Shareholder activism has become a fixture of the annual meeting season for many public companies, as shareholders have sought to use the annual meeting process as a vehicle for advancing particular interests, such as environmental, social and corporate governance issues. Shareholders have effectively used the shareholder proposal process created by SEC rules to include a proposal in a company’s proxy statement, and thereby subject to a shareholder vote. While these proposals have been prevalent at the largest public companies for some time, shareholder activists have increasingly turned their attention to public companies with medium-sized market capitalizations. Given the ongoing threat of shareholder activism through the proposal process, public companies must have a plan to quickly respond when a shareholder proposal is received.
Under paragraph (i) of Rule 14a-8, a company may exclude a shareholder proposal from its proxy materials if the proposal falls into one of thirteen substantive bases for exclusion. These substantive bases for exclusion address situations where a proposal, among other things, is inconsistent with applicable laws, cannot be implemented by the company, duplicates another proposal, has been substantially implemented, or relates to ordinary business operations. In order to exclude a proposal, a company must first notify the SEC, which is typically done through a request for a “no-action” letter. In the no-action letter request, a company may argue that the subject proposal can be excluded under more than one basis for exclusion.