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SEC Staff Continues to Allow Shareholder Proposals Amounting to Micromanagement of the Company

As I detailed at some length in my article, Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016), the SEC shareholder proposal was never intended to allow shareholders to manage--let alone micro-manage--the corporations in which they invest. Yet, in recent decades, the SEC staff has basically eviscerated those safeguards. Skadden Arps lawyers Marc Gerber and Ryan Adams' review of the 2023 proxy season concludes that that trend continues:

The SEC Staff continues to grant no-action requests in some cases where companies argue that a shareholder proposal relates to ordinary business matters, would result in micromanagement or suffers from a procedural defect, among other things.

Nonetheless:

Companies were slightly more successful in excluding proposals under the micromanagement prong of the ordinary business exclusion in the 2023 season than in the previous season.

 

 

 

Do we really want to encourage more retail investor participation in corporate governance?

Ann Lipton posted a couple of weeks ago about proposals to encourage retail investor participation in corporate governance (I'm a little behind).

A while back, Jill Fisch proposed that retail shareholders be given access to the type of electronic tools available to institutional shareholders so that they could create standing voting instructions, allowing them to cast ballots in corporate elections automatically according to predefined preferences.  That vision appears to close to realization; today, there are new programs that make it easier for retail shareholders to cast ballots, including in accordance with preset preferences.  As I understand the Iconik service, for a monthly fee, you can set your preferences and have the app automatically vote them – or you elect to follow the instructions provided by a third party provider like As You Sow or Third Act.  If you do that, it’s free.

And of course, we know that mutual fund companies are proposing to give more voice to retail shareholders through various kinds of pass-through voting experiments.  There are now voting platforms being developed that allow automatic voting in this context, as well.

I am deeply skeptical. In the first place, there are lots of sound theoretical reasons to limit participation by all shareholders--retail or institutional--in corporate governance. See my article The Case for Limited Shareholder Voting Rights: https://ssrn.com/abstract=887789.

Second, retail investors have strong incentives to be rationally apathetic--i.e., to refrain from exercising their voting rights:

1. Lack of Information: Retail investors may not always have access to comprehensive and timely information about the companies they invest in. This can make it challenging to make informed voting decisions. Additionally, the sheer number of companies in which retail investors may hold shares can make it difficult to keep up with all the voting matters.

2. Limited Influence: Individual retail investors often own a relatively small percentage of a company's shares, which can lead to a perception that their votes may not significantly impact the outcome. As a result, some may feel that their vote will not make a meaningful difference.

3. Time and Effort: Voting requires time and effort, especially for retail investors who hold shares in multiple companies. Researching the issues, reviewing the proxy statements, and casting votes can be time-consuming, and some investors may prioritize other aspects of their investment activities.

4. Trust in Management: Some retail investors may trust the management and board of directors of the companies they invest in to make decisions in their best interest. They may believe that voting is unnecessary or that management will act in accordance with shareholder interests without their active participation.

Historically, retail investors have been apathetic. In 2017, for example, the NY Times reported that " 91 percent of the shares owned by institutional investors — but only 29 percent of those held by individuals — were voted." 

There are several reasons why we might want to let there sleeping dogs lie. First, as Ann points out, we are currently observing in real time retail investors in action--i.e., the objections being filed in connection with the proposed settlement of the AMC Entertainment litigation. (For background on that litigation see my posts AMC APEs, Retail Investor Rational Apathy, Blank Check Preferred Stock, Class Voting, and Blasius and Chancery Daily, AMC, DGCL 242, and the Delaware Legislature.) As Ann delicately puts it:

a lot of the comments are, well, uninformed, to put it mildly.  There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting.  Many of the objecting shareholders buy into those theories.  

I've read a lot of these objections and the vast majority do not inspire confidence in the knowledge or judgment of the objectors.

Second, as Ann also pointed out, many retail investors are now day traders and meme stock traders who are very different from the traditional perception of retail investors who are long-term shareholders. Research examining "how the influx of retail shareholders has directly affected the governance outcomes at the meme stock companies" concluded that "meme stock companies have experienced a significant decrease in participation by their shareholders with respect to voting. Shareholder proposals under Rule 14a-8 have also been extremely limited, with most meme firms seeing no proposals brought after the rapid increase in retail ownership." 

The same research also concluded that meme stock companies' "ESG scores have gotten worse subsequent to the meme surge.

Predictions that retail investors will "revolutionize corporate governance and make public companies more responsive to social concerns" thus seem unfounded.

Third, many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.

Today, the WSJ reported that:

... the ticker MMTLP has become a rallying cry for people angry at the Financial Industry Regulatory Authority and, by extension, the entire financial system. Market veterans say the investors’ rage is misguided.

The episode is the latest example of how social media is a double-edged sword in today’s stock market. Online communities allow individual investors to connect and share trading tips, but they can also fan conspiracy theories and lead to disastrous investing decisions.

...

Some Finra employees and market veterans caught up in debate around MMTLP have received death threats. In one anonymous message to a market veteran seen by The Wall Street Journal, the sender alluded to mass shootings and vowed to come “piss on your casket.”

In sum, maybe it'd be best to leave things alone.

Activist Hedge Funds versus Social Justice Warrior CEOs

In the preceding post, I noted how even prominent social justice warrior CEO like Marc Benioff is embracing shareholder capitalism during the present economic turmoil. Why is he doing so? At least in part, according to the WSJ, because he's facing pressure from activist hedge funds:

At least five activist investors have taken positions in the company, including Elliott Management Corp. and Starboard Value LP. They are pressuring Mr. Benioff to change the way he runs things. In a presentation last year, Starboard said Salesforce wasn’t doing enough to increase profits.

This would not surprise readers of my book The Profit Motive, in which I discuss the role hedge funds like Elliott and Starboard have played in checking ESG impulses by CEOs. I used Etsy as a case study of the phenomenon:

The Etsy story in fact stands as a paradigmatic example of the increasing pressure public companies face from activist hedge funds to improve share price performance. ...

In one sense, activist hedge funds are akin to traditional value investors. They seek to identify target companies that they believe to be undervalued by the market. Unlike traditional value investors, activist funds are willing to be much more involved “hands on” investors. Although some activists seek value-enhancing changes through negotiation, the subcategory with which we are mainly concerned tend to be highly confrontational.  In either case, however, the standard hedge fund compensation 2-and-20 rule—i.e., an annual management fee of two percent of assets under management and a performance fee of 20% of returns above a specified benchmark—encourages managers of these funds to have a laser-like focus on the stock price of the companies in which they invest. ...

Although activist investors formerly concentrated on low hanging fruit, which typically consisted of poorly managed small firms, they are increasingly willing to take on even the largest companies.  Not surprisingly, the CFOs of about half of the companies surveyed by Deloitte reported their firm “made at least one major business decision specifically in response to shareholder activism,” with share repurchases being the most common.  In many cases, such decisions have had distinctly negative effects on stakeholders.

As Marc Benioff is now finding out.

As longtime readers know, I am deeply skeptical of shareholder activism. In a book chapter, Preserving Director Primacy by Managing Shareholder Interventions, in Research Handbook on Shareholder Power 231 (Edward Elgar Publishing; Jennifer G. Hill & Randall S. Thomas eds. 2015), I argued that:

... not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

I explained that:

As potential activists, hedge funds have several advantages. First, hedge funds are not subject to the sort of conflicts of interest that discourage activism by mutual funds and other financial institutions with relationships with corporate management. Second, hedge funds are not subject to the regulatory limitations applicable to mutual funds on the size of the stake they hold in portfolio companies. Hedge funds thus can take larger positions in portfolio companies than traditional mutual and pension funds, allowing them to capture a larger share of any gains. Third, because hedge fund compensation structures award them a percentage of any games earned by the fund, hedge fund managers have a higher incentive than those of mutual or pension funds to pursue activities that raise the value of their stake even if other investors are able to free ride on their efforts. (Effross 2013, 268) Finally, the free rider problem is further mitigated when multiple hedge funds band together in so-called wolf packs to target a specific company, sharing the costs and gains of activism.

...

Turning to the merits of the growing incidence of hedge fund activism, [Robin] Greenwood argues that “hedge funds may be up to the task of monitoring management—a number of recent academic papers have found that hedge funds generate returns of over 5 percent on announcement of their involvement, suggesting that investors believe these funds will increase the value of the firms they target.” (Greenwood 2007)

A recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang of 2000 activist hedge fund interventions between 1994 and 2007 found “no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions.” (Bebchuk et al. 2013) A contemporaneous literature review by Bebchuk concludes that shareholder interventions on the aggregate are  “beneficial for companies and their shareholders both in the short term and the long term.”

I go on to express doubts about cases in which hedge fund managers advocate specific business decisions, while expressing less skepticism about cases--like the interventions at Salesforce and Etsy--that operate at a high level of generality and seek to hold directors accountable for focusing on interests other than those of shareholders.

Yours truly interviewed re Nelson Peltz's run at Disney

From Yahoo news:

Trian, which Peltz cofounded in 2005, oversees about $8 billion in assets under management. “That has enabled them to take on some big game,” said Stephen Bainbridge, a professor at the UCLA School of Law who has extensively researched corporate governance.

“I would say that on the spectrum of hedge fund activists, that Peltz is definitely at the aggressive end,” Bainbridge continued, though he noted that in many cases, Trian has made “changes that were regarded as helpful.”

The trouble is getting executives to listen without a protracted battle, he said, since CEOs are known for “big egos” and “nobody wants what they would regard as a sort of professional rabble-rouser coming in and telling them to change their plans.”

...

To his critics, Peltz’s tactics prioritize short-term returns over long-term financial health. “They’re in it and then out of it,” Bainbridge said, summarizing the argument against many hedge fund investors. (Trian has said the firm invests in companies for an average length of six years when it receives a board seat, longer than some competitors.)

...

Despite his triumphs, in recent years Peltz’s name has more often been associated with his daughter, Nicola, who last spring married the son of soccer legend David Beckham and fashion designer Victoria Beckham. The event took place at Peltz’s Palm Beach estate.

“There’s a certain amount of irony here that a guy who’s a multi-billionaire, and in the corporate world is known and feared… is sort of in the back of a picture with a bunch of Beckhams in it,” said Bainbridge. “It’s kind of funny that way.”

Conservative activists are finally discovering SEC Rule 14a-8 and using it to make shareholder proposals: Will the SEC apply neutral principles?

I have long wondered why conservative activists don't make use of the shareholder proposal rule to the extent liberal activists do. In 2004, for example, I asked:

Every time I teach the shareholder proposal rule (Securities Exchange Act Rule 14a-8) in Business Associations, I always wonder the same thing: Why don't conservative activists use the rule more often?

An informed reader responded:

t seems that conservatives have attempted to push a limited agenda through the 14a-8 process. In almost all of these cases, these types of proposals were excluded under 14a-8(i)(7) [as an ordinary business matter]. Which brings me to your point. I think that most proposals pushing a conservative agenda would deal with ordinary business matters.

He had a point. But the SEC under Gary Gensler seems to have liberalized the ordinary business exception to allow a slew of social and environmental proposals from progressives to be included on company proxy statements. Which raised the question: Would he apply neutral principles and allow conservative proposals?

Accordingly, last fall, I took to Twitter to propose that "What I need are some really rich conservatives to finance a Rule 14a-8 shareholder proposal campaign."

It seems others have stepped up to the plate. Bloomberg reports:

More conservative proposals were filed this proxy season by activists looking to bend the ears of CEOs on social issues, aligning with a political crusade to skewer “woke capitalism.”

Conservative or anti-ESG proposals have doubled this proxy season, according to consulting firm Georgeson Inc., which counted 52 such resolutions filed this year—double the 26 filed 2021. ...

The resolutions, most of which target major companies including Walmart Inc.and Comcast Corp., received very few shareholder votes on corporate ballots, regularly securing less than 3% support. But the number of proposals won’t be letting up, said Scott Shephard, a fellow at the National Center for Public Policy Research, one of the main organizations driving conservative shareholder activism.

“I wouldn’t expect the numbers to sink,” said Shephard, explaining that one of his aims is to put CEOs on notice for allegedly violating their fiduciary duties when they project personal preferences.

Activists Using SEC Shareholder Proposal Rule to Drag Companies into Abortion Debate

Bloomberg reports that the recent SEC changes liberalizing shareholder access under Rule 14a-8 are now coming into play in the abortion debate:

Walmart Inc., Lowe’s Cos., and TJX Cos. represent what’s potentially the tip of a burgeoning trend in shareholder activism in this area: All three companies will face votes on proxy proposals in the coming weeks aimed at shaping internal policies related to abortion access. ...

Proposals at Walmart, Lowe’s, and TJX ask the companies to assess the risks they face when abortion access to their employees is restricted—and to report on ways they are mitigating the impacts of the disruption.

Regardless of one's views on abortion, this ought to disturb anyone who thinks that the purpose of business is to make profits. At the moment, the rule is being used by abortion rights activists and any proponent of abortion rights who owns a few thousand dollars worth of stock in a company can use the shareholder proposal rule as a soapbox to get subsidized publicity for their cause. But there is nothing to stop abortion rights opponents from coming at the issue from the other side--assuming, and this is a huge assumption as to which I have serious doubts, that Gary Gensler's SEC uses neutral principles to decide which proposals get included and which get excluded.

I am not making a pro-Roe or an anti-Roe argument (although may view are probably no secret). I am making an anti-shareholder proposal rule argument. The rule functions on a tax on investors to subsidize a soapbox for gadflies and activists.

I used to believe the proposal rule could be fixed. https://ir.lawnet.fordham.edu/flr/vol85/iss2/15/… I'd still like to see that proposal adopted as a minimum. But I've come to believe the only real solution is repeal.

Do we really want ISS setting corporate climate policy?

Cahill Gordon identifies ISS new voting policies, two of which caught my eye:

Say on Climate. ISS has adopted two frameworks for analyzing Say on Climate proposals, one for proposals submitted by shareholders and another for those submitted by management. These new policies list the main, non- exhaustive criteria that will be considered in ISS’s analysis. Vote recommendations by ISS on such proposals will be made on a case-by-case basis, taking into account the completeness and rigor of the plan and disclosures and other relevant criteria, including with respect to shareholder proposals whether the request is unduly burdensome or overly prescriptive.

Climate Accountability. ISS has adopted a new policy applicable to companies that are significant greenhouse gas (GHG) emitters, defined for 2022 as those on the current Climate Action 100+ Focus Group list. Under the new policy, ISS generally will recommend voting against or withholding votes from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in situations where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks to the company and the larger economy relating to climate change. For 2022, ISS considers such “minimum steps” to be: detailed disclosure of climate-related risks (such as those published by the Task Force on Climate-Related Financial Disclosures (TCFD) framework), and appropriate GHG emissions reduction targets.

ISS is the largest proxy advisor, with over 1700 institutional investor clients that buy its advice on how to vote shares they hold. A substantial number of those clients robo-vote in lockstep with ISS recommendations.

This gives ISS "a bully pulpit from which to harangue corporate management and boards of directors on all matters of governance and compensation ...." Yet, as the Institute for Governance reports, there are some serious concerns about ISS:

• Lack of transparency as to the process by which they arrive at formulating their recommendations; • Inaccuracies in their analysis and unresponsiveness to corporate demands for corrections;
• Conflicts of interest, in particular for ISS, by their offering of several services to the same corporations which are the subject of their proxy recommendations;
• More subtle criticisms focus on their definition of «good» governance and the lack of (or very weak) empirical evidence that their kind of governance has any influence on the performance of companies;
• Proxy advisors have a vested interest in raising the bar of «good» governance from year to year to justify their continued employment;
• The influence of proxy advisers on corporate governance makes some, many, boards of directors overly preoccupied with ensuring favorable recommendations from proxy advisers, by taking pre-emptive steps to ensure that their policies on governance and executive pay will not trigger a negative score when fed into the proxy advisers’ standardized algorithm;
• Their business model is problematic. Because their clients, institutional investors, collectively own shares in all publicly listed companies, they have to provide «advice» for all these corporations. In Canada, some 1570 companies are listed on the TSX and another 2,200 are listed on the TSX Venture. The financial year of roughly 84% of companies listed on the TSX ends on December 31st. For some 80% of TSX listed companies, there were less than 50 days between the date the Management Information Circular is received by shareholders and the ultimate date for proxy voting. (IGOPP research, 2012). These statistics create a fundamental issue for these service providers and raise basic questions about their business model. How can they cope with this mass of data and come up with fair and thoughtful recommendations for thousands of corporations in a matter of a few weeks in the spring of each year;
• Surprising and puzzling is the role these proxy advisors are now playing in all cases of mergers, acquisitions, proxy contests and all other litigious matters. Proxy advisers offer their opinion on almost all litigious, contentious issues. As these issues often come about as a result of the actions of some activist hedge funds, a proxy advisor’s favourable opinion, from ISS particularly, is a highly prized input to the argumentation of activist funds. The potential for conflicts of interest is decupled in these highly charged confrontations with huge sums of money at stakes.

The Trump-era SEC tried to put some minimal restrictions on ISS and its fellow oligopolist Glass Lewis. Under woke SEC Chairman Gary Gensler, however, the Biden-era SEC is giving ISS a free pass.

It was bad enough when ISS confined its advice to legitimate issues of corporate governance, but it is increasingly injecting itself into controverted social and economic issues.

The Democrats in Congress and the White House have embraced ISS as part of their progressive a[[roach to business, so it's hard to expect them to take action. If the Republicans win back the Congress, however, they should use their influence to pressure ISS into sticking to its knitting.

23 states file comment opposing DOL's proposed rule that "promotes a social activist agenda over the interests of employees, retirees, and other retirement fund beneficiaries"

H/T: Stefan Padfield:

You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one....

What I need are some really rich conservatives to finance a Rule 14a-8 shareholder proposal campaign

I have a splendid idea to advance the pro-life cause while calling attention to the SEC's recent liberalization of the shareholder proposal rule. It came up in a Twitter conversation with SEC Commissioner Hester Peirce:

I'm still hoping there's an anchor in common sense--a company's proxy should be about the company. We'll have to evaluate, though, at the end of the proxy season.

— Hester Peirce (@HesterPeirce) November 30, 2021

Plus, imagine the havoc if some concerned law professor could persuade wealthy conservatives to mimic James McRitchie and John Chevedden. If there is no nexus, we could bombard companies with anti-abortion proposals and dare the SEC to say they lack social significance. pic.twitter.com/CwXTpKPMaW

— Steve Bainbridge (@PrawfBainbridge) November 30, 2021

Will the SEC now allow shareholder proposals on abstract political, social, and economic questions?

The SEC's latest guidance on Rule 14a-8 (the shareholder proposal rule) abandoned an important limitation on the scope of permissible shareholder proposals:

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” ...

... staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

It has been speculated that this announcement "represents a wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large)." If so, it would represent an abandonment of longstanding rules, including "the “nexus” concept was embedded in the 1998 Release, as stated in Staff Legal Bulletin 14E (Oct. 27, 2009), at footnote 4 (citing the 1998 Release), and reaffirmed in Staff Legal Bulletin 14H (Oct. 22, 2015)."

I am reminded in this regard of a 1945 SEC opinion, which concluded that "the phrase “proper subject for action” to mean proposals which relate directly to the affairs of the particular corporation and concludes that proposals which deal with general political, social or economic matters are not, within the meaning of the rule, 'proper subjects for action by security holders.'" The Sec Today Released an Op. of Baldwin B. Bane, Release No. 735 (S.E.C. Release No. Jan. 3, 1945). Has the SEC now abandoned that position, such that "proposals which deal with general political, social or economic matters" unrelated tp the company's business will now be includable?

This makes no sense. As the 1945 release explained, the purpose of the shareholder proposal rule is "to place stockholders in a position to bring before their fellow stockholders matters of concern to them as stockholders in such corporation ...." The clear implication is that there must be some nexus between the proposal and the company's bison's activities:

... in 1945 the Commission issued a release containing an opinion of the Director of the Division of Corporation Finance that was rendered in response to a management request to omit shareholder resolutions which bore little or no relationship to the company's affairs; for example, these shareholder resolutions included proposals "that the anti-trust laws and the enforcement thereof be revised," and "that all Federal legislation hereafter enacted providing for workers and farmers to be represented should be made to apply equally to investors." The Commission's release endorsed the Director's conclusion that "proposals which deal with general political, social or economic matters are not, within the meaning of the rule, ‘proper subjects for action by security holders.'"

Med. Comm. for Human Rights v. Securities and Exch. Commn., 432 F.2d 659, 677 (D.C. Cir. 1970), vacated, 404 U.S. 403 (1972). Are shareholder proposals "that the anti-trust laws and the enforcement thereof be revised" now admissible? It seems possible:

“By repealing longstanding guidance about treatment of shareholders proposals, the SEC has stated its preference to turn board rooms and shareholder meetings into political debate societies on issues the SEC admits have no nexus to the actual business of the company,” Tom Quaadman, an executive vice president with the Chamber, said in a statement. “This will all come at the expense of companies' ability to focus on long-term performance, including the welfare of their employees, customers, and shareholders.”

Commissioners Criticize New SEC Staff Interpretation on Rules Governing Shareholder Proposals, WGL-ACCTALERT VOL 15 NO 213.

All of which strikes me as problematic. After all, shareholders have a “First Amendment interest in not being forced to be associated with political speech that they do not support." Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 113 (2010). If that's true about political speech by the corporate, as Bebchuk and Jackson claim, should it not be even more true with respect to political speech foisted upon the corporation by government fiat regardless of whether the speech has any meaningful relationship to the company's business?

Milbank ducks the hard question: Why does the SEC get to decide what issues have social significance?

In an otherwise very useful post on the new SEC shareholder proposal rule guidance, Milbank ducks the really hard question:

As a result of the SEC’s most recent Staff Legal Bulletin[1] (“SLB”), shareholder proposals that focus on a “significant social policy” will not be excludable simply because the policy issue is not, in fact, “significant” to the company receiving the proposal. The SEC has decided it will no longer “focus on the nexus between a policy issue and the company.”  Previously, shareholder proposals that did not raise a “policy issue of significance for the company” were excludable under the “ordinary course of business” exception to Rule 14a-8.[2] The new Staff Legal Bulletin is a departure from past SEC practice, and led the SEC to simultaneously rescind three previous Staff Legal Bulletins on the same subject.

Leaving aside the issue of why the SEC – which is presumably dedicated to the regulation of securities – should be determining in the abstract which social issue are “significant,” it is clear from the new bulletin that climate change and human capital management are issues that will be considered “significant.” Beyond that specific guidance, the SEC promises only that “in making this determination [regarding significance], the staff will consider whether the proposal raises issues with a broad societal impact.” This is a standard that doesn’t exactly hem in the SEC or limit the imagination of activists and gadflies.

Given the new woke majority at the SEC led by wide awake Gary Gensler, we can expect firms to be forced into including all sorts of progressive proposals having no meaningful nexus to their business. In a world in which the First and Seventh Amendments had teeth, this would be a regulatory taking by compelled speech.

Expect the SEC to Favor Woke Shareholder Proposals: The SEC's Appalling New 14a-8 Guidance

Wachtell Lipton reports:

The SEC Staff has issued revised guidance rescinding prior Staff Legal Bulletins addressing the exclusion of Rule 14a-8 shareholder proposals based on the social significance to a company, “micromanagement” or  “economic relevance.”  The changes will likely facilitate a larger number of shareholder proposals, including ESG proposals, coming to a shareholder vote. ...

The new guidance revises the SEC’s application of the “ordinary business” exclusion, which considered whether a proposal was of social policy significance or sought to micromanage a company.  While the Staff has previously focused on the significance of a social policy issue to a particular issuer, they will now focus on the proposal’s “broad societal impact.”  

This is appalling. In effect, the SEC is saying that corporate proxy statements can be conscripted by somebody owning a trivial amount of stock to solve "societal problems" that may have virtually no nexus to the company.

In addition, the SEC is encouraging shareholders to micromanage the company when it comes to woke issues:

For example, a proposal requesting a company set greenhouse gas emission targets, but providing the company with discretion on a method for its implementation, will no longer meet the threshold for exclusion based on micromanagement.  

How is deciding corporate environmental policy not micromanagement?

Wachtell concludes:

it is not clear which social issues the Staff will deem broad enough to “transcend the ordinary business,” beyond the Staff’s examples of proposals relating to human capital management with a broad social impact or to greenhouse gas emissions targets without specific methodologies.  

Piffle. It is perfectly obvious that the SEC has become a tool of the Warren/Sanders/AOC wing of the Democratic Party and is now leading the charge towards woke capitalism. I feel confident in predicting that woke shareholder proposals will breeze through the process. In the unlikely event that conservatives emulated progressives and started using the shareholder proposals to effect their policy goals, however, I'd bet the SEC allows their exclusion.

 

Dan Loeb wants Shell to split its brown and green assets

Dan Loeb has been my favorite hedge fund manager ever since his campaign against Warnaco, during which he famously compared Warnaco's CEO to Burt Reynolds’ character, the pornographic producer, in the film "Boogie Nights.”

Loeb is now making a run at Shell, arguing for breaking Shell up into "multiple standalone companies:

For example, a standalone legacy  energy  business  (upstream,  refining  and  chemicals)  could  slow  capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy).  A standalone LNG/Renewables/Marketing business could combine modest cash returns with aggressive investment in renewables and other carbon reduction technologies (and this business would benefit from a much lower cost of capital).  Pursuing a bold strategy like  this  would  likely  lead  to  an  acceleration  of  CO2  reduction  as  well  as  significantly increased returns for shareholders, a win for all stakeholders.

Ann Lipton has a post discussing the issues raised. She points out that:

Shell argues – and apparently some of its large investors agree – that you can’t split them up that easily.  Part of the claim has to do with how the different sides of the business are integrated, and part of it has to do with cash flows, namely, that the brown assets are funding the green ones.  As Matt Levine points out, though, investors themselves could do that if they wanted to – they could take the cash they make from the brown assets and plough it back into green investments ....

This strikes me as plausible. It's basically the same argument that was made to show why conglomerate mergers are value destroying; namely, that diversification at the investor level will almost always be superior to intra-company diversification. 

The even more interesting and provocative part of Ann's post, however, is her argument that Loeb is purporting "to appeal to ESG strategists and possibly take a leaf out of Engine No. 1’s playbook." As she explains, however, "that’s actually not the strategy at all.  Loeb is in no way trying to make energy 'greener.'"

All of this relates to the question of whether traditional shareholder activists like Loeb are going to advance or oppose the ESG movement. Count me as dubious.

New SEC Proxy Voting Disclosure Proposal

This tweet kicks off a string of 8 tweets on the new proposal:

1/ The @WSJ reported today that the SEC plans to require asset managers to provide more extensive disclosures about how they vote the shares of portfolio companies. https://t.co/4XIT2JQLAC #lawtwitter This annoys me.

— Steve Bainbridge (@PrawfBainbridge) October 1, 2021

Why do boards get to spend corporate money to fight off proxy contests?

A friend of mine who teaches constitutional law took an interest in more important matters when he read about the recent proxy fight at ExxonMobil. He asks:

Why is it legal for Exxon’s management or the majority of Exxon’s current board to spend shareholder dollars to tell shareholders not to vote for other candidates?

On level, the answer is "because the courts say so." As I explain in my book Corporate Law (Concepts and Insights):

In theory, incumbent directors do not have unbridled access to the corporate treasury. In practice, however, incumbents rarely pay their own expenses. Under state law, the board of directors may use corporate funds to pay for expenses incurred in opposing the insurgent, provided the amounts are reasonable and the contest involves policy questions rather than just a “purely personal power struggle.” [E.g., Rosenfeld v. Fairchild Engine & Airplane Corp., 128 N.E.2d 291 (N.Y.1955), reh’g denied, 130 N.E.2d 610 (N.Y.1955).] Only the most poorly advised of incumbents find it difficult to meet this standard. The board merely needs have its lawyers parse the insurgent’s proxy materials for policy questions on which they differ. Such a search is bound to be successful: if the insurgent agrees with all of management’s policies, why is it trying to oust them?

In contrast, insurgents initially must bear their own costs. Insurgents have no right to reimbursement out of corporate funds. Rather, an insurgent will be reimbursed only if an appropriate resolution is approved by a majority of both the board of directors and the shareholders. [E.g., Steinberg v. Adams, 90 F.Supp. 604 (S.D.N.Y.1950); Grodetsky v. McCrory Corp., 267 N.Y.S.2d 356 (Sup.Ct.1966).] If the incumbents prevail, of course, they are unlikely to look kindly on an insurgent’s request for reimbursement of expenses. In effect, the insurgent must win to have any hope of getting reimbursed.

On a deeper level, the question is why have the courts so held? The Rosenfeld court explained that:

If directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum, where there is no contest. In the event of a proxy contest, if the directors may not freely answer the challenges of outside groups and in good faith defend their actions with respect to corporate policy for the information of the stockholders, they and the corporation may be at the mercy of persons seeking to wrest control for their own purposes, so long as such persons have ample funds to conduct a proxy contest.

Id. at 293.

The Delaware Chancery Court similarly explains that:

The report of the case of Pell v. London & North Western Ry. Co., [1907] 1 Ch. Div. 5, contains discussions by the three Lord Justices who sat in the case, which very persuasively demonstrate that such expenditures are entirely proper. The underlying reason is given by them as this-that inasmuch as the stockholders are called upon to express their judgment upon the soundness of a questioned policy, it is in the interest of an intelligent decision by them that they should be advised by the responsible managers of the corporation who formulated the policy what were the considerations which induced their approval; and that it would be highly unreasonable to require that the directors should personally defray the expense incident to the performance of a duty which rested upon them to lay before the stockholders the information which is requisite for an informed decision in turn on their part. Where the question in one of a policy to be adopted, the judges in the English case just cited took the view, and very reasonably so, that the corporation was under a duty to advise the stockholders, whose approbation or disapproval was to be determinative, of the reasons for the policy's adoption, and that in such a case the directors are to be regarded as having that corporate duty laid upon them. Any expense incident and reasonably necessary to perform that duty, is an expense incurred in the interest of the corporation and therefore properly chargeable to it.

Hall v. Trans-Lux Daylight Picture Screen Corp., 171 A. 226, 227 (Del. Ch. 1934).

Professor Melvin Eisenberg offered a slightly different explanation:

In considering this problem two economic facts must be viewed in conjunction: (1) Proxy fights involve a lot of money ... and most of the expenses are probably incurred in connection with just those techniques that have the least informational content; (2) While corporate directorships are unquestionably valuable, in themselves they do not normally pay very much money. ... Putting these two facts together, most outside directors and many inside directors ordinarily could not be expected to defend a proxy fight out of their own pockets. Thus a rule which precluded management from using corporate resources for such campaigns might tend to drive corporate offices into the hands of those who are ready and able to pay for such campaigns. Management access to the corporate proxy machinery may therefore be justified, not because the election of directors is a board function — it is not; and not because typically the issues are policy issues and the expenses are incurred for the purpose of informing the shareholders on these issues — they are not; but because in the long run the shareholders and the entire economy might suffer if management had to choose between paying for proxy campaigns out of its own pocket or throwing in the towel.

Melvin Aron Eisenberg, Access to the Corporate Proxy Machinery, 83 Harv. L. Rev. 1489, 1499–500 (1970).

So take your pick:

1. Allowing the board to spend corporate funds allows them to defend the corporation from potential bad actors.
2. It ensures that shareholders are fully informed.
3. It allows persons of modest means to serve as directors.