The SEC Division of Corporation Finance issued a pivotal Staff Statement today that could reshape how public companies approach shareholder proposals. Going forward, the Staff will only consider granting no-action relief under one narrow provision of Rule 14a-8: the “Improper Under State Law” exclusion (Rule 14a-8(i)(1)). Under this ground, companies are permitted to exclude proposals that are not proper matters for shareholder votes under state law. Companies are also required, under Rule 14a-8(j)(2)(iii), to provide the Staff with a supporting opinion of counsel as a matter of state law. This Staff Statement follows an October speech by SEC Chaiman Paul S. Atkins that outlined a position (which we covered in an earlier blog post) that, under Delaware law, “precatory” (i.e., nonbinding) shareholder proposals are not proper matters for shareholder votes.
The implications are immediate and significant. In the absence of receiving no-action relief on any of the other substantive grounds under Rule 14a-8, companies face a limited set of options, each of which may carry significant risk:
- Include shareholder proposals in proxy materials, even if the company believes other statutory exclusion grounds apply
- Omit the proposal from proxy materials without substantive no-action relief, but the SEC’s “no objection” receipt (discussed below)
- Seek a court ruling affirming the right to exclude under Rule 14a-8
- Request no-action relief solely under the state law exclusion
In practice, many companies are expected to pursue the state law route, even if they previously hesitated. But this path is not universally available. This is likely to be true even for companies that were reticent, in the wake of Chairman Atkins’ speech, to elect to ask for relief on this ground when they believed they had other viable grounds. Furthermore, while many companies are incorporated in Delaware, there are numerous public companies incorporated in other states where the law on precatory proposals may be quite different than Delaware, and the viability of this avenue for no-action relief will depend upon both the status of state law and the availability of legal opinions to support a company’s reading of the law.
No-action letters are non-binding and are not agency actions and do not have official precedential value. Only a federal district court can rule definitively on whether a public company can exclude a shareholder proposal. Still, the Staff no-action process does offer public companies and shareholder a means to resolve disagreements on shareholder proposals outside of litigation.
There are three other important points made in the Staff Statement. First, companies that intend to exclude a shareholder proposal with or without no-action relief are still expected to notify the Staff of their intention to omit the proposal in the ordinary course and with the rule-prescribed deadline of 80 days prior to filing the definitive proxy statement. Second, the Staff indicated it would provide companies with a “no objection” response based solely on representations from the company and/or its counsel for companies that elect to “self-help” and omit shareholder proposals in the absence of no-action relief. We note, however, that in the absence of relying on SEC substantive relief, proponents will be incentivized to seek court adjudication on the matter. Third, the Staff expects this single avenue of no-action relief to be temporary, until the time the SEC determines “there is sufficiency guidance available to assist companies and proponents in the decision-making process,” despite the earlier note on precedential value.
Without further changes, the announcement from the Staff today will alter the shareholder proposal process and shareholder engagement dramatically over the course of this proxy season and potentially permanently.
State courts will soon be the battleground of this shift, as Delaware and other states will need to establish whether precatory proposals are proper matters for a vote. If they are, states will need to establish whether all types of matters are appropriate for precatory votes (e.g., is there a disparate treatment of governance matters and environmental and social matters).
As we enter the period when calendar year end companies typically receive shareholder proposals, this is the beginning of what promises to be an unprecedented and action-filled proxy season.
