Can a Public Company Effectively Opt Out of Rule 14a-8?

For almost eighty years Rule 14a-8 has been an integral part of the regulatory landscape, serving as a widely used means of communication between securityholders and the companies in which they invest. While the rule has been not been without controversy and has been tweaked from time to time, its fundamental objective, i.e., subject to certain specified conditions, the obligation of an issuer of publicly traded securities to include in its proxy materials a proposal submitted by a shareholder, has never faced a serious challenge—until now.

I recognize that companies are concerned about Rule 14a-8 being abused by those seeking to advance (usually left-wing) ideologies. In part, that concern prompted the Securities and Exchange Commission to issue Release No. 87458 proposing certain modifications to Rule 14a-8. Yet, while the Commission has been pre-occupied with the finer points of Rule 14a-8 and investors and companies duel it out in comment letters, law firms, led by Skadden Arps, Slate, Meagher & Flom LLP, are quietly promoting a scheme to permit issuers to effectively opt out of the rule entirely.

The genesis of the “Skadden Scheme,” as I call it, is a little known request in January 2017 to the staff of the Division of Corporation Finance (“the Staff”) submitted by Morgan, Lewis & Bockius LLP on behalf of RAIT Financial Trust for no action relief if Rait omitted from its proxy materials a Rule 14a-8 proposal to externalize its management. After receiving a number of letters from the parties vigorously debating the issue, on March 10, 2017, the Staff granted RAIT’s request. In a less than fully reasoned response, it said this:

There appears to be some basis for your view that RAIT may exclude the proposal under rule 14a-8(b). You represent that the proponent holds securities that are entitled to vote only on certain matters, which do not include the subject of this proposal. Rule 14a-8(b) requires that in order to be eligible to have a proposal included in a company’s proxy materials, a shareholder must hold “securities entitled to be voted on the proposal.” Accordingly, we will not recommend enforcement action to the Commission if RAIT omits the proposal from its proxy materials in reliance on rule 14a-8(b). (Emphasis added.)

That apparent “some basis” was RAIT’s contention that its Declaration of Trust prohibited shareholders from voting on any shareholder proposal, binding or precatory, “unless the matters covered by the proposal are among the enumerated matters specifically described in the Declaration of Trust or the Board was to declare a proposed action as being advisable and, in its sole discretion, direct that the matter be submitted to the shareholders for approval or ratification.”

A few months later, Skadden, apparently seeing an opportunity to enlist as clients companies seeking to effectively opt out their obligation under Rule 14a-8 to include otherwise eligible proposals in their proxy materials, piggybacked on the RAIT no action letter by submitting requests based upon the same argument that persuaded the Staff in RAIT, for no action relief on behalf of two issuers if they omitted a Rule 14a-8 proposal from their proxy materials: Government Properties Income Trust and Senior Housing Properties Trust. On February 20, 2018, the Staff concurred with Skadden’s position in both instances,.

A few months ago, my daughter submitted a Rule 14a-8 proposal to Dividend & Income Fund (“DNI”) for inclusion in its proxy materials for its 2020 annual meeting of stockholders. On behalf of DNI, Skadden then requested “no action” assurance from the Staff of the Division of Investment Management if DNI omits her proposal from its proxy materials. Citing the three aforementioned grants of no action relief, Skadden argues that (1) Rule 14a-8(b)(1) requires that in order to be eligible to have a proposal included in a company’s proxy materials, a securityholder must hold “securities entitled to be voted on the proposal,” and since (2) DNI’s organizational documents prohibit shareholders from voting on any proposal other than those submitted by its Board of Trustees, then DNI need not include her proposal in its proxy materials because she does not hold securities entitled to be voted on any proposal submitted by shareholders.

To my knowledge, the Skadden Scheme has only been used by business trusts but there is no reason a corporation could not use it, e.g., by adopting a bylaw to limit proposals that shareholders may vote upon to those submitted by the board or mandated by statute. Allowing each company to determine what proposals shareholders can vote upon (other than those legally requiring a vote by shareholders)—and, hence, under Rule 14a-8, rendering them excludable from its proxy materials could make the rule an empty shell. That realization led me to write a letter to the Commission urging it to intervene before the Skadden Scheme goes viral. (My letter to the Commission and Skadden’s request for no action relief on behalf of DNI are available here.)

As I explain in my letter to the Commission, I believe the staff erred in RAIT by conflating the eligibility of a shareholder submitting a Rule 14a-8 proposal with the eligibility of the proposal itself. Yet, even if the Commission believes it is powerless to prevent companies from utilizing the Skadden Scheme to effectively opt out of Rule 14a-8, it has other options to preserve the usefulness of the rule including encouraging the stock exchanges it oversees to require listed issuers to permit shareholders to vote on any shareholder proposal that is not prohibited by statute.