August 1, 2018

Exempt Solicitations: 2 New CDIs

There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.

Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.

Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).

For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:

While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.

Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.

“Passive” Investors: Causing a Rise in Activism?

We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.

So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.

For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.

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Liz Dunshee