Late last year, the SEC’s Division of Corporation Finance issued a no-action letter in which it agreed that a proposal seeking to lower the threshold for calling a special meeting from 25 percent to 10 percent of the outstanding shares directly conflicted with a company proposal to ratify its existing bylaw with the 25 percent threshold. The AES Corporation, December 19, 2017. In the staff’s view, a reasonable shareholder could not logically vote in favor of both proposals, which is the standard it enunciated for Rule 14a-8(i)(9) in Staff Legal Bulletin 14H issued in October 2015. The letter was not well received by shareholder proponents. The Council of Institutional Investors (CII) sent a letter to Division Director William Hinman expressing its disagreement with the staff’s conclusion and urging that they revisit the approach. CII feared that permitting exclusion in these circumstances would “invite game-playing by corporate issuers” that presumably would cynically propose ratification votes whenever they receive a shareholder proposal to amend their bylaws.
More requests to exclude special meeting proposals such as the one in AES Corporation have come in, and the Division’s approach remains essentially the same, recently though with a significant twist. In a letter to Capital One Financial Corporation (February 21, 2018), the Division agreed that the company, which proposed to ratify its existing special meeting bylaw, could omit a shareholder proposal to lower the threshold to call a shareholder meeting from 25 percent to 10 percent, provided that the company’s proxy statement discloses:
- that the company has omitted a shareholder proposal to lower the ownership threshold for calling a special meeting,
- that the company believes a vote in favor of ratification is tantamount to a vote against a proposal lowering the threshold,
- the impact on the special meeting threshold, if any, if ratification is not received, and
- the company’s expected course of action, if ratification is not received.
The Division based its conditions on Rule 14a-9, suggesting that it believes a proxy statement with a ratification proposal that does not provide the required context in which shareholders are being asked to vote for ratification would be materially misleading.
Placing disclosure conditions on Rule 14a-8 no-action relief is a little unusual. However, the staff could have achieved the same result by making these comments on a company’s proxy statement during the 10-day window after the preliminary filing. Getting a heads up about what the staff believes is required disclosure is likely preferable to being surprised by a comment that could have upended the company’s printing and mailing schedule.
The solution the Division devised to address the “ratification in a vacuum” problem is appropriately Solomonic. On the one hand, shareholder proponents will not be entirely satisfied, as they will likely continue to believe that ratification is inappropriate company gamesmanship. Indeed, the day after the Division issued its no-action letter, CII wrote to the lead independent director of Capital One asking, notwithstanding the conditions in the letter, that the board withdraw the company proposal and allow shareholders to vote on the shareholder’s 10 percent proposal. On the company side, the enthusiasm for using ratification as a means to exclude is likely to wane at least to some degree. However, there remain benefits in adopting this approach. Chief among them is that the company’s arguments in favor of ratification in the proxy statement will not be subject to the proponent’s supporting statement. The company will be able to set the agenda and argue the merits of its bylaw unencumbered by the occasionally inflammatory supporting statements made by some proponents.
But there are risks as well. It is not clear how the proxy advisory firms will view the ratification vote, but it is likely that their recommendation would be based on how they view the proposal that has been excluded. Moreover, to the extent that a shareholder viewed the company’s strategy as inappropriate gamesmanship, following this path might produce unnecessary antagonism from some shareholders who might otherwise be inclined to support the company. Finally, if the company loses the ratification vote, the reputational sting might be worse than had it lost straight up in its fight against the shareholder proposal.
Before deciding which way to proceed, a company in this circumstance should make sure it knows the positions of its significant institutional holders on the underlying proposal. That might help inform the strategy it ultimately adopts. Companies should consider that through July 2017, of the 19 proposals seeking to reduce the percentage threshold to call a shareholder meeting, only one obtained a majority vote, and the average level of support appears to be holding steady around 42 percent. A straightforward approach may turn out to be just as successful.
This post comes to us from Keith F. Higgins, chair of the securities and governance practice at Ropes & Gray LLP, and, from June 2013 to January 2017, director of corporation finance at the U.S. Securities and Exchange Commission.