SEC Proxy Developments in 2018
January 16, 2019
In 2018, the SEC continued to take small steps towards refining the shareholder proposal and proxy processes, although the guidance remains a bit muddled and imprecise. In addition to publishing Staff Legal Bulletin No. 14J (“SLB 14J”) and two new Compliance and Disclosure Interpretations (“C&DIs”) regarding Notices of Exempt Solicitation, the SEC also hosted a proxy roundtable featuring a variety of viewpoints this past fall.
SLB 14J and Proxy Proposals
In October 2018, the Staff of the Division of Corporation Finance (the “Staff”) released SLB 14J as a follow-up to Staff Legal Bulletin No. 14I (“SLB 14I”) released in the fall of 2017. SLB 14J provides additional guidance on the use of board analysis in no-action letter requests, discusses how the Staff views micromanagement arguments and addresses the exclusion of certain executive compensation proposals.
- Board Analysis. The “economic relevance” and “ordinary business” exceptions under Exchange Act Rules 14a-8(i)(5) and (7), respectively, allow companies to exclude certain shareholder proposals from their proxy statements. In SLB 14I, the Staff indicated that companies should include the board’s analysis in requests for no-action relief on the basis of the “economic relevance” or “ordinary business” exceptions. In subsequent speeches, the Staff provided informal guidance that it would like such analyses to include a discussion of any shareholder engagement by directors and whether shareholders expressed interest in or concern about the issues raised by the shareholder proposal. Despite hopes for expanded grants of no-action relief, throughout the 2018 proxy season, the Staff granted relatively little no-action relief for companies, even when board-level analysis was included. In recently released SLB 14J, the Staff emphasized the importance of substantive board analyses versus those that lacked specificity. The Staff also provided a non-exhaustive list of substantive factors for companies to consider in their board analysis.
- Micromanagement. When considering whether a proposal should be excluded under the “ordinary business” exception on the basis of micromanagement, the Staff weighs two considerations: (i) the subject matter of the proposal and (ii) whether the proposal, if passed, would micromanage the company. To assess the degree to which a proposal attempts to micromanage a company, the Staff considers whether the proposal probes complex matters and involves intricate details. Although the initial expectation was that such considerations would be focused on proposals that seek to commission a study or report, there is hope based on a recent Staff no-action relief that the Staff will grant no-action relief more broadly on the basis of micromanagement. Most recently, the Staff granted no-action relief to a company on the basis of micromanagement because the shareholder’s proposal would have required shareholder approval for each new share repurchase program and stock buyback.
- Executive and Director Compensation. The Staff also clarified when it will grant no-action relief for proposals that relate to executive and director compensation. The Staff changed its prior position that micromanagement arguments generally do not apply to proposals regarding senior executive and director compensation, noting that proposals relating to senior executive and/or director compensation should not be treated differently from other ordinary business proposals and therefore may be excluded under the “ordinary business” exception on the basis of micromanagement.
Notices of Exempt Solicitation
Under Exchange Act Rule 14a-6(g), any person who engages in an exempt shareholder solicitation and beneficially owns over $5 million of the subject class of securities must file a Notice of Exempt Solicitation with the SEC. The shareholder filing the notice must also attach the required solicitation materials. Historically, Notices of Exempt Solicitation were filed by shareholders on the company EDGAR page and did not include information that clearly identified the filing party, which created some confusion for investors. Additionally, the 2018 proxy season saw an increase in the voluntary submission of such notices, perhaps most notably by frequent shareholder proponent John Chevedden.
The Staff published two C&DIs to provide guidance on the voluntary use of these notices. The guidance clarified that a shareholder may voluntarily submit a Notice of Exempt Solicitation, even if the holder does not satisfy the minimum share ownership requirement that would require the filing. However, the Staff also clarified that any voluntary filing must provide clear identifying information about the shareholder and state that the filing is voluntary, on the cover page. When submitting a Notice of Exempt Solicitation on EDGAR, even voluntarily, all of the information required by Rule 14a-103 must be presented before the written solicitation materials.
Proxy Voting Reform
On November 15, 2018, the SEC hosted a proxy roundtable, which brought together panelists from issuers, registrars, proxy advisory firms, shareholders, Congress, and law firms. While there was no rulemaking, these panels provided important viewpoints on issues that are ripe for SEC reform.
The first panel addressed proxy voting mechanics and technology, which, as all panelists agreed, is the area that has the greatest systemic issues and the most room for improvement. Some of the areas for improvement discussed were voting confirmation and accuracy, universal proxy and technology. Regarding voting confirmation and accuracy, many of the panelists agreed that there needs to be an end-to-end vote confirmation system, but developing such a system is difficult because the intermediaries involved in the proxy process do not have the proper incentives to participate. Many of the panelists noted that a universal proxy card may eliminate some election problems and mitigate shareholder confusion. There was no consensus regarding technology, however, particularly the use of blockchain. Additionally, while technology is important in the voting process, it was not seen by panelists as the only method of solving voting issues.
The other panels discussed shareholder proposals and proxy advisory firms. Regarding shareholder proposals, all panelists agreed that because the SEC regulates shareholder proposals through Rule 14a-8, it cannot pull back on its oversight. However, the panelists disagreed on whether any changes should be made to the resubmission and voting thresholds. The panel addressing proxy advisory firms discussed the incentives of such firms and how they handle conflicts of interest, but many of the panelists believe these firms adequately disclose conflicts, and we do not expect any new reform in this area.
In light of these recent developments, we recommend that companies and boards continue to meaningfully engage with their shareholders on the governance of the company, and provide substantive, thoughtful and specific analysis in requests for no-action relief to exclude shareholder proposals.