As pressure builds on publicly traded companies to focus on environmental, social and governance issues, they seem to have found a reliable strategy for keeping related shareholder proposals out of their proxy materials. That’s one of the major takeaways from Intelligize’s new whitepaper analyzing requests from companies for no-action letters from the Securities and Exchange Commission. The full whitepaper, No-Action Letter Citation: Analyzing Excluded Shareholder Proxy Proposals, can be accessed here.
As we advance toward U.S. public company annual meetings in May, the recent government shutdown’s disruption of a well-established shareholder proposal exclusion process continues to reverberate. Public companies wishing to block perceived ‘problematic’ or ‘burdensome’ shareholder proposals were constrained by the timing of the shutdown, meaning that some proposals that typically would have been submitted through the no-action letter process have gone straight to proxy materials.
We used Intelligize’s No-Action Letters database to study requests from companies for the exclusion of shareholder proposals over the last three years. This database offers interactive insights derived from a broad range of no-action letters, enabling lawyers and financial analysts to glean quick insights into no-action letter grants and denials by company, issue and law firm. The resulting whitepaper identifies the most effective methods of securing shareholder proposal exclusions through the no-action letter process, the arguments and citations proven most persuasive, and the rules on which the SEC Staff generally rely when concurring.
No-action letters from the SEC don’t have the force of law, but they do indicate that companies won’t be subject to enforcement actions if they exclude shareholder proposals under the conditions given in the requests. Securities Exchange Act Rule 14a-8(i)(7) allows issuers to reject proposals that relate to “ordinary business operations.” Rule 14a-8(i)(10) covers exclusions for proposals that are already “substantially implemented” by a company. Notably, from 2016 to Q1 2019, we found that more than half of all exclusions allowed by the SEC were based on these two rules.
Our examination also revealed that requests to nix proposals dealing with social issues have spiked recently. We identified 14 requests related to human, animal or consumer rights-related shareholder proposals in all of 2016, but they ballooned to 25 in just the first quarter of 2019 alone. Our analysis also revealed that, since 2016, on the more than 40% of environmental-related proposals for which the SEC concurred with a request to exclude, the resulting no-action letter was based on Rule 14a-8(i)(7).
We are in an era where shareholders are aggressively lobbying management of public companies to look beyond profitability and consider a variety of socio-politically charged ESG issues. What once may have been considered ‘micromanagement’ is now a core component of building a company’s brand and value. Corporate citizenship is no longer a fringe topic but is increasingly becoming a central concern for a broad spectrum of investors.