Coronavirus (COVID-19) Considerations for Shareholder Proposals
Coronavirus (COVID-19) Considerations for Shareholder Proposals
Companies have been considering changes to annual meetings because of the concerns about the coronavirus and the disease that it causes known as COVID-19. The typical procedures regarding the presentation of shareholder proposals at annual meetings may, in many cases, need to be reconsidered due to restrictions on public gatherings and travel, as well as the encouragement of social distancing. Any reconsideration of these procedures should be informed by the March 13, 2020 guidance issued by the U.S. Securities and Exchange Commission’s Division of Corporation Finance Staff (the “Staff”) regarding upcoming annual meetings of shareholders. In this client alert, we discuss various considerations relating to the presentation of shareholder proposals in light of the Staff’s recent guidance.
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the “Exchange Act”), if an eligible shareholder submits a proposal for consideration at a public company’s annual meeting and the proposal is consistent with the requirements of the rule, the company must include that proposal in its proxy materials—usually its proxy statement and proxy card (or voting instruction form (“VIF”))—for that annual meeting. At the time the company files and mails its definitive proxy materials, the proxy statement will include the shareholder’s proposal, any supporting statement, and any company statement in opposition to the proposal. The company’s proxy card and VIF will include a short description of the shareholder proposal. The shareholder is required by Rule 14a-8 to attend the annual meeting, either personally or through a representative, and present the proposal.
On March 13, 2020, the Staff issued “Staff Guidance for Conducting Annual Meetings in Light of COVID-19 Concerns” (the “Guidance”). In addition to providing specific guidance regarding certain aspects of conducting annual meetings, the Staff stated its overarching view regarding the 2020 annual meeting season:
We strongly encourage all parties and intermediaries involved in the proxy voting process – including broker-dealers, transfer agents, and proxy service providers – to be flexible and work collaboratively with one another. We expect all market participants to cooperate with one another to facilitate issuers’ obligations to hold annual meetings and disseminate timely, accurate, and clear proxy disclosures under the federal securities laws as well as to allow shareholders to exercise their voting rights under state law.
While this Staff view is not a regulation or an interpretation as to a specific situation, it provides a reminder of its expectations for “all market participants” in the proxy process during this unique time. Put simply, while the Staff has not established any new rules or requirements, it has described a standard of behavior beyond its existing rules and requirements by which the behaviors of all parties—state and federal regulators, public companies, shareholders, intermediaries, service providers, and national securities exchanges—should be viewed under the current circumstances.
Rule 14a-8 includes eligibility and procedural requirements that a shareholder proponent must satisfy and a list of 13 substantive categories that a proposal may not address. If a shareholder proponent fails to satisfy the eligibility or procedural requirements or if a proposal falls within one of the 13 prohibited categories, a company may exclude a shareholder’s proposal from its proxy materials if it submits a no-action request to the Staff. As of the date of this alert, there are pending no-action requests that have been submitted to the Staff by public companies seeking to exclude Rule 14a-8 shareholder proposals from their proxy materials with respect to upcoming annual meetings. Public companies that have such pending requests are awaiting the Staff’s views regarding their intention to exclude the shareholder proposal from their proxy materials.
Unlike during the government-wide shutdown during the 2018-2019 proxy season, the SEC is currently fully operational while the agency works remotely in response to COVID-19 concerns. Accordingly, public companies should receive a response to any no-action requests that have been submitted, with adequate time prior to finalizing their proxy materials. The Staff may provide its response only by way of an update to its “Shareholder Proposal No-Action Responses Chart,” available here on the Division’s website. This chart was a notable change in the manner in which the Staff responds to no-action requests seeking to exclude Rule 14a-8 shareholder proposals, beginning on November 21, 2019.
With regard to other issues that may arise during this proxy season, the Staff indicated in its Guidance that “[a]ny issuer or other person in need of additional assistance related to deadlines, delivery obligations, or their public filings should contact the Division of Corporation Finance at (202) 551-3500.”
The COVID-19 pandemic has caused some companies to reconsider the location, date, time, or format of their annual meetings. In light of recent developments, the Staff stated that it will take the position that a public company that has already mailed and filed its definitive proxy materials can notify shareholders of a change in the location, date, time, or format of its annual meeting without mailing additional soliciting materials or amending its proxy materials if the company: (1) issues a press release announcing such change, (2) files the announcement as definitive additional soliciting material on EDGAR, and (3) takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change. According to the Guidance, the Staff expects issuers to take these actions “promptly” after making a decision to change the location, date, time, or format of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner. If a public company has not yet mailed and filed its definitive proxy materials, the Staff indicated that it should consider whether to include disclosures regarding the possibility that the location, date, time, or format of the annual meeting may change due to COVID-19.
Rules 14a-8(h)(1) and 14a-8(h)(2) set forth the requirement that a shareholder proponent, or a representative, present a proposal at an annual meeting:
(h) Question 8: Must I appear personally at the shareholders’ meeting to present the proposal?
(1) Either you, or your representative who is qualified under state law to present the proposal on your behalf, must attend the meeting to present the proposal. Whether you attend the meeting yourself or send a qualified representative to the meeting in your place, you should make sure that you, or your representative, follow the proper state law procedures for attending the meeting and/or presenting your proposal.
(2) If the company holds its shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.
In its Guidance, the Staff stated that, “[t]o the extent an issuer plans to conduct a ‘virtual’ or ‘hybrid’ meeting,” it “expects the issuer to notify its shareholders, intermediaries in the proxy process, and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the ‘virtual’ or ‘hybrid’ meeting, including how shareholders can remotely access, participate in, and vote at such meeting.” Public companies should heed this guidance in establishing, understanding, and satisfying the processes necessary for shareholders to present proposals at this year’s annual meeting, whether that meeting has an in-person, virtual, or hybrid format; companies should consider the best means of providing information and establishing a mutual understanding with the shareholder proponent of the process for presenting the proposal at the annual meeting.
Shareholder proposals submitted under Rule 14a-8 often raise concerns regarding presentation at the annual meeting due to their inclusion in the company’s proxy statement and the absence of discretionary authority provided to proxy holders. Accordingly, proxy statements that include Rule 14a-8 proposals typically contain a discussion regarding whether the proposal will be voted on at the annual meeting, such as “if properly raised under state law” or “if the proponent is present to raise the proposal.”
As discussed above, Rule 14a-8(h)(1) presents no uncertainties with regard to a shareholder proponent’s obligations: the shareholder or his or her qualified representative “must” attend the meeting and “follow the proper state law procedures” for attending the meeting and presenting the proposal. Similarly, Rule 14a-8(h)(2) presents no uncertainties as to the application of the rule to electronic meetings, stating that, “if the company holds its shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.”
With the unprecedented circumstances of the 2020 annual meeting season, it is likely that companies will face unique challenges concerning a proponent’s ability to attend an annual meeting or satisfy any technological issues that may be presented by a virtual or hybrid format. Companies do not have an obligation to raise proposals on behalf of shareholders and a shareholder does not have a basis to simply state that she or he cannot attend because of COVID-19 and yet still expect a specific matter to be raised for a vote; however, companies and shareholders should make every effort this proxy season to collaboratively determine an appropriate process for raising a Rule 14a-8 proposal at the annual meeting. We recommend contacting proponents well before the meeting to discuss the manner in which proponents will be allowed to present proposals at the meeting and whether the proponent would like to present his or her proposal or would rather have the proposal presented by a company representative.
There is little doubt that lessons learned from 2020 annual meetings will be reflected in proxy statements for the 2021 annual meeting season. Among those lessons may well be the benefit of additional disclosures regarding the possibility of virtual or hybrid meetings, the operation of virtual or hybrid meetings, and the logistics of shareholder proposals at virtual or hybrid meetings. While it is too early to tell what form those disclosures will take, the Staff has made one thing clear: companies are not to raise a shareholder’s inability to properly raise a matter due to COVID-19 as a basis for excluding a shareholder proposal in the next two calendar years.
Where Rule 14a-8(h)(1) provides the requirement that shareholder proponents, or their representatives, must appear and present their proposals at the annual meeting, Rule 14a-8(h)(3) provides the enforcement mechanism for that requirement by providing:
If you or your qualified representative fail to appear and present the proposal, without good cause, the company will be permitted to exclude all of your proposals from its proxy materials for any meetings held in the following two calendar years.
The Staff made clear in its Guidance, however, that, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the Staff would consider this to be “good cause” if issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the proponent for any meetings held in the following two calendar years.
Public companies are reconsidering their annual meeting procedures in light of the challenges posed by COVID-19. These procedures include the process for presenting shareholder proposals at the annual meeting, which involve a consideration of state corporate law, company bylaws, and federal proxy regulation. The recent Staff Guidance provides some specific discussion of the shareholder proposal process. The Guidance also provides an overarching principal of collaboration and flexibility in addressing the current environment that pubic companies and their shareholders should consider in responding to the challenges being faced.