For some companies, the ability for shareholders to have a voice is a source of constant annoyance.
For proxy voting agents, such as Minerva, understanding the rules of the game and where the lines are drawn is key.
Shareholder rights and stewardship are protected by law.
In the US for example, the Securities Exchange Act of 1934, rule 14a-8, allows shareholders to place certain proposals in a company’s proxy materials for voting at general meetings. It gives all the other shareholders chance to look, examine and weigh up how they feel about a resolution before deciding to vote either way.
The system has worked, and the system continues to work, protected by law.
However, towards the end of 2019, the Securities & Exchange Commission (SEC) announced amendments to rule 14a-8. Essentially, companies were given greater power to dismiss proposals submitted by shareholders, and the commission introduced a new process for dealing with dismissal requests. From now on, companies looking to dismiss a shareholder proposal can apply to the SEC for ‘no action relief’. Decisions on this matter do not have to be given in writing but can be delivered orally which some have criticised as lacking transparency.
Minerva has been a vocal opponent of this move in both regular blogs and briefings, and closed-door discussions, highlighting the many misdirections and irregularities that can be laid at the US regulator’s door since this story of change began.
However, while this move to remove significant power from shareholders is concerning enough, the action by the US regulator may have opened the door for an enormous threat to corporate activism to come through.
In a recent blog, Phil Goldstein – manager of the Bulldog Investors hedge fund – said he had unearthed a potential threat he calls ‘the Skadden scheme’.
He argues that Skadden, Arps, Slate, Meagher and Flom LLP have been plotting to undermine rule 14a-8, pushing for corporate directors to adopt bylaws and other measures to prohibit shareholder proposals from being included in proxy materials.
In addition, the scheme could serve board incumbents more power when it comes to elections (with new candidates potentially required to obtain a ‘super majority’ of theoretically possible votes for all outstanding shares).
This is what Goldstein calls the ‘Skadden scheme’.
It all goes to back to 2017, when a request was made to the SEC on behalf of RAIT Financial Trust for ‘no action relief’. In that case, RAIT wanted to omit a rule 14a-8 proposal to externalise its management.
In that instance, the SEC sided with RAIT and said it would not proceed with enforcement (arguing that the shareholders tabling the motion were only entitled to vote on certain matters). In the following months, Skadden piggybacked on this and submitted two similar proposals for similar cases where a trust was seeking exclusion from rule 14a-8. Both proposals were successful.
Goldstein has since written to the SEC, calling for them to step in before things go too far. In a recent blog for the Harvard Law School Forum on Corporate Governance, he wrote: “To my knowledge, the Skadden Scheme has only been used by business trusts but there is no reason a corporation could not use it, e.g., by adopting a bylaw to limit proposals that shareholders may vote upon to those submitted by the board or mandated by statute.
“Allowing each company to determine what proposals shareholders can vote upon (other than those legally requiring a vote by shareholders)—and, hence, under Rule 14a-8, rendering them excludable from its proxy materials could make the rule an empty shell.”
Worryingly, these amendments have already been successfully exploited by companies. Ahead of its AGM, ExxonMobil successfully excluded all but one of the climate change-linked shareholder proposals added to proxy materials. The oil giant was able to secure ‘no action relief’ from the SEC in this case, establishing a worrying precedent for other companies.
It remains to be seen what the SEC says in response to pressure from Goldstein and other corporate governance advocates, but we are keenly watching as stewardship could – once again – be under serious threat.Last Updated: 9 April 2020