In the 2015 proxy season, corporate boards increased their efforts to exclude shareholder proposals from ballots at a time when the Securities and Exchange Commission (SEC) has shown less willingness to let them do so.
“More often than not, these [vague, false or misleading] no-action requests are only used if there are no other exceptions available and may be a last resort. Statistically, they are not very successful,” said David Brown, partner in Alston & Bird’s Securities Group. “The SEC takes a narrow view in respect to these claims, as the staff is focused on only if the statement is objectively false and material to the proposal overall. Even if there are false or misleading statements in [the proposal], if it’s just a minor point the SEC will allow it to slide and the proposal to go forward.”
While the SEC often dismisses no-action requests that claim a shareholder proposal would be detrimental to a company’s ordinary business, that was not the case with Wal-Mart, which in July won a Circuit Court of Appeals ruling excluding a proposal involving terminating gun sales and overturning a December decision by the Delaware federal district court that claimed the proposal would not affect ordinary business operations.
Mary Gill, partner in Alston & Bird’s Securities Litigation Group, said the Wal-Mart victory does not necessarily set a precedent.
“The court confirmed that it’s the subject matter of the proposal [that qualifies it as ordinary business], not the mechanics or operational framework. It’s a case-by-case analysis, not a bright-line rule. Interestingly, and in particular with the number of social policy issues that are being presented by shareholders, the court suggested that the SEC revisit its rules and provide revised guidance [on ordinary business exclusions],” Gill said.
Brown says no-action request numbers do not necessarily reflect the increased engagement between companies and shareholders, as sometimes this engagement is ongoing despite the SEC’s ruling.
“The SEC chair widely favors shareholder engagement and the shareholder proposals process. When shareholders are able to submit a proposal on the proxy statement, it generally results in the company engaging in discussions with the shareholder,” Brown said. “The SEC is encouraging companies to resolve disagreements over shareholder proposals without resorting to the no-action process. I think those views increase the rejection of no-action letters.”
Brown noted that the number of shareholder proposals themselves will probably go up next year, given the success of proxy access this year and that some of the other governance proposals that were successful this year may be proposed at other companies, which may prompt more no-action letters.
However, he added that there are also a number of potential outcomes for the conflicting proposals rule that may affect no-action numbers.
“I think [the SEC] will be coming out with a staff legal bulletin, but any dramatic changes would require formal ruling and be subjected to public comment, and the staff may not have the bandwidth or desire to do that before the next proxy season,” Brown explained.