In May 2017, Nasdaq published a report titled The Promise of Market Reform: Reigniting America’s Economic Engine. The report stems from Nasdaq’s concern about the state of U.S. pubic markets, which have become “more complex and costly for issuers, particularly for publicly-listed small and medium growth companies and for private companies that might consider public offerings.”
The report emphasizes that “companies increasingly question whether the benefits of public ownership are worth the burdens” and warns that if such burdens are not addressed, it “could ultimately represent an existential threat to our markets” as “a growing number of companies have been choosing to remain private—and some public companies are reversing course and going private.”
But Nasdaq’s report does not just create an alarm, it sets forth a blueprint for “critically-needed reforms.”
The report identifies the following three specific problems and offers concrete solutions in these areas:
(i) a complex patchwork of regulation disincentivizes market participation and creates the need to reconstruct the regulatory framework;
(ii) a one-size-fits-all market structure deprives companies of the benefits they need to participate in public markets (particularly for small and medium growth companies), which can be fixed by modernizing the market structure; and
(iii) a culture in the investment community and in the mainstream media that values short-term returns that should be changed to promote long-termism.
For example, Nasdaq suggests that the reconstruction of the regulatory framework would involve: (i) reforming the proxy proposal process; (ii) reducing the burden of corporate disclosure; (iii) rolling back politically-motivated disclosure requirements; (iv) reducing the burden of meritless class action lawsuits; and (v) a tax reform to incentivize long-term investing.
The implementation of most Nasdaq-suggested reforms would involve a lengthy rulemaking process, but it’s important that a dialogue about these issues “among investors, public and private companies, industry groups, and policymakers” has been launched.
Smaller reporting companies are subject to say-on-pay and say-on-frequency votes for the first time this year. In January 2011, the SEC adopted final rules implementing the say-on-pay and say-on-frequency requirements of the Dodd-Frank Act. Under such rules, public companies are required to conduct shareholder advisory votes (i) to approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K, and (ii) to determine how often an issuer will conduct a shareholder advisory vote on executive compensation. Public companies, other than smaller reporting companies, were required to conduct such votes starting with the 2011 proxy season. Smaller reporting companies did not have to conduct such votes until their first annual or other meeting of shareholders occurring on or after January 21, 2013.
In drafting their proxy statements for this year’s annual meeting, smaller reporting companies should look to strategies utilized by other public companies during the past two proxy seasons to avoid a failed say-on-pay vote. For example, public companies have been using their proxy statements, especially their Compensation Discussion and Analysis section, as an opportunity to explain their executive compensation practices to shareholders. Although smaller reporting companies are not required to include a CD&A in their proxy statements, they may want to include disclosure similar to the CD&A or, at a minimum, a summary of executive compensation practices in their proxy statements this year to discuss the company’s compensation philosophy and how executive compensation is aligned with performance.
The Division of Corporation Finance released Staff Legal Bulletin 14G on October 16, 2012 providing additional guidance for excluding shareholder proposals under Rule 14a-8 based on proof of ownership and references to websites:
• The SEC clarified that for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8, a proof of ownership letter from an affiliate of a DTC participant satisfies the requirement to provide a proof of ownership letter from a DTC participant.
• A shareholder who holds securities through a securities intermediary that is not a broker or bank can satisfy Rule 14a-8’s documentation requirement by submitting a proof of ownership letter from that securities intermediary. If the securities intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant or an affiliate of a DTC participant that can verify the holdings of the securities intermediary.
• The SEC said that it will not concur in the exclusion of a proposal under Rules 14a-8(b) and 14a-8(f) on the basis that a proponent’s proof of ownership does not cover the one-year period preceding and including the date the proposal is submitted unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect. The SEC views the proposal’s date of submission as the date the proposal is postmarked or transmitted electronically. In addition, companies should include copies of the postmark or evidence of electronic transmission with their no-action requests.
• If a shareholder proposal or supporting statement refers to a website that provides information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, the SEC believes the proposal would raise concerns under Rule 14a-9 and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite. However, if shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information provided on the website, then the SEC believes that the proposal would not be subject to exclusion under Rule 14a-8(i)(3) on the basis of the reference to the website address.
• The SEC will not concur that a reference to a website may be excluded as irrelevant under Rule 14a-8(i)(3) on the basis that it is not yet operational if the proponent, at the time the proposal is submitted, provides the company with the materials that are intended for publication on the website and a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.
• If information on a website changes after submission of a proposal and the company believes the revised information renders the website reference excludable under Rule 14a-8, the SEC may concur that the changes to the referenced website constitute “good cause” for the company to file its reasons for excluding the website reference after the 80-day deadline under Rule 14a-8(j) and grant the company’s request that the 80-day requirement be waived.
The Bulletin is available at http://www.sec.gov/interps/legal/cfslb14g.htm.