The staff of the Securities and Exchange Commission has granted Alaska Air's request to omit a novel shareholder proposal from University of Michigan law professor Adam Pritchard that seeks to change how investors bring securities lawsuits.

His proposal asked the board to amend the company's certificate of incorporation to provide a partial waiver of the "fraud on the market" (FOTM) presumption of reliance for class-action lawsuits brought by investors under Rule 10b-5. The proposal sought to limit the potential damages available to the disgorgement of any unlawful gains obtained by company officials through their violation of Rule 10b-5, and thus bar investors from recovering losses in the value of their shares.

Pritchard asserted that his proposed certificate amendment would substantially reduce the incentive for plaintiffs' lawyers to sue the company after a stock drop, and would motivate the lawyers to focus on any officers who profited from fraud through large stock option gains.

In a March 11 ruling, the SEC staff agreed with Alaska Air's argument that the proposal was contrary to federal law. The company argued that the proposal would cause it to violate Section 29(a) of the Exchange Act, which prohibits waivers of substantive provisions of that law. In response, Pritchard argued that his proposal only seeks a waiver of a procedural provision, and thus should be permitted. He asserted that his resolution would not waive any compliance obligations for the company, officers, or investors; shareholders could still use the FOTM presumption to show reliance in 10b-5 cases, but they could recover only disgorgement.

A similar proposal was filed at Alaska Air in 2009, but the SEC allowed the company to exclude it on procedural grounds.

*This article first appeared in the ISS Governance Weekly publication.