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AES “Games” SEC: CII Seeks Correction

CII sent an important letter to the SEC on a recent no-action issued to the AES Corporation (AES) (not yet posted). A similar no-action had been granted in 2016 to Illumina (ILMN) on a proposal I (James McRitchie) had submitted. ISS referenced both. From the facts regarding AES, it appears John Chevedden submitted a proposal to lower the required threshold for shareholder to call a special meeting. The current standard is 25%. Chevedden’s proposal requested 10%. The SEC’s no-action letter gave the following rationale:

There appears to be some basis for your view that the Company may exclude the Proposal under rule 14a-8(i)(9). In our view, the Proposal directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals. Accordingly, we will not recommend enforcement action to the Commission if the Company omits the Proposal from its proxy materials in reliance on rule 14a-8(i)(9).

CII suggests there are two problems with SLB 14H and analysis that resulted in the “misguided AES no-action decision.”

First, SLB 14H indicates that staff “will not…view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both.” Contrary to staff’s view in the AES letter, AES’s shareowners could logically vote for the shareholder proposal and management proposal…

In fact, shareholders at five companies in 2016-17 voted on nonbinding shareholder proposals to set 10% or 15% thresholds for special meetings, even as management proposals were up for approval to provide for special meeting rights at 25% thresholds… We believe that boards of the five companies have no reason for confusion on the message from holders of substantial portions of shares that those holders preferred lower thresholds as indicated in the shareholder proposals.

CII concludes with a recommendation to revisit SLB 14H.

We believe that a company seeking no-action relief on 14a-8(i)(9) should be required to provide evidence that it contemplated proposing the relevant management proposal on a date earlier than receipt of the shareholder proposal. To do otherwise is to invite game-playing by corporate issuers such as AES and Illumina — and Whole Foods, which was creative in seeking to block a vote on a reasonable proxy access shareholder proposal, the situation that led to adoption of SLB 14H. Game-playing is particularly likely on proposals that company management opposes and that it believes may nevertheless win approval from shareholders – that is, issues on which there is a difference of opinion and for which expression of collective views of shareholders is particularly important…

CII urges the staff to revisit its approach to Rule 14a-8(i)(9) so that it is more consistent with the language and intent of the underlying rule.

It is critical that shareholder’s have each other’s backs. Although no-actions are not supposed to set legal precedents, they do in fact impact subsequent no-actions. Letting companies game the system would be a huge loss for all. I hope the SEC reexamines the no-action given to AES and updates SLB 14H.

Yes, John Chevedden and I can plead with the SEC. However, it is widely recognized that CII has substantially more clout. With members holding $3.5 trillion in assets and associate members holding $25 trillion in assets, they are hard to ignore. I urge readers to join CII as either a General Member or an Associate Member.



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