October 24, 2018

Shareholder Proposals: Corp Fin’s New Staff Legal Bulletin!

Yesterday, Corp Fin issued Staff Legal Bulletin No. 14J – which follows up on last year’s Staff Legal Bulletin No.14I and provides additional guidance on the application of the “economic relevance” and “ordinary business” exclusions to shareholder proposals submitted under Rule 14a-8. We’ll be posting the memos in our “Shareholder Proposals” Practice Area as they come in (here’s Ning Chiu’s blog on it).

Last year’s SLB 14I addressed, among other things, the scope & application of Rule14a-8(i)(5) (the “economic relevance” exception) & Rule 14a-8(i)(7) (the “ordinary business” exception). That SLB also invited companies to include in their no-action requests a discussion of the board’s analysis of the policy issue raised by the shareholder proposal and its significance in relation to the company.

The new SLB 14J reviews the Staff’s experience with these no-action requests during this year’s proxy season and highlights the discussions of the board’s analysis that were most helpful.  From Corp Fin’s perspective, the best of these submissions focused on the board’s consideration of specific substantive factors in reaching its conclusions.  This new SLB specifies several of these substantive factors:

– The extent to which the proposal relates to the company’s core business activities.
– Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
– Whether the company has already addressed the issue in some manner, including the differences – or the delta – between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company.
– The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
– Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
– Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.

SLB 14J also addresses the application of the ordinary business exclusion to proposals relating to executive and director compensation.  In particular, it provides further guidance on the circumstances under which proposals implicating the following issues may be excludable:

– Senior executive and/or director compensation and ordinary business matters.
– Aspects of senior executive and/or director compensation that are also available or applicable to the general workforce.
– Micromanagement of senior executive and/or director compensation practices

Sustainability: A Low Priority for Institutional Investors?

According to a recent survey, most institutional investors still don’t prioritize sustainability in making their investment decisions. This article summarizes the study:

Sustainable investing is a low priority issue for most institutional investors, according to a survey by Schroders. The UK-listed asset manager polled 650 investors around the world running $24trn (€20.6trn) and found that, although they expected sustainable investing to become a bigger issue in the next few years, it was not currently a high priority for most.

Almost a third (32%) of those questioned by Schroders said that how sustainable an investment was had “little to no influence” on the decision to buy. Factors such as a manager’s track record, expected return and risk tolerance were all more important factors, investors said.

There is a silver lining in the survey’s results for sustainability advocates – nearly 75% of respondents said sustainable investment would become more important over the next five years, and half have increased their allocations to sustainable investments during the past five years.

Activism: Dealing with Shareholder-Nominated Directors

With activists increasingly winning representation on public company boards, many GCs are seeking guidance on how to deal with these new directors.  This Ropes & Gray article provides insight into how to address some of the more difficult issues that arise with the election of a shareholder’s representative to the board.  This excerpt discusses how to approach the director’s sharing of information with the activist:

When a shareholder-nominated director is clearly the representative of the shareholder, the shareholder is generally entitled to receive the information that the director receives.  Since the shareholder-nominated director generally has access to all company information, this effectively means that the shareholder likewise has access to all company information.

In light of the reality and general acceptability of the shareholder-nominated director’s sharing of confidential and/or privileged company information with the shareholder, company counsel should seek, before the shareholder-nominated director takes office, to have the shareholder sign an NDA restricting the shareholder’s disclosure and use of such information.

While the general rule is that information sharing is permissible, the article goes on to address situations in which it might be a breach of the director’s fiduciary duty to provide confidential information to the activist.

John Jenkins