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30 September 2019
As foreshadowed by Corp Fin Director Bill Hinman at an event in July put on by the U.S. Chamber of Commerce (see this PubCo post), Corp Fin has announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, 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. How will companies respond?
Here is the substance of the announcement:
"The staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents as appropriate. In cases where a company seeks to exclude a proposal, the staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company's asserted basis for exclusion. Starting with the 2019-2020 shareholder proposal season, however, the staff may respond orally instead of 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.
"The staff continues to believe, as noted in Staff Legal Bulletin 14I and Staff Legal Bulletin 14J, that when a company seeks to exclude a shareholder proposal from its proxy materials under paragraphs (i)(5) or (i)(7) of Rule 14a-8, an analysis by its board of directors is often useful.
"If the staff declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included. In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8. And, as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court."
What brought about this turn of events? In the announcement, the staff indicates that after the recent proxy season, Corp Fin gave some thought to whether a change to make the process more efficient and effective was warranted. At the Chamber event, Hinman was somewhat more expansive. He observed that, during the proxy season, about one-half of the shareholder proposals were withdrawn, presumably reflecting an agreement following engagement between the company and proponent.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. And, perhaps to that end, in the announcement, Corp Fin has reiterated its view of the "usefulness" of a board analysis in the context of the "economic relevance" and "ordinary business" exclusions. 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. Of course, the staff would still need to figure out how to monitor whether the process was working. But hopefully, 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, the rules were designed to facilitate shareholder engagement—dialogue is good.
Whether the staff response is written or oral, both forms are non-binding and unenforceable expressions of staff views (see this PubCo post) and, presumably, most companies will just try to make a record of the oral responses and continue to rely on the advice. But what about "declines to state"? (For an almost "decline to state," see this PubCo post. Although, in that instance, Corp Fin did ultimately issue a no-action letter to Johnson & Johnson granting relief to the company if it excluded, on the basis of Rule 14a-8(i)(2) (violation of law), a proposal requesting adoption of mandatory arbitration bylaws, Corp Fin deferred entirely to the State of New Jersey and took a pass, with Chair Clayton concurring, on the issue of the federal legality and regulatory implications of mandatory arbitration provisions as applied to claims arising under the federal securities laws.) Perhaps "declines to state" will ultimately be rare, but how will the parties respond to no view from Corp Fin? Will the absence of a view from Corp Fin lead one party or the other to the courts for resolution or will the parties just engage further and settle the matter between themselves, as Corp Fin seems to hope? In the end, that will likely vary depending on the parties, the proposals and the particular circumstances.
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.)
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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