Tuesday, January 12, 2021

Letter to the editor was not a proxy solicitation under Alaska law

By John M. Jascob, J.D., LL.M.

The Alaska Supreme Court has held that a newspaper opinion letter concerning the advisability of allowing discretionary voting in an upcoming board election for an Alaska native corporation was not a proxy solicitation under regulations of the Alaska Division of Banking and Securities. Reversing the decision below, the state high court concluded that, analyzed in the context of the case, the division’s interpretation and application of the proxy solicitation regulation was unreasonable because the regulation only governs seeking the execution or non-execution of a proxy. Moreover, the division’s interpretation appeared to conflict with its regulations describing the effect of "withholding a proxy." Accordingly, the court reversed the division’s civil sanction against the appellant and remanded the matter for a determination of attorney fees (Ahmasuk v. Division of Banking and Securities, January 8, 2021, Winfree, D.).

Proxy solicitation regulation. Corporations authorized by the Alaska Native Claims Settlement Act are incorporated under the Alaska Corporations Code. Although native corporations are explicitly exempted from federal securities regulation compliance, the Division of Banking and Securities has authority under the Alaska Corporations Code to regulate certain activities of specified native corporations and their shareholders, including shareholder elections.

As related by the court, discretionary cumulative proxy voting in director elections has been the subject of a longstanding debate among shareholders of the the Sitnasuak Native Corporation. After Sitnasuak issued a newsletter advocating for discretionary proxy voting, shareholder Austin Ahmasuk submitted a letter to the editor of the weekly Nome Nugget in February 2017 opposing the practice. Ahmasuk closed his opinion letter with the sentence, "Please do NOT vote a discretionary proxy in 2017."

Although Ahmasuk sent his letter well before Sitnasuak’s annual shareholders’ meeting and at least two months before any director candidates were announced or any election-related materials were distributed to shareholders, a Sitnasuak director complained to the division that Ahmasuk’s letter was a proxy solicitation seen by more than 30 people. In mid-March 2017, the division issued an order finding that Ahmasuk had violated the proxy solicitation regulations by failing to file a copy of the letter with the commissioner and by failing to file required disclosures. An administrative law judge upheld the order and the $1,500 civil penalty against Ahmasuk, as did the superior court.

Too wide a net. On appeal to the Alaska Supreme Court, Ahmasuk argued that his letter was protected by the First Amendment as political speech and was not a proxy solicitation. Without reaching the constitutional argument, the state high court agreed.

As the division apparently adopted the SEC’s then-existing definition of "solicitation" when promulgating the Alaska regulation at issue, the court began by analyzing the history of the SEC definition. Although the SEC had expanded its solicitation definition in 1956 to include "furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy," the SEC adopted amendments in 1992 narrowing the definition’s scope, expressing concerns that the definition, too broadly construed, could "turn almost every expression of opinion into a regulated proxy solicitation."

The Alaska Supreme Court expressed similar concerns that the division’s broad regulatory interpretation in this case would contravene the proxy regulations’ purposes and stifles corporate governance debate. "If the solicitation regulation can cast such a wide net that it applies without regard to whether there actually is a pending election with known director candidates and proxy cards circulating (or known to be circulating imminently), for shareholder signatures, then the regulation may well go beyond valid regulation and into free speech infringement," the court stated. Moreover, the court continued, the interpretation would be difficult to enforce even-handedly, leaving unclear the line between lawful proxy solicitation regulation and unlawful infringement of free speech regarding corporate governance.

At its broadest, the court opined, the division’s proxy solicitation regulation governs only seeking the execution or non-execution of a proxy. "If the division predicated its enforcement action on Ahmasuk’s statement being directed to the then-unissued Sitnasuak official proxy card, the division’s solicitation definition does not seem to cover his statement," the court stated.

In addition, the division’s interpretation appeared to conflict with its regulations describing the effect of "withholding a proxy" because Ahmasuk’s opinion letter did not ask anyone to make or withhold specific votes in a proxy card. As the term "proxy" in the regulation refers to "a written authorization to vote," regulatory language describing "withhold[ing] authority to vote" on a physical proxy card appears to describe what it means to withhold a proxy at the voting level, the court reasoned.

Concluding that the division’s interpretation and application of its proxy solicitation regulation were unreasonable on the facts of the case, the court reversed the decision upholding the order sanctioning Ahmusuk.

The case is No. S-17414.