Shareholder Proposals Up, Company No Action Request Letters Down

Companies are becoming more selective about which shareholder proposals to challenge, according to a new Gibson Dunn paper analyzing shareholder proposals and no-action request submissions to provide insights into the type of requests that are deemed excludable by the SEC staff.

While noting that shareholder proposals in the 2023 proxy season reached the highest level since 2016, the report finds that company requests to exclude them from the ballot were down from 244 to 175 – a 9% decline from the previous year and 14% drop from 2021. At the same time, the exclusion success rate increased from 38% to 58%, reflecting a more careful selection of which proposals to challenge (resulting in being more successful with the challenge).

This year’s reluctance can also be attributed to the SEC “changing their tune” in how they interpret the rules. Their exception denial rate more than doubled in 2022 – going from 29% to 62%. As firms navigated the shifting attitudes and the proposed amendments that will continue to narrow exception criteria, they likely felt that shareholder engagement and negotiation tactics up front could present better outcomes than taking the chance with unfavorable SEC decisions.

The report explored the grounds by which companies argue for exclusion and success rates for each type.

• Procedural. The SEC is generally willing to dismiss proposals due to process failures when the proponents fail to provide sufficient proof of email delivery or meet deficiency notice periods. There was an 80% success rate based on procedural grounds in 2023.
  
  
• Ordinary Business. The SEC permits companies to exclude proposals that deal with matters typical of ordinary business operations or when the proposal would result in micromanagement. Even though SEC staff recently modified their interpretation of “ordinary business” to include more topics, such as societal issues that “transcend” ordinary business operations in terms of economic relevance, they granted relief in half of the requests making this argument.
  
  
• Substantial Implementation. A dicey argument that led to SEC support only 26% of the time, substantial implementation is where companies assert they have already taken action through policies, procedures and reporting that essentially address the proposal, even if the company has not implemented all of the elements of the proposal.  The SEC has proposed amendments to Rule 14a-8 that would further restrict a company’s ability to exclude shareholder proposals on the basis of substantial implementation, duplication and resubmission unless all essential elements have been implemented. This rule was proposed in July 2022 and targeted for final approval this fall.

The analysis goes into depth on the nature of the shareholder proposals submitted, indicating that five topics represent 43% of all proposals: climate change, independent chair, non-discrimination and diversity, shareholder approval for certain severance agreements and special meetings.   Severance agreements replaced lobbying spending and political contribution proposals for the first time as investors and proxy advisor firms put a spotlight on excessive termination payments and severance for voluntary terminations in recent years. An FW Cook piece highlights best practices in this area and the Compensation Standards blog points to eight companies last year who were able to avoid majority support by highlighting their policies.