1 8bc0bebm Motion 1 UNITED STATES DISTRICT COURT 1 SOUTHERN DISTRICT OF NEW YORK 2 ------------------------------x 2 3 BEBCHUK, 3 4 Plaintiff, 4 5 v. 08 CV 3716 5 6 ELECTRONIC ARTS, INC., 6 7 Defendant. 7 8 ------------------------------x 8 New York, N.Y. 9 November 12, 2008 9 3:59 p.m. 10 10 Before: 11 11 HON. ALVIN K. HELLERSTEIN, 12 12 District Judge 13 13 APPEARANCES 14 14 MICHAEL J. BARRY, ESQ. 15 Attorneys for Plaintiff 15 16 JONATHAN ROSENBERG, ESQ. 16 Attorneys for Defendant 17 17 18 19 MR. BARRY: Michael Barry for plaintiff, Lucian 20 Bebchuk. 21 Before we get started, I did file a motion to be 22 admitted pro hoc vice. 23 THE COURT: I signed it. Even without such a formal 24 order, you are welcome to this court. 25 MR. BARRY: Thank you, your Honor. With me at counsel SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 2 8bc0bebm Motion 1 table is my colleague from my office, and Lucian Bebchuk, the 2 plaintiff, your Honor. 3 THE COURT: Mr. Barry, you are practicing, where? 4 MR. BARRY: Wilmington Delaware. 5 THE COURT: Welcome. 6 MR. BARRY: We have an office here in New York, 7 though. 8 Thank you, your Honor. 9 MR. ROSENBERG: Good afternoon, your Honor. Jonathan 10 Rosenberg for defendant, Electronic Arts. With me at counsel 11 table is William Sushon, also from the New York Office. And my 12 partner, Marty Dunn. Mr. Dunn is admitted in DC. He is not 13 admitted before this Court. However, your Honor, if your 14 Honor -- if it would please the Court, he will just sit at 15 counsel table assisting me, and will not argue. 16 THE COURT: That's fine. And if he wished to say a 17 few words, that would be all right also. 18 MR. DUNN: Thank you. 19 THE COURT: You never know when a litigator falters, 20 right Mr. Rosenberg. 21 MR. ROSENBERG: That' for sure, your Honor. 22 Also with me, your Honor, sitting in the gallery, is 23 David Lieb, in-house at Electronic Arts. 24 THE COURT: Gentlemen. 25 All right, let's proceed with the argument. It's SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 3 8bc0bebm Motion 1 defendant's motion so, Mr. Rosenberg, you may proceed. 2 Thank you, your Honor. 3 MR. ROSENBERG: Your Honor, if I may, I have a modest 4 demonstrative for my argument. 5 THE COURT: Modest one? All right, sure. 6 MR. ROSENBERG: I'm giving a copy to plaintiff's 7 counsel. 8 Now, your Honor, the proposal that is at issue is 9 excludable for many reasons, both macro and micro, but the 10 chart that I handed up, your Honor, is to show the exclusionary 11 bases that would ordinarily apply under Rule 14 A 8(i). And on 12 the left side are the 13 exclusionary bases that apply under 13 the rule that would allow a company to omit a proposal for 14 access to the company's proxy statement. 15 And on the right side is the regime under Professor 16 Bebchuk's proposal. And we highlighted, in yellow, where there 17 is the overlap. And so it's three provisions, which makes ten 18 of the -- of the Rule 14A-8(i) categories that are not 19 incorporated under Bebchuk's proposal. 20 And so, right away, we start out that his proposal is 21 excludable under each of those ten not-incorporated categories. 22 Because when you have a broad, all-encompassing proposal like 23 this it necessarily relates to all aspects of corporate 24 governance that are not expressly excluded. It opens the door 25 to -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 4 8bc0bebm Motion 1 THE COURT: Your suggestion to me, Mr. Rosenberg, is 2 that the company would be compelled to issue a proxy even 3 though it would be contrary to the commission's proxy rules? 4 MR. ROSENBERG: Well, we make that argument, as well, 5 your Honor, and that's -- 6 THE COURT: You mean to say that the -- the 14a-(8) 7 would not apply. 8 MR. ROSENBERG: Well, it -- in other words, your 9 Honor, what Professor Bebchuk proposes to do in his proposal is 10 institute a regime whereby, in the future, the company would be 11 required to include any proposal, even if it, for example, 12 related to a personal grievance, or even if it related to 13 specific amounts of cash or dividends, or even if it related to 14 any of the other ten nonincorporated exclusionary provisions. 15 And, therefore, it relates to those. And, therefore, 16 it's excludable on each of those ten bases. And this is -- 17 this is actually clear from the supporting statement that 18 Professor Bebchuk includes with his proposal. He says in that 19 supporting statement, "Current and future SEC rules may, in 20 some cases, allow companies that don't currently require them, 21 not to place proposals for bylaw amendments initiated by 22 stockholders in the corporation's notice of an annual meeting 23 and proxy card for the meeting." 24 THE COURT: Mr. Barry, is that true? 25 MR. BARRY: Your Honor, that's what the supporting SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 5 8bc0bebm Motion 1 statement does say. But I -- if your Honor -- the point that 2 we'll get to, and we're were prepared to argue, is that doesn't 3 matter. Even if the company does publish anything listed under 4 the right-hand side of the -- of the left-hand side of this 5 chart here, that doesn't mean it is contrary to the proxy 6 rules. As we demonstrated in the opening brief, and in the 7 briefs submitted -- 8 THE COURT: Let me understand this, because I didn't 9 understand reading these papers. Is it the object of the 10 proposal to do away with 10 of the 13 reasons for exclusion? 11 MR. BARRY: No. 12 THE COURT: Do the ten not mentioned by Professor 13 Bebchuk's proposal remain in effect? 14 MR. BARRY: Yes, they remain in effect. 15 THE COURT: But three would not remain in effect. 16 MR. BARRY: No, every -- 17 THE COURT: It would be changed by the alternate 18 wording of the proposal. 19 MR. BARRY: No. Your Honor, nothing would change 20 about the Rule 14a-8. Nothing would change about the company's 21 obligation to comply with 14a-8 or the company's ability to 22 exercise discretion with regard to 4a-8. The only difference 23 is that there would be an additional requirement under state 24 law that would bind the board of directors in exercising their 25 discretion as to how to compel the company to act on various SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 6 8bc0bebm Motion 1 items. And in that regard -- 2 THE COURT: I don't really understand what changes. 3 MR. BARRY: With regard to 14a-8, nothing. With 4 regard to the director's fiduciary duties under Delaware law, a 5 lot. 6 THE COURT: Okay. If the Delaware law provides that a 7 fiduciary, assuming that Professor Bebchuk's proposal is 8 adopted, would violate the fiduciary duties if they did not 9 submit a proposal to stockholders, that 14a-8 provides is 10 discretionary, that would change the duty of directors. 11 MR. BARRY: That would change the duty of directors. 12 It would not change the duty, or anything about the discretion 13 of the corporation. The distinction here -- 14 THE COURT: That's because the corporation is the 15 stockholder, as well as the director. 16 MR. BARRY: Exactly. The stockholders, as well as the 17 directors. And the action of a corporation can be defined 18 either through director resolution, bylaw, charter provision; 19 any one of those three items. 20 THE COURT: All right. So I understand what you have 21 done with respect to the three items that have much the same 22 language as between 14a-8 and the proposal. 23 What about the ten items that are not covered by the 24 proposal, what happens to them? 25 MR. BARRY: In theory, if a shareholder -- if the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 7 8bc0bebm Motion 1 bylaw was in place, and if a shareholder complied with the 2 bylaw and submitted a proposal, that was in one of the white 3 areas, the nonhighlighted areas, the corporation -- the 4 directors have a decision to make. And if that decision -- 5 that decision is, they either comply with the bylaw or they 6 don't comply with the bylaw. 7 THE COURT: Suppose they feel they want to exclude. 8 MR. BARRY: If they want to exclude, they seek a no 9 action letter, they likely get a no action letter. And it's up 10 to the shareholder to go to Delaware chancery court and seek an 11 order compelling them to comply with their fiduciary duties. 12 And that raises a state law issue, it's not a federal law 13 issue. 14 THE COURT: I wonder if, Mr. Rosenberg, I can talk to 15 Mr. Barry for awhile. 16 MR. ROSENBERG: Sure, your Honor. 17 THE COURT: Before 14a-8 was promulgated, the law gave 18 the directors of the company, discretion -- 19 MR. BARRY: No. 20 THE COURT: -- in general, whether to submit a 21 stockholder proposal by proxy to stockholders or not. 22 MR. BARRY: No. Before -- 14a-8 doesn't give the 23 directors anything; 14a-8 doesn't give the directors any 24 discretion at all. It gives the company discretion. 25 THE COURT: But the business of the company is run by SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 8 8bc0bebm Motion 1 the directors. 2 MR. BARRY: And the business of the company, under 3 State law, is typically run by the directors under Section 141. 4 Except, 141 says, except as provided in the bylaws or 5 certificate of incorporation. 6 In this particular instance, EA doesn't have anything 7 on certificate. EA's bylaws is what gives the directors the 8 ability to exercise any sort of discretion at all in the 9 management in connection with Section 141. 10 So, EA's bylaws specifically provide that they can be 11 amended to restrict that discretion. That is specifically the 12 holding of the Court in the CA versus AFSME case that was just 13 decided by the Delaware Supreme Court. Bylaws can be very 14 restrictive on procedural matters addressed by the board of 15 directors. So the fact that, in the absence -- 16 THE COURT: Restrictive of whom? 17 MR. BARRY: I'm sorry? 18 THE COURT: Restrictive of whom? 19 MR. BARRY: Of the board of directors. They can 20 provide very restricted -- they can define the ground rules 21 within which the directors can exercise their discretion. And 22 the parameters within which they can exercise their discretion. 23 But it can also set the boundaries. And that's exactly what 24 this kind of bylaw would do, that if these kinds of proposals 25 are admitted, you're not -- you can't exercise a discretion as SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 9 8bc0bebm Motion 1 a board member to decide to exclude it. You may be permitted 2 under federal law. The company might be permitted under 3 federal law to -- for the company to exercise the discretion. 4 But that has nothing to do whether the board can. And by 5 enacting a bylaw -- 6 THE COURT: Well, what was the purpose of 14a-8, if 7 all of this could be accomplished under state law. 8 MR. BARRY: 14a-8 provides the mechanism through which 9 shareholders are entitled to have the company publish something 10 in the proxy statement. 11 Without 14a-8 state law couldn't specifically require 12 the publication of something that is necessarily subject to the 13 federal. So, I -- it's an issue we don't necessarily have to 14 reach, but -- 15 THE COURT: I understand. 16 If a bylaw would permit what is customarily done by 17 directors to be done by shareholders, why do we need 14a-8 at 18 all? 19 MR. BARRY: It wouldn't allow what's customarily done 20 by shareholders to be done by -- what's customarily done by 21 directors to be done by shareholders. What it would allow, is 22 the shareholders to set the boundaries of the things which the 23 directors can exercise their fiduciary duties, and their 24 managerial discretion. 25 THE COURT: So why have 14a-8, if it's all a matter of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 10 8bc0bebm Motion 1 the state law, and director's discretion. 2 MR. BARRY: Because 14a-8 talks about what has to go 3 in a proxy statement. 4 THE COURT: But if it's not in a proxy statement, then 5 it doesn't really get passed, because there is really no way 6 that the stockholders can function. 7 MR. BARRY: Yes. 8 THE COURT: And so the whole issue is what goes into a 9 proxy statement. 10 MR. BARRY: It is what goes into a proxy statement, 11 but remember Section 14a-8 provides the minimum of what has to 12 go in a proxy statement, not the maximum. There is nothing 13 that -- nothing that says, even -- even if - if the board -- 14 even if a company -- or even if any of these proposals might be 15 permitted to be excluded, the company has to exclude that. 16 THE COURT: Professor Bebchuk's proposal, if the 17 company wanted something -- if somebody -- if some stockholders 18 issued a proposal and asked the company to put in a proxy, it 19 would be mandatory to do that, notwithstanding the discretion 20 that 14a-8 provided. That's a material change. 21 MR. BARRY: It's not a material change for the 22 company. It's a material change for the directors. The 23 directors, without -- in the absence of a bylaw, the directors 24 can exercise that discretion on behalf of the company, because 25 EA's bylaws tell them they can. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 11 8bc0bebm Motion 1 But if EA's bylaws were changed to tell them how they 2 have to make that decision, that's not a material change with 3 respect to 14a-8. That's a material change under state law, 4 which is how the directors are acting in the first place. 5 So, the bylaw that we're talking about doesn't impact 6 14a-8 at all. And let me be, again, very clear. If the 7 directors want to exclude a proposal, the process works the 8 exact same way. There are likely to get a -- one of Mr. Dunn's 9 former colleagues to write a no-action letter. But that 10 doesn't mean they complied with their fiduciary duties in 11 making that request, and it doesn't preclude -- 12 THE COURT: Why? 13 MR. BARRY: Why? Because if the directors violate a 14 bylaw, they don't act within their business judgement. 15 THE COURT: Seems to me that what you are doing is 16 creating a conflict -- 17 MR. BARRY: I'm not. 18 THE COURT: -- between the proxy rules and fiduciary 19 responsibilities under state law. 20 MR. BARRY: There is no conflict at all. 21 THE COURT: Why don't you take the cup. 22 MR. BARRY: I'm sorry. 23 Your Honor, a conflict would exist -- your Honor, a 24 conflict would exist if -- 14a-8 said that the discretion 25 provided to the company under that rule must be exercised by a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 12 8bc0bebm Motion 1 board of directors. And only, by a board of directors. And 2 unencumbered by bylaws. And if your Honor, if 14a-8 said that 3 companies can't enact bylaws that talk about how directors 4 exercise their discretion, their managerial authority, that 5 would raise serious questions as to regarding whether that -- 6 whether that aspect of 14a-8 would be legal under federal law. 7 Because the Supreme Court made absolutely clear in the Sante Fe 8 case, that where there is a matter that is traditionally 9 addressed in state law and resolved under state corporate law, 10 unless it is specific, unless there is a federal -- federal 11 rule that specifically requires something to happen as a 12 federal matter, it is to be resolved under state law. And 13 there is nothing in 14a-8 or anywhere else in the proxy rules 14 that says the discretion afforded to a company to decide 15 whether or not to include or exclude a proposal must be 16 decided, unencumbered, within the discretion of a board of 17 directors. 18 THE COURT: Let me hear Mr. Rosenberg on this topic. 19 MR. ROSENBERG: Your Honor, Rule 14a-8, gives 20 shareholders a federal right of access to the company's proxy 21 statement. And this is contrary to -- this proposal is 22 contrary to Rule 14a-8, because it attempts to use the 14a-8 23 right of access process to effectuate an opt-out of the 14a-8 24 regime. 25 Now opt-outs, per se, are not impermissible. If the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 13 8bc0bebm Motion 1 board, in the exercise of its fiduciary duties, voluntarily 2 decides that it wants to opt out, or not enforce any of these 3 enumerated provisions under(i) it can do that. If a 4 shareholder wants -- 5 THE COURT: Well, it's not opting out. It is -- it is 6 exercising the discretion that the 14a-8 gives. 7 MR. ROSENBERG: Right. 8 And if the shareholders decide, through a proxy 9 solicitation, that a shareholder does, at its own expense to 10 the other shareholders, if they decide, through that process, 11 that they want to amend the bylaws to opt out of the 14a-8 12 process, they could do that as well. 13 THE COURT: What do you mean by "opting out?" 14 MR. ROSENBERG: Well, in other words, they could adopt 15 this proposal. They -- through their own solicitation of 16 themselves, not using the company as -- 17 THE COURT: You mean as a stockholder could pay for a 18 proxy, conduct a proxy fight? 19 MR. ROSENBERG: Right. 20 THE COURT: And end up with a bylaw that does the same 21 thing as Professor Bebchuk. 22 MR. ROSENBERG: He could comply with 14 -- with 23 Rule 14a, file a Rule 14a schedule, and conduct his own proxy 24 solicitation. And if the shareholders, in their wisdom, 25 decided to amend the bylaws to effectuate that opt-out, they SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 14 8bc0bebm Motion 1 could do that. But what they can't do, your Honor -- 2 THE COURT: So, why -- 3 MR. ROSENBERG: -- is use the company's proxy. 4 THE COURT: Why not? 5 MR. ROSENBERG: Because that totally distorts what the 6 SEC had in mind in adopting Rule 14a-8 in the first place. 7 THE COURT: I can't follow you, Mr. Rosenberg. It 8 seems to me it shouldn't matter what the aegis of the change 9 is. It shouldn't matter if the aegis is a proxy fight waged by 10 the shareholder, or a proxy issued by management. 11 MR. ROSENBERG: Well, your Honor, as I said at the 12 outset, it is wrongful on a macro basis and on a micro basis. 13 THE COURT: I don't know what you mean by that. 14 MR. ROSENBERG: Well, because, first of all, it would 15 violate the right that Rule 14a-8 gives under various of the(i) 16 exclusions; that is the micro basis. 17 But on a macro basis, it effectuates it uses the 18 company's process to effectuate an opt-out that the SEC 19 specifically rejected in 1982 and 1983. 20 THE COURT: But this shouldn't make any difference 21 what -- he just brought this about, whether it is a proposal 22 issued by the company, or a proposal issued by a shareholder. 23 MR. ROSENBERG: Sure, your Honor. Because 14a-8 is a 24 specific framework that the SEC has calibrated over the years 25 with checks and balances for the board and management to decide SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 15 8bc0bebm Motion 1 what should be included in the company's proxy, and what should 2 not be included. 3 And there are specific provisions giving the board the 4 right to decide what not to include, and what to include. And 5 then a whole framework for SEC supervision over that. No 6 action letters, procedural requirements, and so forth. 7 What Bebchuk is trying to do is use that process that 8 the SEC decided to keep in place in 1983, and not to change, 9 and not to allow shareholders to impose alternative frameworks. 10 He is trying to use it to impose an alternative 11 framework. And that distorts, and is contrary to the whole 12 Rule 14a-8 framework. 13 THE COURT: I follow you, and may agree with your 14 point. But I'm puzzled by the difference you draw between how 15 that comes about. You say that if it came about in a proxy 16 contest where the shareholder concerned initiates and pays for 17 the proxy, it's okay. But if done by management, it's not 18 okay. 19 MR. ROSENBERG: It's because it is not done by 20 management, your Honor. It is done -- if it's done through 21 14a-8 in the way Bebchuk proposes, it is co-opting the 22 company's proxy. 23 THE COURT: So what? 24 MR. ROSENBERG: Because -- 25 THE COURT: So what? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 16 8bc0bebm Motion 1 MR. ROSENBERG: Because management has the authority 2 to decide, and the board has the authority to decide what 3 should be in the company's proxy and what shouldn't be in the 4 company's proxy. 5 If a shareholder wants to spend his own funds to 6 solicit other shareholders, and include disclosure, setting 7 forth who he is, who backs him and why he is making this, and 8 the extensive disclosures that are required under Schedule 14a, 9 he can do that. 10 But here, any shareholder, your Honor -- in this case 11 it's a 5 percent shareholder. But taken to its logical 12 extreme, it could be any shareholder, any shareholder without 13 any disclosure obligations, except for the 500 words that are 14 required in the supporting statement, or no more than 500 15 words, could co-op the company's proxy and have the company 16 change how it operates, and -- and how the board and management 17 operates under its -- under 14a-8. And that -- I'm sorry -- 18 THE COURT: Go ahead. 19 MR. ROSENBERG: So, your Honor, the issue is not what 20 the shareholders could do under those circumstances. The issue 21 is what 14a-8 requires. And let me talk about one of the -- 22 the micro things that I mentioned. 23 THE COURT: So this proposal, you argue, is not 24 something that the management is compelled to issue. 25 MR. ROSENBERG: Your Honor, this -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 17 8bc0bebm Motion 1 THE COURT: This proposal is not something that 2 management is compelled to put into a proxy to the 3 shareholders. 4 MR. ROSENBERG: That's correct, your Honor. 5 THE COURT: And precisely because it ousts management 6 of discretion. 7 Now, does the proposal itself oust the management with 8 discretion? Does, under the existing 14a-8, does management 9 have the right to look at this proposal and say, you know, it's 10 an interesting proposal, but in our discretion, we decide not 11 to put it to a proxy. 12 MR. ROSENBERG: No, your Honor, it doesn't have that 13 discretion. 14 THE COURT: Why is that? 15 MR. ROSENBERG: Under this proposal, if it got -- 16 THE COURT: The proposal has not yet been adopted. 17 MR. ROSENBERG: Right. 18 THE COURT: Right now, it is a proposal. 19 MR. ROSENBERG: Right. But what would happen -- 20 THE COURT: So can I ask you, can management say, you 21 know, it's an interesting proposal, but my judgement, in our 22 judgement, it is not a sensible thing for the company to do, 23 we're not going to put it into a proxy. 24 MR. ROSENBERG: Well, that's what the company has done 25 so far, your Honor, and our position is, yes, that company does SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 18 8bc0bebm Motion 1 have that discretion. We, in fact, went to the SEC to seek a 2 no-action letter to get the SEC's concurrence in that and -- 3 THE COURT: And that's why you moved to dismiss the 4 lawsuit that would compel you to. 5 MR. ROSENBERG: That's correct, your Honor. 6 THE COURT: Okay. 7 MR. ROSENBERG: And, apparently, Professor Bebchuk 8 didn't want to wait until the SEC's no-action process went into 9 play, and played itself out. 10 THE COURT: Didn't want to participate in the process; 11 which is their right. 12 MR. ROSENBERG: Right. 13 THE COURT: I understand, now, Mr. Barry. What you 14 want is the company, as a matter of compulsion, to put to the 15 stockholders a proposal which, under 14a-8, is discretionary. 16 MR. BARRY: No. The question before the Court, your 17 Honor, is whether or not this proposal can be excluded under 18 any of the enumerated exclusions under 14a-8, not whether or 19 not it takes away discretion. It's whether or not it can be 20 excluded under any of the exclusions under 14a-8. And it 21 can't. They -- the company, doesn't have the discretion to. 22 THE COURT: Because it doesn't -- 23 MR. BARRY: Because it doesn't -- 24 THE COURT: -- follow any of the exclusions, is that 25 your point? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 19 8bc0bebm Motion 1 MR. BARRY: Exactly. 2 And let me be very specific about what I'm talking 3 about, your Honor. Let me go to the podium. 4 We heard a lot about the 14a-8 giving the board 5 discretion and getting management discretion to decide what to 6 do and what not to do. 7 Show me, in 14a-8, where it gives the board, or 8 management, any discretion. It doesn't. That discretion 9 belongs to the company. So that aside, your Honor hit the nail 10 on the head when you said, well, you have just conceded that 11 the -- that shareholders can go up and run their own proxy 12 solicitation, and adopt this very bylaw that Professor Bebchuk 13 is advocating. And, they have conceded, that the board, if 14 they wanted to, could adopt the bylaw that says exact same 15 thing. 16 Well, what does that tell you. That tells you that 17 they concede that, under state law, they can be restricted on 18 how they -- how the board exercises its judgement and its 19 discretion, its business judgement, in making this precise 20 decision, this discretionary decision as to what to exclude 21 under 14a-8 or not. 22 Now, let's think about what that means to the rest of 23 their argument. 24 If they say that it's perfectly legal to adopt this 25 bylaw, we'll talk about how you do it -- but it's perfectly SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 20 8bc0bebm Motion 1 legal to adopt this bylaw, what does that mean. 2 That means that entire discussion that the supposedly 3 sacrosanct careful balancing that you can't touch that the SEC 4 has done, and you can't do this through this bylaw is 5 irrelevant. They have just admitted that you can do it. They 6 just caution how you do it. 7 It also means that the entire discussion about what a 8 board -- what a board's discretion is, and what a board -- what 9 it can -- what the board can and can't do, can be restricted, 10 and quite substantially so, by this very kind of by law. The 11 Delaware Chancery Court recognizes various issues in the Jana 12 Masser Trust vs. Scenic, where it said although management 13 typically has this discretion, if a bylaw, management may 14 include the proposal. 15 THE COURT: May include what? 16 MR. BARRY: A proposal. That is otherwise that 17 otherwise the board could be permitted to exclude. That was a 18 Vice Chancellor Lamb, recognizing that the fiduciary duties of 19 a corporation of a board of directors can be limited in some 20 respect by the discretion of the bylaws, particularly in how 21 you are going to exercise your discretion, the company's 22 discretion, under 14a-8. 23 So they keep talking about an opt-out. And you said, 24 well, what's opt-out. This doesn't opt out 14a-8 at all. 25 14a-8 stays as it is, it doesn't change, the process doesn't SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 21 8bc0bebm Motion 1 change, the requirement doesn't change. Remember, 14a-8 2 doesn't preclude a company from publishing anything. It gives 3 discretion as to whether or not they can. It says if you 4 comply with procedural and eligibility requirements, you must, 5 unless 13 exclusions apply, in which way you can exercise 6 discretion. 7 Now, this doesn't opt-out, because there is no 8 circumstances, absolutely no circumstances that a board would 9 be required to violate Section 14a-8, or any other of the 10 securities laws if this bylaw was adopted. 11 THE COURT: Let me do this. 12 Let me ask you, Mr. Barry, your point is that this 13 proxy violates 14a-8(i)(3), right, Mr. Rosenberg? I'm sorry. 14 MR. ROSENBERG: Among others, your Honor, yes. 15 THE COURT: I would like you to take me through the 16 rules of 14a-8 that are violated by this proposal. And I take 17 it you agree that if there are none, I must deny your motion. 18 MR. ROSENBERG: Well, that's -- I agree, your Honor. 19 THE COURT: Okay. So let's -- let me -- 20 MR. ROSENBERG: Okay, the -- the -- 21 THE COURT: I have, in my hands, the rule. 22 MR. ROSENBERG: The most straightforward, your Honor, 23 is -- and this is more on the micro level, is (i)(8). And that 24 is the -- 25 THE COURT: (i)(8). And that's the Director Election SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 22 8bc0bebm Motion 1 Provision: If the proposal relates to a nomination or an 2 election for membership on the company's board of directors, or 3 government body, or procedure for such nomination or election, 4 if it does, what is the conclusion? 5 MR. ROSENBERG: It if it does, then the board should 6 have the -- should not be required to include that proposal in 7 the corporate proxy. 8 But under Bebchuk'-s proposal, a chain of events would 9 go into play that would eventually -- they say in their papers 10 at pages 25 to 26, that it would take four years, but they 11 admit that it could happen that in that time the company would 12 be forced to include shareholder nominations for directors in 13 the company's proxy. And that's exactly what(i)(8) was 14 designed to prevent. Now(i)(8) was amended your Honor, in 15 2007. 16 THE COURT: Now, he is saying that "company" is a 17 broader term than directors. And if the company has opted in 18 advance, that something that falls under 14a(i)(8), is not to 19 be ground for exclusion. And the company decided that it 20 should go to the board. 21 MR. ROSENBERG: Your Honor, respectfully -- 22 THE COURT: It should go the stockholders. 23 MR. ROSENBERG: Respectfully, it is a matter of 24 semantics that they are playing. Their proposal states as 25 follows: Resolved that the stockholders of Electronic Arts, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 23 8bc0bebm Motion 1 Inc. recommends that the board of directors, to the extent 2 consistent with fiduciary duties, submit to a stockholder vote 3 and amendment. 4 So, they recognize, through their own proposal, that 5 it's the board of directors that has control over the company's 6 proxy, and it's the board of directors that has the discretion 7 under the 14a-8 regime to decide what proposals should be 8 within the proxy, and what don't. And to the extent that you 9 have a proposal that strips the board of a right to include 10 something that requires it to include something that it 11 otherwise would be allowed to exclude, that is contrary to 12 14a-8, and therefore false within(i)(3). 13 THE COURT: Now, that would seem to be applicable 14 whether the initiator is the company, or an insurgent group of 15 stockholders. 16 MR. ROSENBERG: No, your Honor. And let me give you 17 have an example. One of the(i) items is 13 -- 18 THE COURT: Stay with 8, stay with 8. 19 MR. ROSENBERG: Okay. 20 THE COURT: Let's say a stockholder pays for an 21 election, and puts this proposal through what you are thinking 22 is -- contradicts a(i)(8) and it passes. It could still be a 23 proposal relating to a nomination or an election for membership 24 on the board. And you would have lost, as a company, the right 25 to decide whether it's a good or bad thing for the company to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 24 8bc0bebm Motion 1 submit to the stockholders. 2 MR. ROSENBERG: Your Honor, in 2007 when the SEC 3 amended (i)(8), it says exactly what it wanted to do was what 4 Bebchuk proposes. It said for the past decade, since 1998, the 5 commission staff has repeatedly taken the position that 6 shareholder proposals that may result in a contested election, 7 fall within the election exclusion. And, today, we're adopting 8 a clear concise amendment to the text of rule 14a-8 that 9 codifies the agency's longstanding interpretation of 10 rule 14a-8(i)(8). 11 In other words, if you have a proposal hike this 12 one -- 13 THE COURT: Then that applies to whoever is the 14 initiators of the proposal. 15 MR. ROSENBERG: But it -- no, your Honor. Because a 16 contested election that uses the company's proxy is done on a 17 completely different basis than a traditional proxy fight that 18 a shareholder may start. 19 THE COURT: That's true. That's true. But, again, 20 that seems to be the rule, and it should be the rule, 21 regardless who initiates the proposal. I can't foresee the 22 propriety in a company of stripping the directors of discretion 23 to conduct the business of a company. And part of that 24 business is the decision of what to submit and what not to 25 submit to the stockholders and voting. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 25 8bc0bebm Motion 1 Now the SEC has parsed that, to a degree, after a long 2 period of time of pulling and tugging with different interests 3 that surround the corporate governance issue. And it has 4 affected a compromise. But I don't understand why that 5 compromise should be affected by the providence of the 6 question. 7 If it's wrong to result such a conclusion, if it is 8 wrong to strip the directors of a discretion that is found to 9 be necessary, doesn't seem to me it makes any difference 10 whether it is the company that initiated the proposal or the 11 stockholder that initiated the proposal. 12 MR. ROSENBERG: Because what is at issue, your Honor, 13 is access to the company's proxy. 14 THE COURT: I understand that. 15 MR. ROSENBERG: And if you allow, unfettered -- 16 THE COURT: That's one of the issues. But the 17 consequences of it is an issue. (i)(8) says that the proposal 18 relates to a nomination, or an election from membership on the 19 company's board of directors or analogous governing body, or a 20 procedure for such nomination, or election. The company can 21 decide whether to submit it or not. 22 And I would submit, that in this situation, the 23 decision has to be made at such time as such a proposal is put 24 to the company, and only the board can do it. There can't be a 25 stripping away of a company of discretion in some governing SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 26 8bc0bebm Motion 1 body to make that decision. That's a(i)(8). That shouldn't 2 change, regardless of who initiates the proposal to change it. 3 And that's the view I have. 4 MR. ROSENBERG: Well -- 5 THE COURT: It's different from your view, I think, 6 and it's different from Mr. Barry's view. 7 MR. ROSENBERG: Well, your Honor, I think that 8 question is, actually, not before the Court. It's a question 9 of Delaware State law that may or may not be -- your Honor may 10 be correct, your Honor may not be correct. But it's really an 11 unrelated question. I mean it is related, but it's not the 12 question at issue. Because the question at issue here is what 13 your Honor got to in the first part, which is -- 14 THE COURT: I would hold that the SEC has been very 15 careful not to trammel on the -- except to the extent that it 16 thinks it appropriate on the normal discretion of the board of 17 directors, all right, and the proxy rules honor that. And 18 these 13 provisions for the exclusion, express the different 19 views of different instances. And this particular instance 20 requiring the company to put a proposal that could eliminate 21 the discretion of directors would be wrong. And it would 22 violate the, be contradictory, to what the SEC has done -- the 23 SEC has said. It has to be put to the board for a 24 discretionary judgement at about the time that this issue has 25 to be done. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 27 8bc0bebm Motion 1 It cannot be done in advance eliminating all 2 discretion. 3 MR. ROSENBERG: I agree, your Honor. 4 THE COURT: Mr. Barry -- 5 MR. BARRY: Your Honor -- 6 THE COURT: -- what's wrong with that view? 7 MR. BARRY: Your Honor, 14a-8 says nothing about board 8 discretion, zero. 9 THE COURT: It talks about the company. 10 MR. BARRY: It talks about the company. And the board 11 of directors, the discretion of the board of directors -- 12 THE COURT: I would submit, Mr. Barry -- 13 MR. BARRY: -- is subject to state law -- 14 THE COURT: -- that when it talked about company, it 15 had in mind the typical affairs of a corporation where the 16 business of the corporation is run by the directors. And the 17 directors is the organization that -- the institution that 18 exercises discretion for the benefit of the company. 19 MR. BARRY: Your Honor, that's nowhere -- and I mean 20 nowhere in 14a-8 or the supporting statements. 21 Now, what -- and let's -- let's break this down. We 22 talk about proxy access in two respects; proxy access, access 23 to the proxy, meaning any shareholder proposal, but proxy 24 access in its generic term meaning what has been referred to as 25 a bylaw that would require the company to publish the name of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 28 8bc0bebm Motion 1 the director nominated by the shareholders. And that could be 2 excluded under Section 14a-8(i)(8). And the AFSCME versus AIG 3 case before the Second Circuit, your Honor. And what happened 4 in there, in that case, was the version of Section 14a-8(i)(8) 5 at the time said, you can exclude a proposal that relates to an 6 election to membership on the boards of directors governing 7 body, or the board of directors or analogous governing body -- 8 THE COURT: Start again, I lost you. 9 MR. BARRY: I'm sorry. 10 The version of 14a-8 (i)(8), in effect at the time of 11 the AFSCME versus AIG decision -- 12 THE COURT: What time, which period. 13 MR. BARRY: 2005, 2004. 14 THE COURT: Okay. 15 MR. BARRY: Provided that the company, the board of 16 directors -- rather, the company could exclude a shareholder 17 proposal that related to an election for membership on the 18 board of directors or similar governing body. Or a nomination. 19 Shareholders had been introducing bylaw proposals 20 advocating that the directors place names of shareholder 21 nominated candidates on the company's proxy. For 20 years or 22 so, the Division of Corporation finance, which is not the SEC, 23 the Division of Corporation finance said companies can exclude 24 them. The Second Circuit said, no, they can't. That version 25 of 14a-8, doesn't permit a procedural kind of bylaw like this, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 29 8bc0bebm Motion 1 even though unquestionably it is election related, it doesn't 2 relate to an election. So the SEC amended it. They amended 3 14a-8 to address procedural issues. Saying, yes, you can 4 exclude that kind of nomination bylaw. That was the entire 5 purpose. 6 THE COURT: Overrule the SEC, overruled the Second 7 Circuit. 8 MR. BARRY: It was specifically designed to overrule 9 the Second Circuit. It was specifically not designed to 10 address other issues. 11 Now, there is two things that you have to take away 12 from the Second Circuit's decision in that regard. 13 First, the fact that a proxy access proposal in the 14 traditional sense, this nomination proposal, clearly is 15 election related, but the corporation said it doesn't relate to 16 an election, you can't get it in. Rather, you can exclude it. 17 So, as a result, we know that simply because it's election 18 related, doesn't mean it can be excluded under that version of 19 14a-8. So they -- the SEC amended it, and now we have or 20 procedure that relates to nomination or election. 21 THE COURT: So the SEC was trying to make clear that 22 the prescription in its rule applied generally, to all election 23 issues, and not just a particular election with which the 24 Second Circuit expressed its view. 25 MR. BARRY: That's not true, your Honor. In making SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 30 8bc0bebm Motion 1 that decision, the SEC's supporting statements specifically 2 said that this is not intended to permit the exclusion of many 3 other election-related subjects we have traditionally allowed; 4 for example, majority voting, declassification and that sort of 5 stuff. They're certainly election related, they are certainly 6 procedurally election related. But that's not what this bylaw 7 talks about. 8 Now, let me get back to your Honor concern with the 9 legality of the deal. 10 Before your Honor nobody in this room is contesting 11 the legality of that bylaw, just as nobody in this room is 12 contesting the idea that a bylaw can require a corporate board 13 to place a director nomination by shareholders. 14 THE COURT: That's because it's reserved to the 15 discretion of the board. 16 MR. BARRY: No, it is not because of the discretion of 17 the board, it is because it's a state law issue. And, for 18 example, in the AFSCME versus AIG -- 19 THE COURT: It may be a state law issue, but as long 20 as the board has the discretion to make its judgement in the 21 particular interest, it could decide, itself, what was good for 22 the company and what was appropriate for the directors under 23 the state law -- 24 MR. BARRY: Right, so let's consider two -- 25 THE COURT: -- and now your proposal would eliminate SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 31 8bc0bebm Motion 1 that discretion -- 2 MR. BARRY: Yes. 3 THE COURT: -- so it would promulgate, for the first 4 time, an inexorable rule that eliminated the discretion of the 5 board. 6 MR. BARRY: It would exercise the -- 7 THE COURT: And that's contradictory to the state -- 8 to the proxy rule. 9 MR. BARRY: And, your Honor, that's not the case. 10 For example, the board of directors has the discretion 11 under 14a-8 (i)(8), as it is right now, to exclude a proposal 12 that advocates the adoption of a proxy access bylaw. 13 Unquestionably, the company right now, and in the absence of 14 anything else, has that authority. 15 The Second Circuit recognized, the SEC recognized, the 16 defendants recognized that if a shareholder ran its own proxy 17 solicitation and got that -- got a proxy access bylaw installed 18 on its own, that would be valid. And it would be valid under 19 federal law, and it would be valid under state law. 20 So then the question is not whether or not when 21 presented with another proposal down the line, whether or not 22 they have the discretion to include it or exclude it, because 23 that decision has already been made, and that's okay. The 24 federal proxy rules do not prohibit companies from adopting 25 bylaws that establish these sort of things. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 32 8bc0bebm Motion 1 The Second Circuit, in the AFSCME AIG decision 2 specifically recognized that point. It said the question is 3 not whether or not these kind of bylaws are valid, certainly 4 they are. The question is whether or not you are allowed to 5 exclude it. 6 So, just as in this case, the question is not whether 7 or not this is valid, it is a valid and legal bylaw. You might 8 disagree on the wisdom of adopting that bylaw. It might be a 9 bad idea for a corporation. Shareholders might be -- it might 10 be a bad idea for shareholders to restrict the board's 11 discretion in that regard, but that's not a decision for the 12 Court. 13 THE COURT: Using Mr. Rosenberg's formulation, no one, 14 up to now, has said that the company, as a matter of 15 compulsion, has to use its own machinery to make it easy to 16 adopt such a rule. 17 MR. BARRY: No one has introduced this kind of bylaw 18 before. And simply because it's a novel bylaw, doesn't mean 19 that it's illegal. 20 Now, let's talk about the two -- the two micro 21 sections that the EA brought up. 22 First, Section (i)(3). That's the big one, that's the 23 one that they say it is inconsistent with. 24 THE COURT: Violation of proxy rules. 25 MR. BARRY: Right. It's a violation of proxy rules, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 33 8bc0bebm Motion 1 or contrary to proxy rules. 2 A bylaw that would require -- that would prohibit the 3 board of directors from exercising discretion given to the 4 company, on certain matters, is not contrary. Why? Because, 5 even if the company publishes any proposal that otherwise may 6 be excluded, it's legal. 7 For example, let's take -- 8 THE COURT: Because your proposal makes it legal. 9 MR. BARRY: No. Because even if -- even if -- even in 10 the absence of my proposal, it would still be legal to publish 11 a proposal that otherwise may be excluded. 12 For example, let's talk -- let's talk -- let's talk 13 about personal grievance. Let's talk about the personal 14 grievance one. Right now, they have -- the company has 15 discretion to exclude a proposal on personal grievance. 16 Let's say -- 17 THE COURT: Let me understand xxx14(a)(3). This says 18 you can't issue a proxy that has materially false or misleading 19 statements. 20 MR. BARRY: Right. Okay, materially false and 21 misleading statements. The materially false and misleading -- 22 THE COURT: You are not suggesting that there should 23 be discretion of the company to do that. 24 MR. BARRY: No, absolutely not. As a matter of fact, 25 the bylaw we have designed specifically says, to the extent SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 34 8bc0bebm Motion 1 permitted by law. And that's specific -- that's specific -- 2 and because the publication of a false and misleading statement 3 would be prohibited by law, the bylaw wouldn't require 4 anything. 5 Let's take, for example, a situation where the 6 board -- a -- somebody introduces a shareholder proposal on 7 something relates to ordinary business, something that relates 8 to a personal grievance. 9 The board of directors, right now, in the absence of 10 this kind of bylaw, has the discretion to exclude it. 11 If this bylaw was enacted, they wouldn't. The board 12 of directors would not have the discretion to exclude it. 13 But let's ignore the bylaw for a moment. Let say that 14 the board says, you know, I'll publish the proposal that the 15 single employee is raising about the lunch conditions at the 16 company's cafeteria. 17 THE COURT: Which paragraph is this? 18 MR. BARRY: This is -- this is (i)(3). I'm still 19 talking about whether or not a proposal that could be excluded 20 must be excluded. 21 The Court -- the -- Section 14a-8 provides a minimum 22 level of disclosure. And it provides options for disclosing 23 things. But if the company decides to publish a proposal 24 relating to the lunch conditions at the cafeteria, it can, 25 there is nothing illegal about it. There is nothing that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 35 8bc0bebm Motion 1 violates the proxy rules by publishing a proposal that 2 otherwise may be excluded by the company. And that applies to 3 every one of these exceptions. So if the company is allowed to 4 publish those proposals, the fact that the shareholders, in 5 their wisdom, or not, have adopted a bylaw that would make the 6 company exercise that kind of discretion, there is nothing 7 illegal about that there is nothing that contravenes the proxy 8 rules. There is nothing that would render -- 9 THE COURT: I think I have your point. 10 Let me ask both of you gentleman to just do one more 11 thing for me. Sketch in the history of this type of regulation 12 in 14a-8. 13 MR. ROSENBERG: Your Honor, in 1982, the SEC 14 considered two things: It considered whether there was a need 15 for, and desirability of providing a right of -- continued 16 right of security holder access to the issuer's proxy 17 statement; and, secondly, if so, should there be any 18 modifications to it. 19 And so, as part of considering whether there should be 20 any modifications to it, it sets out for comments a number of 21 different proposals. And one of those proposals was proposal 22 two. And proposal two is very similar to Professor Bebchuk's 23 proposal. 24 It would have allowed a shareholder to include, in the 25 company's proxy, a proposal for an alternative compelled access SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 36 8bc0bebm Motion 1 regime. The SEC got comments from various constituencies and 2 in 1983 it concluded essentially three things: 3 First, that it should keep the right, the continued 4 right of shareholder-compelled access to company's proxy, but 5 only under supervision of the commission, and not under 6 supervision of the courts; secondly, it should reject proposal 7 two, because it would create serious problems of 8 administration, and no uniformity of consistency or consistency 9 in determining the inclusion of security holder proposals. 10 And third -- 11 THE COURT: Why is that? Get to the third,and we'll 12 come back. 13 MR. ROSENBERG: And third, that the basic framework of 14 the current rule 14a-8 provides a fair and efficient mechanism 15 for security holder for the security holder proposal process. 16 So, in other words, what the Court found, is that if 17 you have a crazy quilt of compelled access to public company 18 proxies, that that would be unworkable, that it would be 19 confusing to shareholders, and that it would be unfair. And it 20 would distort the whole process. And rather than having a 21 crazy quilt, what it wanted, was to have one process for 22 compelled access for the federal right to access to the 23 company's proxy, and to modify it as it deemed appropriate. 24 And there were some modifications that the SEC made in 1983. 25 And what Professor Bebchuk wants to do here, is abuse SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 37 8bc0bebm Motion 1 that right of access that the SEC chose to leave in place, by 2 using the right to force the company -- by using that right to 3 force the company to enact an alternative proposal that the SEC 4 specifically rejected in 1983. 5 So that, your Honor, is the key background for why 6 this violates 14a-8(i)(3), why it is contrary to the SEC's 7 proxy rules. 8 In addition, your Honor, you have the State Street 9 decision on the contrary to. 10 And in the State Street case, the proposal was that 11 the company has to include in its proxy any shareholder 12 proposal for a bylaw amendment. And State Street basically 13 made three arguments in response to that, your Honor. 14 First, they said they could exclude it because it was 15 really two proposals rather than one; second, they made the 16 contrary-to argument, making arguments very similar to the 17 arguments that EA makes here; and, third, they said that there 18 were misleading statements in the supporting statements. 19 And what did the SEC do in its no action letter? 20 Well, it agreed that this was contrary to, that there appears 21 to be some basis for your view that State Street may exclude 22 its proposal under Rule 14a-8(i)(3) as contrary to the 23 commission's proxy rules. 24 Now, the State Street no action letter is not binding 25 on this Court. But no action letters are persuasive authority. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 38 8bc0bebm Motion 1 And that's what the Second Circuit held in the New York City 2 Employee Retirement Systems case. 3 THE COURT: I think the better evidence is the 4 consistency of SEC rulemaking reserving discretion to the board 5 of directors. 6 MR. ROSENBERG: Absolutely, your Honor. And 7 especially after the Second Circuit's AIG decision, because 8 there the SEC left no doubt. And it said that: 9 Rule 14a-8(i)(8) permits exclusion of a proposal that, "would 10 set up a process for shareholders to conduct an election 11 context in the future by requiring a company to include 12 shareholders" director nominees in the company's proxy 13 materials for subsequent meetings." And that's exactly what 14 this proposal will do. It sets up a process to ensure 15 contested elections. 16 And plaintiff's counsel admits that in their brief at 17 pages 25 to 26. They just say it's going to take a while. It 18 would take four years under their determination. And they say 19 that it's not a certainty. But the fact that it would take 20 time is irrelevant -- 21 THE COURT: Run me through that. 22 MR. ROSENBERG: Well, here is what they say: First, 23 you have, in year one, shareholders approved the proposal. And 24 the proposal is for a recommendation that the board adopt this 25 new regime. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 39 8bc0bebm Motion 1 In year two, EA's board decides to place the requested 2 amendment on the proxy. 3 In year three, the shareholders approve it. 4 And then in the year 4, assuming that the shareholders 5 approve it, they say a shareholder may emerge seeking to 6 exercise rights under that bylaw to require the company to 7 publish the name of a shareholder nominee candidate for an 8 election as a director. And so what happens, as they concede, 9 is exactly what the SEC said in its interpretive release in 10 2007 should not happen. 11 Now, an interpretive release -- 12 THE COURT: In other words, the nomination process 13 would be taken from the board and put into the hands of the 14 shareholders. 15 MR. ROSENBERG: That's right. 16 Now you have a contested election. And you have it 17 but through their use of the 14a-8 process. 18 Now, this is a formal SEC policy, your Honor, which 19 they admit on page 24 of their brief -- 20 THE COURT: But if the bylaws were to call for such a 21 procedure, it would be perfectly okay. 22 MR. ROSENBERG: If shareholders got together, your 23 Honor -- 24 THE COURT: If someone wanted to organize a company on 25 this premise. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 40 8bc0bebm Motion 1 MR. ROSENBERG: Right. You can envision, 2 theoretically, I guess, a company that shareholders get 3 together and they decide they really don't want the --they 4 don't want the business and affairs of the company to be run by 5 a board of directors, they want something else. 6 THE COURT: Unlikely to happen, but theoretically 7 could happen. 8 MR. ROSENBERG: Right. And it doesn't happen with 9 public companies. 10 THE COURT: Okay. All right. Anything else, 11 Mr. Barry? 12 MR. BARRY: Yes. 13 First off, the fact that the SEC had considered 14 similar alternatives to 14a-8, and rejected them, is not 15 helpful. And why is that not helpful? Because the SEC 16 considered a proxy access rule, and didn't adopt it. And the 17 Second Circuit in the AFSCME decision said that doesn't matter. 18 The fact that they have considered and did not opt it, doesn't 19 mean that this proposal is excludable. 20 So the question is, is this proposal excludable. 21 THE COURT: The AFSCME, A-F-S-C-M-E versus AIG. 22 MR. BARRY: American Federation of State -- 23 THE COURT: It's the case that Mr. Rosenberg refers to 24 as the AIG case? 25 MR. BARRY: Yeah. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 41 8bc0bebm Motion 1 THE COURT: Refers to AFSCME case. 2 MR. BARRY: Rights, AFSCME versus AIG case. 3 THE COURT: 462 F3d. 121. 4 MR. BARRY: Right. And I would suggest, your Honor -- 5 THE COURT: Give me the facts of the case. 6 MR. BARRY: The facts of the case. 7 The facts of the case were discussed earlier. There 8 was a shareholder -- AFSCME introduced a proxy access proposal 9 requiring -- 10 THE COURT: American Federation of State and County 11 and Municipal Employees. 12 MR. BARRY: The employees retirement system, thereof. 13 Asked to submit a proxy access proposal. The company 14 sought and obtained a no-action letter from the Division of 15 Corporation Finance saying that they could exclude it under 16 (i)(8) because it relates to an election, because it could 17 result in a contested election. 18 AFSCME filed a lawsuit before the Southern District of 19 New York seeking an injunction, saying it was -- it was 20 improperly excluded. It was the District Court denied. The 21 Court requested an injunction, held that, as a matter of law, 22 it was appropriate to exclude it within the board's discretion, 23 the company's discretion under Section 14a-8 (i)(8) as it was 24 in effect at the time, the Second Circuit reversed. The Second 25 Circuit reversed. And there is very, very important language SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 42 8bc0bebm Motion 1 in that case, your Honor, on many subjects that we are talking 2 about today. 3 First, and most importantly, this entire opting-out 4 issue. The Second Circuit recognized, that the company can, 5 that the company can adopt that proxy access bylaw. Everyone 6 agrees that that proxy access bylaw is legal. 7 So what the SEC then did, post the AFSCME AIG 8 decision, was to amend the 14a-8(i)(8) specifically to allow 9 the company to exclude that kind of proposal. 10 Now, does that mean that if a bylaw exists that says 11 you've got to put a proxy access proposal in, does that mean 12 it's illegal? No. So because it's -- and it's not excludable 13 under (i)(3), otherwise it would have been excludable before. 14 It's excludable under (i)(8), because they amended (i)(8). So 15 the question about this bylaw, is whether or not you can comply 16 with the bylaw, and comply with the Rule 14a-8. And there is 17 no circumstance where a board could be forced to comply with 18 the bylaw that we are talking about, that Professor Bebchuk has 19 suggested, and violate Section 14a-8 (i)(3). And because you 20 don't violate any securities laws, it's not excludable as 21 inconsistent under Section 14a-8 (i)(3). Why do I know that? 22 Because when the SEC adopted Section 14a-8 (i)(3) it 23 specifically said that -- let me get the quote, your Honor. In 24 order for it to be excludable an inconsistent under (i)(3), it 25 has to be contrary to, actually conflict -- where is the -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 43 8bc0bebm Motion 1 where is the quote, I'm sorry, your Honor. Oh. Release 2 number -- the SEC release number 12598 is quoted at page 21 of 3 our brief. The proposal has to contravene, be prohibited by, 4 and violate some SEC rule. And this proposal does nine of 5 those. And under no circumstances -- because, under no 6 circumstances would a company who would be required to publish 7 a proposal that otherwise it might be permitted to exclude, 8 violate, or is prohibited, from publishing those proposals. 9 They won't violate the law, it is not prohibited by law to 10 publish the kind of proposals, we're simply saying you have to 11 publish -- 12 THE COURT: Mr. Barry, if all of this effort to 13 understand the American Federation versus AIG, the case we are 14 talking about, is nothing more than the issue of how to 15 interpret an ambiguous regulation as to which the SEC has 16 changed its mind and is, therefore, as the Court held, not 17 entitled to deference. 18 The Court held that, because the interpretation is not 19 the way the company dictated, it was not an item that was part 20 of the exclusion and so, therefore, had to be put to the 21 shareholders. 22 So the SEC then turned around and promulgated a rule 23 that was clear, and as to which deference had to be given. 24 MR. BARRY: Yes. 25 THE COURT: So it's all a matter of procedure within SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 44 8bc0bebm Motion 1 the SEC, and not a matter that I think should go under my 2 decision. 3 MR. BARRY: Well, actually, your Honor, it is directly 4 related to your decision, because the first thing you have to 5 do is, as the AIG case noted, was start with the language of 6 the statute, language of the regulation. And the language of 7 the regulation, they are relying primarily on two sections -- 8 THE COURT: And they held that the regulation provided 9 for a particular election, and not for elections in general. 10 MR. BARRY: Exactly. 11 THE COURT: Let me take a brief recess, read them 12 over, and I'll furnish you with my decision. 13 (Recess) 14 THE COURT: Be seated, please. 15 In the first instance, as a matter of procedure, the 16 district judge has an option to consider the issue in chambers 17 and to write a learned, so-called, and sometimes extensive 18 opinion about a matter of this nature. But my judgement is 19 that whatever I do will not be dispositive, because the losing 20 party is going to take this up to the Court of Appeals. And it 21 will be the decision of the Court of Appeals that will be 22 informative and dispositive. 23 And so there is no point in my taking the time to 24 write. It is better that I give you my extemporaneous decision 25 and let this matter go up to the Court of Appeals, so that both SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 45 8bc0bebm Motion 1 parties can have, as early as possible, a dispositive ruling. 2 The complaint in this matter by Lucian Bebchuk against 3 Electronic Arts, Incorporated, asks for the following prayers 4 of relief: 5 A declaratory judgement that the company is required 6 to include the stockholder proposal, the Bebchuk proposal in 7 its 2008 proxy materials, injunctive relief compelling the 8 company to do so, plus litigation costs and the like. 9 The motion to dismiss is brought to dismiss the 10 complaint arguing that a declaratory judgement, so ruling, 11 would be in violation of Section 14a of the Securities Exchange 12 Act, Rule 14a-8 thereunder, and that injunctive relief, 13 therefore, could not be granted. 14 I grant the motion to dismiss. 15 The stockholder proposal, in broad terms, is as 16 follows: 17 Resolved that stockholders of Electronic Arts, 18 Incorporated recommend that the board of directors, to the 19 extent consistent with its fiduciary duties, submit to a 20 stockholder vote, an amendment to the corporation, certificate 21 of incorporation, or the corporation's bylaws that states that 22 the corporation shall, to the extent permitted by law, submit 23 to a vote of the stockholders at an annual meeting, any 24 qualified proposal, a word of art, to amend the corporation's 25 bylaws. And then it goes on to say that it should come into SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 46 8bc0bebm Motion 1 the annual meeting, and allow the stockholders to vote on it, 2 and to carry out that vote. 3 The definition of "qualifying proposal" is largely 4 procedural. It has to do with the time that it is submitted, 5 the certain length of it, that it would be a valid proposal to 6 amend the bylaws under their state law, and that it's a proper 7 action for the stockholders. And there is a time period to 8 deal with such an issue. 9 Section 14a-8, mostly in question and answer form, 10 provides certain number of enumerated exceptions to the company 11 duty to submit proposals initiated or suggested by shareholders 12 of a certain size and having shares for a certain duration, to 13 the stockholders in annual meetings. 14 With regard to these enumerated exceptions, 15 exclusions, the company has the discretion whether to submit 16 them or not. 17 So, in other words, if it is not one of the 18 exclusions, the company must submit to them. If it is one of 19 the exclusions, the company has discretion whether or not to 20 submit them. 21 Am I right on that, gentlemen? 22 MR. BARRY: Your Honor, that's correct. 23 MR. ROSENBERG: Yes, your Honor. 24 THE COURT: Okay. 25 So the real question is what does this proposal do? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 47 8bc0bebm Motion 1 The form of the proposal is a recommendation. It's a 2 recommendation to the board. If a recommendation of this 3 nature is made by the stockholders, as Mr. Barry points out, 4 the directors could ignore the recommendation at its fiduciary 5 parallel. And so the directors are put into a quandry. Even 6 if they think it is poor judgment for the company to bind 7 itself in this compulsory matter in the future, and for the 8 directors, thereafter, to loose the discretion that the law 9 gives them, it would be very difficult for the directors to 10 ignore such a recommendation. 11 As both lawyers have pointed out to me, that is a 12 point that delves into state law, and it's not the point of 13 this motion. 14 What is the point of this motion, is to deal with 15 whether or not there is an inconsistency between the resolution 16 and 14a-8. 17 And I hold that there is. It is the historic purpose 18 of the SEC in adopting Rule 14a-8 over an extensive period of 19 years, carefully to preserve the discretionary powers of the 20 company. And it is clear, by "the company," that the SEC 21 understand the company to be those who act for the company, and 22 are entrusted and have the responsibility to act for the 23 company. And that is a small, relatively small group of 24 people, like the board of directors, who have management 25 discretion to run the business and the affairs of the company. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 48 8bc0bebm Motion 1 And it is they that must have this discretion. 2 So that if a proposal falls within the discretion, the 3 area of discretion that arises from the regulation, that is in 4 terms of one of the exclusions, the company, that is the board, 5 can decide, well, it's still a good idea, let's submit it. Or: 6 It's not a good idea, we shall not submit it. And this opens 7 the door, this kind of thing, this kind of proposal, to numbers 8 of other areas where the SEC has been very carefully regulating 9 what should be the obligation of the company, and what should 10 happen by way of the stockholders. For example in the proxy 11 context, how boards are nominated, how directors are elected. 12 Those kinds of very delicate issues, relationship to corporate 13 governance, have much to do in terms of the regulation by the 14 SEC in who may do what, and who is compelled to do what. And 15 it is a form of regulating corporate governors. And so the 16 proxy rules exercise the restraint of the SEC to regulate the 17 areas of required disclosure, but not to involve themselves in 18 areas that are matters of state law to govern. 19 With respect to what we have hear, and the issue has 20 come up, for example, under subparagraph Fine Line, if the 21 proposal, the rule says, is not a proper subject for action by 22 shareholders under the laws of the jurisdiction of the 23 company's organization, the directors need not exclude it. The 24 directors -- and that is the company -- has discretion and 25 other items of that nature. This question and answer format SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 49 8bc0bebm Motion 1 goes into some detail in 14a-8 in defining these areas of 2 exclusion, and preserving the rights of the company, that is 3 the directors, to decide how to go about things and whether to 4 submit such a proposal or not. 5 The purpose of this proposal is to eliminate such 6 discretion on the part of the directors. They will retain the 7 discretion, in the first place, to heed or not to heed the 8 voice of the shareholders, because the proposal, in and of 9 itself, is innocuous, or apparently so in relationship to the 10 13 exclusions. But once the recommendation is made, if it's 11 made, the inevitable effect of this proposal is to do away with 12 the careful limitation on the part of 14a-8, to eliminate the 13 discretion of the company, because there will be nobody to 14 exercise it, and to have all of these questions submitted as a 15 matter of law, federal law, to the shareholders. 16 That contradicts 14a-8 and, therefore, I grant the 17 motion and dismiss the complaint. 18 A summary order will be issued tomorrow, putting this 19 into effect. And the losing party may, therefore, proceed 20 immediately to the Court of Appeals, which will inevitably have 21 to decide this question anyhow. 22 Thank you very much. 23 MR. ROSENBERG: Thank you, your Honor. 24 MR. BARRY: Thank you, your Honor. 25 (Adjourned) SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300