The message from Securities and Exchange Commission Chairman Mary Jo White to activist investors and the companies they seek to influence: play nice. “It is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike,” she said during a speech Tuesday at Tulane University.
White addressed the role the SEC has amid those often caustic debates and the disclosure requirements that relate to those fights. She also shared her views on the role the SEC may play when bylaws and charter provisions shift the company’s costs in shareholder litigation to the plaintiff if they lose or are not entirely successful.
“Increasingly, companies are talking to their shareholders, including so-called activist ones,” White said. “That, in my view, is generally a very good thing. Increased engagement is important and a growing necessity for many companies today.”But that spirit of cooperation with activist investors is still far from the norm. Company leadership is not easily persuaded that activists are, as they may claim, interested in increasing long-term value.
“Our role at the SEC is not to determine whether activist campaigns are beneficial or detrimental in any given circumstance,” White said. “The agency’s central focus is making sure that shareholders are provided with the information they need and that all play by the rules.”
The Division of Corporation Finance typically gets involved once an activist campaign becomes public through a proxy fight or other non-routine proxy solicitation, a tender offer, or disclosure in an investor’s beneficial ownership reports. It reviews materials related to these campaigns to facilitate compliance with applicable disclosure requirements. “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,” White said.
For example, all 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,” she said. Recently, the SEC brought actions against eight individuals and entities—including officers, directors and major shareholders—for failing to update their 13Ds to reflect material changes.
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 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,” White said.
As for fee-shifting bylaws White acknowledged “a great deal of debate.” In May 2014, the Delaware Supreme Court ruled that a fee-shifting provision in a bylaw could be valid under Delaware law, although it left open 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. Subsequently, more than 40 companies adopted some form of similar fee-shifting provisions and concerns have been raised that such bylaws could stifle shareholder actions.
“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 or public policy arguments,” White said. For now, however, the focused on making sure the disclosures in company filings about their fee shifting provisions clearly communicate to shareholders the specific features of the provisions and the effect on their ability to bring a claim. “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,” she said.