One of the surprises of the 2018 proxy season was the use of Notices of Exempt Solicitation by shareholders that almost certainly did not meet the $5 million holding threshold that would require filing under Exchange Act Rule 14a-6(g). Rule 14a-6(g) requires a person who owns more than $5 million of the company’s securities and engages in a solicitation without seeking to collect, or act as, a proxy to file solicitation materials with the SEC.
At AES, shareholder and frequent proponent John Chevedden submitted a shareholder proposal to lower the threshold for shareholders to call special meetings to 10%. The company included in its proxy statement a management proposal to ratify the existing 25% threshold for shareholders to call special meetings contained in the company’s bylaws. This allowed the company to seek, and receive, no-action relief from the Securities and Exchange Commission (SEC) on the basis that the management and shareholder proposals conflicted. Chevedden then filed a “shareholder memo” criticizing management and urging shareholders to vote against the management proposal as a Notice of Exempt Solicitation. Although shareholders were able to view the memo, as Notices of Exempt Solicitation appear on a company’s EDGAR page on the SEC’s website, the company proposal ultimately passed, receiving approximately 60% shareholder support.
This proxy season saw several other instances of shareholders who seemingly were not required to file Notices of Exempt Solicitation availing themselves of this avenue to share their views. Critics wondered whether such notices could or should be used in such fashion; notices of Exempt Solicitation do not have a cover sheet that clearly identifies the filing party, like Schedules 13D and 13G, leading to concerns that the lack of clarity might cause investor confusion.
Likely in response to these notices and the accompanying uncertainty, the SEC Staff published two new Compliance and Disclosure Interpretations (C&DIs) to provide guidance on the use of such notices. New C&DI 126.06 clarifies that the Staff will not object if a soliciting party who is not subject to Rule 14a-6(g)(1), because they do not own more than $5 million of the company’s securities, submits a Notice of Exempt Solicitation on a voluntary basis. However, the Staff further clarified that if the written solicitation material is submitted voluntarily under the cover of a Notice of Exempt Solicitation, such cover notice must make it clear that the notice is being provided on a voluntary basis, on the theory that such clarification would be an indication to investors that the filer does not own more than $5 million of the company’s securities.
The Staff addressed in new C&DI 126.07 how the solicitation materials should be presented in the Notice of Exempt Solicitation. As set forth in C&DI 126.07, the written solicitation material should not appear in the notice before the Rule 14a-103 information, as Rule 14a-103 is designed to be a “cover” to which previously disseminated written solicitation material is “attached”. Rule 14a-103 requires that the soliciting party disclose its name and address as well as the name of the company to which the solicitation relates. The C&DI states that “when submitting a notice on EDGAR, whether voluntarily or to satisfy the requirements of Rule 14a-6(g)(1), all of the information required by Rule 14a-103 must be presented in the submission before any written solicitation materials (including any logo or other graphics used by the soliciting party) are presented.”
Now that the SEC has provided guidance surrounding the voluntary usage of Notices of Exempt Solicitation, it remains to be seen if shareholders will take advantage of these filings on a large-scale basis in this environment of increased shareholder engagement. And although it is clear that Notices of Exempt Solicitation are subject to Exchange Act Rule 14a-9, which prohibits false or misleading statements in solicitations, the 2019 proxy season is likely to provide interesting case studies regarding what, if any, impact these Notices of Exempt Solicitation may have on shareholder proposals and annual meetings.
The text of the new C&DIs can be found below:
Question: Exchange Act Rule 14a-6(g)(1) requires that any person who engages in a solicitation pursuant to Exchange Act Rule 14a-2(b)(1) and beneficially owns over $5 million of the class of securities that is the subject of the solicitation to furnish or mail to the Commission a statement containing the information specified in the Notice of Exempt Solicitation (Exchange Act Rule 14a-103) no later than three days after the date the written solicitation is first sent or given to any security holder. Rule 14a-103 requires the soliciting party to attach only those written soliciting materials “required to be submitted” pursuant to Rule 14a-6(g)(1). If a soliciting party is not subject to Rule 14a-6(g)(1), is it permitted to submit a Notice of Exempt Solicitation?
Answer: Although the requirements of Rule 14a-6(g)(1), including the submission of a Notice of Exempt Solicitation, only apply to a soliciting party who beneficially owns more than $5 million of the class of subject securities, the staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in C&DI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities. [July 31, 2018]
Question: Rule 14a-6(g)(1) requires a Notice of Exempt Solicitation to contain the information specified in Rule 14a-103, including the name and address of the person relying on the exemption in Rule 14a-2(b)(1), and that the written soliciting material be attached to the notice. When submitting a Notice of Exempt Solicitation to the Commission electronically on EDGAR, can the written soliciting material appear in the notice before the Rule 14a-103 information is presented?
Answer: No. Rule 14a-103 is designed to be a “cover” to which previously disseminated written soliciting material is “attached.” See Rule 14a-103 (“Attach written material required to be submitted pursuant to Rule 14a-6(g)(1).”); Release No. 34-31326 (Oct. 16, 1992)(noting that the written soliciting material must be submitted “under cover” of the Notice of Exempt Solicitation). Therefore, when submitting a notice on EDGAR, whether voluntarily or to satisfy the requirements of Rule 14a-6(g)(1), all of the information required by Rule 14a-103 must be presented in the submission before any written soliciting materials (including any logo or other graphics used by the soliciting party) are presented. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. [July 31, 2018]