You may recall that, last 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.) In describing the new approach in remarks to the PLI Securities Regulation Institute, Corp Fin Deputy Director Shelley Parratt said that the plan was to post a chart on the SEC website with the bottom line responses to these no-action requests and to inform both the company and the proponent by email that the response would shortly be posted on the chart. (See this PubCo post.) As reported on thecorporatecounsel.net blog, the 2019-2020 Shareholder Proposal No-Action Responses chart is now available. Parratt had suggested that the chart might actually be easier for readers to follow—and she may well be right.
In her remarks, Parratt indicated that the only real change that would result from the new approach was in the form of the response; there was no intent to otherwise change policy (i.e., for those who were concerned about the potential expansion of “declines to state.”) Parratt also observed that SEC responses to no-action requests are essentially an accommodation to companies and that it has always been the case that Corp Fin could decline to state a view. She added that Corp Fin will continue to provides letter responses where they believe it would be valuable.
What brought about Corp Fin’s new approach? In the announcement, the staff indicates that after the recent proxy season, Corp Fin gave some thought to whether a change was warranted to make the process more efficient and effective. Corp Fin Director Bill Hinman has previously observed that, during the proxy season, about one-half of the shareholder proposals were withdrawn, presumably reflecting an agreement following engagement between the company and proponent.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, like some other types of no-action requests that are submitted, Corp Fin would not respond in writing (or at all) to every no-action request submitted to exclude a shareholder proposal. Requests based on difficult topics, he said, such as the “ordinary business” exclusion, would likely receive a response. But, Hinman said, if the request were ordinary course and there were no value to be added in a written response, Corp Fin may not provide a formal letter response at all. Hopefully, with the SEC out of the way, the result would be more direct engagement between companies and shareholders. (See this PubCo post.)
The introduction to the chart reiterates the SEC’s position that the staff’s responses represent only the “informal, non-binding views as to whether the Division would recommend enforcement action to the Commission if a company excludes a proposal from its proxy materials. The staff does not and cannot adjudicate the merits of a company’s position with respect to a proposal. Only a court can determine whether a company may legally exclude the shareholder proposal from its proxy materials.”
Thecorporatecounsel.net reported that, in one case, the staff emailed notification (presumably to both parties) that it had “completed its review of the company’s submission. Our response will be posted after 4:30 PM this afternoon,” providing a link to the chart and indicating that all the correspondence would be available soon. So far, the chart has two entries, and both of the staff responses, issued on November 21, concurred with exclusion of the proposals. One of the two companies that submitted no-action requests received a written response. In that case, the staff concurred that the proposal (for a majority vote for directors) would cause the company to violate the corporate laws of the company’s state of incorporation under Rule 14a-8(i)(2). The request that did not receive a response asserted as a basis for exclusion Rule 14a-8(b)/(f), procedural bases related to failure to establish the requisite eligibility to submit the proposal within the required time following the company’s notice.
In the chart, there are hyperlinks to each company’s initial no-action request. There are also supposed to be hyperlinks to all the related correspondence back and forth in reverse chron order. The text indicates, however, that the hyperlink will not be available until “the materials are posted on the SEC website, generally within a few business days of the staff’s response.” The chart also indicates the regulatory bases asserted by the company for exclusion and the rule on which the staff based its decision.
At least one of the proxy advisory firms, Glass Lewis, has chimed in with its expectations regarding how companies should respond to the new approach. In its 2020 Proxy Paper™ Guidelines, Glass Lewis has stated that they “believe that companies should only omit proposals in instances where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded. In instances where the SEC has declined to state a view on whether a shareholder resolution should be excluded, we believe that such proposals should be included in a company’s proxy filings. A failure to do so will likely lead Glass Lewis to recommend that shareholders vote against the members of the governance committee.” [emphasis added] Of course, at least to date, declines to state have been rare and, based on Parratt’s remarks, will likely remain so.
This next guideline, however, could have greater general application as it applies in all cases where the SEC has “verbally permitted a company to exclude a shareholder proposal and there is no written record provided by the SEC about such determination.” In the absence of a “written record,” Glass Lewis says that it expects “the company to provide some disclosure concerning this no-action relief. In cases where a company has failed to include a proposal on its ballot without such disclosure, we will generally recommend shareholders vote against the members of the governance committee of the board.” [emphasis added] Is a staff response in the Corp Fin chart described above a sufficient “written record,” or is Glass Lewis referring here only to a staff response letter? Is the disclosure intended just for purposes of verification or is more extensive disclosure expected (e.g., of the bases for the requested exclusion)?