It’s been a busy late summer and early fall for the Staff of the Division of Corporation Finance (the Staff) as it relates to shareholder proposals and the Staff’s historical involvement in the no-action process related to those proposals.
On September 6, 2019, the Staff, focusing on how it could most efficiently and effectively provide guidance where appropriate regarding shareholder proposals, announced that it was changing its practices in this important area. Historically, issuers that were seeking to exclude a shareholder proposal from their proxy statement on the grounds that the SEC’s proxy rules permitted such exclusions sought formal, written no-action relief from the Staff of the Division of Corporation Finance.
These no-action letters issued by the Staff would inform the issuer whether or not the Staff would recommend that the SEC’s Enforcement Division take action against the issuer for excluding a particular shareholder proposal.
How Will Oral Notices Change the Current No-Action Process?
With the recently announced change, the Staff may instead choose to respond orally rather than in writing, leaving written no-action letters to those cases where responding in writing would provide value, such as more broadly applicable guidance about complying with Rule 14a-8. Time will tell whether issuers and their counsel will become comfortable with this oral process and feel confident omitting a shareholder proposal on the basis of an oral statement from a Staff member confirming the issuers’ view that a proposal may be properly excluded or why the issuers may begin to utilize the court system to seek formal, binding adjudication on the merits of the issue in court. Frankly, I think we are unlikely to see a rash of lawsuits filed seeking more formal resolution of these issues in light of the cost and time it takes to receive a judgment through the courts.
It will also be interesting to see whether the frequency with which the Staff declines to reach a conclusion on a particular proposal will increase. Historically, the Staff has typically reached a decision either supporting the issuer’s view that the proposal may be properly excluded or failing to concur in that view. Now, we may see more instances where the Staff declines to state a view, leaving the issuer and its counsel to decide on a particular course of action. When the Staff declines to state a view, issuers will be left weighing the benefits of omitting a proposal where they think solid legal ground exists to do so against the potential negative reaction of shareholders, the media, or proxy advisory firms like ISS or Glass-Lewis. The threat of litigation from a shareholder that has had a proposal omitted also seems higher when the Staff declines to express a view on a proposal and the issuer nonetheless excludes the proposal.
Issuers: Continue to Provide Advanced Notice When Omitting Proposals
Though the Staff has expressed its desire to get out of the business of issuing formal guidance on these no-action proposals, issuers remain obligated to notify the Staff in advance when they intend to omit a proposal and to provide the underlying basis for their decision.