Groups reject revised 14a-8 no-action approach
Groups including Ceres and the Council of Institutional Investors have called for the SEC’s division of corporation finance to drop its recently revised approach to handling shareholder proposals that companies want to exclude from AGMs.
The groups argue in a letter to division director William Hinman that the altered process ‘reduces transparency and accountability, increases the burden on investors and could increase conflict between companies and their investors.’
They also request a meeting with the agency before ‘the no-action season is in full swing’ to tackle the issue. Other signatories include the Interfaith Center on Corporate Responsibility, the Shareholder Rights Group and US SIF.
The division’s announcement earlier this month has caused confusion and concern among both corporate attorneys and investors, who are unsure how the agency will act in practice in the upcoming season. Industry professionals say the key aspects of the statement are, firstly, the emphasis the division places on its option not to make a decision on excluding a proposal and, secondly, its plan to respond orally in some cases.
Attorneys and investors fear potential outcomes including a wave of niche shareholder proposals, a lack of clear guidance and being forced into litigation to settle disputes.
The staff statement says officials will continue to monitor correspondence and provide informal guidance to companies and proponents as appropriate. Where a company seeks to exclude a proposal, the division will let the proponent and the company know of its position, being that it concurs, disagrees or declines to state a view.
But in future the staff may respond orally instead of in writing to some no-action requests. ‘The [division] intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,’ officials write.
The statement makes clear that if the division declines to state a view on a request, ‘as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.’
A request for comment from an SEC spokesperson was not returned immediately.
In their recent letter, Ceres and the other groups note that the division has only declined to issue a decision in very rare cases, usually when there was pending litigation or a pending SEC rulemaking.
‘This process of notifying the parties as to whether or not the staff would refer a company’s exclusion of the proposal for enforcement has generally served the parties well by providing an element of predictability, while the new exceptions to this consistent practice appear to be unbounded by any timeframes or standards of decision. The new announcement raises substantial questions and concerns for issuers and proponents alike,’ the groups write.
Where the division declines to state a view, it may also decline to recommend enforcement if the proposal is excluded. ‘This would place the burden of enforcement of the commission’s rules on the proponents, who may have to resort to litigation to enforce the rule,’ the groups write. ‘Thus, the outcomes resulting from the SEC’s announcement place an unreasonable and unfair burden on investors – especially smaller and individual investors.’
They also argue that oral decisions will lead to reduced transparency and less accountability. ‘[This] will take the no-action process out of the domain of readily trackable written transactions, and toward the possibility of deliberations or decisions in which proponents may lack symmetrical access to communications and evidence presented to the staff,’ they write.
The groups add that the change does not seem to be merited because the number of no-action requests processed by the division has not increased. They also suggest actions the division could take to limit the impact of the new approach if it is applied:
- Clarify that in the 2020 proxy season the new options will not be routinely or widely used, but applied only to a few ‘pilot decisions’
- Set clear criteria for determining when the division will decline to issue a no-action decision or issue an oral decision
- Indicate a time limit on when the no-determination option will be taken
- Post any correspondence from the proponent’s perspective, as well as the issuer’s request, with the decision statement
- Specify procedures for presenting oral decisions to ensure fair and symmetrical information and access by the parties.