Exempt Proxy Solicitations: A New Twist on an Old Form

SEC Seal Blog

Have you checked out the latest SEC Form PX14A6G filings?

Doesn’t ring a bell? Form PX14A6G is a relatively obscure SEC form used for reporting exempt solicitations under the proxy rules. The form serves as a cover page for the filer to submit communications intended for communications with other investors dealing with upcoming shareholder meetings. Exchange Rule 14a-6(g) mandates filings when the person making the solicitation holds more than $5 million of the company’s securities. These communications are exempt from the proxy statement delivery requirements because the filers are not seeking authority to vote any proxies. Over the last four years, filers have submitted an average of about 150 communications on Form PX14A6G per year. By way of illustration, an average year’s total for Form PX14A6G filings would be a relatively slow day if we were counting newly-filed Form 8-Ks.

So why should we be interested in a form that has been primarily used by institutional investors a few times a year to discuss how they want their fellow shareholders to vote at upcoming meetings? The answer is a simple one. Things changed this spring, when the form ceased to be solely a means for institutional investors to communicate with each other. In March 2016, prominent shareholder activist John Chevedden filed his first communication on Form PX14A6G on a voluntary basis.

This past proxy season, Chevedden submitted a request to AES to allow holders of 10 percent of the company’s outstanding common stock to call a special shareholder meeting. The staff allowed AES to exclude the proposal under Rule 14a-8(i)(9) because the proposal directly conflicted with one put forth by management. In this case, and in others, companies have put forth their own proposals to ratify their existing higher thresholds, and then challenged the levels put forth by Chevedden as being in direct conflict.

Previously, a no-action grant from the staff brought the question to a close, but Chevedden took a novel step. He filed a shareholder memo on EDGAR, which appears on the AES EDGAR page, as a Form PX14A6G notice of an exempt solicitation. These notices allow shareholders to lobby other investors to cast their votes without soliciting proxies or having a proposal included in the proxy materials. In this case, Chevedden was able to describe his proposal that AES shareholders didn’t see, and laid out the reasons for voting against the company proposal.

Since March, shareholder activists have ramped up the use of Form PX14A6G filings.  For example, Chevedden filed a memo to H&R Block shareholders advising that the company might publish an image, such as a circle with a slanted line through it next to a 2018 shareholder proposal, as the company did in the 2017 proxy statement. Chevedden sought to clarify that the graphic did not mean that the proposal dealing with shareholder approval of bylaw changes called for any improper or prohibited action. In another example, prominent activist James McRitchie and his wife, Myra Young, submitted a Form PX14A6G filing urging General Electric shareholders to support an executive compensation proposal. The proposal asked the board of directors to disregard earnings per share results or other financial ratios when setting executive incentive compensation amounts unless the board excluded the effect of stock buybacks during the performance period.

These filings are attractive to shareholder activists for several reasons. Initially, Form 14A6G filings are a low-cost way to reach other investors and the general public. Proponents do not need to employ counsel to draft complex supporting statements as in the shareholder proposal process, and these documents are freely accessible on the issuer’s EDGAR page. The communications are also not subject to any screening by the issuer or the Corporation Finance staff, as the documents appear on EDGAR without going through any staff approval process.

In two Compliance and Disclosure Interpretations issued on July 31, 2018, the Corporation Finance staff stated that will not object to voluntary submissions these notices, provided that the filer complies with some procedural formalities. The written soliciting material must be submitted under the cover of a Notice of Exempt Solicitation, which must clearly state that the notice is being provided on a voluntary basis. The notice must include the name of the registrant and the name and address of the soliciting person. This information must be presented in the submission before any written soliciting materials, including any logo or other graphics. According to the staff, the presentation of this information “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.” The staff indicated that if the notice consists only of the text of the solicitation, and does not include the required identifying information, the filing could be misleading within the meaning of Exchange Act Rule 14a-9.

One downside to these filings is that they are merely informative. Unlike shareholder proposals made through the Rule 14a-8 process, anything contained in a Form PX14A6G filing is meant only to inform or persuade, and is not presented for a vote at a shareholder meeting. Another drawback of these EDGAR filings is that—they are on EDGAR. The EDGAR service contains a wealth of information, but it is not the most intuitive of tools.

While shareholder activist James McRitchie noted that EDGAR is “definitely not user-friendly,” he told Bloomberg Law that shareholders and others and others are reading and responding to these communications. According to McRitchie, “a lot more people read those feeds and pass on what might be helpful than read my blog posts.”

The question now is how long this avenue of direct communication will be available to activists. The topic has recently attracted the attention of some leading law firms. One firm stated that the use of these filings “can be confusing to shareholders and other stakeholders,” and added that “it is unclear what practical and timely recourse a company would have for materially false and misleading statements that are included in Notices.”  Another firm stated, “Who knows what will be next? Query whether the exempt solicitation rules were meant to give proponents a year-round soap box to further their agenda.”

It will be interesting to see how the SEC handles this issue going forward. The Commission definitely has the proxy process in its sights. On July 30, 2018, Chairman Jay Clayton announced that the agency will hold a proxy roundtable in the fall. The chairman indicated that the SEC is prepared to take a close look at the shareholder proposal process. He stated that “shareholders, as the ultimate owners of the company, bear the costs associated with management’s consideration of a proposal and its inclusion in the proxy statement,” and included the ownership threshold, which currently stands at $2,000 (or 1 percent, but virtually no public company shareholder gets to 1 percent before they get to $2,000), as a subject for discussion.

The chairman’s statement that the SEC will “appropriately consider the interests of all shareholders, taking into account the potential benefits to shareholders of a proposal (or resubmission) being considered or adopted, as well as the costs associated with the inclusion of a proposal (or resubmission) in the proxy statement” certainly raises the possibility of an increase in the $2,000 threshold. It would not be surprising if the agency takes a hard look at Form PX14A6G filings in the course of an overall review of the proxy process and considers dialing back this avenue of activist access to investors and the public.