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Jan 24, 2020

Industry gets first insight into SEC’s 14a-8 no-action shift

Agency officials no longer always send letters explaining decisions

Governance professionals at companies, law firms and investors are beginning to find out how the SEC will apply its revised approach to handling companies’ requests to exclude shareholder proposals from their AGMs – specifically, where the agency declines to give a written explanation of its decision.

The division of corporation finance’s staff on September 6 issued a statement explaining that officials will continue to monitor correspondence and provide informal guidance to companies and proponents where appropriate.

But in a change from previous practice, the division stated: ‘Starting with the 2019-2020 shareholder proposal season… 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.’

In the intervening months, professionals have speculated about how the SEC would make this work in practice – for example, whether officials would hold conference calls with issuer and shareholder representatives to let them know about decisions. There has also been uncertainty about what guidance, if any, would be provided if there is no letter, how often no letter would be sent and why the division is declining to offer written decisions in some cases.

Answers to these questions are starting to be revealed. Excluding where proposals have been withdrawn, the SEC has at time of writing listed 33 decisions it has made on proposals for this proxy season. It has sent letters explaining its reasoning for seven (21 percent) of those decisions, and no letters regarding the other 26.

Among all 33 decisions, seven favor the proponent in that the SEC states on its website that it is ‘unable to concur’ that Rule 14a-8 provides a basis to exclude the proposal. In the 26 other cases, the agency agrees that the rule gives the company grounds to exclude the proposal.

Attorneys acting on behalf of issuers and a shareholder that have recently been through the process and not received a letter tell Corporate Secretary they instead received an email from the SEC informing them that the division would be posting a decision on its website later that day, without stating in the email what that decision would be.

Those emails were Cc-ed to counsel – in-house and/or outside – for the company and to the shareholder or its representative so that each was given the same information simultaneously, the professionals say. The emails gave between one and three hours’ notice before the decision was posted, and included a link to a new table where no-action requests and decisions for this proxy season are displayed, according to the professionals. Previously, the SEC has posted no-action requests, proposals and all relevant correspondence in separate folders.

In the new table, the SEC provides links to correspondence regarding the no-action request, and in cases where no decision letter is sent it states the division’s reasoning by citing sections of Rule 14a-8.

For example, in the case of shareholders seeking to have a proposal included in the General Dynamics proxy statement, the staff did not send a written decision but states in the table: ‘Unable to concur that Rule 14a-8(i)(3) provides a basis to exclude.’ Similarly, in a recent case of PPG Industries seeking no-action relief, the staff did not send a letter but states: ‘Concur that Rule 14a-8(i)(10) provides a basis to exclude.’

Views among professionals who have experienced this process are mixed. For example, Gibson Dunn & Crutcher partner Lori Zyskowski was outside counsel to HP when the company recently sought no-action relief for excluding a shareholder proposal. The company requested the relief pursuant to Rule 14a-8(i)(7) because the ‘proposal relates to the ordinary business operations of the company and seeks to micromanage the company.’

The SEC did not respond by letter but sent an email around 11.00 am on December 20 letting Zyskowski know the decision would appear online at 12.00 noon. The entry states: ‘Concur that Rule 14a-8(i)(7) provides a basis to exclude (ordinary business).’

Zyskowski, noting that the basis for the SEC’s decision is displayed, tells Corporate Secretary that traditionally some letters from the agency would have had ‘a bit more color’ in explaining decisions. But she describes the new process as not being too different and a more efficient way to handle requests.

She also describes the new chart as helpful in giving professionals an easy overview of the staff’s responses without having to delve into every batch of correspondence. Requests where it is important for the reasoning behind a decision to be explained in more detail will continue to receive a letter, she adds. 

Skadden Arps Slate Meagher & Flom recently represented The Allstate Corporation, which requested that a proposal be excluded under Rule 14a-8(h)(3) ‘because neither the proponent nor his qualified representative attended the corporation’s 2018 annual meeting of stockholders to present the proponent’s proposal contained in the corporation’s 2018 proxy materials.’ There was no letter and the SEC’s response online states: ‘Concur that Rule 14a-8(h)(3) provides a basis to exclude.’

‘I don’t think we are missing anything important because, if there was something, they’d have written a letter,’ says Skadden partner Brian Breheny, who worked on the request and is a former deputy director for legal and regulatory policy with the division. ‘But I’m still trying to figure out what problem they’re solving [by not sending letters].’

Hagen Ganem, counsel with Skadden and a former member of the division’s Rule 14a-8 shareholder proposal taskforce, says of not receiving a decision letter: ‘When we draft requests next year will we be missing anything [in terms of the SEC’s thinking]?’ He notes that in the past attorneys have been able to boost their arguments by quoting previous SEC letters explaining decisions.

Justin Danhof, general counsel for the National Center for Public Policy Research, is more critical. The SEC agreed with The Walt Disney Company over a proposal the center attempted to bring, stating: ‘Concur that Rule 14a-8(i)(11) provides a basis to exclude.’

Danhof describes this explanation as ‘wildly unhelpful.’ He adds that the SEC should probably spell out its reasoning when allowing the exclusion of a proposal on the grounds that it relates to the company’s ordinary business operations, is vague or has been substantially implemented.

An SEC spokesperson did not have immediate comment.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...