Corp Fin has announced that it intends to begin to publicly release on EDGAR “bedbug” letters—letters issued by Corp Fin to advise the issuer that its registration statement or other offering document is so deficient that Corp Fin won’t even bother to review it until the filing is amended to repair the deficiencies. (This type of “bedbug” letter is not to be confused with the “poison pen” type of “bedbug” letter that is frequently submitted to the SEC by participants in proxy contests for the purpose of identifying errors, misleading statements and violations made in filings by their opponents. Why they are both called “bedbug” letters is above my pay grade.)
For quite a while, the CDIs related to the proxy rules and proxy statements have been a bit of a hodge-podge of different sources and supplements. There were even interpretations extant from the ancient Telephone Interpretations Manual—you may even have a mimeograph copy of that in your office somewhere. Now, Corp Fin has undertaken to update and harmonize some of those proxy-related interpretations, specifically the basic Interpretations Manual and its March 1999 Supplement. The rest of the supplements remain undisturbed for the moment; however, Corp Fin advises that it is in the process of updating them all.
In past few years, after Corp Fin issued Staff Legal Bulletin 14H redefining the meaning of “direct conflict” under the Rule 14a-8(i)(9) exclusion for “conflicting proposals,” the staff has continued to fill in the outline of what works and what doesn’t work under the new interpretation of the exclusion. In American Airlines Group (avail. April 2, 2018), the staff concluded that the approach taken by the company was coloring outside the lines and denied no-action relief.
The WSJ is reporting that “people familiar with the matter”—every reporter’s favorite source—say that the SEC is “weighing” expanding “test the waters” beyond just EGCs. You might recall that, in 2012, the JOBS Act allowed IPO candidates that were EGCs to take preliminary steps to determine the potential level of investor interest before committing to the expensive and time-consuming prospectus drafting and SEC review process. That flexibility, together with the new confidential IPO filing process—which allowed EGCs to start the SEC review process on a confidential basis so that sensitive information would not be disclosed if they ultimately determined not to move forward with the offering—was intended to promote and facilitate access to the public capital markets. Since that time, however, the IPO market has not exactly taken off like a rocket, and the hand-wringing over the lack of interest in going public has continued. In June 2017, Corp Fin extended the confidential filing process, permitting non-EGCs to submit confidential draft registration statement for IPOs and for most offerings made in the first year after going public. Will testing the waters be the next step?
When we last left the saga of proxy access, we had just started a new chapter on so-called “fix-it” shareholder proposals—efforts to revise existing proxy access bylaws to make them more “shareholder-friendly.” You might recall that, in 2016 and 2017, John Chevedden et al. submitted a slew of fix-it proposals that requested amendments to proxy access bylaws to raise the cap on the number of shareholders that could aggregate their shares to reach the necessary 3% ownership level. Target companies, in turn, submitted no-action requests seeking to exclude those proposals on the basis that they had already been “substantially implemented” under Rule 14a-8(i)(10). In response to the requests for relief, the SEC staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number. This time, the staff rejected H&R Block’s no-action request. In essence, it appears that the staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. (For more history on these fix-it proposals, see this PubCo post.) This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
The Council of Institutional Investors has sent a letter to William Hinman, director of Corp Fin, raising objections to the staff’s treatment of a recent shareholder proposal. The staff permitted the company, the AES Corporation, to exclude a shareholder proposal submitted by John Chevedden that sought to reduce the threshold required for shareholders to call a special meeting from 25% to 10%. The basis for exclusion was Rule 14a-8(i)(9), which allows a shareholder proposal to be excluded if it directly conflicts with a management proposal to be submitted for a vote at the same shareholders meeting. In its letter, CII charged the company with “gaming the system to exclude a vote on a legitimate proposal that receives substantial shareholder support when it is voted on at other companies – to reduce the threshold for calling a special meeting,” and urged the SEC to revisit, once again, its approach to Rule 14a-8(i)(9).
In 2016, the AFL-CIO submitted several shareholder proposals designed to curb the impact of stock buybacks on executive compensation. (See this PubCo post.) The question at the time was whether we would see many more of these proposals. However, amid significant media and academic criticism, as well as relatively high stock valuations, the levels of stock buybacks declined, and the anticipated wave of proposals on buybacks did not materialize. However, the new tax act is expected to trigger a new spike in the levels of stock buybacks. (See this MarketWatch article.) Perhaps with that in mind, one of the most prolific proponents of shareholder proposals has submitted a proposal to eliminate the impact of stock buybacks in determining executive compensation. Will these proposals now become a thing?