Regulation 14C and the Effectiveness of a Non-Unanimous Shareholders’ Written Consent

by Kilpatrick Townsend & Stockton LLP
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Securities lawyers know that the regulatory regime for disclosure and shareholder communications under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), when action is being taken by shareholders, includes the low‑profile Regulation 14C as well as the high‑profile Regulation 14A.  Regulation 14A covers the predominant scenario, which involves “soliciting” the public shareholders to support or oppose the subject action.  Regulation 14C covers the much less frequent scenario in which the public shareholders are not being “solicited”.  A typical no‑solicitation scenario – usually involving small to mid‑size public companies – is where a small cohort of shareholders own enough shares to approve an action by written consent without soliciting the public shareholders (a “Non‑Unanimous Written Consent”).  It can raise some interesting questions about the applicability and effect of Regulation 14C.

Most state corporate codes permit shareholder action by Non‑Unanimous Written Consent, and typically require only that reasonably prompt written notice be provided to all shareholders in order to inform them of the action that was taken, by whom it was taken and the effective date of the action taken.  The effective date is typically not tied to the delivery of such written notice; it can be any date beginning with the date on which the last acting shareholder whose consent is necessary to reach the required shareholder approval threshold (the “Last Required Consent”) signs the written consent.

No part of the Exchange Act’s regulatory regime prevents the use of a Non‑Unanimous Written Consent approach.  However, Regulation 14C stands sentinel, and its requirements must be addressed if it applies in that context.  When it applies, Regulation 14C requires the filing with the SEC, and delivery to the public shareholders, of an information statement that meets the disclosure requirements of Schedule 14C (an “Information Statement”).  And, Regulation 14C has implications for the timing of the effectiveness of the subject action.  The answers to whether Regulation 14C applies, and its effects, in certain written consent scenarios are not all clear.  First, the easy answers.

When a meeting of shareholders is being held at which the subject action will be taken (even though no shareholder is being “solicited” with respect to the action), it is manifest that Regulation 14C applies.  Rule 14c‑2(a)(1), which establishes the scope of Regulation 14C’s applicability, is less than a paragon of clarity in one important regard that we discuss below, but there is no doubt that Regulation 14C applies where a written consent is “[i]n connection with . . . [an] annual or other meeting of [security holders] . . . .”

Whenever Regulation 14C applies, Rule 14c‑2(b) states that the Information Statement must be delivered to the public shareholders “at least 20 calendar days prior to the earliest date on which the corporate action may be taken.”  The prerequisites for the Information Statement delivery are analogous to those for a Schedule 14A proxy statement when Regulation 14A applies, including its filing with the SEC no later than its first dissemination to the shareholders.  As a result, Regulation 14C operates to impose at least a 20‑day delay on the effectiveness of the subject action, calculated from the date of the Last Required Consent.

Query, then, the effective date ‒ and the validity of the subject action per se ‒ in a situation where a Non‑Unanimous Written Consent purports to be “effective immediately” on the date of receiving the Last Required Consent?  And, what result if there is no filing or delivery of a compliant Information Statement?  We return to those questions in a moment; but, first, the other part of the threshold applicability issue.

Regulation 14C’s applicability is less clear in the written consent scenario where no meeting is being held (which we will call the “Non‑Unanimous Written Consent, No Meeting Scenario”).  Rule 14c‑2(a)(1) is admittedly and unfortunately ambiguous in this regard.  It states the coverage of written consents (the “Written Consent Clause”) in the form of a dependent clause ‒ i.e., “including the taking of corporate action by the written authorization or consent of security holders . . .” ‒ in a sentence that begins:  “In connection with every annual or other meeting of [security holders] . . . .”  That grammatical structure allows one to read the overall sentence as meaning that the Written Consent Clause does not apply where there is no shareholders meeting.  Under such a reading, Regulation 14C would not apply in the Non‑Unanimous Written Consent, No Meeting Scenario.

We believe such a reading is misguided and problematic, and that Regulation 14C applies in the Non‑Unanimous Written Consent, No Meeting Scenario.  To read Rule 14c‑2(a)(1) otherwise would make the Written Consent Clause non‑sensical.  It would then only cover a tiny (and strange) universe of situations ‒ i.e., where a meeting is being held even though the subject action is being taken by written consent.  We can envision a happenstance scenario where a Non‑Unanimous Written Consent is being executed around the same time that a completely unrelated meeting of shareholders is otherwise scheduled.  However, it is inconceivable that such a happenstance scenario is the intended focus of the Written Consent Clause.  Yet, that is precisely what non‑applicability of Regulation 14C to the Non‑Unanimous Written Consent, No Meeting Scenario would mean.

As a result, we believe Regulation 14C operates to impose the 20‑day delay on the effectiveness of the subject action in the hypothetical situation we describe above.  However, we do not believe it would invalidate the action per se if such delayed effectiveness does not otherwise have the practical effect of doing so.  That said, where a company never files and delivers a compliant Information Statement as contemplated by Regulation 14C, we believe the effectiveness of the purported action will be open to potential challenge, if a claimant can establish the requisite interest in the matter to bring a lawsuit (the de facto equivalent of standing) and harm to the claimant.

We have found no explicit definitive discussion of those matters, whether by the SEC or securities law commentators.  All discussions we have seen presume applicability of Regulation 14C in the Non‑Unanimous Written Consent, No Meeting Scenario, and none of them address specifically the effectiveness timing issue.

On the other hand, we have seen at least one instance ‒ actually, it is a series of consistent actions by one company ‒ where a company (and apparently its counsel) appear to believe otherwise.  That company filed a Form 8‑K on multiple occasions to disclose corporate actions that had been taken via Non‑Unanimous Written Consents by a small group of affiliated shareholders.  In each case, the company did not file or deliver an Information Statement pursuant to Regulation 14C, and it stated the subject action as being “effective immediately”.  We doubt the soundness of that approach and do not recommend it.

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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