Marc Rotter at Ropes & Gray recently issued a client note about an update to SEC’s “guidance on circumstances in which investors engaging with issuers on ESG and other matters can file a short-form Schedule 13G [for certain investors with more than 5% of a company’s equities that do not intend to influence or control the company] as a passive or institutional investor rather than a long-form Schedule 13D”, which applies to investors who do intend to exert control or influence the company. The updates take the form of a major revision to Question 103.11 and publication of a new Question 103.12 of the SEC’s Compliance and Disclosure Interpretations on Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting.
According to the updates:
“Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be ‘influencing’ control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:
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- Recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
- Discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.”
Last November, we wrote about whether company outreach to investors as part of a Double Materiality Assessment (DMA) could constitute “solicitation” under US securities rules. We concluded that
“outreach to shareholders for DMA input as ‘general off-season engagement’ may not be solicitation, [but] it must be done within certain guardrails. Seeking input from a shareholder that has shown interest in ESG by submitting an ESG-related proposal (or is planning one) may be particularly tricky.”
On the flip side, investors must exercise caution when providing input to DMAs – possibly triggering SEC filings to do so. This is an obstacle about which companies should know when setting expectations about shareholder responsiveness to these requests.
Members can learn more about shareholder engagement here.
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