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Providing practical guidance since 1975. |
"Shareholder Proposals: Corp Fin Speaks"Tuesday, November 14, 2017
In the wake of Corp Fin's new Staff Legal Bulletin No. 14I on shareholder proposals, you may need to adjust how you approach some shareholder proposals this proxy season. Hear these experts talk about what the new Staff Legal Bulletin means - and what companies should be doing now. Join our experts:
Broc Romanek, Editor, TheCorporateCounsel.net: Welcome to today's webcast, "Shareholder Proposals - Corp Fin Speaks." Here's some of our upcoming webcasts on our sites: - CompensationStandards.com's webcast - "Your Upcoming Pay Ratio Disclosures" (12/5) - CompensationStandards.com's webcast - "The Latest Developments: Your Upcoming Pay Ratio & Proxy Disclosures" (1/10) - TheCorporateCounsel.net's webcast - "Handling the Proxy Season: The In-House Perspective" (1/11) - TheCorporateCounsel.net's webcast - "Pat McGurn's Forecast for 2018 Proxy Season" (1/18) - Section16.net's webcast - "Alan Dye on the Latest Section 16 Developments" (1/24) - DealLawyers.com's webcast - "How to Handle Post-Deal Activism" (1/25) - TheCorporateCounsel.net's webcast - "Audit Committees in Action: The Latest Developments" (2/1) - TheCorporateCounsel.net's webcast - "Conflict Minerals: Tackling Your Next Form SD" (2/7) - DealLawyers.com's webcast - "Auctions: The Art of the Non-Price Bid Sweetener" (2/8) - CompensationStandards.com's webcast – "Pay Ratio: The Top Compensation Consultants Speak" (2/14) - DealLawyers.com's webcast - "Activist Profiles & Playbooks" (3/6) - TheCorporateCounsel.net's webcast - "The Latest on ICOs/Token Deals" (4/26) As Matt McNair will tell you, of course, he only speaks for himself, not for Corp Fin or the SEC. So this program's title is a little misleading. Ning Chiu at Davis Polk is such a great friend. She's always got great ideas - and as soon as this Staff Legal Bulletin came out, she came up with the idea of having this program, because it's such an important topic and time is short for those dealing with proposals right now. Matt McNair - who is Senior Special Counsel in the Office of Chief Counsel in Corp Fin - was kind enough to do this webcast on relatively short notice. I'll go ahead and turn it over to Ning - and then Matt will give his disclaimer. Ning Chiu, Counsel, Davis Polk & Wardell LLP: Thanks so much, Broc. As all of you joining us know, on November 1st, the Staff issued Staff Legal Bulletin 14I and we are very fortunate to have Matt join us. Some or many of you may recognize Matt's name from the fact that he signed many of the responses to no-action letters. He has a lot of great insights on not just the Staff Legal Bulletin, but the shareholder proposal process overall. We are going to take time on this program to assume that you have read the Staff Legal Bulletin and not spend time summarizing it. Also, it would be more valuable to really talk about the implications of the Bulletin, including a lot of the practical issues for all the parties who are involved in the shareholder proposal process. We will focus first on the ordinary business exclusion, (i)(7), the economic relevance exclusion, (i)(5), and then we'll spend the last few minutes on proposals by proxy. Matt, we are going to start with 14a-8(i)(7), but before we turn to that, do you want to go ahead and give your disclaimer? Matt McNair, Senior Special Counsel, SEC's Division of Corporation Finance: Broc already did it for me, but out of abundance of caution, the statements that I make today are my own views and don't necessarily represent those of the commission or any other member of the Staff.
Chiu: On 14a-8(i)(7), as most of you know, it's the ordinary business exclusion and the exclusion is available if a proposal raises matters that are fundamental to management's day-to-day running of the business unless - and this is a big "unless" - it focuses on policy issues that are sufficiently significant, because they transcend ordinary business. Under Staff Legal Bulletin 14I, a company can now, but does not have to - I emphasize that point - include a discussion when they are making an argument under 14a-8(i)(7) that reflects: a board's analysis of the policy issues that are raised by the proposal; its significance to the company's business based on the board's knowledge of that business; and the implications of the proposal on that business. Matt, now that we understand that a company can make an (i)(7) argument without including this board determination - and it is optional for companies - can you give us a little bit of background on the purpose of this part of the Staff Legal Bulletin? McNair: Yes, of course. I do just want to reiterate the point that you just made, which is that we don't expect to see this information included as part of every ordinary business argument. If something is clearly on the ordinary side, we wouldn't expect the board to include it. What we're looking for is when the proposal implicates significant issues that the Staff Legal Bulletin says raises difficult judgment calls for us, the company and proponents, that is where we think this analysis would be helpful, but again, it's not required. That is the purpose of at least this section of the Staff Legal Bulletin, which is we're trying to improve the process. I think these determinations are difficult whether something not only is significant, but whether there is sufficient connection to the company's business. We felt like it would be really helpful if we could get the board's input, because of its role as overseer of company and management. That is the background of it. We are optimistic that the guidance is going to foster shareholder engagement by getting proposals in front of boards, hopefully earlier in the process. I guess we will see how that plays out. That is the background and the point of this part of the Staff Legal Bulletin, to get it in front of the board and provide more information to the Staff so that we can use that information and have it available to us in making our decisions. Chiu: The Staff Legal Bulletin says that one way we can make this determination available and helpful to you would be to provide details of the specific processes the board uses and to ensure that its conclusions are well-informed and well-reasoned. Those words are lifted straight from the Staff Legal Bulletin itself. We have a bunch of practical questions and I'm going to ask them all at once in case some of them overlap. How can issuers provide the best information for you to make a decision? First, some companies have already submitted no-action letters making ordinary business argument and whether they can then supplement their letters that are out there already with a board argument under the Staff Legal Bulletin. The second question, which has come up a fair amount, and has been addressed in different ways by a bunch of commentators - mostly law firm memos - is whether the process can be fully delegated to a board committee. This means fully delegated, not just that the board committee takes the first look, but then to take to the board. Can the entire decision and determination analysis may be made by a board committee. Additional questions have come up as to how formal does the determination have to be. A lot of board processes have resolutions involved behind them and whether that may be necessary or useful. Also, another thing is whether board materials would be helpful to the Staff or whether we can just describe them in the no-action letter itself. I know that is a lot, but hopefully you can give us some insights on trying to write the best crafted no-action request. McNair: On the first question, whether a company can supplement a letter later in the process for those companies who have already submitted no-action requests, they are certainly welcome to do that. One thing to keep in mind is we would expect once we get that information we're going to give proponents time to review it and respond before we issue our decision. Companies can certainly do that, but it is probably going to take a little bit longer to hear back from us. Then on the second question, which I'm glad you asked because there has been a lot written about this. This is one of the big issues people are struggling with and that is whether the board can delegate fully to a committee or whether there needs to be some involvement by the full board. Let me remind everybody, again, this information isn't required, we are not suggesting that it has to be provided to us. We're just asking for additional analysis that the board thinks might be helpful when we review the no-action request. We are leaving it to the board to decide what their level of involvement should be. What I will say, and what people have heard Corp Fin Director Bill Hinman say publicly is that a well-developed record that has been prepared by a board committee, reviewed and approved by the full board is going to carry more weight than one that has been approved solely by a committee. The more the full board is involved, there is a spectrum there, right? Just solely committee involvement on the one hand versus full board involvement on the other - I think there's a spectrum. That is something that the board may want to think about - but, again, it's entirely up to them. On the formality part, it doesn't need to be done by a formal resolution. Again, there aren't any specific methods that need to be followed in this case, but if the board's decision is documented in that way, telling us that and providing us that documentation would certainly be helpful. Then the last question about what materials to provide, again, I don't think there's an expectation that board materials are going to need to accompany the no-action requests. The most important thing is to make sure that the description of the board process and their findings is sufficiently detailed so that we can get a good sense as to whether those conclusions are well-informed and well-reasoned. If a company believes board materials, board books, or something like that would be helpful and would like to provide them, they are certainly welcome to do that. One thing I would caution - and I don't know if many are aware of this - but materials that are submitted in connection with a 14a-8 request are public records and they are going to be included as part of the final packet that we publish on our website. As far as I'm aware, I don't think there is a way to submit materials confidentially in connection with a 14a-8 request. That is something to keep in mind. Whatever does end up getting provided to us, if board materials submitted, they will become part of the public record. Chiu: In addition, there may be potential waivers of privilege by giving it to you as well. So the way this might happen if somebody does want to provide materials, for example, is to provide a page out of a deck or an example of some charts that the board looked at in terms of operations or other metrics. Those are all helpful responses, Matt, in terms of trying to help everyone understand what the letter may include. I'm turning now to talk about the board analysis and how that differs from the Staff analysis, where the Staff has been making decisions for years about whether or not the ordinary business exclusion applies. The "social policy significance" under the ordinary business exclusion has been reviewed and determined by the SEC Staff based on the transcendence test, and whether it rises to a level as a general societal matter. Sometimes the words that come up are widespread public debate. In this day and age, when everything seems to be debated, it is unclear what that means exactly - but the general societal impact has always been a key part of the ordinary business analysis when the Staff looks at it. Does the board of a company need to examine the matter on a societal basis - or should a board really limit its analysis to the specific facts and circumstances of whether it's significant to the company, and just the company? McNair: It is the latter. Again, this is another great question because I've seen a lot written about this - and I know folks are really curious about this part. I'll just reiterate that the Staff Legal Bulletin isn't intended to change the historical framework under (i)(7) in any way. What we are really asking for in this part of the Bulletin is help when something is sufficiently connected to the issuer's business, right? When a proposal raises a policy issue or potentially raises a policy issue, there needs to be this sufficient nexus between that issue and what the company does, its operations. That is where the Bulletin comes into play. Historically, we have used our best judgment in deciding whether there is a sufficient nexus, but as the SLB says, we think boards are generally in a better position to determine those matters. What we're doing is inviting the board's views on how the issue raised in the proposal specifically affects the company's business. We don't need input from the board necessarily on the societal issue question. I will say no-action requests could, as they do currently, continue to address that broader societal issue, but there's no expectation that the no-action letter would include a description of the board's analysis of that issue. I guess to summarize and reiterate, the analysis is the same - what we're asking for is information that is going to help us decide the nexus question, whether it is sufficiently significant to the company's business. Chiu: So turning to the other parties involved, you've got the Staff looking at it, you've got proponents who submitted the proposal, you've got the company where the proposal has been submitted, and at the end of the day there may be shareholders who vote on the proposal or if it's a repeat proposal, there may have been shareholders who previously voted on the proposals. One question that has come up is about a prior shareholder vote on a repeat proposal, because that does tend to happen sometimes on these types of proposals that touch on ordinary business. Is that something the board could consider? And if so, how much weight do you think they it should carry? McNair: Again, I know there has been a lot of talk about this - and this is a factor that a board could certainly consider. At least for now anyway, I don't know how much weight they're going to carry for purposes of assessing significance. I can see why a board would want to look at that, but I can also see arguments as to why maybe that information wouldn't be as helpful. I think we are in "wait & see" mode to see how important that information is, but at least for now I'm not sure how much weight that data point will carry. Chiu: I guess it would be possible that if it's an extremely low vote or a high vote, then maybe it carries more weight than if it is in the middle. McNair: I think that is how folks who advocate for taking into account the vote would view it. They may say, "Look, if there's a really low vote maybe it doesn't trip the resubmission threshold under (i)(12), but it's still a low vote." That is an indicator that this isn't important to our shareholders, but I can also see arguments the other way. Chiu: I agree. Basically, after listening to you - and looking at the Staff Legal Bulletin based on everybody's collective thinking on the issue, you come to a natural conclusion: is it possible that a proposal that raises an already recognized significant policy issue under prior no-action letters can now be excluded going forward? McNair: I think that is right. As I mentioned, the SLB addresses nexus. If a company can demonstrate that a proposal isn't sufficiently significant to its business notwithstanding the social significance or other significance, there would be a basis I think to exclude. It is really the board's analysis that is going to help us determine whether there's a sufficient nexus. It's possible that in the past, we've made our own determination on that point, or that a company has conceded and not made the argument. They viewed it as a foregone conclusion that it would not be excludable and did not challenge it. I think something that is already recognized under this new framework as a significant policy issue, that proposal could be excluded depending on connection to the company. Chiu: Right. First, that may be where you face your toughest challenges, but it may also be where a lot of companies think it would be well worth their boards' time to undertake the analysis and demonstrate that there may not be a nexus. I know it's hard to anticipate these things, because you haven't seen the letters and even we don't know exactly on the issuer side what it may look like. As you have been thinking about this, what do you think would be useful in the no-action letter request? For example, would a board look at the impact of the issue on their financial operating results? Would they talk about how many meetings they had or what kind of documents they looked at or who they talk to? I'm just trying to get a sense of what constitutes a well-detailed and well-informed process. McNair: I don't know how helpful I'm going to be on this point unfortunately - but I guess what I'll say is that I think boards are going to approach this differently, right? We certainly don't expect them to follow any specific process, we're not going to tell the board what they need to consider. They really should tell us what they looked at and what their thoughts were. I think that is the point. We are really putting it in the board's hands. We are leaving it to them and whatever they believe is appropriate and helpful is what we would like to get. I can see them wanting maybe to talk about the board meetings that they held or the number of directors who agreed on a matter or describing inquiries they had with management, consultants or other third parties. Or if they want to discuss the financial impact or if they want to tell us that they've engaged with shareholders and what their interest level is, whatever they feel would be appropriate and helpful, that is really what we are looking for. We didn't give any examples in the SLB and I think that was intentional. We are not trying to be coy. We don't want to suggest things that the board should consider when we don't know for sure how helpful those things will be. We think at this point anyway, it would be better to leave it to the board - and then through the no-action process we will see what ends up being the most helpful. I know that is not as helpful now with everybody trying to wrap their arms around the SLB. On the other end, after the proxy season, I think we will have a much better idea of what was helpful and what wasn't. As a final point, I think the bottom line is that we don't have any preconceived notions as to what the board needs to give us. It really should just have in the no-action request any information that the company thinks is going to help the Staff in assessing that question of significance. Chiu: By the end of the proxy season some of it will probably answer itself as we all start working with boards on the process and as you all start looking at it.
Turning now to the economic relevance exclusion, this is an exclusion that's not been used much to exclude proposals. It relates to operations which account for less than 5% of the company's total assets, earnings and gross sales - which all sound very straightforward until you get to the second part, which says that the proposal is not otherwise significantly related to the company's business. I think the word "significant" is the dominant theme here. Again, the Staff Legal Bulletin itself provides helpful background on why this exclusion has not been used much, including due to a federal case. Under the SLB going forward, if the proposal relates to operations that meet the economic portion of the test, then the Division will focus on a proposal's significance to the company's business. Again, there can be, although not required, a board's determination that it is insignificant to a company's business or operations, which seems very similar to (i)(7). There is also a portion of the Bulletin that talks about if the proposal's significance is not obvious, then the proponent of the proposal may try to demonstrate it by providing information about how it might impact other segments of a company's business as well. This sounds like a similar process in terms of the board's determination analysis under (i)(7). Do you have a view on that, as to whether that's how you are kind of envisioning it? McNair: I think the process is similar for both. Obviously, the purposes of the two bases are slightly different, but when you think about it, they are both sort of nexus questions. We suspect the information we would get under (i)(7) would be similar to that for (i)(5) and vice versa. Yes, we think the process would be similar for both. Chiu: As I mentioned about the economics relevance exclusion, there is a part of the SLB that talks about what a proponent may want to demonstrate in terms of information. If the significance of a proposal to the company's business is not obvious, then the proponent may talk about the impacts to other segments to company's business, whether it subjects the issuer to significant contingent liabilities - or if there are social or ethical issues. There may be a discussion tying it to having a significant effect to the company's business. It can't simply be the mere possibility of reputational economic harm. In terms of what proponents need to provide, do you have a sense of the kind of information that they may need - and the bar does seem to be higher at this point, but also a sense of how much higher? McNair: I'll echo here what I said earlier about the information the board should provide. There are going to be different ways of evaluating significance under (i)(5). There isn't a specific formula for showing what's otherwise significantly related and we don't expect shareholders to follow any specific process. We don't have any, again, preconceived notion as to what needs to be provided. What the SLB says is that a shareholder can provide information demonstrating that a proposal may have a significant impact on other segments of the issuer's business or subject the issuer to significant contingent liabilities. Those are just two examples of how to show significance, but in terms of what information would need to be provided to show that, again, we don't have any notions about what the proponents will need to provide. The bottom line is that just like with boards, they should just provide us with whatever information they think is going to be most helpful to us in assessing significance. As far as how high the bar is now, what the SLB says is that we'll consider the total mix of information about the issuer and that the mere possibility of reputational or economic harm isn't going to preclude relief. There does need to be something more than just a chance of a significant effect. You can't just say this could result in a boycott in the future and that could significantly harm our reputation and our bottom line. There is going to need to be some sort of demonstration that there's more than just a chance. At this point, it is hard for us to say exactly where that bar is. I think it's really going to play out through the no-action process. Chiu: We know you've talked a little about the nexus between the proposal for a company in two cases: the ordinary business argument and the economic relevance one. It seems like when you take a proposal, depending obviously on the subject matter of the proposal, there may be opportunities or arguments where you could make both an ordinary business and an economic relevance argument. You could make one or the other instead since the process seems to be similar if the board is going to undertake the analysis. Does that seem like it is consistent with what you were thinking as well? McNair: Yes, it is. I think there might be times when companies try to make both arguments. Again, the underlying bases are somewhat different as (i)(5) is about relevance - and (i)(7) is about the business decision. Is it ordinary or is it best left to management - or does it transcend? I can see companies making both. I suspect what will happen is that companies are going to argue one or the other, but there might be instances where they argue both. For example, I guess if we weighed in on (i)(7) in the past for a similar proposal, but (i)(5) is available for this particular company submitting the proposal, I could see the company raising both. There's certainly nothing to prevent a company from making both arguments - but we'll see what happens. Chiu: I think our last question on (i)(7) and (i)(5) is in some ways the hardest one. You talked earlier in terms of the types of information that might carry more weight. Do you have any sense, and I know this may be too early, of how much weight overall a board finding would carry in terms of when the Staff looks at it. Boards are saying, "Well we looked at all these things, we talked to all these people, we considered it from a financial perspective and from a number of other perspectives, and our view is that it is not significant to the business." It seems like that would be a pretty big conclusion, since the board's undergone an entire process to come to that view. Do you have anything you think you could speak to as to how much weight that would carry? McNair: I mean obviously given the board's role we think a well-developed and well-reasoned analysis is going to be useful to us. That is why we're asking for it. It's hard to know how useful it's going to be. We think it's going to be helpful, that is why we are asking for it. I'd say, it's not going to be determinative, it's definitely going to be an important factor and going back to what I said before, I think the more developed the board record is, the greater weight it is likely going to get. In terms of overall how much weight, I think it's going to depend, but obviously we're asking for it because we think it's going to be helpful to us. Chiu: We just have a few questions on proposal by proxy that has come up. This is the submission of proposals through a representatives which the short-hand for is proposal by proxy. The Staff Legal Bulletin is helpful in describing the kind of documentation that would be necessary to show that representation is authorized. It is a procedural deficiency, so if it was not properly done the first instance, there is a chance to fix it. There has to be a deficiency notice to provide it to the proponent within the requisite period of time and there is another 14 days for the proponent to provide the correct authorization. A lot of companies that have been using a form deficiency notice may want to add this now to make it easier. Can you give us a little background about why the Staff wanted to address this in the Legal Bulletin and the purpose of this clarification? McNair: This is something I think we have faced and is an issue that has been raised with us for a number of years. We're aware of the concerns that have been raised by folks in this area, and I think we just thought this was a good opportunity to address those concerns. I mean, we've seen instances in the past that made us a little queasy when we saw them, but our practice at the time was to let the proposals go through. And I think it may seem as though based on our prior decisions that we were unsympathetic. I think we're always trying to figure out a good way to address this that wouldn't be overly burdensome on proponents, but would also give companies an assurance that they know who they are dealing with and that a shareholder actually is submitting the proposal, because that is the requirement of the rule. Our hope is that this information we are asking for will do that. That it won't be overly burdensome and that it will give companies some clarity. One point I want to make is that we are not trying to open this up and create a new "foot fault" for issuers to be able to try to exclude proposals. We're not going to be sympathetic to "foot fault" type arguments. If all the information mentioned in the SLB isn't provided, but the company can reasonably conclude based on what is provided that there is a shareholder that has authorized the proposal's submission, we are probably not going to agree with exclusion. We are really going to use a "reasonableness" test here - and are looking to help companies when there is some uncertainty. We're not trying to trip proponents up and try to find hyper-technical arguments. Chiu: A technical question has come up, and it would be useful for both parties to be aware of, to the extent that a company wants to raise a procedural deficiency if not all the information can be ascertained from the information given. If the proposal is submitted on December 1st and the deficiency letter goes out on December 14th and the proponent writes back, do they need to make clear that the authorization goes back to the time the proposal was submitted? I know that's technical, but I think it would be useful for everyone involved to know where the parameters are so everyone does it properly. McNair: I think that is a helpful question. I mean, what I'll say is to me, this sounds like the type of hyper-technical argument that we are hoping companies will avoid. Again, I think the important thing is that the company gets the information and can have a reasonable assurance that a shareholder is submitting it. Our hope is that good judgment is going to be used here, and the challenges are only going to be made when there's a genuine question about a shareholder's authorization to submit a proposal. I'd say that this is that type of hyper-technical argument and hopefully we wouldn't see that type of argument.
Chiu: Matt, we have taken up a lot of your time. Is there something you would like to conclude with or is there something we didn't talk about? Do you think, for example, the timing of this year's process may be just a little shy of the record breakers that you have had in the past? McNair: I ask everybody to please be a little bit more patient with us this season. I think we are going to be more deliberate. It's going to take us time to look at the new information we get in connection with these requests and really think about them. It's new. It's going to take us time to adapt just as it's going to take the parties involved time. I would just ask for patience and communicate with us as always. Let us know on the company side what your print deadlines are, and we will obviously do our best to work within that timeframe. Just one other thing. I know this is a new area, but I want to reiterate that I get the sense sometimes when we get communications from both sides that they are trying to get the last word in and sometimes the correspondence that we're getting is really just reiterating things that have already been said. Again, I perceive it as folks just want to get the last word, which I'm not suggesting that folks shouldn't submit information if they have information that they want to provide to us, but if you can limit the correspondence to really the critical arguments so we are not reviewing information that has already been stated previously. Chiu: I assume that would make everything take longer as well? McNair: It does. It takes things longer and when we get new information in, we want to let the other party digest it, respond to it and it takes our Staff time to review it. It does slow the process down. So, again, I don't want to discourage folks from sending information that is going to be helpful, but if it's just reiterating or trying to make a point that has already been made, it's generally not as helpful to us. Chiu: Thank you so much Matt for your time. I hope that this was helpful to everybody who was listening in. I hope people continue to ask good questions about the process. And we have a lot more to learn even in the next two months. We probably have an initial sense and at the end of the season we can get your reaction Matt on how you think it went. I think that would be a great idea. McNair: Yes, I'd be happy to do that. Thanks for doing this. I think it is helpful to everybody to get their arms around this new Bulletin and figure out how to implement it. I'd be happy to do a post season discussion.
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