Tracking Shareholder Proposals and No-Action Letters

January 20, 2014

4541As the 2013-2014 proxy season gets under way the team behind the new Business Law Center on WestlawNext is tracking shareholder proposals and no-action letters. This is the first in a series of posts examining the ragged edge of shareholder proposal-land:  no-action letter requests to the SEC.

No-Action Letter Tracker as of December 31, 2013: 132 letters, 71 registrants, 65 proponents 

2013-2014 Season (as of 12/31/13) 2012-2013 Season (as of 12/31/2012)
1. Registrants Submitting the Most No-Action Requests
Dominion Resources 10 General Electric 11
Verizon 9 Dominion Resources 8
General Electric 8 Verizon 7
AT&T 6 AT&T 6
2. Proponents Most Frequently Cited in No-Action Letters
J. Chevedden & collaborators 32 J. Chevedden & collaborators 31
Qube Investment Management 8 United Brotherhood of Carpenters 10
National Center for Public Policy 6 ALF-CIO 4
3. Most Common Proposal Subjects
Executive Compensation 22 Executive Compensation 35
Political Contributions 15 Environmental Issues 21
Independent Board Chair 14 Political Contributions 14

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Notable letters and trending topics

On December 13th, the SEC received a letter from Amy Carriello, Senior Counsel, Corporate Governance, for PepsiCo, Inc. Carriello explained that PepsiCo had decided to exclude a shareholder proposal from its proxy statement. The proposal, precipitated by a Super Bowl Doritos commercial featuring a felicidal dog who writes a threatening note – “YOU DIDNT SEE NUTHIN” – directed PepsiCo to apologize for its “misguided and tasteless” advertising and donate to charity half the salaries of the executives responsible. Carriello expressed PepsiCo’s disagreement with “the Proponent’s assessment of the Company’s advertisements” and sought SEC approval for PepsiCo’s decision to keep the proposal out of its proxy statement (Pepsico, Inc., 2013 WL 6701968 (S.E.C. No-Action Letter Dec. 13, 2013)).

The chain of events that ends with a senior PepsiCo lawyer defending a Great Dane begins with ’34 Act Rule 14a-8 (17 C.F.R. § 240.14a–8), which gives investors power to insert proposed shareholder resolutions into management’s proxy statement for other shareholders’ approval. 14a-8 also gives management various grounds to exclude proposals, both technical – e.g. the proposal is not timely, and substantive – e.g. the proposal is not a “proper subject” for shareholder action. Before unilaterally striking a proposal, management typically seeks assurance from the SEC that the exclusion comports with 14a-8. PepsiCo asked the SEC to concur with its judgment that the Doritos proposal be excluded on the grounds it was not a proper subject for shareholder action, because it relates to advertising, and “decisions regarding the advertising of a company’s products are part of a company’s ordinary business operations” (Pepsico, Inc., 2013 WL 6701968 (S.E.C. No-Action Letter Dec. 13, 2013). The SEC has yet to respond.

Many shareholder proposals make their way into proxy statements without fuss – via negotiation between management and the proponent, but negotiations can fail and it is unsurprising that registrants pass the buck to the SEC when dealing with proposals deemed irrelevant, inappropriate, or propounded by organizations with an ideological agenda. Ideologically motivated proposals, frequently advanced by labor-affiliated organizations, represent a large piece of the SEC’s no-action letter burden. The National Center for Public Policy Research, for example, a self described “conservative organization” and sponsor of several proposals that led to no-action letters, is expressly concerned with economic issues with impact beyond the individual registrant. In an email, Chairman Amy Ridenour explained that, “[o]ur proposals are very much geared to events of the day ” and aimed at business decisions that cause harm to “the business sector, to employment, and to our economy as a whole.” The NCPPR has been particularly active this year because of the roll out of Obamacare. Ridenour explained that, “[w]e believe our proposals, if they survive the no-action process, will expand the influence of these very important companies in that critical debate.”

In a 1994 article, Professor Jill E. Fisch predicted that Rule 14a-8 would usher in a new “relationship investment strategy” whereby long-haul investors suggest changes to maximize returns (Jill E. Fisch, “Relationship Investing: Will It Happen? Will It Work?” 55 Ohio St. L.J. 1009). The volume of no-action letters hasn’t changed since 1994, but there appears to be a drift toward the strategy Fisch predicted. So far this season, nearly 30% of challenged proposals were generated by a small group of activist investors led by retired aerospace engineer John Chevedden. Twenty-five companies, including Starbucks, Mattel, General Electric, and Coca-Cola, have asked the SEC to let them exclude Chevendden’s proposals. In a recent Reuters profile, Chevedden described his strategy as submitting a proposal that “seems to be good policy and seems to get votes.” James McRitchie, editor of and a frequent Chevedden collaborator, chooses investments by analyzing the company’s corporate governance, but has “never invested in a company that I think is a loser in order to file proposals. However,” he admits, “I have held on too long at a few companies where I thought reforms were needed.” Although some have characterized him as inflexible, Chevedden looks a lot like Fisch’s relationship investor – motivated as much by the desire to make good investments as by fervor for better corporate governance.

Also furthering the development of relationship investing is an emerging class of active (and activist) proponents, many of whom are signatories of the UN-sponsored Principles of Responsible Investing. Qube Investment Management, one of 716 investment managers to have signed the UNPRI and one of the season’s most active proponents, invests based on “quality of earnings and social responsibility,” explains Portfolio Manager Ian Quigley. Qube also aims to get shareholders talking to each other, and to management, “[w]e believe that the [annual general meeting] is intended for healthy proactive discussion,” Quigley explains. Qube’s overtures have been met with a reflexive hostility. Quigley concedes that “[t]he reaction from most companies we engaged was a major global law firm drafting a multi-page ‘no action’ brief on their behalf at significant cost without corporate acknowledgement of the proposal made.”

(Thanks to Paul Clark and John Sutton who contributed significant efforts to generate the data outlined in this post)