SEC Sets New Limits on Exempt Solicitations

Activist investors have seen better days.

In the latest policy shift affecting shareholder activists, new guidance indicates the Securities and Exchange Commission now opposes publishing so-called exempt solicitations from stockholders who don’t have large ownership positions in the companies involved. These documents contain communications between investors, and activists often use them to argue in favor of their preferred positions on matters such as climate change and diversity, equity and inclusion.

Until recently, the SEC published all exempt solicitations on its EDGAR online platform – allowing them to function as a low-cost, high-impact communication tool for activists. The agency now intends to publish solicitations only from shareholders who own at least $5 million of a company’s stock. That effectively eliminates communications from activist investors, who typically hold smaller equity positions in companies. (Notably, SEC staff members previously advised that solicitations should only be submitted to EDGAR if they have already been transmitted to shareholders in other forms.)

The SEC stated in its revised guidance that its staff members had grown concerned that the exempt solicitation filing process was being used “for reasons other than its intended purpose.” The agency said it “appears to be primarily a means to generate publicity,” and build consensus support among similarly situated shareholders. Proponents of exempt solicitations, on the other hand, argue the system gives shareholders with relatively small stakes an opportunity to make their voices heard on key questions of governance and corporate strategy. In effect, exempt solicitations offer them a way to deliver their messages to the institutional investors and proxy advisors with the most sway over votes on shareholder proposals.

“Communications on material issues central to informed investor decision making is the underpinning of our free market system,” said Andy Behar, the chief executive of the prominent shareholder activist organization As You Sow. “Restricting exempt solicitations to the few largest investors harms the core tenets of capitalism — information and trust between corporations and their beneficial owners.”

Critics claim that the current SEC has shown indifference towards shareholder engagement in general, which would fit with the new constraints on exempt solicitations. Meanwhile, it’s difficult to ignore that the SEC’s policy reversal on exempt solicitations comes amid a backlash from some policymakers against efforts to embed environmental, social and governance concerns in the regulatory architecture of the financial system. And note that the SEC has already taken a much-publicized step away from weighing in on companies removing shareholder proposals from their proxy statements.

Ultimately, this latest kerfuffle over exempt solicitations raises philosophical issues about shareholders and their role in corporate governance. Specifically, do stockholders get a say in ESG matters and other matters the agency deems non-essential to governance, simply as a right of ownership, and do companies benefit from exposure to views on these issues originating from outside their C-suites?

—

Want faster, smarter insights? Intelligize puts the data you need at your fingertips. Request a free trial and see how it can transform your workflow.