Defending shareholder rights

Paul Hodgson on developments around Staff Legal Bulletin 14i in the US

In July, the Shareholder Rights Group (SRG) published an article outlining its analysis of the Securities and Exchange Commission’s no-action process – the process by which companies attempt to exclude shareholder proposals from their proxy – for the last proxy season. The article was a summary of a memorandum that was delivered to the SEC on 3 July by Sanford Lewis of SRG and Adam Kanzer of Domini, at an SEC stakeholder meeting. SEC stakeholder meetings are annual events that the Commission holds to allow representatives from both sides of the no-action process to discuss developments. The memorandum focused on three issues resulting from Staff Legal Bulletin 14i: most boards proved unable to demonstrate that topics of shareholder proposals were insignificant; new ‘micromanagement’ rulings spread to proposals calling for companies to set goals and targets for reducing greenhouse gases – similar proposals had been allowed in the past; and the SEC’s decisions on ‘conflicting proposals’, where a company creates a management proposal on a similar topic in order to exclude a shareholder proposal. “This had the effect of allowing corporate gamesmanship to override shareholder rights,” said the memorandum.
In addition to presenting the memorandum, the SRG asked a number of organisations to write to the SEC directly to ask them to respond to the points raised within it, including USSIF, the Interfaith Centre for Corporate Responsibility (ICCR) and the New York State Comptroller. “From there, another meeting was scheduled with the SEC,” Lewis tells RI, “with Matt McNair, Senior Special Counsel, Office of Chief Counsel, the coordinator of the no-action process, and Corporation Finance Chief Counsel, David Fredrickson, who was also in the meeting. Adam Kanzer represented ICCR and I represented the Shareholder Rights Group.
“We largely discussed whose opinion matters as to whether proposals raising big policy issues should be considered micromanagement. If a proposal raises an issue large enough that shareholders could reasonably want to vote on it, then unless it’s too prescriptive, we believe it should be included in the proxy.”
Kanzer and Lewis also sent a follow-up letter to the SEC after this meeting. Lewis reiterates the main points of the letter for RI: “For decades, Rule 14a-8 has been utilised to raise critical issues that had not received sufficient attention from the Board. The Board’s tacit view that an issue lacks significance is often a motivating factor prompting the submission of the proposal. The appropriate framework for determining significance should turn on whether investors would consider the issue raised to be significant.”
The letter called again for additional guidance on SEC staff’s decision-making framework for evaluating board reviews, “along with guidance for the types of evidence that might be persuasive for proponents to use to rebut these arguments,” he adds.
“In that letter,” says Lewis, “we urged the SEC to issue a staff legal bulletin addressing the points raised in the memorandum. If they have put a staff bulletin on hold because of the roundtable on the proxy process, this would be an unfortunate outcome.“The last proxy season was full of uncertainty and unnecessary cost for both sides. If there is no new staff legal bulletin before the new season, the costs and uncertainties of the last season may recur. It is still possible that a staff legal bulletin will be issued sometime before 1 November. Of course, a new bulletin could either be helpful or harmful to proponents.”

“One thing that was agreed upon was that SEC staff ought to provide more clarity regarding the decisive factor in a proposal’s wording that led to staff’s conclusions” – SRG’s Sanford Lewis

“Staff Legal Bulletin 14i created an imbalance,” continues Lewis, “By providing guidance on what boards should submit, but not what was expected from proponents to rebut board assertions. One thing that was agreed upon at the July 3 stakeholder meeting by the investors and the corporate side was that the staff ought to provide more clarity in no action letters regarding what was the decisive factor in a proposal’s wording that led to staff’s conclusions. The letters seldom do so; but at least one leading corporate lawyer in attendance also agreed with this request for more clarity in staff decisions.”
In connection with these actions, a shareholder proposal at Tapestry was challenged by the company and then withdrawn by the proponent. On 23 July this year, Jantz Management LLC withdrew a proposal requesting that the company establish a long-term business strategy on greenhouse gas (GHG) reduction. Jantz then issued a news release urging the SEC to respond to the recommendations from the SRG memorandum. “We are withdrawing this proposal because we believe it is necessary for the SEC to clarify, across the board, the limits to its new interpretations of micromanagement, rather than continuing to expand the exclusion of long-standing engagement topics on a case-by-case basis,” said Christine Jantz, CEO of Jantz Management, in the release.
Commenting on the make-up of the SRG, which includes only 15 investors, Lewis said: “We purposely kept the Shareholder Rights Group small because we wanted to pull together a group of proponents that was able to exercise leadership on these issues.”
The new activism surrounding the shareholder proposal process is clear in its origins. Winning on proxy access is one thing, but when shareholders give majority support to a proposal calling for an energy company to publish a plan for dealing with its stranded assets, it is another thing entirely. Pushback on shareholder proposals from groups like the National Association of Manufacturers and the Main Street Investors Coalition is a direct result of a series of successful majority-supported proposals. “They are in an atmosphere where they believe they stand a chance at advancing their regressive agenda,” warns Lewis.