Shareholder Proposals: Corp Fin’s Big Announcement – Oral Responses & Declining to Provide a View!
A few months ago, we wrote about how Corp Fin was considering changing how their “referee” role. Well, that change has happened. On Friday, Corp Fin announced that some of its no-action responses going forward may be in oral form rather than in writing. A written response can be expected if Corp Fin “believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.”
We’re posting memos in our “Shareholder Proposals” Practice Area – and our “SEC All-Stars” will be discussing this big development during our “Proxy Disclosure Conference” next week.
Here’s a few “food for thought” items to start with:
1. Will There Really Be No Writings? – Good lawyers like to see things documented, particularly if they achieve a result they seek. So mere oral responses may feel like kissing your sister. Surely, Corp Fin will have some type of writing somewhere about their decision?
This announcement seems like the kind of approach that Corp Fin’s accounting staff has employed over the years for financial statement waivers – and that Chief Counsel’s office has used with S-3 eligibility waivers. In both situations, I believe the Staff still puts an internal (ie. nonpublic) note up on Edgar, so maybe they will do the same thing here. Of course, if this writing is nonpublic, that’s not doing you much good…
2. Can I Record My Conversation With Corp Fin? – If a Staffer leaves a voicemail as its oral response, you’ll at least have some sort of “writing” that you can archive and share with your working group. But what if you pick up the phone when they call? Can you tape it? Or should you just write a memo to the file memorializing the conversation?
I guess you’ll find out when you ask (I wouldn’t record the convo without the Staffer’s permission). But I threw this item in here so I can go back in the day to when I started in Corp Fin in the late ’80s. Back before computers. We wrote comment letters by hand – they would eventually get typed up by a secretary. But the Corp Fin “branches” had one secretary for about 10 lawyers. So comment letters didn’t get typed up until the deal went to market in most cases. Instead, Staffers would call and read off their comments over the phone – and the law firm on the other side would record the conversation and transcribe it. So there is some sort of precedent…
3. What Happens If Corp Fin Doesn’t Take Any Position? – Corp Fin’s announcement states that the Staff’s failure to take a position on a no-action request should not be construed as an indication that the company’s failure to include a shareholder proposal in its proxy materials is a violation of Rule 14a-8. As noted in a Gibson Dunn blog, the Staff may now more frequently decline to give a definitive response. That used to be rare – perhaps now it will be more common.
Gibson Dunn notes: “In considering whether to omit a proposal in such situation, a company will need to consider the potential reaction of its shareholders, the risk of adverse publicity, possible reactions from proxy advisory firms (discussed below), the risk of litigation, and the possibility that including the proposal in its proxy statement will attract more proposals in future years.”
4. Why Bother Seeking No-Action Relief At All? – Unfortunately, this Corp Fin position doesn’t change anything for companies in terms of spending resources to seek no-action relief. (Remember that a no-action response only means that Corp Fin won’t refer the matter to the SEC’s Enforcement Division if a company excludes a shareholder proposal from the proxy. It ain’t a “get out of jail free” card).
Companies still are required by Rule 14a-8 to notify Corp Fin that they intend to omit a proposal and the “reasons” for excluding it, and since (at this point at least) we don’t have a good sense of when Corp Fin will respond with a definitive position, companies still have to make as strong of a case as they can because you don’t want to be so unconvincing that Corp Fin says (whether orally or in writing) that they don’t concur.
5. Will Corp Fin’s Announcement Result in More Lawsuits? – Corp Fin’s announcement notes – as has always been the case – that proponents & companies are free to seek adjudication of the Staff’s positions in federal court. Personally, I don’t think we’ll see more lawsuits.
For the bigger investors that have submitted shareholder proposals in the past, they may gravitate to other methods to pressure companies in the wake of the Staff’s new position – for example, engage in more “just vote no” campaigns or more joint activities with other investors to apply pressure. Lawsuits take too long, cost too much and the judges involved typically don’t know the nuances of the securities laws. But you never know, maybe we’ll see more litigation after all…
6. Will Corp Fin Give Broader Guidance More Frequently? – As noted in a Gibson Dunn blog, “The Staff announcement indicates that one instance in which the Staff will issue response letters will be to provide “more broadly applicable guidance about complying with Rule 14a-8.”
Although the Staff has on occasion used a Rule 14a-8 no-action response to elaborate on its interpretation of the rule, historically the Staff has utilized Staff Legal Bulletins to provide “more broadly applicable guidance” regarding its interpretation of Rule 14a-8. The Staff’s announcement appears to suggest that it now will more commonly spring guidance on the shareholder proposal community in the middle of the season and in the context of specific factual situations, which may make such guidance harder to apply in other contexts than if the Staff addressed such issues more generally.”
-Broc Romanek, TheCorporateCounsel.net September 9, 2019
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