As blogged last week, the SEC Division of Corporation Finance announced changes to its process for administering the Rule 14a-8 no-action process. Although staff will continue to weigh in on companies' requests to exclude a proposal, that input may consist of declining to state a view, which the announcement cautions should not be interpreted as indicating that the proposal must be included; rather, it merely indicates that staff is not taking a position on the merits. In that situation, although staff isn't weighing in, a company may have a perfectly valid legal basis for exclusion.
Furthermore, beginning with the 2019 - 2020 proxy season, staff may respond to some no-action requests orally. Staff plans to issue letters where it believes a writing will "provide value" - e.g., to provide "broadly applicable guidance" on Rule 14a-8 compliance. The announcement also reiterates (see here, here, and here) staff's view that inclusion of a board analysis is "often useful" to staff's evaluation of a no-action request.
Gibson Dunn shares this perspective on staff's declining to state a view on any particular no-action request:
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.
The firm's initial observations encompass the uncertainties associated with the new approach, potential proxy advisor implications, increased risk of shareholder proposal litigation, and the seemingly diminishing transparency of the process that both companies and shareholder proponents depend upon to assist their analyses and decision-making. Ropes & Gray further notes (among other things) that - depending upon when staff weighs in with a declination to express a view on a no-action request relative to the company's proxy timeline - companies may at that point not have sufficient time to pursue alternatives.
CII Executive Director Ken Bertsch reacted: “If the SEC staff does what seems to be indicated here, the result will be less transparency, more guesswork by shareholder proponents and companies, more litigation, harm to the shareholder proposal process, and likelihood that small main street shareholder proponents will be left in the cold, since companies will know they are unlikely to litigate on inclusion of a proposal."
We are posting law firm memos, and other commentary and analysis real-time on our Shareholder Proposals page. This post first appeared in this week's Society Alert!