You may recall that, earlier this month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, the staff may respond to some requests orally, instead of in writing, and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. (See this PubCo post.) Now, five investor organizations—Council of Institutional Investors, US SIF (Forum for Sustainable and Responsible Investment), Interfaith Center on Corporate Responsibility, Ceres and Shareholder Rights Group—have written to Corp Fin Director William Hinman to “express major concerns” regarding the new approach to Rule 14a-8 no-action requests and to ask that it be rescinded. Why? The organizations contend that the new policy “reduces transparency and accountability, increases the burden on investors, and could increase conflict between companies and their investors.”
Of course, increasing conflict was not exactly what Corp Fin had in mind in adopting the new policy. At an event in July organized by the Chamber of Commerce, Hinman had observed that, during the preceding proxy season, about one-half of the shareholder proposals were withdrawn, presumably reflecting an agreement that followed engagement between the company and the proponent. That statistic—plus the fact that during the month-long government shutdown, the ball seemed to keep rolling without SEC intervention—triggered some rumination at the highest ranks about the possibility of really revamping the process so that perhaps Corp Fin would not respond in writing (or at all) to every no-action request submitted to exclude a shareholder proposal. The hope was that, with the SEC out of the way, the result would be more direct engagement between companies and shareholders. After all, SEC Chair Jay Clayton noted at the same event, the rules were designed to facilitate shareholder engagement—dialogue is good. (See this PubCo post.)
In this article from S&P Global, an unnamed SEC staff member explained that another reason for the new policy
“was that companies, investors and trade groups have for some time pressed the SEC to provide more detailed answers in their responses to no-action letter requests, the staffer said. By having the flexibility on whether to respond to requests, staff aims to free up its ability to discuss particular issues in greater length and detail. ‘We’re trying to focus our resources on where we think we can provide more value….[M]ost people will get responses, it may just be in a different form than what they’ve gotten in the past.’ But the division does not currently have a sense of how often it may opt not to weigh in or issue a written response. Going forward, staff expects to indicate in some way online whether it agreed, disagreed or expressed no view on a company’s petition and to include a link to any written letter, to the extent one may exist.”
The organizations contend that the staff’s past practice of responding in writing to requests for no action regarding exclusion of shareholder proposals—whether the staff does or does not concur with the propounded basis for exclusion—“has generally served the parties well by providing an element of predictability.” In the past, only in very rare instances “did the Staff decline to issue a decision, typically limited to circumstances in which a pending litigation, or a pending SEC rulemaking or staff deliberation, was focused on interpretation of the Rule 14a-8 exclusion addressed in the no-action request.” However, the new approach, in their view, “appear[s] to be unbounded by any timeframes or standards of decision.” The letter implicitly chastises Corp Fin for not having circulated a written draft of the new policy for comment by affected stakeholders.
Although the letter states that the new approach “raises substantial questions and concerns for issuers and proponents alike,” the organizations seem to be particularly disturbed by the prospect of the staff’s declining to take a position more frequently. Presumably they fear a decline-to-state response from the staff will be used as an opportunity for companies to simply exclude the proposal—rather than an overture to engage, as the SEC contemplates—ultimately resulting in more litigation. In that regard, the letter questions whether retail shareholders who submit proposals will still benefit from the same protection that they previously received—the threat of Enforcement if proposals were improperly excluded. If the staff “declines to state a view,” the burden of enforcement through private litigation would shift to the proponents of the proposal—“an unreasonable and unfair burden on investors—especially smaller and individual investors, whose protection is a central priority for SEC Chairman Jay Clayton. We assume that it is not the Division’s intention to escalate the amount of issuer-investor tension, costs, and conflicts associated with shareholder proposals, yet the new process appears likely to do so.”
Recourse to the courts on issues related to shareholder proposals, while not exactly common, does have a history. In 2019, for example, the NYC Comptroller sought to have a manufacturer of aerospace components adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and before even submitting a response to the SEC or receiving a response from the staff—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section l4(a) and Rule l4a-8. Then, on December 7, the NYC Comptroller’s office wrote to the SEC that it would not respond to the company’s November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief “that would ensure the… shareholder proposal is included in the proxy solicitation materials. The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. (See this PubCo post.) But it’s not just large asset managers and pension funds like the NYC Comptroller that are willing to participate in court fights. You might recall that, in 2014, three companies facing shareholder proposals from John Chevedden et al., a prolific shareholder activist, adopted a “direct-to-court” strategy, bypassing the SEC no-action process. In each of these cases, Mr. Chevedden fought back and the court handed him a victory, refusing to issue declaratory judgments that the companies could exclude his proposals. (See, e.g., my News Briefs of 3/18/14, 3/13/14 and 3/3/14.)
Even oral decisions, they argue, will result in reduced transparency and decreased accountability. Proponents may not have “symmetrical access to communications and evidence presented to the Staff,” and other companies and shareholders/potential proponents will lose the “predictive understanding of Staff thinking, while the lack of transparency prevents legislative oversight.”
In the event that Corp Fin did not agree to rescind the policy, the five organizations offer five suggestions to reduce “uncertainty and conflict”:
- Employ the new policy only in exceptional circumstances, and initially, only on a pilot basis “until the implications are better understood.”
- Establish a set of criteria to guide the staff and the market as to when the new policy will be employed or, at a minimum, explain the use of the options on a case-by-case basis. As examples, the letter suggests that the staff might note that it is declining to take a position but “that this does not preclude later referring the matter for enforcement.”
- Advise the parties early in process if the staff will decline to take a position so that proponents can avoid “futile efforts and expenditures…to prepare a proponent’s response for the Staff’s consideration, and allow time to pursue litigation. Conversely, [the organizations] seek clarification as to whether the Staff will await a response from the proponent before choosing one of these forms of disposition.”
- If the staff indicates its disposition of the request for no action online, post the correspondence from both the company and the proponent as well (which would be consistent with current practice generally and seems to be the plan).
- Provide “procedural safeguards for oral decisions [to] ensure fair and symmetrical information and access by the parties,” such as conference calls involving both companies and proponents.