Commissioner Gallagher Takes on Shareholders Proposals by Corporate Gadflies

By Cydney Posner

This article from Law360 discusses the keynote address of SEC Commissioner Dan Gallagher at the Corporate Law Institute in New Orleans.   His hot topic: a series of suggestions for reforms to reshape how the SEC treats shareholder proposals. The goal of his suggestions: tightening restrictions on activist investors.

According to the article, in Gallagher's view, "dissident investors… capitalize on loose and vague SEC regulations to ‘hijack the shareholder proposal system' and leave companies on the defensive — costing them substantially in the process." In particular, his suggestions seem aimed not at hedge-fund activists but rather at "'corporate gadflies,' which he described [according to the article] as shareholders who routinely level proposals that have little actual basis, capitalizing on weak standards to insert themselves in the boardroom at the expense of other investors." The costs of dealing with these proposals can be significant and can "trickle down" to affect all shareholders, he argues.

One of his proposals is to increase the stock ownership threshold that must be satisfied for a shareholder to have a proposal included in the company's proxy. "Rather than holding $2,000 in shares, he suggested a percentage-based benchmark, a switch he said would filter out willy-nilly filings. He did not offer a specific percentage threshold, and said that number — and exceptions to it — would have to be carefully mapped out by the SEC and drafted in a way that is easily enforceable." (Of course, if the SEC continues to permit "proposals by proxy," it may be that raising the threshold, depending on the level of increase, will not necessarily have much effect.)

The article reports that Gallagher also expressed concern about shareholder proposals for "shakeups and other changes within a company." Currently, the SEC permits exclusion of a proposal that deals with the company's "ordinary business operations," unless it raises "significant policy issues." According to the article, however, Gallagher, contended, "the exclusion criteria are too ambiguous, inviting investor pitches that both distract companies' top brass and have little traction among everyday shareholders. Vague statutory language currently permits proposals that raise ‘significant policy issues' but does not offer a specific rubric for defining that standard. As a result, Gallagher said, questionable calls for change slip through to boardrooms, pushing companies to react. Targeted outfits are backed into a corner, he said, tearing into the existing parameters that require a company to show such statements are false and misleading." Where the SEC's policy allows discretion, he argued, the SEC should provide clear guidance for how that discretion will be exercised.

Gallagher also took aim at proposals that contain materially false or misleading statements. In a 2004 SLB 14B, he noted, the Staff curtailed the use of this ground for exclusion because the type of staff review that would be required was too time-consuming and instead required issuers to rebut or correct the misstatements in their statements in opposition. Gallagher's proposal is to require the proponent of the proposal to satisfy the burden of proving a statement's veracity, a reversal of current policy. Citing the court victory of Express Scripts on this issue (see my email of 3/3/14), Gallagher advocated that the SEC Staff "take a more aggressive posture toward proponents that fail to meet that burden."

Finally, he suggested that the rules further limit the number of times a dissident may introduce the same proposal by adopting a three-strikes rule, which would force any proposals off the table for a set number of years if they did not meet beefed-up investor approval thresholds, such as actual majority support.

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