On September 6, 2019, the staff (the “Staff”) of the Division of Corporation Finance (“Corp Fin”) of the Securities and Exchange Commission (“SEC”) announced1 two significant changes to the Rule 14a-8 no-action process:
- Staff Response May be Oral. Starting with the 2019 – 2020 shareholder proposal season, the Staff may respond orally rather than in writing to some no-action requests. The Staff intends to issue a response letter “where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.”2
- Staff May Decline to State a View. In addressing no-action requests, the Staff may respond that it “concurs, disagrees or declines to state a view” with a company’s asserted basis for exclusion. It should be noted that while these response options have always been available to the Staff, historically, the Staff declined to state a view only in limited circumstances, such as in situations where there is pending litigation. If the Staff declines to state a view, the Staff noted that interested parties “should not interpret that position as indicating that the proposal must be included,” and further stated that, “as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.”
The announcement also reiterated the Staff’s belief3 that when a company seeks to exclude a shareholder proposal from its proxy materials under paragraphs (i)(5) (the economic relevance exclusion) or (i)(7) (the ordinary business exclusion) of Rule 14a-8, an analysis by its board of directors is “often useful.”
It remains to be seen whether the new policy of providing oral responses in certain cases may allow the Staff to respond more quickly to requests where the grounds for the exclusion are clear or well settled by precedent. In the meantime, the possibility of providing an oral response or declining to state a view could result in greater uncertainty for companies seeking no-action relief. As a result, companies seeking no-action relief will have to be prepared to consider different alternatives to the standard no-action relief process, including negotiating withdrawal with the proponent (typically in exchange for a related commitment by the company) or making an independent determination to exclude a proposal without the certainty of a written confirmation from the SEC. The new guidance will introduce new timing, legal and investor relations considerations to the no-action relief process.
No-Action Request Still Required if Excluding a Proposal
Rule 14a-8(g) states that “the burden is on the company to demonstrate [to the SEC or its Staff] that it is entitled to exclude a proposal.” Rule 14a-8(j) states that if a company intends to exclude a proposal from its proxy statement, “it must file its reasons with the [SEC] no later than 80 calendar days before it files its definitive proxy statement…which [among other things] should, if possible, refer to the most recent applicable authority, such as prior [Corp Fin] letters issued under the rule.” These rules have not changed under this new guidance. Therefore, a company that intends to exclude a proposal from its proxy statement should still submit a no-action request letter to the Staff explaining its reasons for excluding the proposal. However, if the Staff declines to state a view or provides oral responses only, the body of precedent will diminish, which may negatively impact companies’ ability to materially comply with Rule 14a-8(j).
Uncertain Outcomes and Consequences if Staff Declines to State a View
Because of the possibility that the Staff will decline to take a view on a no-action request, there will be more uncertainty around the outcome of a no-action request submission. The unintended result may be that some companies include proposals in their proxy statements that, in the past would have been excluded based on the Staff’s written response. Companies will need to take this into consideration when determining a strategic approach to handling a shareholder proposal. In certain situations, the benefit of negotiating the withdrawal of a proposal outside of the no-action request process may be greater than engaging in the 14a-8 process. Similarly, when a proposal is expected to receive minimal investor support, including the proposal in the proxy statement would provide more efficiency during an otherwise very busy time for public companies. It is important to note that if a company decides to exclude a proposal even in the absence of a Staff position on the company’s no-action request, prior to doing so the company should carefully consider all potential consequences, such as increased scrutiny from investors and proxy advisory firms and the increased risk of litigation. Engagement with the proponent and the company’s investors at large may become even more crucial in such situations.
During the upcoming 2020 proxy season, when determining how to respond to shareholder proposals, companies will need to consider carefully the prospect that the Staff will decline to take a view and/or only provide an oral response and determine how to proceed in those circumstances. Should a company seek a no-action request from the Staff, the different outcomes under this guidance should be weighed carefully with management and, as appropriate, with the nominating committee and/or the full board.