Chapter 35 Negotiation and Settlement of Proposals
§ 35.01 Introduction
Rule 14a-8, with its myriad procedural requirements and substantive
bases for exclusion, provides the framework or backdrop for shareholder
activism. If one were to read only the rule and the no-action letters, it
would be easy to infer that the shareholder proposal process is highly
structured, formal and legalistic. And in some ways it is —
shareholders and companies alike strive to meet deadlines and satisfy
requirements, and both sides are acutely aware of the time constraints
imposed by Rule 14a-8 and the annual meeting cycle.
§ 35.02 Participant Insights into the Process
An emphasis on legal requirements misses what many participants in the
process, both shareholders and companies, view as a valuable opportunity
— the chance to discuss important issues and reach a settlement to
which everyone can agree. In writing this chapter, we spoke with numerous
participants on both sides and asked them to share their insights on the
negotiation and settlement process. Because many of them wished to remain
anonymous, no one is named, nor is information provided that would allow
identification of companies or individuals.
As an initial matter, shareholders and companies agreed that the
shareholder proposal process is changing in ways that make settlement
more difficult. Shareholders, according to most accounts, are becoming
more sophisticated and are less apt to be won over by a slick
presentation lacking in substance. More resources, especially on the
Internet, are available to help shareholders navigate the proposal
process and coordinate with other investors. Some participants observed
that the SEC's reversal of its Cracker Barrel position in 1998
reintroduced significant uncertainty into the no-action process. And at
least until the recent market downturn, companies asserted that
shareholder expectations regarding performance were high, and declines in
share price predictably led to shareholder proposals, especially from
individual investors.
Establish Expectations Upfront. Nearly every participant gave
this advice, in one form or another. Shareholders and companies
concurred that it is critical to establish expectations upfront.
Shareholders should have a preconceived notion of what it would
take for them to withdraw — or not file — a proposal, and both
sides should establish expectations for the dialogue itself.
A number of shareholders stressed that setting internal expectations is
a balancing act. On the one hand, it is useful to have a sense going into
a dialogue of what measures short of total implementation of the proposal
would be satisfactory. Such an understanding is even more important when
co-sponsors are involved. This helps avoid a situation in which one
sponsor wants to settle but others do not. To handle this issue, some
proponent groups appoint a lead or primary filer, who takes on more
responsibility in connection with the dialogue and enjoys significant
latitude to make decisions about settlement.
On the other hand, a number of participants spoke of the need for
flexibility and an open mind. One shareholder described approaching a
company to make clear early on that it would not agree to take any steps
resembling those in the proposal. However, the company suggested a
completely new way to address the proponent's concern — one that
the shareholder would never have thought feasible — and an
agreement was reached in short order.
Setting expectations among participants also requires balancing.
Shareholders and companies should agree on the utility of deciding,
before beginning discussions:
Who will participate in the dialogue;
The scope of the discussion; and
How progress will be measured.
Sometimes, understanding the scope of the discussion is not as easy as
it sounds. The shareholder proposal rule's substantive exclusions may
lead a shareholder to draft a proposal in a particular way to ensure that
it will pass muster with the SEC, when the shareholder's real concern is
something quite different. Also, a shareholder may see an issue, such as
board independence, as a way to begin talking about more sensitive
matters, such as the competence and stature of directors.
Build Trust Early On. A number of participants mentioned the
importance of building trust early in the dialogue. Agreeing on
easier items, such as additional disclosure, can serve this purpose.
Ensuring that everyone is kept informed of significant developments
also helps build trust. One shareholder touted the importance of
keeping channels of communication open with the company's in-house
and outside counsel to ensure that there are no surprises.
Timing Isn't Everything, But It's Not Irrelevant. Many
shareholders and companies reported reaching agreement without a
proposal ever being filed. For shareholders seeking to avoid having
to draft a proposal and defend it against a no-action
challenge — especially if legal fees would be involved — such a
resolution can be ideal. Some shareholders prefer to keep their
activism low-key and shun the spotlight whenever possible. Many
corporate representatives stated that they — or their senior
company officers — view the filing of a proposal as a sign that they
have failed. Others claimed that the negotiation process is generally
more amicable if a proposal has not been filed with the SEC staff.
Both sides agreed that the key to reaching an early agreement is to
commence discussions early. Many shareholder participants stated that
they send letters or call potential target companies well in advance of
the shareholder proposal deadline to inform them of issues of concern and
initiate discussions. Sometimes, a company and shareholder have been in
dialogue on an issue for several years and can simply pick up where they
left off.
At times, though, due to an impending deadline (in the case of
shareholders) or a proposal that arrives with no warning (in the case of
companies), a pre-filing dialogue is not possible. Several shareholders
reported that they believe some companies do not feel sufficient pressure
to engage in a dialogue until a proposal has been filed. Reading between
the lines, these may be the corporate representatives their colleagues
described as "battle-fatigued" from working in industries or at companies
with more than an average number of shareholder issues without sufficient
support from within the company.
In such cases, the parties generally begin discussions while
simultaneously evaluating the feasibility of a no-action request.
Shareholders and companies agreed that it does not usually make sense to
refrain from negotiating simply because a no-action request is pending or
contemplated. However, a few shareholders cautioned that a dialogue can
be squelched by ad hominem attacks in a company's
no-action letter. According to a few corporate representatives,
individual shareholders are sometimes put-off by the fact that a company
has sought no-action relief, but institutional investors usually
understand that such a request is part of the process.
Finally, several participants cautioned that it is easy to feel
pressured because the deadline for mailing proxy materials is close at
hand and there is a very real risk that the parties agree to a resolution
that one or both parties winds up regretting. This concern underscores
the importance of setting expectations in advance.
Be Realistic. This concept means different things to
shareholders and companies, but the core concept is the same:
companies exist to make a profit, and the issues raised by
shareholders are not always at the top of the CEO's "to-do" list.
Shareholders advised that it is often unrealistic to expect that a
shareholder proposal alone will effect a change in corporate
behavior, especially when the proposal asks the company to do
something that it believes is not in its economic best interest. In
such cases, it may be necessary to publicize the issue using the
media, involve consumers or organize demonstrations in addition to
engaging in a dialogue with the company. A few shareholders reported
that personnel inside the company — internal allies —
instructed them to increase the pressure on the company to enable the
allies to make progress internally on the shareholders' issues.
For their part, corporate participants explained that, although
corporate governance and corporate responsibility issues are important,
top company officers are busy handling many other pressing matters.
Accordingly, it may not be possible to ensure that a CEO can meet with a
shareholder. Several company representatives describe experiences with
proponents who simply do not understand why the CEO cannot attend meetings
to negotiate over a proposal. It is realistic though, in the eyes of both
companies and shareholders, to expect that someone with functional
responsibility over the subject matter of the proposal will attend such
meetings. Company representatives said that these employees normally are
quite open to the dialogue process.
Settlement Is Not Always the Best Outcome. Both shareholders
and companies agreed that, at times, allowing a proposal to go
to a vote is the better choice. Shareholders maintain that when the
goal is visibility for an issue, letting a proposal (or a group of
proposals on the same topic) be put in the proxy can be more
beneficial than any potential settlement. However, both shareholders
and companies cautioned that there's a fine line between rallying
support and grandstanding. One shareholder stressed that a reputation
for obtaining high votes on occasion can help convince companies to
settle in the future. Corporate representatives see the merit in
putting certain proposals to a vote, especially when the cost of
settling is too high or when the company is proud of its record on
the subject of the proposal, and would welcome the opportunity to
tout its achievements in the proxy statement and to the media.
Don't Forget the SEC Staff. Although the SEC staff is not
directly involved with negotiations over a proposal, their importance
to the process cannot be understated. Maintaining a favorable
relationship with the staff can come in handy when there is a sticky
issue that needs pressing attention. Along these lines, if a proposal
is settled after a no-action request has been filed, a request to
withdraw should be made so that the staff does not waste resources
processing the now moot request. Recently, the SEC staff set forth in
a Staff Legal Bulletin[fn1] the matters that it wishes that a company
will address in its letter withdrawing a no-action request. These
matters include:
A statement that either the shareholder has withdrawn the
proposal or the company has decided to include the proposal
in its proxy materials;
If the shareholder has withdrawn the proposal, a copy of the
shareholder's signed letter of withdrawal, or some other indication
that the shareholder has withdrawn the proposal;
If there is more than one eligible shareholder, the company
must provide documentation that all of the eligible shareholders
have agreed to withdraw the proposal;
If the company has agreed to include a revised version of the
proposal in its proxy materials, a statement from the shareholder
that he or she accepts the revisions; and
An affirmative statement that the company is withdrawing its
no-action request.
