Shareholder Proposals. Ohio Edison Co is a public utility. Ohio Edison's articles of incorporation vest the authority to make capital expenditures solely in the board of directors. Since 1982, the company's capital expenditures have averaged $595

Question

million per year. C. L. Grimes, a shareholder in Ohio Edison, proposed that the company amend its articles of incorporation to require shareholder approval of certain capital expenditures in excess of $300 million. In other words, under Grimes's proposal, once the spending threshold of $300 million was reached, each expenditure, including such routine expenditures as the purchase of a typewriter or a new desk, would require shareholder approval. On October 23, 1990, Grimes asked Ohio Edison to enclose his proposal in the proxy materials for the next shareholders' meeting. Ohio Edison submitted the proposal to the Securities and Exchange Commission (SEC) for an opinion as to whether it needed to be included with the proxy materials. The SEC ruled that the proposal could be omitted, because it concerned ordinary business operations. When Ohio Edison distributed proxy materials for the meeting without mentioning Grimes's proposal, Grimes filed suit. Grimes contended that Ohio Edison violated SEC rules by failing to include his proposal in its proxy materials and by failing to inform its shareholders that he would offer his proposal at the meeting (which, Grimes argued, made the proxy materials "false and misleading"). Ohio Edison responded with a motion to dismiss the complaint. The court granted the motion. Grimes appealed. How will the appellate court rule? Discuss fully.

Answer 1

Shareholder proposals
The appellate court affirmed the lower court's decision, holding that the proposal dealt with a matter relating to the conduct of ordinary business operations and that the failure to mention the proposal did not render the proxy materials misleading within the meaning of SEC rules. As to the first issue, the appellate court explained that under the SEC's interpretation, shareholder proposals relating to "business matters that are mundane in nature and do not involve any substantial policy" considerations need not be included with proxy materials. The court noted that the SEC "typically treat[s] proposals bearing on a company's capital expenditures as not having major implications, but rather as relating instead to ordinary business operations." There have been exceptions, but "[t]he problem with Grimes' proposal is that it does not target a particular capital expenditure, thereby precluding a determination as to whether any expenditure subject to his proposal has significant economic, policy or other implications." As to the second issue, the court reasoned that compelling corporations to give notice in their proxies of proposals qualifying for exemptions would nullify the exemptions. If a proposal need not be disclosed because it qualifies for an exemption, the failure to disclose the fact that the proposal will be presented at the next shareholders' meeting cannot render the proxy materials misleading.