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Following the issuance earlier this year of updated CDIs on the impact of engagement topics on 13G eligibility, many companies have found that large stockholders have become much more guarded in their discussions with management in an effort to avoid trigging a 13D filing.  A recent Skadden memo offers some tips on how companies can engage more effectively with their investors in this environment. This excerpt provides some examples about on how investors have changed their approach and how companies may want to respond:

Change: Questions from investors at engagement meetings will likely be more open-ended and less targeted. For instance, questions are now likely to be more broadly worded. Such as: “We would appreciate if you could share your thoughts on….”

Response: Companies should be prepared to answer the questions and add gloss that they expect the investor will want/need to make informed investment decisions.

Change: Similarly, investors will likely not answer pointed questions, including and most specifically any questions about how the investor intends to vote.

Response: Companies should be prepared to ask investors more broad-based questions, such as: “Did you get enough information to make an informed voting and/or investment decision.”

On the other hand, in remarks delivered during yesterday’s “SEC Speaks” conference, Commissioner Mark Uyeda said that investors shouldn’t interpret the recent 13G CDIs as a reason to clam up:

In my view, the wording of the CDI in fact broadens the scope of permissible activities while still remaining eligible for Schedule 13G, which is premised on not “influencing” control of the company. “Influencing” is not defined under the Securities Exchange Act and a common dictionary definition is “the act or power of producing an effect without apparent exertion of force or direct exercise of command.” By requiring that a shareholder needs to “exert pressure on management,” the CDI indicates that there needs to be something more than the mere planting of an idea with management in order to lose Schedule 13G eligibility.

This result reflects a commonsense interpretation of longstanding rules: if you are pressuring the board to undertake certain actions relating to the management or policies of an issuer, whether ESG-related or otherwise—coupled with voting threats, such actions are covered by existing rules and should be treated as such.

As with the unfounded concerns that Regulation FD would cease all communications between companies and shareholders, I am confident that asset managers will be able to navigate the parameters of the applicable Exchange Act rules to have appropriate levels of engagement with boards and executives of public companies without losing eligibility to file on Schedule 13G—and if an asset manager chooses to exert pressure, then they can provide the disclosure and transparency surrounding such conversations as required by Schedule 13D.

If you’re interested in a more in-depth discussion of how companies and investors are responding to the challenges created by the CDIs, be sure to check out our recent “Timely Takes” podcast on these topics.

– John Jenkins