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Federal Government Shutdown Throws Wrinkle into Proxy Season

January 25, 2019

On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.

As the 2019 proxy season nears, public company general counsel, management and the board face a question they may not have anticipated only two months ago: Could the five-week-long partial federal government shutdown impact shareholder engagement and our ultimate proxy statement this year?

The answer from Wachtell Lipton Rosen & Katz is: Yes, but companies need to be careful about its decisions regarding the omission of shareholder proposals from their proxy statements.

Wachtell Lipton issued a memo specifically addressing the impact of the shutdown on the Rule 14a-8 shareholder proposal process. “As the 2019 proxy season approaches, to the extent the U.S. federal government shutdown continues, companies with Rule 14a-8 shareholder proposals will have some difficult decisions to make,” the memo read. “Although a company is not required to submit a no-action letter to the SEC to exclude a Rule 14a-8 shareholder proposal (but is required to submit its reasons for the exclusion to the SEC and to the proponent), the almost universal practice is to ask the SEC Staff to concur with a company’s planned exclusion of a proposal.”

It further points out, “unless the shutdown ends, the SEC Staff will not respond to requests for no-action letters and, once the shutdown ends, there is likely to be a significant backlog of requests.” So, without a decision by an SEC staff member on a no-action letter, a company is faced with the prospect of whether or not to include the shareholder proposal in the proxy statement. Wachtell Lipton explains any action a company takes to exclude a Rule 14a-8 shareholder proposal could lead to shareholder litigation and/or proxy advisors being “emboldened” to take action against the company.

So, what are SEC registrants to do?

Wachtell Lipton advises its clients to seek out the shareholder proposal proponent and open a dialogue to negotiate a desired outcome. “It is often beneficial (and not only due to the uncertainty created by the shutdown) to seek to discuss the Rule 14a-8 shareholder proposal with the proponent, explain the company’s rationale for its preferred outcome and attempt to negotiate the withdrawal of the proposal either by negotiating a compromise or alternative outcome or implementing the proposal or by convincing the proponent that it would be detrimental for the company and/or the shareholders to include the requested proposal in the company’s proxy statement,” the law firm stated.

The firm also advises companies to consider pre-emptive approaches addressing topics being raised by proposals and whether to submit a management-sponsored proposal to a vote so as to increase the likelihood of securing shareholder support for the board’s recommendation.

The same question regarding interpretative guidance was posed last year at this time when the federal government shut down for three days. At the time, 18 law firms issued a consensus report called “Potential SEC Shutdown: Frequently Asked Questions About the Impact on Capital Markets Transactions and Public Companies.” The FAQ, which is still relevant today, addressed issues regarding Edgar, filings, specifically answered two questions regarding interpretative guidance:

Q: Will it be possible to obtain answers from the SEC Staff to routine interpretive questions?

A: No. The SEC Shutdown Plan states that “nonemergency interpretive advice” will be discontinued.

Q: Will it be possible to obtain no-action relief from the Division of Corporation Finance?

A: No, including with regard to shareholder proposals. During an SEC Shutdown, a company should make the submission required by Rule 14a-8(j) via email if it intends to exclude a shareholder proposal. The SEC Staff will not, however, respond until after the SEC Shutdown ends. If the SEC Shutdown is continuing at the time the company disseminates and files its definitive proxy statement, it would have to decide whether to exclude the proposal without the benefit of a no-action letter.

Among the 18 law firms that signed on to the report were Cleary Gottlieb Steen & Hamilton, Cravath, Swaine & Moore LLP, Davis Polk & Wardwell LLP, Gibson, Dunn & Crutcher LLP, Jenner & Block LLP, Latham & Watkins LLP, Mayer Brown LLP, Morrison & Foerster LLP, O’Melveny & Myers LLP, Ropes & Gray LLP, Shearman & Sterling LLP, Sidley Austin LLP, Simpson Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP, Weil, Gotshal & Manges LLP, Wilson Sonsini Goodrich & Rosati PC, and Wilmer Cutler Pickering Hale and Dorr LLP.

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.