Several noteworthy developments have occurred following the September 6, 2019 announcement by the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (“SEC") regarding two significant procedural changes for responding to Exchange Act Rule 14a-8 no-action requests that will be applicable to no-action requests regarding shareholder proposals submitted for annual meeting to be held in 2020. That announcement indicated that the Staff may now respond orally instead of in writing to shareholder proposal no-action requests and that the Staff may now more frequently respond by declining to state a view on whether or not it concurs that a company may properly exclude a shareholder proposal under Rule 14a-8.
Following the Staff's announcement, a coalition of investor-related organizations sent William Hinman, Director of the SEC's Division of Corporation Finance, a letter on September 19, 2019 criticizing the change in process.[1] The letter asked that the Staff “rescind this change in process" or, if it does not, at least take certain steps “to reduce the level of uncertainty and conflict resulting from the new approaches." The steps requested in the letter include using the new response options sparingly “until the implications are better understood," describing the criteria for when the Staff will use the new response options, signaling early in the process if the Staff will use one of the new response options (and clarifying if the Staff will wait until after the proponent has responded to make that decision), and maintaining visibility when the Staff uses one of the new response options (for example, indicating on the SEC's website any oral decisions and providing the same information to both parties).
Subsequent remarks by the Staff have begun to provide additional specificity regarding these shareholder proposal no-action request procedural changes and the Staff's rationale for implementing the changes. For example, in late September, Mr. Hinman indicated that the changes were driven by the Staff trying to think of “a new and creative approach" in responding to no-action requests.[2]
With respect to oral responses, he indicated that they generally will be used for more routine matters (such as failure to provide ownership proof) and confirmed that the Staff will reflect those responses on the SEC's website in “real time" showing whether or not the Staff concurs that a shareholder proposal may be excluded. With respect to no-action requests where the Staff declines to state a view, he commented that the Staff may take this approach when so-called “regulatory humility" is appropriate—that is, when the Staff believes that it is not in the best position to make a decision about the excludability of the shareholder proposal. In remarks at an American Bar Association meeting in mid-September, Mr. Hinman noted that the Staff was not certain how frequently it would issue responses in which it declines to state a view on exclusion of a shareholder proposal.
While Mr. Hinman's statements address some of the concerns raised by the issuer and investor communities about the new procedures, the exact impact—especially where the Staff declines to express its views—will become clearer during the 2020 proxy season.
[1] Available at https://www.investorrightsforum.com/new-blog-1/five-investment-organizations-to-director-hinman-no-action-process-concerns-and-recommendations. The letter was signed by Kenneth A. Bertsch, Executive Director at the Council of Institutional Investors; Lisa Woll, CEO at US SIF; Josh Zinner, CEO at the Interfaith Center on Corporate Responsibility; Mindy S. Lubber, CEO and President at Ceres; and Sanford Lewis, Director at the Shareholder Rights Group.
[2] Based on remarks made at the Society for Corporate Governance Eastern Regional Conference on September 27, 2019.