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New Twist for Old Shareholder Proposal Tactic

Each year some public pension funds and other institutional shareholders voluntarily file with the U.S. Securities and Exchange Commission (SEC) a Notice of Exempt Solicitation under Exchange Act Rule 14a-6(g).  This rule requires a person who owns more than $5 million of a company’s securities and who conducts an exempt solicitation of the company’s shareholders (in which the person does not seek to have proxies granted to them) to file with the SEC all written materials used in the solicitation.  However, these funds also file these Notices, which appear on EDGAR as “PX14A6G” filings, typically to respond to a company’s statement in opposition to a shareholder proposal included in the proxy statement or to otherwise encourage (but not solicit proxies from) shareholders to vote a specific way on shareholder proposals, say on pay proposals and in “vote no” campaigns. 

In a new twist, this week John Chevedden (the most prolific individual shareholder proponent given that he submits them in his own name and by using “proposal by proxy” to submit proposals for other shareholders) filed his first Notice of Exempt Solicitation.  Chevedden’s Notice addresses a proposal included in the AES Corp. proxy materials to ratify the company’s existing 25% special meeting ownership threshold.  The SEC staff previously concurred that AES could exclude from its proxy materials Chevedden’s shareholder proposal requesting a 10% special meeting threshold pursuant to Rule 14a-8(i)(9) because the company’s ratification proposal and the shareholder proposal conflicted.  See The AES Corp. (avail. Dec. 19, 2017). 

Chevedden’s filing consists of a “Shareholder Memo” to AES shareholders that criticizes the AES special meeting ratification proposal, includes a link to the SEC no-action letter concurring with the exclusion of Chevedden’s proposal, and urges shareholders to vote “against” the AES ratification proposal.  Chevedden’s Notice is available here.  (Chevedden subsequently filed a similar, but lengthier, notice at CF Industries Holdings, Inc. even before the company filed its definitive proxy statement, which is available here.)

Chevedden likely does not own more than $5 million in AES stock.  In fact, his broker letter provided to AES states that he owned “no fewer than” 250 AES shares as of October 13, 2017.  (Assuming he owned 250 shares, the value of those shares based on the closing price on that date was less than $2,900.)  However, the SEC has not to date restricted shareholders owning less than $5 million of a company’s stock from making “voluntary” PX14A6G filings to publicize their views on various proposals, notwithstanding that they may misleadingly suggest that the filing person is a significant shareholder.  Shareholders like that these notices, as with proxy materials filed in a traditional proxy contest, are posted on a registrant’s EDGAR page.  Thus, Chevedden’s Notice appears on the AES EDGAR page (see here) after the AES proxy statement and before a subsequent Form 8-K filed by the company. 

Notices of Exempt Solicitation can be confusing to shareholders and other stakeholders because the SEC does not require that they include a cover page containing information about the filer that clearly demonstrates that the Notice was not filed by the company (unlike with, for example, Schedule 13Gs and 13Ds).  Moreover, filers are not required to provide basic information in the Notice, such as what interest they may have in the matter they are soliciting on or their share ownership in the company (or even to demonstrate that they are, in fact, a shareholder).  Finally, it is unclear what practical and timely recourse a company would have for materially false and misleading statements that are included in Notices.  As a result, industry groups have requested in past years that the SEC staff limit these filings to shareholders relying on the Rule 14a-6(g) exemption and require that certain minimum disclosures be included.

In addition to the potential for shareholder confusion, the filing of these Notices may lead to increased press coverage of the filers’ views.  And now that Chevedden has EDGAR codes, there is a risk that he will start filing these types of letters regularly.  This is particularly notable since Chevedden frequently submits numerous short and cryptic responses to the SEC staff and companies regarding his shareholder proposals, and the SEC staff has permitted him to include language maligning individual directors and addressing entirely unrelated topics in supporting statements to his proposals.  Thus, in the future there may be a substantial increase in the use of Notices of Exempt Solicitation in connection with shareholder meetings. 

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