Issue link: https://digital.shearman.com/i/1019978
Shearman & Sterling LLP 66 | Shareholder Proposals 2018 – Was 14I Really a Game Changer? DEFERENCE TO THE BOARD? NOT SO FAST! When SLB 14I was issued, there was a certain amount of speculation that it could represent a sea change in the way the SEC staff approached social policy-based shareholder proposals. There was a great deal of optimism among companies that a robust process and thoughtful analysis by a board which was clearly described, would be given substantial deference by the SEC staff. Based on the letters we reviewed, however, there was no evidence that the SEC staff has adopted a policy of automatic or even substantial deference to a board's determination. There were five no-action requests related to shareholder proposals on lobbying that provide a good test case on deference. The SEC staff has traditionally not granted no-action requests in connection with proposals seeking reports or additional disclosures pertaining to lobbying activities. This year, five companies 3 submitted (i)(7) no-action letters relating to lobbying proposals. In each case, the no-action letters provided detailed and comprehensive discussions of the processes their boards followed to make a determination about whether the issue of lobbying transcends ordinary business. None of these no-action letters were successful. In four of the no-action letters 4 , the SEC staff cited previous votes relating to the subject matter of the proposal that received in excess of 20% support as a basis for refusing to concur in the exclusion, noting that the board's determinations did not adequately address the shareholder votes. In one of the letters 5 , where previous shareholder votes on the topic had never exceeded 10%, the SEC staff indicated that the discussion of the board's analysis, while setting forth several factors the board considered, did not provide a sufficient level of detail to reach a determination that exclusion was appropriate. 3 Citigroup Inc., SEC No-Action Letter (Mar. 6, 2018); Eli Lilly and Company, SEC No-Action Letter (Mar. 2, 2018); Goldman Sachs Group, SEC No-Action Letter (Mar. 12, 2018); NextEra Energy, Inc., SEC No-Action Letter (Mar. 30, 2018); Alliant Energy Corporation, SEC No- Action Letter (Mar. 30, 2018). 4 See Citi, Eli Lilly and Company, NextEra and Alliant, supra note 3. 5 See Goldman Sachs Group, supra note 3. The SEC staff's approach to the lobbying letters raises a number of questions related to how a company should approach prior shareholder votes on the same subject matter of a shareholder proposal, including the following: • When will the SEC staff defer to the views of shareholders over the conclusions of the board? • Is a shareholder vote on the subject matter rebuttable? If so, what does a company need to show to rebut it? Does engagement with shareholders on the subject matter suffice? • Is there a percentage threshold for a prior shareholder vote above which the SEC staff is unlikely to concur with a company as to whether an issue is ordinary business? • Does all of this really mean that there are certain social policy matters (such as lobbying and political contributions), that the SEC staff believes transcend ordinary business at every company? WHEN SLB 14I WAS ISSUED, THERE WAS SPECULATION THAT IT COULD REPRESENT A SEA CHANGE IN THE WAY THE SEC STAFF APPROACHED SOCIAL POLICY PROPOSALS, BUT THERE WAS NO EVIDENCE OF REAL DEFERENCE GIVEN TO THE BOARD.