ANALYSIS: Is the No-Action Letter Process on Its Way Out?

US companies have included an impressive 608 shareholder proposals in their definitive proxy statements so far this year.

One explanation for this high count is that companies are taking a step back from the no-action letters—a process companies typically use to obtain SEC feedback on whether they may keep proposals out of their proxy statements under Rule 14a-8.

No-Action Letter Process

There are 13 substantive grounds for companies to exclude a shareholder proposal from their proxy statement under Rule 14a-8. The substantive grounds of exclusion most frequently mentioned in no-action letter correspondence are management functions (14a-8(i)(7)), substantially implemented (14a-8(i)(10)), and proxy rule violations (14a-8(i)(3)).

In 2023, most of the substantive bases for exclusion were mentioned less than they were in 2022. As for this year, the bulk of proxy season activity has already taken place. Because the correspondence mentioning the three most popular exclusions is about half of what it was last year, it’s highly likely that the no-action letter correspondence mentioning these substantive exclusions will decrease again.

While it’s possible that more proposals are adhering to the 14a-8 requirements, that doesn’t seem to be a compelling explanation for the drop. Many stakeholders in recent years have argued that proposals are becoming increasingly prescriptive (potentially in violation of the management functions exclusion).

So how are companies addressing perceived deficiencies in proposals?

Risking a Proxy Vote

Some companies appear to be more willing to take proposals to a vote. Of the 608 proposals included in definitive proxy statements YTD, nearly 90% (540) failed to pass a shareholder vote.

Year-end approval rates for 2023 were even grimmer—92% (593 of 644 proposals) failed to pass a shareholder vote, the lowest since 2017. With so few shareholders proposals passing, companies may be opting to let proposals into their proxy statements and then risking a vote over requesting a nonbinding no-action letter from the SEC (and hoping the agency responds).

But not all companies are willing to take that risk.

Taking Proposals to Court

On Jan. 21, Exxon Mobil Corp. skipped the traditional no-action letter path and filed a lawsuit in the Northern District of Texas, asking the court to declare that a shareholder proposal submitted by Arjuna Capital LLC and shareholder advocacy organization Follow This was excludable from the company’s proxy statement. Specifically, Exxon alleged that the proposals violated Rule 14a-8’s management function exclusion and resubmission threshold (14a-8(i)(7) and 14a-8(i)(12), respectively).

Arjuna and Follow This withdrew their shareholder proposal shortly thereafter, but Exxon proceeded with the lawsuit, concerned that the shareholders could resubmit their proposal. The case was ultimately dismissed on June 18 after Arjuna and Follow This assured the court that they would not resubmit the proposal.

Although the court didn’t determine whether the proposal violated proxy rules, the willingness of a company to ask a court to weigh in—rather than looking to the SEC for (nonbinding) answers—may be the catalyst for additional companies to circumvent the no-action letter process when they want to exclude a proposal.

The gap between shareholder proposals included in proxy materials and no-action letter correspondence may continue to increase as companies weigh whether seeking nonbinding SEC guidance is worth it.

Bloomberg Law subscribers can find related content on our ESG Practice page, as well as our Practical Guidance: Shareholders page. Shareholder proposal data accessible at BI PROXY <GO>.

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