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Sep 12, 2019

SEC staff’s 14a-8 no-action announcement sparks questions and concerns

Starting next proxy season, officials may respond ‘orally’ to some requests

The SEC’s division of corporation finance has caused a splash ahead of the 2020 proxy season by announcing a revised approach to handling companies’ requests to exclude shareholder proposals from their AGMs.

The announcement is causing confusion and concern on both sides of the aisle, with corporate attorneys and investors unsure how the agency will act in practice. They fear potential outcomes including a wave of niche shareholder proposals, a lack of clear guidance and being forced into litigation to settle disputes.

The division’s staff on September 6 issued a statement saying that officials will continue to monitor correspondence and provide informal guidance to companies and proponents as appropriate. Where a company seeks to exclude a proposal, the division will let the proponent and the company know of its position, being that it concurs, disagrees or declines to state a view.

But starting with the 2019-2020 proxy season, the division 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,’ officials write.

The statement makes clear that if staff declines to state a view on a request, the interested parties should not take that to mean the proposal must be included and that the company ‘may have a valid legal basis to exclude the proposal under Rule 14a-8.’ The division emphasizes that, ‘as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.’

For attorneys and investors, the key aspects of the statement are, firstly, the emphasis the division places on its option not to make a decision on excluding a proposal and, secondly, its plan to respond orally in some cases.

‘If [the division] doesn’t issue a decision it creates a default that favors corporate management and goes against shareholders,’ Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management, tells Corporate Secretary.

If a company is determined to exclude a proposal and the division doesn’t state a view, the only solution for a shareholder proponent is to go to court, Kron notes. This favors companies because they have in-house and outside legal teams and can pass their costs on to shareholders, this type of litigation is very rare and time is a factor in getting a resolution before the AGM, he says.

But he tempers this concern by noting that the impact of the division’s statement will depend on how it is implemented. There will be minimal impact if the division declines to state a view once or twice a year, but doing so in 100 cases would mark a major change, he explains.

Betty Moy Huber, counsel with Davis Polk & Wardwell and co-head of the firm’s environmental, social and corporate governance group, notes that the effects of the statement may be felt soon. Proxy season 2020 is just a few months away, particularly for those companies holding early AGMs.

Like Kron, Huber notes that where the division declines to state a view parties will face the prospect of going to court, although she frames it as a situation where companies will have to decide whether to allow the proposal onto the proxy or exclude it and face litigation risk.

A Davis Polk memo on the announcement also notes that, although the division reiterates its view that a board analysis can be useful, ‘given the limited basis on which this argument has succeeded during the past two seasons, companies may be discouraged from engaging their boards for this purpose.’

‘In the current climate, where there are a growing number of shareholder proposals, companies need a referee more than ever,’ Huber tells Corporate Secretary. She also fears a potential rash of niche or non-material proposals as some shareholders try to take advantage of the changes by ‘throwing things at the wall to see what sticks.’

Kron does not expect such an outcome, at least not from his firm. ‘We in no way try to game or abuse the system,’ he says. ‘Our reaction is not to exploit this situation.’

Professionals say the statement has left industry lacking in certainty. ‘I don’t think [the division has] done anything to improve the process. It has just created confusion,’ Kron says.

Among the questions being asked about the SEC giving oral responses are: can the company or proponent record the call to use as reference or evidence? Will the SEC call both sides at the same time, and how would this work? How should the company act if it receives the information first?

The corporation finance announcement arose from the staff having ‘focused on how it could most efficiently and effectively provide guidance where appropriate,’ officials write. But Kron notes that they will not reduce their workload significantly by just offering oral responses because most of the effort is expended in analyzing the competing claims of the issuer and proponent.

‘The impact of the announcement is too early to determine, but at a minimum the analysis of shareholder proposals this season may be more difficult for all parties,’ Davis Polk attorneys write. One of the few things corporate counsel, in-house lawyers and shareholder proponents agree on is that they would like SEC letters on Rule 14a-8 no-action requests to be longer, Kron says.

The Council of Institutional Investors (CII) has also weighed in, releasing a letter this week that it sent to William Hinman, director of the division of corporation finance, in August following a meeting at which it says staff members discussed the then-potential changes.

‘We believe the staff [have] played a valuable role for many years through the 14a-8 no-action process. Management attempts to omit shareholder proposals by definition involve contention between parties. Despite this, in most cases the staff no-action advice has been accepted by both sides, and there has been only limited litigation,’ CII general counsel Jeffrey Mahoney writes.

‘Moreover, the staff responses have helped various stakeholders navigate this terrain with much greater efficiency than would be the case without written responses by the staff. In light of this history, we initially were doubtful about this idea of ending written responses on some matters. As we have thought about it more, considering input from both investors and company managers, we have become more convinced that this is not a good idea.’

Among other things, CII argues that an SEC ‘pull-back’ could damage the shareholder proposal process in the long term. Without staff responses on some matters, some risk-averse companies may include proposals that would have been excluded previously, some of which are ‘misguided or on trivial issues,’ Mahoney writes. 

‘On the other hand, companies that are inclined to freeze out shareholders – which tend to be the ones shareholders are more concerned about – are likely to exclude meritorious proposals, notwithstanding the risk of litigation,’ he adds.

A request for comment from the SEC press office was not returned immediately.

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...