October 3, 2019

Shareholder Proposals: Should Corp Fin Referee the No-Action Process?

Here’s a blog that I drafted before Corp Fin made its recent announcement about how it will process Rule 14a-8 requests for shareholder proposals going forward – it’s still worth sharing: Last month, I had lunch with a friend who started foaming at the mouth about the need for Corp Fin to remove itself as the referee in the no-action process for shareholder proposals. After his foam had dried, I replied that Corp Fin would like nothing more. The problem historically has been that whenever Corp Fin suggests that it diminish its role, participants on all sides scream bloody murder.

Processing no-action requests under Rule 14a-8 is labor intensive in Corp Fin. Most requests come in during a short window and are time sensitive. The Staffers working on them still have their regular workload to deal with (at least when I served in Corp Fin). Being placed on the “Shareholder Proposal Task Force” feels like punishment. Long hours. Very long. Highly sensitive situations in some cases – the kind that can derail your career. And not exactly intellectually rewarding.

Here’s an excerpt from the SEC’s adopting release in 1998, the last time the SEC significantly changed Rule 14a-8:

Some of the proposals we are not adopting share a common theme: to reduce the Commission’s and its staff’s role in the process and to provide shareholders and companies with a greater opportunity to decide for themselves which proposals are sufficiently important and relevant to the company’s business to justify inclusion in its proxy materials. However, a number of commenters resisted the idea of significantly decreasing the role of the Commission and its staff as informal arbiters through the administration of the no-action letter process. Consistent with these views, commenters were equally unsupportive of fundamental alternatives to the existing rule and process that, in different degrees, would have decreased the Commission’s overall participation.

Processing Shareholder Proposals: Life Can Be Rough

A story to illustrate. When I first joined Corp Fin in ’88 for my first tour of duty at the SEC, I was right out of law school. That was typical back then. And each branch was required to contribute one person to the Shareholder Proposal Task Force. You were “it” if you were the newest person in the branch. So the Task Force was comprised of a dozen people who were right out of law school.

Nothing was electronic back then. We wrote out our analysis & recommendation for each no-action request by hand. There was only one computer for the entirety of Corp Fin. So you would have to wait until “after hours” to be able to access it and print out precedent to support your analysis (the Division had a Lexis account on this prized computer that sat over in the Office of Chief Counsel). To top off this charmed experience, I was chewed out by a crazed supervisor over one of my first recommendations. By the end of his diatribe, he realized he had gone over the top and invited me out to go drink whiskey (I declined).

I wouldn’t blame him except I was right out of law school. My training when I arrived consisted of my boss handing me a rulebook and saying “here, read this over the next week.” So I read S-K – and the ’33 Act &’34 Act rules – straight. Those things are not meant to be read straight. So I learned nothing, Other than that the SEC’s rules & regulations are not written in anything close to plain English. There was literally no training. If you got lucky, your office mate was experienced & willing to teach. Yes, life was tough in the old days…

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