This is one article in a collection of 52 articles published on the basics of Bitcoin. If you are unfamiliar with bitcoin, some of the early articles in the series will be beneficial for this portion of the series discussing bitcoin treasury companies. Please contact us, if you have any questions or comments.
Recently, the SEC sided with Dell Technology in excluding a shareholder request from its proxy materials to have the company’s board of directors assess if adding Bitcoin to the company’s balance sheet was in the best interest of the shareholders. These types of proposals have been in vogue over the last six months with both Microsoft and Meta shareholders overwhelmingly rejecting proposals to have the company add bitcoin to their balance sheet. The song and dance is silly as these votes are nonbinding and would not force the respective company to put bitcoin on its balance sheet even if the proposal received a majority or a super majority of the votes. Rather than appease the shareholder, Dell Technology took a different approach by successfully arguing the shareholder proposal could be excluded from the proxy materials under SEC Rule 14a-8(i)(7).
Rule 14a-8(i)(7) allows a shareholder proposal to be excluded if “the proposal deals with a matter relating to the company’s ordinary business operations.” In its final rule on the matter the SEC explained “the legal term-of-art "ordinary business" might be confusing to some shareholders and companies. The term refers to matters that are not necessarily "ordinary" in the common meaning of the word, and is rooted in the corporate law concept providing management with flexibility in directing certain core matters involving the company's business and operations.” See Securities and Exchange Act Release No. 34-40018 (May 21, 1998).
The Final Rule explained the ordinary business exclusion rests on two central considerations. The first consideration relates to the subject matter. Certain tasks are so fundamental to management’s ability to run a company on a day-to-day basis they could not, as a practical matter, be subject to direct shareholder oversight. The second consideration relates to the degree to which the proposal seeks to micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.
Both considerations appear applicable to shareholder proposals to add bitcoin to a company’s balance sheet. First, the management of a company’s cash and investment strategy is highly complex and involves myriad considerations which make it so fundamental to management’s ability to run a company on a day-to-day basis that it could not, as a practical matter, be subject to direct shareholder oversight.
Furthermore, the proposal to add bitcoin to the balance sheet would micromanage the company. In a previous case the SEC ruled “when a proposal prescribes specific actions that the company’s management or the board must undertake without affording them sufficient flexibility or discretion in addressing the complex matter presented by the proposal, the proposal may micromanage the company to such a degree that exclusion of the proposal would be warranted.” SLB Nos. 14K.
Interestingly, Dell’s attorney, Kevin Greenslade, cited a Tesla case from 2022 when the shoe was on the other foot and the SEC ruled in favor of Tesla. In that ruling the SEC held Tesla did not have to include a shareholder proposal in its proxy statement to liquidate newly acquired bitcoin. Tesla’s attorney successfully argued “determining where, how and when a company makes investments is fundamental to management’s ability to oversee a company’s financial condition.” The SEC agreed to not recommend enforcement action to the Commission if Tesla omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(7).
These types of proposals have been common at Fortune 500 companies over the last year and have repeatedly been rejected. Considering the benefits the first Fortune 500 company will reap once a bitcoin strategy is fully implemented with 100 percent conviction, it is fitting one CEO will have to have the courage to come to this conclusion with his/her most trusted advisors.
While a pure corporate treasury play has successfully been implemented by companies like Strategy (United States), Metaplanet (Japan), and The Smarter Web (United Kingdom), the next iteration of this strategy will involve the world’s biggest players entering the space who have cash flow. These companies will have a distinct advantage as they will not only have cash flow but also access to more capital markets to deploy the bitcoin strategy. When the bear market hits, these types of companies will have the cash flow to continue to hold the bitcoin they have accumulated and accelerate their bitcoin position at the discounted bear market prices.
With bitcoin creating an extremely high hurdle rate, the most logical type of company to do this would be one who is not primarily thought of as a tech company. Tech companies have had the helium in their stock price where they probably believe they can clear the bitcoin hurdle rate. Instead, this strategy would make the most sense for a company that has market factors fading away from it - past corporate giants. What do you all think? Who will be the first Fortune 500 company to move all of their chips in with courage and conviction?
My prediction: AB-Inbev. The king returns!
