at annual meetings, a bylaw amendment eliminating the notice requirement for shareholder-proposed bylaw amendments, and a proposal that independent public auditors be elected by stockholders beginning in 1947 and attend annual meetings. Transamerica did not include these proposals in its proxy materials or notice of meeting. The court treated Delaware law as controlling on whether each proposal was a proper subject for shareholder action under the SEC proxy rules. Transamerica's charter and bylaws broadly vested management and conduct of corporate affairs in the board, and its bylaws required notice of proposed bylaw amendments before action at an annual meeting.

Issue

Whether, under SEC Rules X-14A-7 and X-14A-2, Transamerica was required to include Gilbert's proposals in its proxy materials and notice of annual meeting. More specifically, whether each proposal was a proper subject for action by stockholders under Delaware law.

Rule

For purposes of the SEC proxy rules, a shareholder proposal must be included only if it is a proper subject for action by security holders under the law of the state of incorporation. Under Delaware law as applied here, stockholders ordinarily do not act on matters committed to the board's management and conduct of corporate affairs, and reasonable bylaw procedures regulating how stockholders amend bylaws may limit action at annual meetings; however, the selection of independent auditors is a matter of such fundamental importance that it should be considered and passed upon by stockholders and is not treated as already delegated exclusively to directors.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Mesa Valley Foods, Inc. is incorporated in Delaware and headquartered in Phoenix. Before the annual meeting, shareholder Dana Ortiz asks management to include a proposal in the company’s proxy materials, and a dispute arises over whether the proposal is a proper subject for stockholder action.

Which body of law governs whether the proposal is a proper subject for action by security holders under the SEC proxy rules discussed here?

Explanation. The controlling inquiry is whether the proposal is a proper subject for action by security holders, and that question is answered by the law of the state of incorporation, not by federal law alone. Because the corporation is incorporated in Delaware, Delaware law governs the proper-subject analysis. (Derived from Securities and Exchange Commission v. Transamerica Corp. (n.d.).)