In the latest policy change to hit shareholder activists, new guidance indicates that the Securities and Exchange Commission is now opposing the publication of so-called exempt filings from shareholders who do not have major ownership positions in the companies involved. These documents contain communications between investors, and activists often use them to argue for their favored positions on issues such as climate change and diversity, equality and inclusion.
Until recently, the SEC published all exempt solicitations on its EDGAR online platform, allowing them to function as a low-cost, high-impact communications tool for activists. The agency now plans to only publish requests from shareholders who own at least $5 million worth of a company’s stock. That effectively eliminates communications from activist investorswho typically hold smaller equity positions in companies. (Notably, SEC staff previously advised that requests should only be submitted to EDGAR if they have already done so are passed on to shareholders in other forms.)
The SEC stated in its revised guidance that its staff had become concerned that the exempt filing process was being used “for reasons other than its intended purpose.” The agency said it “appears to be primarily a means of generating publicity” and building consensus among like-minded shareholders. Supporters of exempt requests, on the other hand, argue that the system gives shareholders with relatively small stakes the opportunity to have their voices heard on important issues of governance and corporate strategy. In effect, exempt solicitations give them a way to get their messages across to the institutional investors and proxy advisors with the most influence over votes on shareholder proposals.
“Communication on material issues critical to informed investor decision-making is the foundation of our free market system.” said Andy Beharthe CEO of the prominent shareholder organization As You Sow. “Limiting exempt requests to the few largest investors harms the core principles of capitalism – information and trust between companies and their ultimate owners.”
Critics claim that the current SEC has shown this indifference to shareholder involvement in general, which would fit with the new restrictions on exempt requests. Meanwhile, it’s hard to ignore that the SEC’s policy reversal on waiver filings stems from a backlash from some policymakers against attempts to entrench environmental, social and governance concerns in the regulatory architecture of the financial system. And note that the SEC has already taken a much-publicized step not to interfere with companies that remove shareholder proposals from their proxy statements.
Ultimately, this latest fuss over exempt requests raises philosophical questions about shareholders and their role in corporate governance. In particular, do shareholders get a say in ESG matters and other matters that the agency deems non-essential to governance simply as a matter of ownership, and do companies benefit from exposure to views on these issues coming from outside their C-suites?
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