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A Few Observations on Shareholders in 2015

Chair Mary Jo White

Tulane University Law School 27th Annual Corporate Law Institute<br/>New Orleans, Louisiana

March 19, 2015


Thank you, Faiza [Saeed], for that kind introduction. I am honored to be here at Tulane’s 27th Annual Corporate Law Institute. As usual, you have gathered an incredibly distinguished group to discuss cutting-edge issues in M&A.

Today, I will share a few observations on three specific areas: the current state of shareholder activism; the shareholder proposal process; and fee-shifting bylaws. I know your next two panels take up aspects of these important topics, but I think the space is lively and big enough for all of us to comment.

The Current Activism Landscape

There are different views on what is meant by “shareholder activism,” but just the word “activism” triggers an adverse reaction from many companies. Reflexively painting all activism negatively is, in my view, using too broad a brush and indeed is counterproductive. To me, the term activism captures the range of efforts by investors to influence a company’s management or decision-making. Some of it is constructive. In certain situations, activism seeks to bring about important changes at companies that can increase shareholder value. Now, some of you may find the juxtaposition of the word “activism” with “shareholder value” does not comport with your sense of reality. Some of you also believe that activists are not interested in increasing long-term value for shareholders and other stakeholders. Still others will assert that activists are simply short-term traders looking to make a quick dollar. I did say this was a lively topic with many different views.

Activism is used to achieve a variety of outcomes: board seats or control of the board; an acquisition or spin-off of a non-core or unprofitable line of business; or a share buyback. Negotiations between an activist and a target company may take place privately, or an activist may choose to go public. An activist may also begin a campaign behind the scenes, but go public if it believes it is not being heard or making enough progress. Any of these approaches, if used in the right circumstances, can be compatible with the kind of engagement that I hope companies and shareholders can foster.

Increasingly, companies are talking to their shareholders, including so-called activist ones.[1] That, in my view, is generally a very good thing. Increased engagement is important and a growing necessity for many companies today.

The activism landscape in 2015 continues to evolve. While activists traditionally focused on small and significantly underperforming companies, many of them today are also targeting larger issuers that are not necessarily poor performers. [2] Campaigns also appear to be experiencing greater success. Activist investors secured at least one board seat in roughly 73% of all proxy fights in 2014, up from the previous year’s record of 63%.[3] And the campaign objectives appear to be shifting, with breakups, a review of strategic alternatives, and corporate control transactions featuring more prominently, and governance issues arising less frequently.[4]

Hedge funds are playing a much more prominent role in this space and their size and influence are growing; interesting, new players are joining their ranks. The total assets under management for such funds has been pegged at more than $120 billion in 2015 — a roughly 30% jump from 2014.[5] Their growing presence has undeniably changed the corporate landscape. But is that good or bad, or both?

As you know, an intense debate is taking place in the business, legal and academic communities as to whether activism by hedge funds and others is a positive or negative force for U.S. companies and the economy. Some believe that activism of all stripes is essential to effect necessary management and board changes at underperforming companies,[6] while others contend that certain activism results in short-term gains at the expense of companies and shareholder value in the long run.[7] Competing economic studies have helped fuel the debate by asserting that activism leads to either increased or decreased long-term economic well-being for targeted companies. One study, for example, found that activist campaigns are followed by improved operating performance during the five-year period after the campaign,[8] while another study observed that activists’ impact on operating performance is, at best, “very unclear.”[9]

It is an interesting and important debate, but our role at the SEC is not to determine whether activist campaigns are beneficial or detrimental in any given circumstance. Rather, the agency’s central focus is making sure that shareholders are provided with the information they need and that all play by the rules.

Our staff in the Division of Corporation Finance typically gets involved once an activist campaign becomes public, be it by way of a proxy fight or other non-routine proxy solicitation, a tender offer, or pertinent disclosure in an investor’s beneficial ownership reports. The staff reviews materials related to these campaigns to facilitate compliance with the applicable disclosure requirements so that shareholders receive the information necessary to make an informed investment or voting decision. No matter how contentious the relationship is between the activist and the company, or how high the stakes, all parties, including activists and management, are obligated under the federal securities laws to provide shareholders with timely, clear, complete and accurate disclosures about the subject matter and their interests.[10]

All parties should make their obligations under the federal securities laws a high priority. For example, parties should be mindful of the requirements under Regulation 13D-G to file their initial and amended beneficial ownership reports on a timely basis, and provide accurate and complete disclosure about their plans or proposals, rather than recite boilerplate that obfuscates their true intentions or their coordination with other investors. The concern about inaccurate and incomplete beneficial ownership reports is not theoretical. Just last week, we brought actions against eight individuals and entities — including officers, directors and major shareholders — for failing to update their 13Ds to reflect material changes, including a series of significant steps to take the companies private. [11]

Activists and companies should also pay special attention to Exchange Act Rule 14a-9 — the prohibition against making material false and misleading statements or omissions in proxy solicitations — as they make their cases for or against change in their fight letters and other communications under the federal proxy rules. While I appreciate the importance of allowing the parties to fully debate the issues in what may be adversarial situations, they should be careful not to make claims or accuse others of wrongdoing without an adequate factual foundation.

While I am on the topic of disclosure, it was implicated in an interesting way in a recent takeover bid this past year — a bid with which you are likely familiar. In that bid, we saw a unique pairing of a strategic bidder and an activist hedge fund in which the parties took novel and, for some, controversial steps that generated significant interest. Initially, the hedge fund publicly sought to call an informal meeting of the target company’s shareholders and filed a proxy statement with the Commission for a solicitation in connection with such a meeting, which it referred to as a “shareholder referendum” — a mechanism not provided for in the company’s bylaws. The objective was to seek shareholder support in favor of a non-binding resolution to request that the target’s board promptly engage in good faith negotiations about an acquisition of the company.

Some questioned whether a shareholder has the ability to call a meeting of shareholders outside of a company’s bylaw framework, hold a non-binding vote by way of a proxy solicitation, and file a purported proxy statement under the proxy rules. Specific questions were raised about whether communications relating to such a shareholder referendum should be allowed to be filed as soliciting materials under the Commission’s proxy rules. The concern was that doing so could give the disputed materials a form of official imprimatur. All fair questions.

SEC rules do not specifically address shareholder referendums. And it is state law and a company’s corporate instruments that provide the rules for shareholder meetings and specify what are proper matters for shareholder action. Whether a shareholder referendum is a form of proper corporate action under state law is thus a question best left to state legislatures and the courts. For our part, the Commission has long taken steps to facilitate shareholders communicating with one another.[12] Our federal proxy rules, which quite broadly define the term “solicitation,” provide procedural protections that support the exercise of voting rights granted under state law.[13]

To fully effectuate that objective, the staff has a longstanding practice of accepting and looking at all filings, even if it is unclear whether the filing was required under our rules as a “solicitation.” Whenever a filing is made, we expect it to fully comply with the applicable disclosure requirements, and filers assume potential liability under the federal securities laws. The staff’s goal in such a situation is to ensure that the filing complies with the applicable rules and that shareholders are provided with complete and accurate material information. The alternative in this context would be for the referendum to go forward under the radar, without public disclosure, without SEC staff oversight, and without the protection of our rules.

Ultimately, the shareholder referendum I mentioned was abandoned and the hedge fund called a special meeting of the target company’s shareholders pursuant to the company’s bylaws. We do not know whether other activist shareholders will try the shareholder referendum approach in future campaigns. If they do, you can expect the SEC staff to perform its oversight role of ensuring that investors receive timely, complete and accurate disclosure.

Even though the SEC staff does not act as a “merits or behavior referee,” parties should still take a hard look at their actions and rhetoric and consider whether they are engaged in a constructive dialogue and facilitating a constructive resolution. I recognize, of course, that highly sophisticated strategies have come to dominate proxy fights and takeover bids; I have been involved in them as a private sector lawyer. And it is not my intent to threaten the vibrancy of anyone’s practice area. But I do think it is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike. Fortunately, by some accounts, companies and activists are starting to make positive progress,[14] as they increasingly engage with each other and negotiate outcomes that seem more mutually beneficial.

* * *

Rule 14a-8 Shareholder Proposals

Shareholders obviously do not have to resort to a proxy contest to engage with companies. They can and often do engage through the SEC shareholder proposal process.

Exchange Act Rule 14a-8 enables shareholders meeting certain requirements to have their proposal included in a company’s proxy materials. And shareholders often take advantage of this option. By one count, over 400 shareholder proposals were voted on at U.S. companies in 2014.[15] The total number of shareholder proposals submitted to companies was undoubtedly much higher as this tally does not reflect the proposals that may have been submitted and withdrawn as a result of negotiations between companies and their shareholders, or that may have been excluded under our shareholder proposal rule.

This proxy season, there has been special interest in the shareholder proposal and staff no-action process. I played a role in that.

The initial event that sparked interest was the staff’s decision in December on a no-action request by a company to exclude from its proxy materials, under Rule 14a-8(i)(9), a shareholder proposal seeking proxy access, on the grounds that it directly conflicted with a proposal subsequently made by the company.[16] Many other companies have received similar shareholder proposals, and, after the initial no-action letter was granted, they made similar arguments in seeking no-action letters from the staff to exclude the proposals.[17]

One shareholder proponent raised questions about the proper application of our rules and sought reconsideration of the staff’s initial decision to issue a no-action letter. Others raised questions as well.[18] After reviewing the proposals, counterproposals and competing arguments, I was not comfortable that I or the staff had sufficient opportunity to consider the questions and concerns that were raised about how to interpret the term “directly conflicts” under Rule 14a-8 in the particular context presented. So, I requested that the staff review the appropriate application of the provision and report to the Commission on its findings.[19] In light of the pending review, the Division of Corporation Finance decided not to express a view on the provision during the current proxy season.[20]

The staff’s review is ongoing, and it would not be appropriate to talk about the specifics of the proposal or staff responses. But I would like to make a few comments about our shareholder proposal rule and the no-action process generally.

Every year, the staff receives approximately 300-400 requests to exclude shareholder proposals under Rule 14a-8. A team of staff members reviews these requests and provides a response to assist both companies and shareholders in complying with the rule. While the staff strives for consistency and correctness in the administration of this process, their informal responses are neither “precedent” nor binding on the Commission or a court. And, over time, views and interpretations may evolve, and changes may be reflected in guidance, interpretation, or rule changes if necessary.[21]

While the staff works tirelessly to review and respond to all requests consistently and in a timely manner, they have the discretion to decline to review requests for no-action letters. It is, and should be, rare for the staff to decline to review a request, but it does happen, as it did this proxy season.[22]

There has been considerable discussion — and some not insignificant consternation — about my direction to the staff to examine the application of Rule 14a-8(i)(9) and the staff’s subsequent decision to decline this season to review requests asserting that rule as a basis for exclusion. I recognize that my direction and the staff’s decision has raised new questions and resulted in a change in how some companies were expecting to address some shareholder proposals this season. While any frustrated expectations are regrettable, my request was driven by a deeper concern that the application of (i)(9), as originally interpreted by the staff, could result in unintended consequences and potential misuse of our process. The purpose of the review is to think carefully about the application of the rule and a variety of related questions.

Keith Higgins, our Director of the Division of Corporation Finance, recently discussed a number of these questions.[23] By way of example, if a management proposal is made in response to a shareholder proposal on the same subject matter, does that end the inquiry — and the company may exclude the shareholder proposal because it “directly conflicts” with management’s proposal? What if the proposals have the same subject matter, but the terms differ? What if management’s proposal could be viewed as a proposal that, if adopted, may purport to provide shareholders with the ability to do something, such as call a special meeting or include a nominee for director in a company’s proxy materials, but that, in fact, no shareholder would be able to meet the criteria to do so? If a company excludes a shareholder proposal because it conflicts with the company’s own proposal on the same subject matter, should the company have to disclose to its shareholders the existence of the shareholder proposal? What if the company’s competing proposal was offered only in response to the shareholder’s proposal — should the company have to disclose its motivations for its own proposal? I am looking forward to the results of the staff’s review on these and other questions.

In impartially administering the rule, we must always consider whether our response would produce an unintended or unfair result. Gamesmanship has no place in the process.

* * *

Fee-Shifting Bylaws

Changing focus a bit, I would like to briefly mention one more issue that appears to be getting some initial traction in the issuer community — fee-shifting bylaws. A great deal of debate has taken place about bylaw and charter provisions that shift the company’s costs in shareholder litigation to the plaintiff shareholder if the shareholder loses or is not entirely successful on all claims.

Just for context, the so-called “American rule” is that each party in litigation generally bears its own costs.[24] In shareholder derivative actions, however, courts can require that a company pay the attorneys’ fees of a successful shareholder out of the proceeds of any judgment or settlement.[25] This is designed to incentivize a shareholder to bring suit where the costs could be high and the individual return may be small but shareholders as a whole could benefit.[26] Under the federal securities laws, Section 11(e) of the Securities Act also allows, in the court’s discretion, the imposition of costs and attorneys’ fees against either party whose suit or defense is found to have been without merit, including in class actions.[27]

In May 2014, the Delaware Supreme Court ruled that a fee-shifting provision in a bylaw could be valid under Delaware law,[28] although it left open the questions of whether the manner in which the provision was adopted or the circumstances under which it would be invoked could make the bylaw unenforceable. Thereafter, more than 40 companies[29] adopted some form of similar fee-shifting provisions. Concerns have been expressed that such bylaws could stifle shareholder actions against companies because the provisions are one-sided and only apply to shareholders who lose, including, in some situations, those who lose any part of their claim. Recently, the Delaware Corporation Law Council[30] recommended that the Delaware General Corporation Law be amended to expressly prohibit companies from including fee-shifting bylaws for claims brought against officers and directors for violation of their state law duties, but no action has been taken to date.

There have been calls for the Commission to intervene in some way, including possibly participating by way of an amicus brief in an appropriate case to advance possible pre-emption and/or public policy arguments. [31] While I am not commenting today on such calls or the merits of any particular argument, I will say that the SEC and courts have long recognized that the ability of shareholders to bring an action under the federal securities laws provides them with an important remedy that can complement our enforcement actions.[32]

Our staff is thus keeping a very close eye on the evolving developments, and I am too. Specifically, our staff is focused on making sure the disclosures in company filings about its fee shifting provision — and the implications of such provisions — are clear. If a company chooses to adopt a fee-shifting provision, it should clearly communicate to shareholders the specific features of the provisions and its effect on shareholders’ ability to bring a claim. Shareholders should be fully informed of a company’s efforts to affect their ability to seek redress so that the issue can be considered in voting and investment decisions.

I am concerned about any provision in the bylaws of a company that could inappropriately stifle shareholders’ ability to seek redress under the federal securities laws. All shareholders can benefit from these types of actions. If the Commission comes to believe that these provisions improperly hinder shareholders’ exercise of their rights, it may need to weigh in more directly in this discussion, as it did with indemnification under the Securities Act.[33]


Let me stop here. What I have been advocating a bit today is a more open, constructive and balanced approach between companies and their shareholders. Companies should continue toward greater engagement with their owners, and carefully listen to their views. Activists should act responsibly and according to the rules. The strategic creativity of lawyers on either side may not always best serve the public interest. Upending the traditional roles of management, boards, and shareholders should not be the objective. Companies need their management and boards focused on their “jobs” so they can deliver shareholder value and contribute to the economic growth and innovation on which our country has always depended. But resisting all change, stonewalling every overture or ignoring the views of shareholders is also not acceptable or productive. Constructive engagement should be everyone’s goal.

Thank you. Enjoy your conference.


[1] See “Let’s Talk: Governance, 2014 Proxy Season Review,” EY Center for Board Matters (July 2014), available at$FILE/ey-proxy-season-review.pdf. There are efforts to provide services to assist in this engagement and to establish procedures and protocols for what some think engagement should look like. See, e.g., Shareholder-Director Exchange, available at

[2] “The Activist Revolution: Understanding and Navigating a New World of Heightened Investor Scrutiny,” J.P. Morgan Corporate Finance Advisory Publication, Section 3.2 (January 5, 2015), available at See also “An Investor Calls,” Economist (February 7, 2015), available at The number of companies with a market cap over $10 billion facing campaigns to secure board seats or some other fundamental change has nearly doubled over the last two years — from 11 in 2012 to 21 in 2014. See Ronald Orol and Paula Schaap, “Insurgencies by the Numbers,” Deal Pipeline (December 26, 2014), available at (citing FactSet).

[3] David Benoit, “Activists Are on a Roll, With More to Come,” Wall Street Journal (January 1, 2015), available at (citing FactSet).

[4] “The Activist Revolution: Understanding and Navigating a New World of Heightened Investor Scrutiny,” J.P. Morgan Corporate Finance Advisory Publication, Section 3.1 (January 5, 2015), available at See also “An Investor Calls,” Economist (February 7, 2015), available at (noting that according to FactSet, half of the demands made by activists in 2014 fell into one of three categories: a buy-back, the spin-off of a non-core subsidiary or the search for a merger partner).

[5] “An Investor Calls,” Economist (February 7, 2015), available at; David Benoit, “Activists Are on a Roll, With More to Come,” Wall Street Journal (January 1, 2015), available at (citing Hedge Fund Research); “The Activist Revolution: Understanding and Navigating a New World of Heightened Investor Scrutiny,” J.P. Morgan Corporate Finance Advisory Publication, Section 1 (January 5, 2015), available at

[6] Stephen Foley, “Shareholder Activism: Battle for the Boardroom,” The Financial Times (April 23, 2014), available at (“Companies that are doing poorly are the ones that tend to get targeted…. A well thought out business plan for a company that has become somewhat entrenched in its thinking can result in all shareholders over time becoming substantially enriched.”).

[7] David A. Katz and Laura A. McIntosh, “Corporate Governance Update: Engagement and Activism in the 2015 Proxy Season,” NYLJ (January 29, 2015), available at

[8] Lucian A. Bebchuk, Alon Brav, and Wei Jiang, “The Long-Term Effects of Hedge Fund Activism,” 114 Columbia Law Review (June 2015) (forthcoming), available at

[9] John C. Coffee, Jr. and Darius Palia, “The Impact of Hedge Fund Activism: Evidence and Implications,” 64 (September 15, 2014), available at

[10] See, e.g., Schedule 14A and Rule 14a-9 of the Securities Exchange Act of 1934 (“Exchange Act”) for the disclosure required in proxy solicitations; Schedules TO and 14D-9 and Exchange Act Section 14(e) for the disclosure required in connection with certain tender offers; and Schedule 13D for the disclosure to be provided by certain beneficial owners of greater than 5% of a class of a registered equity security. For instance, a company that is the target of a third-party tender offer subject to Exchange Act Section 14(d)(1) must disclose in a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9, among other things, any material actual or potential conflicts of interest (Item 3 of Schedule 14D-9 and Item 1005(d) of Regulation M-A); the reasons for its position (including the inability to take a position) with respect to the tender offer (Item 4 of Schedule 14D-9 and Item 1012(b) of Regulation M-A); and, whether or not it is undertaking or engaged in any negotiations concerning a possible alternative transaction in response to the tender offer (Item 7 of Schedule 14D-9 and Item 1006(d) of Regulation M-A). As another example, a shareholder who reports its beneficial ownership on Schedule 13D must disclose the purpose of the acquisition of shares, including any plans to affect the issuer’s board of directors or cause an extraordinary corporate transaction. See Item 4 of Schedule 13D.

[11] See Press Release No. 2015-47, Corporate Insiders Charged for Failing to Update Disclosures Involving “Going Private” Transactions (March 13, 2015), available at

[12] See, e.g., Exchange Act Release No. 34-31326 (October 16, 1992).

[13] Exchange Act Rule 14a-1(l) defines “solicitation” as “(i) Any request for a proxy whether or not accompanied by or included in a form of proxy; (ii) Any request to execute or not to execute, or to revoke, a proxy; or (iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”

[14] See “Let’s Talk: Governance, 2014 Proxy Season Review,” EY Center for Board Matters (July 2014), available at$FILE/ey-proxy-season-review.pdf.

[15] See, e.g., Shareholder Proposal Developments During the 2014 Proxy Season (June 25, 2014), available at

[16] Exchange Act Rule 14a-8(i)(9). See Whole Foods Market, Inc. (December 1, 2014), available at

[18] See, e.g., Letter from Council of Institutional Investors to Keith F. Higgins, Director of the Division of Corporation Finance (January 9, 2015), available at

[19] See Statement from Chair White Directing Staff to Review Commission Rule for Excluding Conflicting Proxy Proposals (January 16, 2015), available at

[20] See Division of Corporation Finance Will Express No Views under Exchange Act Rule 14a-8(i)(9) for Current Proxy Season, available at

[21] See, e.g., Staff Legal Bulletin No. 14E (October 27, 2009) (reexamining, and announcing a new framework for, the analysis used to determine the excludability under Exchange Act Rule 14a-8(i)(7) of proposals relating to risk), available at

[22] See Whole Foods Market, Inc. (January 16, 2015), available at and Hewlett-Packard Company (January 22, 2007), available at

[23] See Rule 14a-8: Conflicting Proposals, Conflicting Views, Keith F. Higgins, Director, Division of Corporation Finance (February 10, 2015), available at

[24] See Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247 (1975).

[25] See 1 R. Franklin Balotti and Jesse A. Finkelstein, Delaware Law of Corporations and Business Organizations, Section 13.19[C] (Supp. 2013) (collecting cases).

[26] Id. (“Attorneys’ fees are awarded to create the incentive for shareholders to bring meritorious lawsuits (thus operating as checks on corporate behavior) and litigating such lawsuits efficiently.”).

[27] See Securities Act Sections 11(e) (“…In any suit under this or any other section of this subchapter the court may, in its discretion, require an undertaking for the payment of the costs of such suit, including reasonable attorney’s fees, and if judgment shall be rendered against a party litigant, upon the motion of the other party litigant, such costs may be assessed in favor of such party litigant (whether or not such undertaking has been required) if the court believes the suit or the defense to have been without merit, in an amount sufficient to reimburse him for the reasonable expenses incurred by him, in connection with such suit, such costs to be taxed in the manner usually provided for taxing of costs in the court in which the suit was heard.”). See also Exchange Act Section 21D(a)(8) (“In any private action arising under this chapter that is certified as a class action pursuant to the Federal Rules of Civil Procedure, the court may require an undertaking from the attorneys for the plaintiff class, the plaintiff class, or both, or from the attorneys for the defendant, the defendant, or both, in such proportions and at such times as the court determines are just and equitable, for the payment of fees and expenses that may be awarded under this subsection.”).

[28] See ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). The court answered four certified questions from the United States District Court for the District of Delaware as follows: (1) fee-shifting bylaws may be lawfully adopted under Delaware law; (2) if otherwise valid and enforceable, the bylaw could shift fees if a plaintiff obtained no relief in the litigation; (3) the bylaw would be unenforceable if adopted for an improper purpose; and (4) the bylaw would generally be enforceable against members who joined the company before the provision’s enactment.

[29] See “Fee-Shifting Bylaws,” Council of Institutional Investors, available at

[30] The Delaware Corporation Law Council is a committee of the Delaware State Bar Association responsible for formulating and recommending to the Delaware General Assembly, after approval by the Delaware State Bar Association, amendments to the Delaware General Corporation Law. See

[31] See, e.g., Testimony of Professor John C. Coffee Jr. Before SEC Investor Advisory Committee (October 9, 2014), available at

[32] See Brief for the United States as Amicus Curiae Supporting Respondent, Halliburton Co. v. Erica P. John Fund, Inc. (“Meritorious private securities-fraud actions are “an essential supplement to criminal prosecutions and civil enforcement actions” brought by the Department of Justice and the SEC. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007).”), available at

[33] The Commission has taken the position that corporate indemnification of directors for violation of federal securities laws is against public policy and unenforceable, and it requires disclosure about this position in registration statements filed under the Securities Act of 1933. See Items 510 and 512(h) of Regulation S-K. Also, Commission settlement orders have included bars against seeking indemnification. See, e.g., Consent of Defendant Jack Benjamin Grubman, SEC v. Grubman, No. 03-2938 (S.D.N.Y. Apr. 2003), available at

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