SEC's White Warns Companies About Fee-Shifting Bylaws; Says Agency May Act

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By Dave Michaels

March 19 — Securities and Exchange Commission Chair Mary Jo White warned companies March 19 not to take measures that could stifle investors' ability to hold management accountable, commenting on fee-shifting bylaws in particular.

“If the Commission comes to believe that these provisions improperly hinder shareholders' exercise of their rights, it may need to weigh in more directly,” White said in prepared remarks at Tulane University Law School.

Her remarks follow a recent trend of companies that have altered bylaws to force shareholders to pick up the legal tab if they sue the company and lose. Since the Delaware Supreme Court found in May 2014 that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable, almost 40 companies have enacted them, according to research by Claudia H. Allen, a partner and co-chair of the Corporate Governance practice at Katten Muchin Rosenman LLP.

The Delaware State Bar is considering a legislative proposal that would outlaw such bylaws in stock corporations.

Academics have encouraged the SEC to substantively act to restrict fee-shifting practices, such as by declining to accelerate registration statements for companies that have fee-shifting bylaws.

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White's speech adds to a string of recent SEC actions siding with shareholders in fights with management over issues ranging from director nominations and executive compensation.

White took credit for a decision in January that stopped Whole Foods Market Inc. from blocking a measure that would make it easier for shareholders to propose directors.

Since the SEC's ruling on Whole Foods, other companies including Citigroup Inc. and General Electric Co. said they would support allowing shareholders owning at least 3 percent of the company's shares for three years to nominate directors. Whole Foods postponed its annual meeting after the SEC's response.

Avoid ‘Inflammatory Rhetoric.'

White also cautioned companies and activist investors against “inflammatory rhetoric,” including spreading false information about one another.

“While I appreciate the importance of allowing the parties to fully debate the issues in what may be adversarial situations, they should be careful not to make claims or accuse others of wrongdoing without an adequate factual foundation,” White said.

White also questioned strategies such as calling emergency shareholder votes to win control of a company. Pershing Square Capital Management LP, the hedge fund run by Bill Ackman, last year called for a special referendum of Allergan Inc. shareholders to vote on his plan to replace its board of directors. He eventually called off the referendum.

White said any such moves should be fully disclosed to ensure all shareholders know about them and have an opportunity to vote.

“We do not know whether other activist shareholders will try the shareholder referendum approach in future campaigns,” White said. “If they do, you can expect the SEC staff to perform its oversight role of ensuring that investors receive timely, complete and accurate disclosure.“

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To contact the editor responsible for this story: Joshua Gallu at

The text of White's remarks is available at

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