In new SLB 14L, Corp Fin takes new (old) approach to “ordinary business” and “economic relevance” exceptions
Yesterday, Corp Fin issued Staff Legal Bulletin 14L, which outlines Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception. The new SLB also rescinds SLBs 14I, 14J and 14K, following a “review of staff experience applying the guidance in them.” Generally, new SLB 14L presents its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. SEC Chair Gary Gensler said that “[t]oday’s bulletin will provide greater clarity to companies and shareholders on these matters, so they can better understand when exclusions may or may not apply. The updated staff legal bulletin, which replaces three previously issued bulletins, is consistent with the Commission’s original intention.” The effect of the new SLB is to relax some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under the rescinded SLBs, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. Needless to say, climate activists are pleased that their proposals will now likely find a more receptive audience at the SEC.
In 2018, a Harvard law professor submitted (on behalf of a related trust/shareholder) a shareholder proposal to Johnson & Johnson requesting that the board adopt a mandatory arbitration bylaw. After receiving a no-action letter from Corp Fin, J&J excluded the proposal, and the professor then sued J&J. A decision has just been rendered dismissing the complaint. But that’s not necessarily the end of the shareholder’s proposal to J&J for mandatory arbitration.
The January 6 attack on the Capitol and the subsequent efforts to rewrite voting and vote-counting laws led many companies and CEOs to speak out, sign public statements and pause or discontinue some or all of their political donations. However, as companies and executives increasingly take positions and express views on important social issues such as voting and democracy, climate change and racial injustice, there are many who want to hold them to it. As an MIT Sloan lecturer suggested in this article in the NYT, a signed statement from a CEO expressing commitment to an issue “gives people who want to hold corporations accountable an I.O.U.” One way the public has tried to call companies to account is to examine any dissonance or contradiction between those public statements and the company’s political contributions—to the extent those contributions are publicly available. A piece published recently in the NYT’s DealBook, On Voting Rights, It Can Cost Companies to Take Both Sides, explores how that concept has played out dramatically this year, particularly as investors have sought accountability by submitting more shareholder proposals than ever seeking political spending and lobbying disclosure—and actually winning. As the executive director of the Black Economic Alliance contended in the article, “[b]eyond C.E.O. statements[,] businesses demonstrate their values by how they allocate their resources.” And investors are increasingly compelling companies to disclose their allocation of resources on political spending.
Corp Fin staff updates guidance regarding presentation of shareholder proposals in light of COVID-19
On Friday, the Corp Fin staff announced that it has updated its Guidance for Conducting Shareholder Meetings in Light of COVID-19 Concerns originally published on March 13, 2020 and updated on April 7, 2020 (see this PubCo post and this PubCo post). The updated guidance posted on Friday tweaks the advice related to presentation of shareholder proposals, extending its application to the 2021 proxy season.
On Monday, the SEC announced that John Coates has been appointed Acting Director of Corp Fin. He has been the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. If that name sounds familiar—even if you haven’t been one of his students—it may be because he sometimes pops up in Matt Levine’s column in Bloomberg as the author of “The Problem of Twelve,” which he describes as the “likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.” Beyond that, he has been a very active member of the SEC’s Investor Advisory Committee, and Committee recommendations he has authored may give us some insight on his perspective on issues.
You might remember that the first piece of legislation signed into law by the then-new (now outgoing) administration in 2017 was, according to the Washington Post, a bill that relied on the Congressional Review Act to dispense with the resource extraction payment disclosure rules. (See this PubCo post.) Under the CRA, any rules that were recently finalized by the executive branch and sent to Congress could be jettisoned by a simple majority vote in Congress and a Presidential signature. According to the Congressional Research Service, before the current outgoing administration took up the cudgel in 2017, “[o]f the approximately 72,000 final rules that [had] been submitted to Congress since the [CRA] was enacted in 1996, the CRA [had] been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That’s because the stars are rarely in proper alignment: generally, the CRS indicated, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. That was the case in 2017, and, as of January 9, 2020, the CRA had been used to overturn a total of 17 rules, according to the CRS. Well, the stars are in proper alignment now. To observe that the new Congress and new administration have a lot on their plates is quite an understatement. Will they use the CRA to scrap any of the SEC’s “midnight regulations”?
Let’s just say that the SEC’s Investor Advocate, Rick Fleming, was none too pleased with the work of the SEC this year. Although, in his Annual Report on Activities, he complimented the SEC for its prompt and flexible response to COVID-19, that’s about where the accolades stopped. For the most part, Fleming found the SEC’s rulemaking agenda “disappointing.” While cloaked in language about modernization and streamlining, he lamented, the rulemakings that were adopted were too deregulatory in nature, with the effect of diminishing investor protections. But issues that definitely called for modernization—such as the antiquated proxy plumbing system—despite all good intentions, were not addressed, nor did the SEC establish a “coherent framework” for ESG disclosure. And the SEC “also selectively abandoned its deregulatory posture by erecting higher barriers for shareholders’ exercise of independent oversight over the management of public companies” through the use of shareholder proposals and by imposing regulation on proxy advisory firms. That regulation could allow management to interfere in the advice investors pay to receive from proxy advisory firms and was widely opposed by investors. What’s your bet that he’ll be a lot happier next year?
Just in time for the new proxy season comes this Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings from the Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance. The report is replete with helpful guidance, detailing best and emerging practices for virtual shareholder meetings. The Working Group updates its 2018 report (see this PubCo post) in light of the deluge of pandemic-induced VSMs that were convened during the 2020 proxy season. Sorry to say, but it seems likely that this new proxy season will see a repeat for the same reason—at least in the first part of the season—so this report should be especially useful.
Happy holidays everyone! Good riddance to 2020! Hooray for science and scientists!
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted (once again, three to two) to adopt highly controversial amendments to the requirements for submission of shareholder proposals in Rule 14a-8. According to the adopting release, the final amendments are intended to “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders.” The final amendments modify the eligibility criteria for submission of proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. Notably, the submission threshold has not been amended since 1998, and the resubmission threshold since 1954. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post.
At an open meeting this morning, the SEC voted (once again, three to two) to adopt two highly controversial proposals: amendments modifying the criteria for eligibility and resubmission of shareholder proposals in Rule 14a-8, and amendments to the SEC rules implementing the whistleblower program. The shareholder proposal press release indicates that the change to the submission threshold, which has not been amended since 1998, “appropriately takes into consideration the interests of not only the shareholder who submits a proposal, but also the other shareholders who bear the costs associated with reviewing, considering and voting on such proposals in the company’s proxy statement.” Similarly, the changes to the resubmission threshold, which has not been amended since 1954, “relieve companies and their shareholders of the obligation to consider, and spend resources on, matters that had previously been voted on and rejected by a substantial majority of shareholders without sufficient indication that a proposal could gain traction among the broader shareholder base in the near future.” The changes to the whistleblower program, according to the whistleblower press release, “are designed to provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.” In both cases, the rulemakings generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process.