Securities and Exchange Commission Getting Out of the No Action Letter Business re Shareholder Proposals

Is it really "a giveaway to issuers"and "an act of hostility toward shareholders"?

SEC Rule 14a-8 allows qualifying shareholders to offer a proposal to be put to a vote at the company’s annual shareholder meeting. The issuer must include the proposal and a supporting statement from the proponent in the company’s proxy statement and include it on the company’s proxy card.

Absent SEC Rule 14–8, there would be no vehicle for shareholders to put proposals on the firm’s proxy statement. Shareholders’ only practicable alternative would be to conduct a proxy contest in favor of whatever proposal they wished to put forward. The chief advantage of the shareholder proposal rule, from the perspective of the proponent, thus is that it is cheap. The proponent need not pay any of the printing and mailing costs, all of which must be paid by the corporation, or otherwise comply with the expensive panoply of regulatory requirements.

Not all shareholder proposals must be included in the proxy statement. Rule 14a–8 lays out various eligibility requirements, which a shareholder must satisfy in order to be eligible to use the rule. The rule also lays out various procedural hurdles the shareholder must clear. Finally, the Rule identifies a number of substantive bases for excluding a proposal.

The SEC referees the shareholder proposal process, albeit sometimes reluctantly. If the subject corporation’s management believes the proposal can be excluded from the proxy statement, management must notify the SEC that the firm intends to exclude the proposal. A copy of the notice must also be sent to the proponent. Management’s notice must be accompanied by an opinion of counsel if any of the stated grounds entail legal issues, such as when management claims the proposal is improper under state corporate law. Although the rule does not require the proponent to reply, the SEC staff will consider any arguments the proponent may wish to make in support of the resolution’s eligibility for inclusion in management’s proxy statement.

If the SEC staff agrees that the proposal can be excluded, it traditionally issued a so-called no-action letter, which states that the staff will not recommend that the Commission bring an enforcement proceeding against the issuer if the proposal is excluded.

On Monday, however, the SEC’s Division of Corporation Finance announced that:

Due to current resource and timing considerations following the lengthy government shutdown and the large volume of registration statements and other filings requiring prompt staff attention, as well as the extensive body of guidance from the Commission and the staff available to both companies and proponents, the Division [of Corporation Finance] has determined to not respond to no-action requests for, and express no views on, companies’ intended reliance on any basis for exclusion of shareholder proposals under Rule 14a-8, other than no-action requests to exclude a proposal under Rule 14a-8(i)(1).

…

In light of recent developments regarding the application of state law and Rule 14a-8(i)(1) to precatory proposals,¹ the Division has determined that there is not a sufficient body of applicable guidance for companies and proponents to rely on. As such, the Division will continue to review and express its views on no-action requests related to Rule 14a-8(i)(1) until such time as it determines there is sufficient guidance available to assist companies and proponents in their decision-making process.

SEC Commissioner Caroline Crenshaw (the lone Democrat on the Commission) slammed the proposal as “more of a giveaway to issuers than an exercise in resource allocation. And, more directly, it is an act of hostility toward shareholders.”

Really?