When It's Your Turn to Speak, Here's What You Must Say
The SEC's Division of Corporation Finance recently took this time to update its “Guidance for Conducting Shareholder Meetings in Light of COVID-19 Concerns.” One portion of the updated guidance says:
Presentation of Shareholder Proposals
Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 and 2021 proxy seasons.
I’ve heard a few stories from shareholders related to the presentation of proposals at virtual shareholders’ meetings (VSM) this year, which are most likely what prompted the staff to reissue this guidance.
Presenting a Proposal at a Meeting
At any shareholders’ meeting, each item of business — whether its management’s or a shareholder’s — must be properly presented for any votes to actually be cast and counted, regardless of whether the item appeared in the notice and proxy statement and shareholders voted by proxy in advance. So, if a shareholder proponent is a no-show,[i] and they can’t find anyone to present the proposal at the meeting (and management doesn’t want to present the proposal on the proponent’s behalf), it’s as if the proposal never existed for purposes of the meeting. It's a dead letter. (See my own “war story” on this here.)
Power of the Chair to Conduct the Meeting
Common law tells us that the fundamental principles for the conduct of shareholder meetings are “fairness” and “good faith.” In general, whomever is designated as the chair of the meeting (it doesn’t necessarily have to be a board member or even a shareholder) has broad power to conduct the meeting, including the power to establish and enforce rules of procedures and ensure orderly conduct. Sometimes these powers are set forth in the corporation’s bylaws. Rules established and enforced by the meeting chair may cover such things as (a) who has the right to address the meeting; (b) how shareholders will be recognized to speak; (c) time limits per speaker; (d) number of times a shareholder may address the meeting; and (e) the person to whom questions should be addressed.[ii]
Rules of Procedure
Companies can, and should, create and communicate rules of procedure for their shareholders’ meetings. Rules of procedure (a.k.a., rules of order or rules of conduct) help everyone understand ahead of time what is and isn’t proper conduct, how the Q&A session will be run, what to do in case of an emergency or technical malfunction, etc., and generally lead to a meeting where the official business — first and foremost electing directors — can be accomplished in a safe, orderly, and efficient manner. This is all in the best interests of the corporation and its shareholders and goes for both in-person meetings and VSMs.
It’s common for companies to limit the time for a shareholder proponent to present their proposal. I’ve generally seen limits of two minutes (skimpy), three minutes (standard practice), or five minutes (generous). The proponents are told about the time limits in advance and usually tailor and rehearse their comments to fit within the time allocated. If it's sounding like they might go over, companies give them warnings when the time is getting short and tell those who do go over to wrap it up quickly. Some companies cut off the mic right on the dot, but I haven’t heard many instances of that.
Some companies use visible clocks, which some proponents find helpful, but others find to be a heavy-handed tactic. Some companies allow, or even encourage, shareholders to send audio recordings of their oral presentations to be played at the meeting in lieu of a proponent’s actual attendance. This saves the proponent time and expense and reduces the risk of flubbing their lines and going over the time limit, and it takes away the board and management’s concern about the proponent potentially making a scene at the meeting.
Limits on Content
Notice that all of what I’ve written thus far relates to the how and when, but not the what of shareholder proposal presentations at meetings. Some reasonable limits on content can be appropriate. Obviously, “falsely shouting fire in a theatre and causing a panic”[iii] or using offensive or threatening language is not in the best interests of the corporation, shareholders, or others in attendance, and thus should be off limits. But so long as they are related to the proposal up for a vote and the company’s business and affairs, what is said in the presentation should be up to the presenter.
A Few Bad Apples...
This leads me to the stories about issuers’ placing strict substantive limits on presenting shareholder proposals at VSMs. These instances involve issuers dictating what proponents can say:
(1) Requiring the proponent to provide a very short written statement (e.g., 100 words), to be read by management at the meeting in lieu of the proponent speaking in their own voice by phone or audio recording.[iv]
(2) Requiring proponent to stick to a prepared script provided by the company, based on the proposal and supporting statement in the proxy statement.
(3) Limiting the proponent to only the exact words of the proposal and supporting statement as printed in the proxy statement… and citing the SEC rules as the source of this limitation.
Let's be clear that these three examples are outliers, especially for large-cap companies. But unfortunately, when someone asks me whether companies have been putting the clamps down on shareholder proponents at VSMs, I have to answer "yes," even though we're talking about a handful out of hundreds of companies.
What SEC Rule?
The third example particularly bothers me. About a week before the annual meeting, the company instructed the proponent that at the meeting they were to read only the text of the proposal and supporting statement, "in accordance with SEC Rule 14a-8." I don't know what the company is referring to because nowhere in Rule 14a-8 does it say this! Nor is this addressed in any of the dozen Staff Legal Bulletins that the SEC staff has issued over the past 20 years to provide guidance on Rule 14a-8.
Rule 14a-8 addresses “when a company must include a shareholder’s proposals in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders,” not what shareholder may say at a shareholders’ meeting. The rule answers technical and procedural questions, like eligibility requirements and deadlines, and word limits on what the proponent can submit to have printed the proxy statement, as well as what bases the company may rely on to exclude a proposal from appearing in the proxy statement. Rule 14a-8 is a proxy disclosure rule, not a shareholders’ meeting conduct rule. The SEC doesn’t have authority to tell companies how to conduct their annual meetings. That’s a matter of state law (as I outlined above).
Here’s the only thing Rule 14a-8 says about the meeting itself:
(h) Question 8: Must I appear personally at the shareholders' meeting to present the proposal?
(1) Either you, or your representative who is qualified under state law to present the proposal on your behalf, must attend the meeting to present the proposal. Whether you attend the meeting yourself or send a qualified representative to the meeting in your place, you should make sure that you, or your representative, follow the proper state law procedures for attending the meeting and/or presenting your proposal.
(2) If the company holds its shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.
(3) If you or your qualified representative fail to appear and present the proposal, without good cause, the company will be permitted to exclude all of your proposals from its proxy materials for any meetings held in the following two calendar years.
I’m not qualified to speak to the law of the state of incorporation of this particular company, but I’ve never seen or heard of a statute or court opinion that explicitly says, or even suggests, that a company may restrict a shareholder proponent to say at the meeting only what was printed in the proxy statement. If their state law does allow a company to do this, then the company should have cited that law, not SEC Rule 14a-8.
The shareholder proponent respectfully pushed back, and the company relented, allowing the presenter to deviate from the exact proxy statement text as long as the content was aligned with the business of the meeting and the remarks stayed under three minutes. It's good that this eventually got to the right place, but the original misstatement of the law was a pretty flagrant foul that not every shareholder proponent would have picked up on.
What Does This Accomplish?
Here’s the question that always runs through my mind when companies do these kind of things: “Why?” Since these practices are such outliers, these management teams are clearly going out of their way to accomplish something. Are they trying to reduce the risk that a shareholder will show up and go on a complete rant on the CEO and their entire extended family? Has that happened at their prior annual meetings? Today’s most frequent shareholder proponents can sometimes be cranky or even difficult to deal with, but they rarely go into Evelyn Y. Davis mode. And if they do, then the chair has the authority to declare them out of order, as I explained above.
What they actually end up accomplishing is this: They draw the ire of investors, regulators, proxy advisory firms, the media, and guys like me in the peanut gallery. And that just invites heightened scrutiny of other things that may not be related to corporate governance. Plus, it undercuts anything the company has done or will try to do in the near future on the good governance front. In Corporate Governance Land, Brownie Points are very hard to earn, but very easy to lose.
I totally get that most boards and management teams don’t see much value in being leaders in corporate governance practices. But most of them also realize that there is a downside to being called-out for bad corporate governance practices. Nobody is saying that every company needs to strive for a gold medal. So, why not just do what is standard practice instead of going out of one’s way to do something completely unnecessary?
All it takes is one year of doing something off-kilter, and your company will be cited as an example of that practice for years to come. The Home Depot may be the best example of a company that had an imperial CEO whose poor judgement on how to conduct an annual meeting[v] gave the company a bad reputation that lasted well beyond his firing. That guy drove away with $210 million (probably on a forklift), his successor was the one who was left to apologize,[vi] and the legend of The Home Depot's 2006 annual meeting lives on.
[i] There’s another discussion on proponents who aren’t able to attend for “good cause,” and that’s also addressed in the SEC’s “COVID Concerns” guidance, as amended on April 9, but I’m not going to get into that here.
[ii] ABA Committees on Corporate Laws and Corporate Governance, Handbook for the Conduct of Shareholder’s Meetings, 3rd. ed., Chapter 10 (2021).
[iii] Borrowing Justice Oliver Wendell Holmes Jr.’s line from his opinion in Schenck v. United States.
[iv] AT&T did this last year. See letter dated Apr. 21, 2020 from the Council of Institutional Investors, Democratic Treasurers Association, Shareholder Rights Group, USSIF, AFL-CIO, and Interfaith Coalition on Corporate Responsibility to AT&T's Chairman and Lead Independent Director, and "AT&T denies investors a dial-in as annual meeting goes online," Ross Kerber, Reuters (Apr. 17, 2020).
[v] "The Board Wore Chicken Suits," Joe Nocera, The New York Times (May 27, 2006).
[vi] "Home Depot top executives take blame for 2006 meeting," Jennifer Waters, MarketWatch (May 24, 2007).