Challenges of no-action letter requests

With the SEC restricting the reasons that companies can exclude shareholder resolutions from their proxies, more are turning to litigation, inviting other risks  

For all the attention companies are devoting to shareholder engagement, this proxy season many firms also tried to exclude shareholder proposals from their proxies in what could be seen as a conscious alternative to trying to improve relationships with investors.

On July 2 on the Harvard Law School Forum on Corporate Governance and Financial Regulation, two partners at Gibson Dunn posted an exhaustive summary and analysis of proposals that companies asked the SEC to exclude from their proxy statements this year. While they pointed out that during the 2014 proxy season no-action requests submitted by companies to the SEC declined nearly 13 percent to 286 from 328 the previous year (and declined 8.7 percent to 226 from 260 when you exclude no-action requests that were withdrawn), the percentage of exclusions granted actually rose to 71 percent from 65 percent this year. According to Gibson Dunn's post, these were the principal reasons for excluding shareholder proposals:

    •    30 percent based on procedural arguments, such as timeliness or defects in the proponent's
          proof of ownership
    •    18 percent because the proposal was vague or false and misleading
    •    14 percent based on ordinary business arguments
    •    12 percent because the company had substantially implemented the proposal
    •    11 percent because the shareholder proposal conflicted with a company proposal that was
          to be submitted for a vote at the same meeting.

Gibson Dunn tries to make a case for possible abuse of the shareholder proposal process such as offering, as proof of a Chevron shareholder having authorized Investor Voice to submit a proposal, an authorization letter more than one year old that didn't refer to the proposal or the subject company. Gibson Dunn quotes Chevron stating that such a broad grant of authority 'serves as carte blanche for Investor Voice to submit any proposal it wishes at any company where [Mr Rehm] own[s] stock', whereas actually the proposal in question was identical to one Investor Voice had submitted on behalf of the same shareholder in the two prior proxy seasons, says Bruce Herbert, chief executive of Investor Voice. He adds that shareholders have the right 'to delegate a broad array of authority under Rule 14a-8 to an agent' and that using an agent for such purposes is 'entirely parallel to a company hiring outside counsel.'

The SEC ended up saying the proposal couldn't be excluded from Chevron's proxy based on that argument and ruled against exclusion a second time when Chevron appealed to the full commission.

In the Harvard Law School Forum post, Gibson Dunn says the SEC also failed to agree that companies could exclude proposals under Rule 14a-8 for either lack of explicit grant of authorization or when there is a change in proponents, as the Environmental Working Group argued in response to a deficiency notice from Coca-Cola earlier this year.

Perhaps because of the challenges involved, an increasing number of companies have recently eschewed the no-action process for litigation seeking to disqualify shareholder proposals. During a panel about the exclusion process at the Society of Corporate Secretaries and Governance Professionals' annual conference in Boston last Friday, Adam Offenhartz, another partner at Gibson Dunn (not one of the two who authorized the July 2 post) suggested companies 'early in the process talk to your litigators to decide whether it's better to skip the no-action process and start litigation because a district court is the final arbiter.'

Another panelist, WilmerHale partner Meredith Cross, said that while the SEC won't be upset if a company takes a shareholder proposal to court, the company's shareholders will be. Going to court is also likely to attract more media attention than a no-action letter request, said a third panelist, while 'if a CEO's goal is to be private about it, engagement is your best bet,' Cross added.

A comment from audience member Tim Smith, director of ESG shareholder engagement at Walden Asset Management, drove home Cross' remark. 'If proponents see more companies pursuing litigation to stop proposals, they will push back with litigation and that will sour the relationships between shareholders and issuers,' he warned.

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