Season-end Summary of Challenges under Rule 14a-8

Posted by Neil McCarthy, G. Michael Weiksner, James Palmiter, DragonGC, on
Wednesday, May 29, 2024
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Neil McCarthy is Co-Founder and Chief Product Officer, G. Michael Weiksner is Co-Founder and Chief Technology Officer, and James Palmiter is CEO and Co-Founder at DragonGC. This post is based on a DragonGC memorandum by Mr. McCarthy, Mr. Weiksner, Mr. Palmiter, Jennifer Carberry, Natalie Richardson, and Evan Quille.

The SEC has just completed its oversight role for the 2023/2024 season over challenges brought by companies to exclude proposals submitted by their shareholders per Rule 14a-8. What follows is a summary of the results for this season with comparisons to the 2022/2023 season.

Under Rule 14a-8, companies generally must include shareholder proposals in their proxy statements to be considered at the annual meeting. The rule, however, provides several bases for exclusion, including 13 substantive requirements that proposals must comply with to avoid exclusion – Rule 14a-8(i)(1) to (i)(13) – as well as procedural requirements for when and how they must be submitted to the companies by shareholders. The rule has a process for how companies can seek to exclude these proposals by submitting a challenge to the SEC to obtain a favorable ‘no-action letter.’

Challenges were up 50% from 2022/2023

We saw 276 challenges this season compared with 184 in the 2022/2023 season, an increase of 50%. So far this season, 646 shareholder proposals have been included in annual proxy statements, compared with 641 for all last season.

In the 2021/2022 season we saw 241 challenges compared with 184 in the 2022/2023 season, so this season there’s been a noteworthy rebound in the number of challenges and the percentage of proposals challenged.

We attribute last season’s falloff to the SEC’s adoption of staff legal bulletin (SLB) 14L (Nov. 3, 2021) to help explain why. SLB 14L rescinded staff legal bulletins 14I, 14J and 14K, and made it more difficult to invoke the 14a-8(i)(7) ‘ordinary business’ exception with proposals that raise issues of broad social or ethical concern related to the firm’s business.

In the first season after its adoption, we saw a marked increase in the number of proposals and a drop in the number which were challenged, particularly for those related to environmental and social issues.

Season over Season Observations

  1. Challenges were up year over year by 50% from 184 to 276.
  2. For those proposals that were challenged this season, the SEC allowed exclusions at a higher rate (52% vs 46%) and a greater number (144 vs 85) than it allowed last season.
  3. Procedural exclusions were down as a percentage of all exclusions (29% vs 46%) and flat in absolute number (41 vs 39).
  4. Exclusions under 14a-8(i)(7) ‘ordinary business’ were up as a percentage of all exclusions (40% vs 35%) and in absolute number (58 vs 30). We note that this season, the SEC invoked (i)(7) thirteen times when it wasn’t the challenger’s first choice for grounds for exclusion.
  5. Exclusions under 14a-8(i)(2) ‘violation of law’ increased substantially from one to 22 as challenges were successful for Majority Vote-related proposals and Director Compensation-related proposals.
  6. We saw an increase in the percentage of proposals that were withdrawn by proponents (21% vs 15%) and in number (58 vs 27).

14a-8 Litigation Update

NCPPR v SEC (Fifth Cir.) Broad-sweeping challenge to SEC’s 14a-8 shareholder proposal rule brought in the Fifth Circuit by conservative advocacy groups includes Constitutional claims. Oral argument was heard on March 5, 2024.

Exxon Mobil v Arjuna Capital (ND TX). Exxon Mobil has sued two activist proponents over a proposal that calls for reduction in greenhouse gas emissions claiming that the activists have “publicly stated they do not care about growing shareholder value while they pursue their own agenda.” Reply briefs were filed on March 6, 2024.

Notes

  • For the 2023/2024 season, the information in this report is for companies whose annual meeting was scheduled between July 1, 2023 and June 30, 2024; for the 2022/2023 season, between July 1, 2022 and June 30, 2023.
  • Procedural grounds for exclusion are set forth in Rule 14a-8(b)-(f) and include failure to submit the proposal by the required date and failure to adequately prove ownership of shares that are beneficially held in ‘street name.’