Key Points
- Revised guidance from the SEC regarding ownership reporting is making institutional investors circumspect about raising issues with management.
- Seeking to influence a company’s executive compensation, or its social, environmental or political policies, may disqualify a shareholder from filing short-form ownership reports.
- Companies need to respond proactively, anticipating major investors’ issues and information they want but may be reluctant to ask for.
Recently updated guidance from the staff of the Securities and Exchange Commission (SEC) regarding its beneficial ownership reporting rules has had a significant impact on companies’ interactions with major shareholders, making some shareholders cautious about initiating discussions on corporate policies with a company’s management. Companies need to adapt their approaches to engagement to respond to changes from institutional shareholders.
Shareholders with beneficial ownership of more than 5% of a class of registered voting securities must report their holdings on either Schedule 13G or 13D. If they do not hold their securities “with the purpose of changing or influencing the control of the issuer” they can avoid filing the more detailed Schedule 13D. Instead, those passive investors may be eligible to file a simpler form, Schedule 13G. For large institutional investors with more than 5% beneficial ownership in many public companies, the ability to file on a Schedule 13G avoids significant administrative burdens.
In the past, the SEC staff had said in its guidance that engagement with management on executive compensation, environmental, social or other public interest issues, or corporate governance topics unrelated to a change of control, typically would not prevent the shareholder from reporting on Schedule 13G.
While investors in the past have often weighed in on the agenda for engagement meetings, some may no longer do that. Companies should thus not wait for the investor to raise particular topics.
On February 11, 2025, however, the SEC staff rescinded that interpretation and said that investors may no longer be allowed to use the shorter form if they “exert[] pressure on management to implement specific measures or changes to a policy” — that such lobbying about policies may now be deemed to “be ‘influencing’ control over the issuer.”
As examples, the SEC staff cited pressure on management “to 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.”
The change has made institutional investors circumspect about raising policy issues in discussions with a company’s management. And, in response, companies are having to change their approach to interactions with major shareholders. Here is what we are seeing, and how companies can adapt so that their biggest shareholders get the information they want but may now be reluctant to ask for explicitly.
- Change: Investors are being cautious about requesting an engagement and, in many cases, may engage only when requested by companies. Among the factors that investors will likely consider when agreeing to a meeting may include the proposed date of the meeting in relation to the date of the shareholder meeting and the proposals on the agenda at the meeting. Meetings with contested agenda items will likely be greeted with particular caution.
- Response: Companies that want to speak to an investor should take the initiative to arrange the meeting.
- Change: In the past, investors have weighed in on the agenda for engagement meetings. Many investors may no longer do that and, if they do, any suggested agenda topics are expected to be less prescriptive.
- Response: Companies should be prepared to discuss the topics that they expect the investor will likely want to cover and not wait for the investor to raise particular topics.
- Change: Questions from investors at engagement meetings will likely be more open-ended and less targeted. For instance, questions are now likely to be more broadly worded. Such as: “We would appreciate if you could share your thoughts on….”
- Response: Companies should be prepared to answer the questions and add gloss that they expect the investor will want/need to make informed investment decisions.
- Change: Similarly, investors will likely not answer pointed questions, including and most specifically any questions about how the investor intends to vote.
- Response: Companies should be prepared to ask investors more broad-based questions, such as: “Did you get enough information to make an informed voting and/or investment decision.”
- Change: Investors may read disclaimers at the beginning of engagement meetings. The use of these disclaimers will not necessarily eliminate the possible implications under the new SEC staff guidance. Nonetheless, investors will likely want to make it clear that they do not intend to exert pressure or take the discussion beyond what the SEC staff currently thinks is allowed for companies filing on the shorter Schedule 13G.
- Response: Companies may want to respond that they understand the plan for the discussion and they similarly do not intend for the discussion to go beyond what is required.
Many companies have significantly expanded their shareholder engagement efforts over the past few years and companies typically are well served in building productive relationships with their long-term investors, notwithstanding these changes to potential engagement meetings. To make the most of these discussions, companies need to take into consideration the new constraints institutional investors feel because of the revised guidance.
View other articles from this issue of The Informed Board
- Delaware Tells Companies: ‘Let’s Stay Together’
- Making Sure Newly Cautious Shareholders Get the Information They Want
- Director Judy Bruner on Finding the Right Mix of Skills for a Board
- Director Matthew Massengill Shares Firsthand Lessons About Splitting a Company
- Podcast: Should Your Board Consider a Move Out of Delaware?
See all the editions of The Informed Board
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