A Creative Approach to Resisting Shareholder Proposals Pays Dividends


Phillips Lytle LLP’s securities practice recently brought its litigation experience to bear on behalf of a client – National Fuel Gas Company (“National Fuel”) – faced with a shareholder proposal, which the proponent sought to circulate to all shareholders in National Fuel’s annual proxy statement.  National Fuel believed that the proposal, if approved, would harm long-term shareholder value.  The shareholders of other public companies frequently approved similar proposals.

When we were retained, we first reviewed the Securities and Exchange Commission (“SEC”) regulations pertaining to shareholder proposals.  These regulations create and limit a shareholder’s right to use the corporation’s proxy statement to submit proposals for other shareholders’ approval.  See generally 17 C.F.R. § 240.14a-8 (“Rule 14a-8”).  Crucial to our case, we noted that not all shareholders are eligible proponents.  Among other requirements, a putative proponent must hold a certain amount of a “company’s securities entitled to be voted on the proposal at the meeting.”  Rule 14a-8(b)(1).  A proponent must also state, in writing, its intent “to continue to hold the securities through the date of the meeting of shareholders.”  Rule 14a-8(b)(2)(i).

An investigation, conducted in close collaboration with National Fuel’s in-house counsel, revealed that the proponent had delegated the right to buy, sell, or vote its shares of National Fuel stock to outside money managers.  We asserted that the regulation requires that the proponent itself, rather than some other entity, be entitled to vote the securities.  Rule 14a-8’s legislative history strongly supports this interpretation.  Adoption of Amendments Relating to Proposals by Security Holders, Exchange Act Release No. 12999, 1976 WL 160347, at *1-2 (Nov. 22, 1976).  Thus, the proponent was ineligible to submit the proposal, having forfeited its right to vote its shares of National Fuel stock.  Moreover, the proponent could not meaningfully promise to hold its shares of National Fuel stock through the shareholders meeting, having relinquished its discretion to buy or sell those shares.

Conventional wisdom and practice among public companies facing similar proposals dictated that National Fuel either “roll over” and publish the proposal, hoping its shareholders would vote intelligently, or request a “no-action letter” from the SEC.  Instead, on National Fuel’s behalf, we sued the proponent in federal district court, seeking a judgment declaring the proponent ineligible to submit the proposal. 

The suit proved effective.  Rather than defend the action, the proponent withdrew its proposal.

Chalk that win up to aggressive protection of the long-term interests of the client, and the teamwork between Phillips Lytle’s litigators and National Fuel’s general counsel’s office.

If you have any questions, or for additional information, please contact Kenneth A. Manning at (716) 847-7041, kmanning@phillipslytle.com, or John G. Schmidt Jr. at (716) 847-7095, jschmidt@phillipslytle.com.


Topics:  Proxy Statements, SEC, Shareholder Proposals

Published In: Business Organization Updates, Energy & Utilities Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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