The NYC Comptroller’s New Normal?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal. The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section 14(a) and Rule 14a-8. Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future? Will going straight to court be the new normal?

The proposal from the pension funds, submitted in September 2018, requested that the company adopt a “policy with time-bound, quantitative, company-wide goals for managing greenhouse gas (GHG) emissions, taking into account the objectives of the Paris Climate Agreement” and report back on its plans to achieve these targets. The supporting statement contended that “[w]ell over 60% of Fortune 100 companies have already set GHG emissions targets.” By “leav[ing] the nature, timing and level of the goals entirely up to TransDigm’s discretion,” and merely “set[ting] a guiding direction that can be assessed by shareholders,” the proposal sought to preempt a potential exclusion effort on the basis of micromanagement under the Rule 14a-8(i)(7) “ordinary business” exclusion.

In its request for no-action relief, submitted to the SEC on November 9, the company contended that the proposal was properly excludable on the basis of Rule 14a-8(i)(7) because, in the company’s view, the proposal did seek to micromanage the company. The company cited the staff’s new SLB 14J, which stated that, in determining excludability based on micromanagement, the staff “looks only to the degree to which a proposal seeks to micromanage,” not the underlying subject matter of the proposal.

Notwithstanding the proponent’s effort to avert micromanagement, the company contended that, by requesting a policy with “time-bound, quantitative, company-wide goals” managing GHG emissions, the proposal “seeks to subjugate management’s judgment with respect to day-to-day operational matters to the need to comply with rigid goals that cannot possibly account for the full range of circumstances that the Company’s numerous operating units and locations may face in the future.” Separately, the company argued that the board had determined, in the context of the company and the implications of the proposal on its business, that the policy considerations raised by the proposal did not transcend the company’s ordinary business matters.

Instead of conforming to the usual practice of submitting its own response to the SEC, the NYC Comptroller’s office wrote to the SEC on December 7 that it would not respond to the company’s November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief “that would ensure the… shareholder proposal is included in the proxy solicitation materials.” As a result, in light of the pending litigation, the Comptroller requested that the SEC leave the matter to the courts, requesting that, the “staff follow its prior practice and decline to issue any response to TransDigm’s no-action request.”

The complaint filed by the pension funds maintained that, although materials submitted with the proposal fully established the funds’ eligibility and compliance with SEC Rule 14a-8, the company nevertheless wrote to the SEC of its intent to omit the proposal, requesting no-action relief. However, the complaint asserted, the 14a-8(i)(7) “ordinary business” exclusion “does not apply to the Funds’ proposal.” The complaint then states that companies are not required to seek no-action, but that that process “merely serves as an informal means for the company and the proponent to learn the Division’s non-binding view on the company’s planned omission of the proposal.” The SEC had not responded as of the date of the complaint, and the funds believed that the company planned to mail its proxy materials in late January or early February. If the proposal were excluded, the funds argued, they would be injured irreparably. The complaint also noted the funds’ intent “to submit the proposal again next year, for inclusion in next year’s proxy materials. The Funds plan to repeat this process until the proposal is adopted.” The NYC Comptroller went even further its subsequent press release, characterizing the company’s action in requesting relief as an “illegitimate” attempt to “block a shareholder proposal,” and the Corporation Counsel contended that the company “unlawfully blocked the Funds from weighing in on one of the most important environmental issues facing society today…. A ‘no-action’ letter from the SEC would have effectively silenced the legitimate right of shareholders to have a voice in long-term issues facing the companies they invest in.”

The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. The parties filed a stipulation of settlement on January 18 concluding the action. In its press release announcing the settlement, the Comptroller said that the “need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal roll-backs are making polluting easier and could cause generations of damage. That’s why as investors, we’re using our voice to pressure companies to step up and address their role in climate change….Reducing greenhouse gas emissions is a moral imperative—and it’s better for business. We’ll continue to fight for shareholders rights and to hold companies like TransDigm to the highest standards for business and our planet.” (See also thecorporate blog post, which reports that the pension funds previously announced that “they might pursue climate change proposals as an initiative and more recently said they’d pursue a ‘clean energy’ investment & divestment strategy—insisted that this was an urgent matter.”)

But was it the urgency of the subject matter that led the Comptroller to circumvent the SEC process and take the issue to court? Or, as a well-funded and well-staffed proponent, will the Comptroller’s office now pursue redress in the courts if a company seeks no-action relief and/or the SEC staff allows exclusion of any of the pension funds’ proposals going forward? What’s more, will the success of the proponent in causing the company to include the proposal lead other proponents to follow the Comptroller’s lead and pursue judicial intervention?

If you recall, in 2014, Comptroller Stringer submitted proxy access proposals to 75 companies—and ignited the push for proxy access at public companies across the U.S. (See this PubCo post and this PubCo post.) Whether the Comptroller will follow a similar path with regard to submission en masse of climate change proposals remains to be seen.

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