Issue link: https://digital.shearman.com/i/1019978
Shearman & Sterling LLP Shareholder Proposals 2018 – Was 14I Really a Game Changer? | 69 A WHOLE LOT OF WORK FOR NOTHING? Based on the no-action letters we reviewed, it is not at all clear that the SEC staff's new policy requiring the board to make a determination on social policy issues has resulted in measurable benefits for companies in terms of excluding proposals implicating social policies. Nearly half of the no-action requests submitted were still rejected under the SLB 14I approach, and of the ones that were granted, most, if not all, were either straightforward ordinary business issues, like choice of products and tax policy, or easy micro-management arguments not implicating any social policy analysis, and would likely have been granted prior to SLB 14I without any board involvement. In light of that conclusion, it has to be asked whether SLB 14I is more of a benefit or burden to companies in the context of (i)(5) and (i)(7) proposals, given the need to prepare and involve the board or at least a committee in the no-action letter process. Without a convincing record of success, the benefits are unclear. One wonders whether, over time, SLB 14I will end up discouraging companies from opposing proposals on the basis of (i)(5) or (i)(7), because a successful no-action letter will need board engagement, or it will, at least, prompt companies to be more discriminating about when they take up the board's time and focus. Issuers are not the only parties frustrated by failure of SLB 14I to inject greater clarity into the process for exclusion of proposals, and activist investors have also lamented the inertia in this area. In a recent submission with analysis and recommendations to the SEC, the "Shareholder Rights Group," which consists of 15 activist proponents, requested that the SEC increase the predictability of outcomes for no-action letters, noting that "the invitation for board findings under SLB 14I increased expenses and uncertainties for investors and companies without changing decision outcomes." ONE WONDERS WHETHER, OVER TIME, SLB 14I WILL END UP DISCOURAGING COMPANIES FROM OPPOSING PROPOSALS ON THE BASIS OF (I)(5) OR (I)(7). CONCLUSION A single proxy season is hardly sufficient to draw definitive conclusions about the benefits and burdens of the new guidance in SLB 14I, but it seems clear that there will not be the level of deference to board determinations that was expected upon first reading the guidance. Companies considering their options with respect to proposals implicating social policy issues should remember the following: Always look for ways to argue the proposal micro-manages the company, which avoids the entire question of whether the issue transcends ordinary business and avoids interaction with past shareholder votes Build in time to inform the board and help board members arrive at a determination that can be described in detail in the no-action request – for most companies, shareholder proposals arrive at the end of the calendar year and require board engagement during the first part of the new year, which is a notoriously busy time for all boards Take care when advising the board as it considers sensitive social policy issues as the board's deliberations and assessment may form part of a public no-action request Provide sufficient detail and quantitative and qualitative support for the analysis and conclusions made by the board Do not overlook past shareholder votes. Be prepared to address them in the description of the board's process and determination – clearly reflect that the board considered those past votes in its deliberations. Most importantly, have an explanation for any prior vote above 15% Be aware of the policy issues on which the SEC staff has historically not granted no-action relief – look to the reasons cited by the SEC staff and reflect those reasons in the board deliberations