The U.S. SEC announced that starting with the 2019-2020 proxy season, staff will end its default practice of writing and publishing its rulings on corporations' requests to block shareholder resolutions. Moreover, the agency may opt not to weigh in at all on some requests and could instead leave it to the companies and shareholders to potentially duke it out in court.
In a Sept. 6 announcement on the agency's website, the regulator's Corporation Finance Division said that starting with the next proxy season, staff may opt to "respond orally instead of in writing" to some requests. The notice said staff will inform the company and the shareholder who proposed the resolution of the agency's finding.
"The staff intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying" with the SEC's rules regarding the shareholder resolution process.
The announcement went on to say that if staff "declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included" in the company's annual shareholder meeting. "In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8," which is the agency's shareholder resolution rule. "As has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court," staff said.
SEC Commissioner Hester Peirce first revealed in an exclusive interview on S&P Global's ESG Insider podcast in June that the agency was considering whether to stop weighing in on resolutions. The move will reduce the transparency of the SEC's no-action letter decision-making process to shareholders and the public.
In the past, the agency has posted online its response to all companies' no-action letter requests. The nonbinding letters effectively indicate whether staff supports a company's argument that a particular resolution does not fall within the rules and therefore can be excluded from the annual shareholder meeting. The no-action letters also include the full record of correspondence from the lawyers from the company and the shareholders.
Shareholder advocates view the proxy process as a key tool for pushing companies to pay attention to emerging issues. But companies and their trade groups such as the Business Roundtable have pushed for reforms to the process amid an uptick in environmental, social and governance-related shareholder proposals.
