You may recall that, last month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, the staff may respond to some requests orally, instead of in writing, and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. (See this PubCo post.) In its most recent proxy guidelines, Glass Lewis explains its expectations from companies in light of the new approach.
SEC proposes new obligations for proxy advisory firms and changes to rules for shareholder proposals
Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective “market-based solution” helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms “faux regulators,” wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC’s efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.
Just in time for proxy season, the Corp Fin staff has issued a new Staff Legal Bulletin 14K on—what else—shareholder proposals and the “ordinary business” exclusion. The SLB attempts, once again, to provide some insight—following SLB 14I (see this PubCo post) and SLB 14J (see this PubCo post) which also address the “ordinary business” exclusion— regarding the staff’s interpretation of Rule 14a-8(i)(7), including:
company-specific significance of policy issues;
board analyses submitted in no-action requests to demonstrate that a policy issue raised by the proposal is not significant to the company; and
the application of “micromanagement” as a basis to exclude a proposal under Rule 14a-8(i)(7). Notably here, the staff attempts to explain the thinking behind its treatment of various climate change proposals submitted last proxy season.
In addition the SLB addresses “proof-of-ownership” letters.
You may recall that, earlier this month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, the staff may respond to some requests orally, instead of in writing, and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. (See this PubCo post.) Now, five investor organizations—Council of Institutional Investors, US SIF (Forum for Sustainable and Responsible Investment), Interfaith Center on Corporate Responsibility, Ceres and Shareholder Rights Group—have written to Corp Fin Director William Hinman to “express major concerns” regarding the new approach to Rule 14a-8 no-action requests and to ask that it be rescinded. Why? The organizations contend that the new policy “reduces transparency and accountability, increases the burden on investors, and could increase conflict between companies and their investors.”
As foreshadowed by Corp Fin Director Bill Hinman at an event in July put on by the U.S. Chamber of Commerce (see this PubCo post), Corp Fin has announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, the staff may respond to some requests orally, instead of in writing and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. How will companies respond?
In a post last month, I noted that, notwithstanding the growth in the number of shareholder proposals related to corporate social responsibility, for the 2019 proxy season (unlike 2018), we did not find any shareholder proposals that were submitted for shareholder votes directly addressing gun safety (although some did indirectly). I wondered out loud whether, in light of current events and the renewed national debate on gun safety—not to mention the gridlock leaving government incapable of doing anything—investors, customers, employees and other stakeholders might turn to companies to “do something.” Would they begin to apply more pressure to companies involved with firearms, including retailers and banks, to reexamine their relationships with the gun industry? It turns out that at least one of them has. Will others follow?
In this article from the Center for Political Accountability, the authors tout the recent “banner proxy season” for disclosure of political spending, both in terms of the uptick in shareholder support for disclosure proposals submitted by CPA (and its “shareholder partners”) and the number of shareholder proposals withdrawn as a result of agreements reached with companies for disclosure of political spending and board oversight. According to the authors, these results reinforce “earlier findings about ‘private ordering’ making political disclosure and accountability the new norm for companies.” Is there a new “eagerness by companies to adopt or strengthen political disclosure and accountability policies”? Is it now viewed as a key element of good governance? What is the impact of today’s highly politicized environment?
As noted in thecorporatecounsel.net blog, last week, the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce held an event discussing corporate governance and possible reforms. Both SEC Chair Jay Clayton and Corp Fin Director Bill Hinman were interviewed on stage and previewed a number of potentially important developments regarding, among other topics, proxy advisory firms and shareholder proposals.
You might remember this no-action letter to Johnson & Johnson granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory shareholder arbitration bylaws. (See this PubCo post.) In that letter, the staff relied on an opinion from the Attorney General of the State of New Jersey, the state’s chief legal officer, which advised the SEC that the proposal was excludable under Rule 14a-8(i)(2) because “adoption of the proposed bylaw would cause Johnson & Johnson to violate applicable state law.” The issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position: “The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,” consideration that would be more appropriate at the Commissioner level than at the staff level. However, mandatory arbitration was not an issue that he was anxious to have the SEC wade into at that time. To be sure, if the parties really wanted a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination. And, you guessed it—Clayton’s words to the proponent’s ears—the proponent filed this complaint on March 21.