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Prior Posts

The Question Posed

In the proposing release, the SEC asks:

6. To what extent have recent developments, including the potentially lower burdens of independent solicitation campaigns and the emergence of alternative shareholder engagement channels, weakened the original justifications for a Federal shareholder proposal rule? To what extent have costs to proponents associated with conducting an independent solicitation changed since the adoption of Rule 14a-8?

In my view, post-1942 developments have not merely undercut Rule 14a-8’s original justifications, those developments have actually flipped the cost calculus on which the rule rested.

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In the proposing release, the SEC set out 13 questions it wished commenters to address. Number 2 asks:

Do companies and proponents have reliance interests in Rule 14a-8 that should be considered? If so, what are those interests and how can we balance the need to address the Commission’s authority concerns with the potential effects on affected parties?

I take up that question in this post.

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The first post gave an overview of the SEC proposal:

My second post addressed the question of whether the SEC had authority to adopt a shareholder proposal rule in the first instance:

The third tackled the basic question: should the rule be repealed? (In short, yes.)

In this post, I take up the claim made by proponents of the rule that it serves “the congressional aim to facilitate ‘corporate democracy.’”1 As the story goes, § “14 of the Securities Exchange Act of 1934 (governing proxies), under which Rule 14a–8 was promulgated, was intended to ‘give true vitality to the concept of corporate democracy.”2

Hence, for example, former SEC Commissioner Caroline Crenshaw has complained that Rule 14a-8 “a preferred punching bag of those who wish to diminish corporate democracy.”

All of which is lousy legal history and worse corporate governance theory.

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Initially envisioned as a mechanism to enhance shareholder participation, Rule 14a-8 has instead evolved into a tool for a minority of activists to advance agendas often unrelated to the company” financial performance. This evolution has come at a cost: growing procedural complexity, increased compliance burdens, and the diversion of board attention from strategic priorities.

As discussed in two prior posts, the SEC is now considering rescinding the rule:

In the proposing release,1 the SEC posed 13 questions. Many of them overlap.

In this post, I address the following:

1. “Should Rule 14a-8 be rescinded as proposed?”

4. “To what extent have costs to registrants associated with Rule 14a-8 (such as the costs of addressing and including shareholder proposals), the volume of shareholder proposals, and the degree of shareholder support changed since the adoption of Rule 14a-8?”

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Among the SEC’s arguments in favor of repealing the rule is the assertion that the SEC lacked authority to adopt the rule. Indeed, the lack of authority is the SEC’s main argument. To be sure, it offers up various policy arguments, but the SEC frames those as secondary—"independent of," in its own words—its threshold conclusion that Rule 14a-8 exceeds what Congress gave it power to do under Section 14(a) of the Exchange Act.

The legislative history of section 14(a) is relatively sparse, in large part because the controversy over federal proxy regulation was resolved early in the legislative process. As originally introduced, the proxy provision mandated substantial disclosures and gave the SEC authority to adopt additional disclosure requirements. The proposal met with substantial criticism.

Congress redrafted section 14(a) in response to these criticisms. In doing so, Congress did what it often does when it has a tough problem to solve: it told somebody else to solve it. In effect, the Act simply made it unlawful to solicit proxies “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” If the delegation doctrine had any teeth, that statutory language would never have succeeded because it gave the SEC zero guidance as to how to regulate proxies.

Having punted the problem to the SEC early in the legislative process, there were few references to proxy regulation in the legislative history. Indeed, virtually the only pertinent legislative history are a pair of cryptic references in a House Committee Report1 to “fair corporate suffrage”:

1. “Fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”

2. “Inasmuch as only the exchanges make it possible for securities to be widely distributed among the investing public, it follows as a corollary that the use of the exchanges should involve a corresponding duty of according shareholders fair suffrage.”

The question is what those sparse references tell us about the scope of the SEC’s authority under § 14(a).

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In 1942, when one might have thought the government had bigger fish to fry, the SEC adopted what was then called Rule X-14A-7. Later renumbered Rule 14a-8 and amended extensively, the so-called shareholder proposal rule has become a fixture of American corporate governance.

In brief, the rule allows shareholders of public corporations who meet certain eligibility requirements to have a proposal—along with a supporting statement, the two together capped at 500 words—included in the company’s annual meeting proxy statement and proxy card so that shareholders may vote on the proposal. If the Rule did not exist, a shareholder wishing to have a matter put before the annual shareholder meeting would be obliged to go to the expense and hassle of conducting a proxy solicitation with its own proxy statement and card. Given that the median cost of a proxy solicitation in 2017-2020 was $750,000 and that the costs incurred by the proponent of shareholder proposal rarely exceed $20,000, the cost advantages are obvious.

Assuming that the proponent meets the rule’s ownership thresholds and comply with the rule’s various procedural requirements, the company must include the proposal unless it can establish that the proposal falls within one of the rule’s thirteen substantive exclusions, such as improper subject under state law, ordinary business, relevance, substantial implementation, duplication, or resubmission.

Every proxy season, hundreds of proposals—on topics ranging from declassified boards to climate disclosure—make their way onto corporate proxy statements via Securities Exchange Act Rule 14a-8. Generations of corporate lawyers have cut their teeth on no-action letters parsing the rule’s thirteen substantive exclusions.

Gregory Burke, SEC Rule 14a-8 shareholder proposals: No-action requests, determinants, and the role of SEC staff. Journal of Accounting and Public Policy, Volume 42, Issue 1.

The Proposing Release

In Rescission of Rule 14a-8’s Federal Regulation of Shareholder Proposals and Amendments to Rule 14a-4, Release No. 34-106383 (File No. S7-2026-32), the Commission proposes to rescind Rule 14a-8 in its entirety and “leave determinations about the role of shareholder proposals to State law and company governing documents” (Release at 1). At the same time, it proposes to amend Rule 14a-4, which governs discretionary voting authority, to expand the circumstances in which a company may vote proxies it receives on shareholder proposals that are not included in the company’s own proxy materials.

In this post, I want to lay out what the Commission has proposed and the reasons it gives. I will save my views on the merits for another day (actually, a lot of future days, given how much there is to say).

Of course, regular readers can doubtless guess where I will come out. I have not exactly been playing hide the ball, after all.

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You can expect that it will be the principal subject of my Substack for several weeks. The SEC proposing release contains 13 requests for comment. I plan posts answering most of them, which I will then combine into a comment letter for submission to the SEC.

In the meanwhile, here are some past posts from the archives:

Evan Epstein has a great post on the corporate governance fight at Cloudflare. Highly recommended.

Boardroom Governance Newsletter

Cloudflare’s Founder-Control Fight Is a Governance Case to Watch

One of the most interesting corporate governance disputes of 2026 is playing out at Cloudflare, the $100 billion internet infrastructure company co-founded by Matthew Prince and Michelle Zatlyn…

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a month ago · 3 likes · Evan Epstein

For me, the most interesting part deals with the potential application of the DGCL § 141 safe harbor for conflicted controller transactions, which was created by SB 21 and about which we have written often here.

Cloudflare has a dual class capital structure that gives co-founders Matthew Prince and Michelle Zatlyn voting control (50.3% of the voting power) despite owning only about 10% of the company’s equity. Plaintiff shareholders are challenging a proposed recapitalization that would perpetuate the founders’ control.

A chart at Epstein’s post compares the status quo to the recap:

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Part I discussed state approaches to incorporating churches and other religious entities:

Part II discussed the role played in the case by the constitutional law church autonomy doctrine:

Part III tackled the corporate law issues, focusing on the contractual nature of corporate organic documents:

Addenda: “Elected” But by Whom?

Since writing Part III, I came across an article by an entity called the Trinity Foundation in which they assert that:

Almost buried in Texas Business Court Judge Grant Dorfman’s ruling against Jeremiah Counsel Corporation (JCC) last month certifying Second Baptist’s suspicious 2023 bylaws revision was a clause returning the church to its 1928 charter and rejecting Second Baptist’s 2023 charter amendment. …

… a new filing by Jeremiah Counsel argues the Judge’s rejection of the 2023 charter amendment legitimizes the original 1928 charter, is prima facia evidence invalidating the current board made up of mostly Young family members (dubbed the “Young Group”) and automatically reinstates the board of trustees extant prior to the 2023 amendment.

The new filing states in pertinent part that:

Article V of the 1928 Articles (“Article V”) provides: “This Corporation shall have Six (6) Trustees, who may be elected annually, or in classes with terms of office not exceeding three (3) years, as this Corporation may, from time to time, deem desirable.” [My emphasis]

The crucial difference between still-governing Article V and Defendant’s failed amendment is that the former only allows Board members to be elected, while the latter would permit members of Second Baptist’s Board or MLT members to be elected, appointed or designated. As addressed more fully below, Defendants argued that Board members may be elected by other Board members. JCC disagrees, and argues that under the governing documents, Board members may only be elected by church members. However, all parties agree that the Articles require Board members to be elected.

As I explained in Part III, Article V says “elected” but does not specify by whom. JCC now argues that the new MLT (effectively the church’s board of directors) was not elected but rather selected:

As the Court itself found, under section 5.01, the initial MLT was to be composed (1) of the Senior Pastor, who was simply designated under the 2023 Amended Bylaws to take a seat on the MLT when these Bylaws were adopted, and (2) individuals whom the Senior Pastor then appointed to the MLT.

Hence, the JCC prays for relief (among other requests):

Rule that the term “elected” as used in the church’s Articles of Incorporation is ambiguous and that its meaning should be submitted to the fact finder or clarify for the record that the Court determined JCC’s reading of “elected” is unreasonable.

It’s an interesting and, it seems to me, plausible argument. So we will continue following this case.

My Law and Religion Scholarship

Over at StephenBainbridge.com, my eclectic personal online journal, I posted an essay on being a Christian and a lawyer with emphasis on bringing the values of my Catholic faith to bear on my vocation as a legal scholar:

StephenBainbridge.com

Gaudium et spes on the Christian Vocation

I first met William (“Bill”) Stuntz at UVa law school in the early 1980s. Bill was a year ahead of me and sort of mentored me on the law review. He went on to clerk at the Supreme Court for Justice Lewis Powell and got hired at our alma mater (not that I was jealous or anything) as a law professor specializing in criminal law. He went on to be hired at …

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3 months ago · 1 like · 1 comment · Stephen Bainbridge

In a subsequent post, I offered brief descriptions of and links to my own work in law and religion. My work in the field generally falls into two categories. One is akin to the posts here about the Young case; namely, the corporate law and governance applicable to religious organizations. Hence, for example, articles about piercing the corporate veil in the case of corporations sole. The other is more jurisprudential, focusing on how Christian teaching (especially Catholic social thought) can help us understand but also critique secular legal doctrines.

StephenBainbridge.com

Christianity and the Law

In an earlier post, I talked about my late friend Bill Stuntz, who was a pioneer in studying the intersection of Christianity and the law…

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3 months ago · Stephen Bainbridge

I encourage you to check them out.

In Part I, I summarized the facts and then explored how states approach the question of incorporating religious entities such as churches. As we saw therein, there are three basic approaches:

1. The state provides a separate religious corporation statute.

2. The state permits incorporation of religious entities under its general not-for-profit corporation statute, but with meaningful provisions specific to religious entities.

3. The state permits incorporation of religious entities under its general not-for-profit corporations statute but with minimal (if any) special rules for religious entities.

Texas falls into the second category.

In Part II, we turned to the constitutional issue—i.e., the church autonomy doctrine. We saw that the Texas trial judge (Judge Grant Dorfman) determined that the church autonomy doctrine precluded him from deciding certain issues—most notably derivative claims against individual defendants for breach of fiduciary duty, etc.—but did not preclude him from determining certain direct corporate law claims regarding the validity of certain church governing documents; namely, its amended articles of incorporation and bylaws.

I’m assuming your familiarity with the first two posts, so I won’t rehearse the entire set of facts herein. Instead, let’s focus on the facts relevant to the organic document dispute: At the time the dispute arose, the Second Baptist Church of Houston operating pursuant to articles of incorporation dating to 1928 (as amended in 1978) and bylaws dating to 2005. Judge Dorfman observed that the amended articles “constituted the Church's certificate of formation” for as defined by Texas Business Organizations Code (TOBC) § 1.002(6). Filing of such a certificate with the Texas Secretary of State is the essential step in forming any entity subject to the TOBS. See § 3.001.

In 2023, the Church’s Board of Trustees unanimously approved amendments to the articles and bylaws. The amendments had three significant effects on the Church’s governance:

1. The church’s members were effectively stripped of voting rights “to elect the Senior Pastor, Board members, officers, committee members, to vote on amendments to governing documents, and to approve expenditures and certain business dealings.”

2. A Ministry Leadership Team (MLT) was created, which took over the oversight powers of the Board of Trustees. The MLT would consist of “the Senior Pastor and, thereafter, any additional individuals whom the Senior Pastor may nominate and the MLT may elect. The right to elect the Senior Pastor belongs solely to the Senior Pastor; and the MLT’s ability to remove the Senior Pastor is circumscribed.”

3. “The MLT was granted broad discretion over Church assets.”

In effect, the amendments converted the Church from a democracy with 94,000 voters into a nearly absolute monarchy.

JCC—”a Texas nonprofit corporation formed as an association of long-standing current or former Church members”—sued.

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That structural choice drives the central question in Young1; namely, once a church incorporates under secular corporate law, how far can a secular court go in enforcing that law before it crosses into territory the First Amendment puts off-limits?

The Facts

You will recall from Part I that the Second Baptist Church of Houston is a mega-church with a whopping 94,000 parishioners.

The church long operated as a Texas nonprofit using articles of incorporation drafted in 1978 and a set of bylaws adopted in 2005. The articles and bylaws gave the congregation substantial voting rights, including the right to elect the Senior Pastor and Board members and to approve any amendments to the governing documents.

In May 2023, church leadership proposed sweeping amendments to both documents. Notice went out on four separate occasions—twice via the weekly church newsletter, on May 19 and 26, and by oral announcement at all six church campuses during weekend services on May 21 and 28—stating the purpose was “to update our by-laws, to protect our ability to continue operating as a Biblical Church.” At a May 31 meeting, the congregation voted 315–2 to approve. The new bylaws eliminated member voting rights entirely, replaced the elected Board with a self-perpetuating “Ministry Leadership Team” (MLT) controlled by the Senior Pastor, and vested the MLT with broad discretion over church assets.

Then-Senior Pastor Ed Young subsequently appointed his son Ben Young as the church’s new Senior Pastor. Ben stacked the MLT with his friends and family members. The MLT then transferred a media platform called The Winning Walk to Ed Young.

A group of current and former members, organized as Jeremiah Counsel Corporation (”JCC”), sued in the Texas Business Court, seeking to void the amendments and pursuing derivative claims for breach of fiduciary duty, ultra vires acts, fraud, conversion, and more.

The Current Decision

In resolving cross-motions for summary judgment, the trial judge opined that:

Before reaching the merits of the motions, however, the Court must clear two jurisdictional hurdles. The first is the boundary between a church’s constitutional right to self-governance and its statutory obligations as a Texas nonprofit corporation. Relying on the First Amendment, Defendants argue that the church autonomy doctrine bars all but one of the Plaintiff’s claims because this lawsuit concerns matters of faith and internal church governance.

An outfit called Trinity Foundation, which has been critical of former Senior Pastor Ed Young in the past, reports that JCC is pressing new motions to determine the validity of the MLT structure.

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The Securities and Exchange Commission is planning to scrap rules governing how and when public company shareholders can bring proxy proposals, according to a new post by the Office of Management and Budget.

The agency sent the proposal to the White House’s OMB for review last week ….

We’ve devoted a lot of attention to Rule 14a-8 over the years, none of it complimentary:

I spent some time digging into those anomalies and examining them through the lens of incomplete contracting theory. It’s now a short (less than 5000 word) article, which has been posted to SSRN:

Abstract

This article uses the ABA’s Private Target Mergers and Acquisitions Deal Points Study to interrogate a puzzle that I initially took for evidence of bad lawyering: the persistent presence of undefined or unaddressed terms in sophisticated acquisition agreements.

Post-closing purchase price adjustments, representation and warranty insurance exclusivity, exclusive remedy provisions, and—most strikingly—the material adverse change (MAC) clause itself are all, in a nontrivial share of deals, left silent or vague on questions that seem central to what the parties are bargaining over.

Rather than treat these gaps as drafting failures, I turn to the incomplete contracting literature to ask what work silence and vagueness might be doing. I show that the literature offers not one explanation but several, and that they are not mutually exclusive: strategic vagueness (Choi and Triantis), renegotiation-lever theory (Denis and Macias, Quinn), risk-allocation architecture (Gilson and Schwartz), delegation to a trusted forum—here, Delaware’s accumulated MAC jurisprudence—stickiness and agency costs in boilerplate drafting (Anderson and Manns), and “agreeing to disagree” (Ben-Shahar).

Using the MAC clause as the central case study, I argue that the ABA data, properly read, actually vindicates rather than falsifies the strategic vagueness account. Ninety-eight percent of deals nominally “define” a MAC, but the core standard remains circular—defining a material adverse change by reference to materiality—while drafting effort is instead concentrated in an increasingly long and specific list of carve-outs. That two-part architecture is exactly what strategic vagueness predicts: precision where it is cheap and valuable across every deal, vagueness where specification cost is better deferred to the rare tail event that actually triggers litigation.

I then examine two harder cases that resist easy assimilation to strategic vagueness: the small percentage of deals with no MAC definition at all, and the larger percentage silent on RWI exclusivity. I argue that the first is genuinely underdetermined by the frequency data alone, admitting of several competing explanations that happen to generate the same observable correlation. The second, by contrast, is better explained as a structural or signaling gap than as vagueness properly understood, since exclusivity is a binary allocation question rather than an open-textured standard.

The larger methodological payoff is a caution against reading deal-points frequencies as revealed-preference evidence of efficient design without further cross-sectional data on deal size, structure, and counsel sophistication—data the published tables do not provide, and without which efficient deferral and lawyerly inattention remain observationally equivalent.

Keywords: incomplete contracts, contract theory, mergers and acquisitions, acquisition agreements

But in mid-class I got to wondering about “agentic” AI. So, after class, I asked Claude “what tasks do agentic AIs commonly perform” and “do any of those tasks involve the AI buying or selling things on behalf of the user”?

Here’s what Claude said (AI generated):

Yes—commerce is one of the more actively developed (and more controversial) categories of agentic AI:

Shopping agents: some AI systems can search for products, compare prices, and complete a purchase on a retailer’s site given a budget or set of preferences (e.g., early versions of this have been piloted by various shopping assistants and browser-based agents).

Financial/trading agents: there’s experimentation with AI agents executing trades or rebalancing portfolios within pre-set rules, though this remains more constrained and heavily regulated than shopping use cases.

Booking and reservations: buying tickets, booking travel, or reserving services counts as a transaction-executing task and is a common target for agentic systems.

Business procurement: agents that place recurring orders (e.g., restocking inventory) based on preset thresholds.

That said, giving an AI agent the ability to actually spend money is treated with more caution industry-wide than read-only or draft-only tasks, since it involves real financial risk, authentication, and liability questions. Many current implementations stop short of full autonomy here—the AI might find options, compare prices, or prepare an order, but leave final confirmation of a purchase to the human.

“More caution” does not mean it isn’t happening. And a lot of that looks like the sort of stuff human agents do all the time.

So the question arises: If your AI agent signed you up to a contract, would you be bound by that contract in the same way you would be if a human agent had done so?

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Ms. Pringle recently posted the following at LinkedIn:

”Beloved”? My blushes.

And, yes, that is exactly my catnip. Corporate law as applied to religious entities has long been an intersection of my two main interests (sort of the flip side of my interest in theological implications for corporate law).

The Case: JCC v. Young

The case in question is Jeremiah Counsel Corporation v. Young.1 It arises out of a dispute at the Second Baptist Church of Houston (SBC), which is one of the largest churches in Texas. SBC is organized as a Texas nonprofit corporation, which means it is subject to the Texas Business Organizations Code. In turn, that places the legal regime in which the church operates within the framework of state corporate law, which became central to the dispute.

For decades, SBC operated under articles of incorporation originally adopted in 1928 and later amended in 1978, along with its bylaws. Under that governance structure, church members had meaningful voting rights. Among other things, members participated in decisions involving church leadership and changes to the church’s governing documents.

That structure changed significantly in 2023.

In May of that year, church leadership proposed amendments to both the articles and the bylaws. The congregation considered the changes at a May 31 business meeting and approved them by a vote of 315–2.

The amendments did much more than make minor adjustments to the church’s governing documents. The new bylaws eliminated member voting rights and replaced the existing board structure with a self-perpetuating Ministry Leadership Team (“MLT”). They also gave Senior Pastor Ed Young substantial influence over the MLT’s membership and succession, while placing broad authority over church assets in the hands of the MLT.

Jeremiah Counsel Corporation (“JCC”), an association made up of current and former church members, challenged the changes in court. JCC alleged, among other things, that church leadership had used the restructuring to consolidate control and had not adequately disclosed the effect of the proposed amendments before the vote. It also asserted violations of Texas corporate law, breaches of fiduciary duty, ultra vires conduct, and claims involving the allegedly improper transfer of a church asset known as The Winning Walk.

The Chancery Daily Takes Note

The Chancery Daily long has been my go to source for keeping up to date with developments in Delaware corporate law. Its daily email summary of decisions and filings is an essential resource.

With the rise of DExit and the concomitant growth in interest in Texas and Nevada corporate law, the perspicacious Ms. Pringle added a section that (with tongue firmly planted in cheek, I suspect) she calls Hinterlands Holdings, “highlighting nascent developments from business courts around the country.”

In August 18th’s Tuesday Texas Trailer report, she took note of four recent Texas Business Court decisions, including Young. She explained:

Plaintiff brought this action to challenge the 2023 Bylaws and the amendment to the Articles of Incorporation (together, the "2023 Amendments"). The TBC concluded as a threshold matter that it had the authority to determine the validity of the 2023 Amendments. The TBC concluded that, under the church autonomy doctrine, it lacked "neutral principles of law to be applied" and plaintiff's derivative-based claims of ultra viresacts, fraud, breach of fiduciary duty, civil conspiracy, tortious interference, and conversion were barred because defendants "acted in furtherance of the [c]hurch's religious mission and any judicial inquiry into the propriety of their choices would necessarily intrude upon the [c]hurch's right to structure its internal governance free from secular interference." The TBC also concluded that, while plaintiff lacked derivative standing, as an association of former and current members who lost their voting rights in the 2023 Bylaws, it possessed standing to bring direct claims. The TBC concluded that notices provided by the church made no mention of the Articles of Incorporation, invalidating this amendment, but that TBOC § 22.156(b) eliminated the written notice requirement (for churches) for meetings to amend bylaws. The TBC concluded that the 2023 Bylaws did not conflict with the Articles of Incorporation because the Articles did not specify who elected the trustees or expressly assign voting rights to members, leaving no basis on which to invalidate the bylaws.

Plaintiff also challenged the church's lawyer's conduct as legal counsel and later as a member of the Ministry Leadership Team. The TBC concluded that a challenge to conduct arising after joining the Ministry Leadership Team was barred by the church autonomy doctrine and plaintiff's lack of derivative standing. The TBC concluded that the court is expressly barred under Texas Government Code § 25A.004(h)(3) from exercising jurisdiction over claims rooted in alleged legal malpractice such as those arising from the lawyer's pre-appointment conduct.

The Big Question

The dispute ultimately raises a difficult question at the intersection of corporate law and religious autonomy: when a church chooses to organize itself as a corporation under state law, how far can a secular court go in enforcing the ordinary rules of corporate governance without crossing the line into the church’s right to govern its own religious affairs?

The Plan for Going Forward

I anticipate a total of four posts involving various aspects of this interesting case. In today’s post, I tee things up by discussing the various ways in which states have approached the question of incorporating churches and similar religious entities. In future posts, I will tackle the church autonomy issue, the corporate law issues bubbling under the surface, and finally some links to my prior work on incorporating religious entities.

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There’s a lot going on in Lipton’s article. Due to the space limits on the JCL response, I have been posting a series of additional comments here. I assume familiarity with those posts:

Lipton’s article depends heavily on these propositions:

1. Corporate authority requires visible social legitimacy.

2. Governance procedures serve symbolic as well as economic functions.

3. Shareholder welfare and public welfare sometimes diverge in ways external regulation does not adequately resolve.

In this post, I focus on the first proposition.

Lipton starts with a simple but important distinction: there is a difference between having legal power and having legitimate authority. Corporations may have the legal right to own property, hire workers, sign contracts, shut down factories, develop new technologies, influence elections, and decide how billions of dollars are spent. But just because corporations are legally allowed to exercise this kind of power does not automatically mean that society will continue to accept it without demanding greater political oversight.

For Lipton, legitimacy comes from a broader sense that corporate power is being used within reasonable boundaries and in ways that do not conflict with the public good. That does not mean corporations have to be popular, morally perfect, or simply follow the law. Instead, legitimacy depends on an ongoing public belief that the corporate system is worthy of acceptance, respect, and institutional protection. When that belief weakens, society becomes more likely to question corporate power and demand stronger limits on it.

In my response, I focus on the portions of Lipton’s article most directly relevant to the debate over DExit. But her legitimacy thesis also pertains to DExit. Specifically, her DExit story ultimately depends on a legitimacy mechanism rather than a conventional charter-competition mechanism. She is not primarily arguing that companies leave because Delaware law has become economically inefficient. She is arguing that polarization exposes the political content concealed within shareholder primacy, which in turn destroys Delaware’s ability to market its corporate law as politically neutral. Once that neutrality is lost, states can compete not merely on legal quality but on different normative visions of corporate governance, making DExit a structural threat to Delaware’s traditional dominance.

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On November 17, 2025, the Division announced that for the 2025–2026 proxy season (October 1, 2025 – September 30, 2026) it would not respond to no-action requests or express any views regarding companies’ intended reliance on any basis for excluding shareholder proposals under Rule 14a-8, except for no-action requests to exclude a proposal under Rule 14a-8(i)(1).

Longtime readers will recall that I covered that announcement in depth last year:

I concluded therein that:

It’s easy to imagine boards spending more time and money deciding whether to exclude a proposal and be less willing to exclude marginal proposals.

My sense is that that proved the case in this year’s proxy statements. As Drew Hutchinson reported Friday:

Friday’s update signals that companies and their investors will have to keep working out proposal disputes among themselves until the agency says otherwise, a process that during the 2026 proxy season involved an unforeseen amount of litigation.

In any case, the Division’s new announcement says that it is getting out of the no-action business entirely:

In order to focus Division resources on the review of Securities Act and Exchange Act filings, including those reviews that are statutorily required, for the protection of investors and facilitation of capital formation, and in light of the extensive body of guidance from the Commission and the staff available to both companies and proponents on Rule 14a-8, the Division has determined to discontinue responding to Rule 14a-8 no-action requests entirely, including those submitted under Rule 14a-8(i)(1), effective immediately, unless and until the Division announces otherwise. …

Companies will continue to be required under Rule 14a-8(j) to submit notices to the Commission containing the information required by the rule when they intend to exclude shareholder proposals from their proxy materials.

Hutchinson reminds us that:

The SEC is also reconsidering a federal rule requiring companies to include eligible investor proposals, which can deal with anything from shareholder rights to environmental and social programs, on their ballots.

Given the burden placed on companies by the Division’s decision to get out of the no-action letter business, the SEC needs to speed that process up. A lot.

If Chairman Atkins wants to know what I think, I refer him (and the interested reader) to my post:

In it, I explained that:

In order of preference, my reform proposals have been: Repeal > Private ordering,

But today I offer a third option: Relocation.

If we must have a shareholder democracy project, let’s move that project from Rule 14a-8 to 14a-4. I speak, of course, of the so-called zero slate proxy contest. …

… eliminating the shareholder proposal rule would not eliminate shareholder proposals. It would simply mean that a proponent would have the obligation to file a proxy statement and comply with the full panoply of proxy rules. To be sure, this would raise the proponent’s costs, meaning that proponents would need deeper pockets than the current de minimis cost system. But so what? A shareholder proponent ought to be willing to put its money where its mouth is.

Lastly, however, for my case for simply repealing Rule 14a-8, see this post:

Bainbridge, Stephen Mark, An Interest Group Response to The Legitimation of Shareholder Primacy (August 06, 2026). Available at SSRN: https://ssrn.com/abstract=7244362

ABSTRACT

This essay is forthcoming in the Journal of Corporation Law Online. It is an invited response to Professor Ann Lipton’s (Colorado Law) article, The Legitimation of Shareholder Primacy, 51 J. Corp. L. 83 (2025).

Lipton’s foundational thesis is that the exercise of corporate power requires social legitimacy. Shareholder primacy purports to provide the requisite legitimacy by constraining that power in politically neutral ways. Formal governance procedures make that constraint visible, but those procedures do not always align with shareholder value because they also serve social and symbolic purposes. When shareholder welfare conflicts with public welfare, corporate law must choose between them. The present highly polarized political environment has generated a series of controversies over issues such as the use of environmental, social, and governance (ESG) metrics in both management and investing, diversity initiatives, climate risk, Elon Musk’s immense compensation package, and directors’ oversight duties that have forced Delaware to make such choices. Delaware’s choices in recent years revealed that shareholder primacy and Delaware law are political after all. In light of those developments, Delaware’s traditional neutrality is now questioned, as its courts and legislature are accused of taking sides in national political disputes. That politicization helps drive the DExit phenomenon.

This article offers a complementary explanation. The phenomena Lipton identifies can be understood without treating them primarily as manifestations of shareholder primacy’s internal contradictions. They can instead be explained through a public-choice model in which the three principal producers of Delaware corporate law—the Delaware bar, the Delaware legislature, and the Delaware judiciary—act rationally to advance their own institutional interests. What Lipton describes as a crisis in the legitimation of shareholder primacy may therefore also be understood as the destabilization of an interest-group equilibrium.

Download link: https://ssrn.com/abstract=7244362

In the early 1900s, it was becoming increasingly common for companies to have two classes of common stock: one with full voting rights on a one vote per share basis, the other with no voting rights (but perhaps with greater dividend rights).

Although these disparate voting right capital structures were popular with managers (who tended to own the bulk of the voting shares), and investors showed a surprising willingness to purchase large amounts of nonvoting common stock, an increasingly vocal opposition emerged in the 1920s. Hence, the poem, which mocked the leftists of the day for opposing corporate capitalism, while largely ignoring the fine details of how corporate capitalism actually worked. (The New Masses was a Marxist journal of the day.)

William Z. Ripley, a Harvard professor of political economy, was the most prominent (or at least the most out-spoken) proponent of equal voting rights. According to Ripley, nonvoting stock was the “crowning infamy” in a series of developments designed to disenfranchise public investors. (You might say he was the Lucian Bebchuk of the day.)

William Z. Ripley

The opposition to nonvoting common stock came to a head with the New York Stock Exchange’s (NYSE) 1925 decision to list Dodge Brothers, Inc., for trading. Dodge sold a total of $130 million worth of bonds, preferred stock, and nonvoting common shares to the public. Dodge was controlled, however, by an investment banking firm, which had paid only $2.25 million for its voting common stock. In January 1926, the NYSE responded to the resulting public outcry by announcing a new position:

Without at this time attempting to formulate a definite policy, attention should be drawn to the fact that in the future the committee, in considering applications for the listing of securities, will give careful thought to the matter of voting control.

This policy gradually hardened, until the NYSE in 1940 formally announced a flat rule against listing nonvoting common stock. Although occasional exceptions arose, the most prominent being the 1956 listing of Ford Motor Company despite its dual class capital structure, the basic policy remained in effect until the mid-1980s.

In the middle of that epic decade—the era of Ronald Reagan, great music, and yuppiemobiles—we were experiencing a boom in hostile takeover bids. It was the era of corporate raiders, white knights, poison pills, and LBOs. Greed is good was the motto of the day.

So companies began trying dual class recapitalizations in which they created two classes of stock: typically a class with one vote per share and a class with ten votes per share. Through various ways, companies arranged things so that insiders held most of the super voting rights stock and outsiders held the lower voting rights stock. If successful, the dual class recap would leave the insiders with voting control. The ultimate takeover defense. Insiders who cannot be outvoted, after all, cannot be ousted.

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