On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the ESG Center research team, is meant to serve to spark discussion on some of the most important corporate governance issues.

The SEC Division of Corporation Finance’s new policy on responding to companies seeking no-action relief if they exclude shareholder proposals sends two messages to public companies: companies need to work out issues with such shareholders on their own and more changes to Rule 14a-8 are yet to come.

At least that is the consensus of three law firms that specialize in corporate governance have told their clients. The new policy, which was announced Sept. 6, states that starting with the 2019-2020 proxy 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.”

According to the policy change statement, the SEC 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.

Under Rule 14a-8, a shareholder owning a relatively small amount of a company's securities to have his or her proposal placed alongside management's proposals in that company's proxy materials for presentation to a vote at an annual or special meeting of shareholders. The rule allows a company to exclude a proposal from a proxy statement if, for instance, it focuses on regular business. But such an exclusion is subject to the SEC, which has a practice of issuing of no-action letters to companies if it believed the exclusion was allowed.

The release of no-action letters by the SEC became an issue in January when the staff responsible for issuing those letters were furloughed during the federal government shutdown. As a result, the number of such letters fell to about 170 in the first quarter of 2019 from more than 200 in 2018. Also, the number of letters that concurred with company requests to exclude shareholder proposals dropped by about one-third. That continued a three-year trend.

So, what do law firms believe the big takeaways from the SEC policy change are for public companies? In the short term, they see uncertainty in the area of no-action letter requests for the next proxy season. In the long term, it looks like the SEC will continue to slowly extract itself as an arbiter during the proxy season so that companies and shareholders can work out the difference for themselves.

Wachtell Lipton Rosen & Katz

The SEC announcement specifically states that if the staff decides not to take a view on a particular company request to exclude a shareholder proposal from a proxy statement both parties should not take that to mean the proposal must be included or that a company has a valid reason to exclude the proposal, according to a Wachtell Lipton client memo.

“Some uncertainty may reasonably be anticipated for the upcoming proxy season, as companies, shareholder proponents and proxy advisory firms determine how to best address oral guidance from the SEC Staff and circumstances where the SEC Staff declines to take a view.  The impact of [the Sept. 6, 2019] announcement will depend in significant part on the frequency with which the SEC Staff declines to take a view with respect to requests for relief.  In addition, as the SEC continues to review proxy mechanics, there may well be substantive changes to the Rule 14a-8 shareholder proposal rules and process,” the Wachtell Lipton memo states.

The law firm states that “as noted by the SEC Staff, the parties always have the option to “seek formal, binding adjudication on the merits of the issue in court.”  There is a possibility that some shareholder proponents and proxy advisory firms may take advantage of situations where the SEC Staff declines to take a view, by seeking to withhold votes from directors even if proposals are properly excluded, the law firm stated.

Gibson Dunn

Although the shareholder proposal landscape continues to evolve, the SEC staff’s announcement heralds a more significant shift, according to Gibson Dunn.

“Combined with the implications of the SEC’s recent guidance for proxy advisory firms and investment advisors engaged in the proxy voting process, it means that the 2019-2020 shareholder proxy season could be particularly tumultuous,” the law firm stated in its client memo. “Moreover, it remains likely that the SEC will propose amendments to Rule 14a-8 in the near future, although any such rules are unlikely to be in effect for much of the 2019-2020 shareholder proposal season.”

The law firm has a suggestion for the SEC regarding communication of its oral responses to companies: “The Staff could effectively maintain the same level of transparency as in the past by maintaining this practice and, when it issues an oral response, including some indication on the website where it posts decided no-action letters, indicating the nature of its oral response (Concur, Unable to concur, or No View) and, if it concurs, the basis of its concurrence.”

However, the announcement did not indicate whether the staff intended to inform the company and proponent of the basis of its decision when issuing an oral response, the law firm states.

DavisPolk

Regarding the impact on next year’s proxy season, DavisPolk points out that 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.”

The law firm focused on the impetus of the policy change by raising the concern by SEC Chair Jay Clayton in September 2018 regarding the limitations of the applicability of staff views. The firm states how both Clayton and Commissioner Hester Peirce were worried about how SEC staff guidance and the Rule 14a-8 review process could be seen as “quasi-legislative rulemaking” on the staff level.

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