Exempt solicitation use by shareholder proponents will continue to surge. Almost six years ago, SharkRepellent.net documented the rising use of PX14A6G filings. (Proponents Increasingly Proactive Promoting Their Issues by John Laide)
Read any good PX14A6G filings lately? During the 2012 proxy season, sponsors of shareholder proposals have been increasingly making use of rules allowing them to further press their case to stockholders to support their issues. Pursuant to Rule 14a-2(b)(1) of the Exchange Act, a shareholder can freely communicate its views to stockholders without having to comply with the proxy filing and disclosure rules associated with a contested solicitation if it is not seeking proxy voting authority (i.e. the shareholder is not seeking the power to act as proxy for a stockholder and does not provide its own proxy card in its materials). The filing itself generally takes the form of a letter to fellow shareholders attempting to persuade them to vote for a proposal the shareholder is sponsoring, to vote against a management proposal, or to withhold votes for directors, and will appear on the SEC’s EDGAR filing system alongside the company’s other filings. An exempt solicitation provides an easy, cost-effective way for proponents to express their views and lobby fellow shareholders beyond the 500-word limit imposed by Rule 14a-8 for a proposal and supporting statement in the company’s proxy statement.
Exempt solicitation use by institutional investors has been on the rise. Now that retail shareholders, such as John Chevedden and I have begun to use them, we can expect the numbers to rise even higher. Check latest filings. Hopefully, we will get many more shareholders checking that data more frequently in years to come.
Exempt Solicitation Use Criticized by Gibson Dunn
A recent post by Gibson Dunn argues, “Such filings can be confusing to shareholders” and “may lead to increased press coverage of the filers’ views.” With regard to the so-called confusion issue, I find it very confusing how AES could obtain a no-action letter from SEC staff that appears in direct contradiction to SLB 14H. Whole Foods became something of a pariah when they put up a counter proxy access proposal to mine with thresholds that could never be met. (See Appeal of No-Action on Proxy Access at Whole Foods Markets (WFM) Shareholders protested, Chair White ordered a staff review of the (i)(9) exclusion and the SLB was issued. See my post “Directly Conflicts” Clarified by Staff Legal Bulletin.
In the case of AES, the company had an existing standard: Special meetings can only be called by shareholders holding not less than 25% of the voting power. Chevedden’s proposal requested that be lowered to 10%, AES responded by placing a proposal to ratify their existing threshold by shareholder vote and asked SEC Staff to block Chevedden’s proposal as conflicting with the company proposal. SEC Staff accepted the argument from AES that “a reasonable shareholder could not logically vote in favor of both proposals.”
Exempt solicitations in such cases can help clear up confusion by adding insights from the shareholder.
CII’s Letter on AES Decision Prompting Chevedden to Start Filing Exempt Solicitation
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.
Unfortunately, most AES shareholders have not read the letter from CII. Chevedden’s exempt solicitation likely reached many more AES shareholders, helping them understand the no-action letter as an unreasonable interpretation of SLB 14H. However, still too few care.
My Exempt Solicitation at GE on Share Buybacks
Similarly, there is a great deal of existing confusion around share buybacks, with some arguing they are never positive and others arguing they add shareholder value, so are a legitimate contributor to executive pay. This is a new topic for many funds and proxy advisors. Hopefully, my exempt solicitation filing re GE will help dispel some of the confusion in that area. Although share buybacks can be a reasonable use of corporate funds, using them to goose executive pay is never good.
Increased Press Coverage From Exempt Solicitation
With regard to Gibson Dunn’s charge that such filings “may lead to increased press coverage of the filers’ views,” I certainly hope so. Coverage of proxy proposals in the financial press is typically limited to reporting the votes, if that.
Given the proliferation of social media and contraction of the number of reporters, about all most of them seem to have time for is reading the feed of SEC filings, mostly from corporate press officers. It takes little effort to cut and paste from an 8-K filing. Imagine if the only press coverage of government elections was the resulting votes. Democracy would be in even more shambles than it is.
More exempt solicitation use by shareholder proponents is bound to raise press coverage and awareness of the issues in corporate governance, at least a little. Contrary to what is implied by Gibson Dunn, a more informed electorate is a positive step.