Misguided SEC “Guidance” On No-Action Letters

And on Allowing Non-Shareholders to Submit Shareholder Proposals as “Proxies”: Time for Some Tough Talk, We Say

Your editors seem to be the only people on earth who feel that the recent SEC staff “Guidance” on No-Action letters - and on the ability of non-shareholders to submit “shareholder proposals” by proxy, is totally misguided.

For as long as anyone can remember, public companies have been free, under SEC rules, to exclude any shareholder proposals that bear on “the ordinary business of the company” - or that are “immaterial” to the overall business of the company in the big scheme of things.

But now - out of the blue, and at a time when corporate directors, and many governance experts too, are bemoaning the ever-increasing workload of being a director - which has only been exacerbated by fears that a failure to micro-manage sufficiently will bring criticism, and maybe even new liabilities - here’s the SEC staff calling on Boards to form committees, or subcommittees, to study, and pass upon proposals that most sensible people would consider to be “ordinary business matters” - or - “immaterial” - on their face!

And lots of lawyers, and outside advisors are publishing guidance of their own, on how best to cope with this sudden raising of the bar when it comes to getting a no-action letter. But the real problem, in our book, is with the misguided SEC guidance.

Sure, there are some cases where there may be “a difficult judgment call” as SEC staff noted. But most corporate people, and their legal advisors too, are well aware of several landmark cases, where shareholder proposals were deemed to transcend the ordinary-business and economic materiality aspects. And they are smart enough, and politically savvy enough, in our book, to run “difficult proposals” by the board if they want to exclude them from the ballot. But to run each and every shareholder proposal by the Board - or a Board committee in order to get a No Action letter is just plain stupid - and a wasteful use of Board members’ time and attention.

We like the way that Apple jumped right on the issue - and placed it in proper perspective - neatly finessing it, and providing a very good “template” for all responses…But what a waste of valuable time and talent, it seems to us, to cater to this crazy new guidance:

“The Board recognized that it had already considered the issues raised by the Proposal when setting the strategic direction of the Company and performing its duties as a Board. Additionally, the Board determined that senior executives’ focus on reviewing, improving, and implementing policies designed to promote human rights make these matters an integral part of the ordinary business operations of the Company, and the issues presented in the Proposal as a whole fit squarely within the Company’s ordinary business mission to safeguard and uphold human rights wherever it does business. The Board also considered the Company’s existing policies, practices, and disclosures and concluded that the Proposal, even if submitted to shareholders and approved, would not call for the Company to consider facts, issues or policies that the Company does not regularly consider in the course of its day-to-day operations, and therefore does not transcend the Company’s ordinary business The Board considered the fact that it, along with management, is regularly and actively involved in the consideration, oversight and re-assessment of the Company’s human rights policies.

It also seems to us that with discussion and analysis like this, there is no need to ask for a No Action letter at all! Just drop the proposal, say why, and let the proponents and/or the SEC take whatever “action” is available to them.

The staff’s simultaneously issued “guidance” on allowing non-shareholders to file “shareholder proposals” via a “proxy” is, to put it bluntly, a travesty: “While Rule 14a-8 does not address shareholders’ ability to submit proposals through a representative,” the SEC ‘guidance’ notes, “shareholders frequently elect to do so, a practice commonly referred to as ‘proposal by proxy.’ The Division has been, and continues to be, of the view that a shareholder’s submission by proxy is consistent with Rule 14a-8.[10]”

Whatever gives them this crazy idea? The SEC has numerous rules on the books to describe how many shares a would-be-proponent needs to have, the number of proposals they can file at a given company and the voting levels they need to get in order to re-submit the proposal in succeeding years. All of these rules were specifically designed to deter serial-proponents, attention-seeking gadflies - and outright nuts - from overrunning companies with proposals - which is currently happening at many companies without the use of “proxies.”

Quite aside from the obvious fact that proposals made by a “proxy’ are NOT “shareholder proposals” - and that they are clearly designed to short-circuit existing SEC rules - there is hardly a corporate citizen alive - nor an acting or retired SEC commissioner either - who does not agree that the bar for submitting and re-submitting shareholder proposals needs to be raised, rather than lowered - which is what proposal by proxies undeniably do. It is way past time for the SEC to tackle this entire issue in a serious way. Meanwhile, allowing “proposals by proxy” should be stopped at once!