SEC Issues New Staff Legal Bulletin (SLB 14I) on Rule 14a-8 Shareholder Proposals
By Anne Meyer, Georgeson LLC
On November 1, 2017, the SEC issued a new Staff Legal Bulletin (SLB 14I) on shareholder proposals under Rule 14a-8. SLB 14I addresses several issues that have been in the spotlight in recent years, including the scope of the "ordinary business" exception set forth in Rule 14a-8(i)(7) and the "economic significance" exception set forth in Rule 14a-8(i)(5), as well as the ability of proponents to act by proxy and the use of graphics and images in shareholder supporting statements. The guidance is particularly substantive as it pertains to no-action requests under Rule 14a-8(i)(7) and Rule 14a-8(i)(5) that seek no-action relief on the basis that the topic of the proposal does not raise a significant policy issue that would be appropriate for a shareholder vote. The SEC notes that such requests can raise challenging issues and that the company's board of directors is often better positioned to make these tough determinations. In such instances, the company's no-action request must now include a discussion that reflects the board's analysis of the particular policy issue raised by the shareholder proposal and its significance. SLB 14I notes that it would be most helpful if this discussion details "the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned."
Directors and Officers
New Jersey Amends Its Business Corporation Act
By Lawrence A. Goldman, Gibbons P.C.
A package of three acts, all effective January 16, 2018, amended the New Jersey Business Corporation Act, N.J.S.A. 14A-1-1 et seq. (BCA) in several respects. P.L. 2017, c.299 authorizes a corporation to establish, in its bylaws, procedures or conditions under which materials with respect to shareholder-nominated individuals will be included in a corporation’s proxy solicitation materials for an upcoming election of directors. P.L. 2017, c.356 amends N.J.S.A. 14A:2-9 to permit the bylaws of a New Jersey corporation to include a forum selection clause by which federal and state courts in New Jersey would be the sole and exclusive forum for derivative actions, actions by shareholders asserting breach of fiduciary duty claims, claims arising under the BCA or the corporation’s certificate of incorporation, or other state law claims against the corporation or current or former directors and officers. P.L. 2017, c.363 adds clarifying language to N.J.S.A. 14A:6-7 to make it clear that actions by unanimous consent of directors may be by way of electronic transmissions.
New Partnership Audit Rules May Require Amendments to Alternative Entity Governing Documents
By Tarik J. Haskins, Morris, Nichols, Arsht & Tunnell LLP
New rules for partnership tax audits (the "New Rules") included in the Bipartisan Budget Act of 2015 shall become effective for partnership tax returns filed for tax years beginning after December 31, 2017. The New Rules may require amendments to the governing documents of partnerships, limited liability companies and other entities taxed as partnerships for federal income tax purposes. Generally, the New Rules provide that: (i) adjustments to tax items shall be made at the partnership level and (ii) the partnership, rather than the partners, shall be liable for any resulting underpayment. The New Rules also replace the "tax matters partner" concept with a "partnership representative" concept that provides the partnership representative with much broader authority than a tax matters partner has under existing rules. Further, unless certain procedures are followed, an assessed underpayment could be borne by persons who were not partners of the entity for the tax year under audit, which could be problematic for many entities, including hedge funds formed as Delaware entities where partners change frequently. Consequently, alternative entities, including Delaware entities, taxed as partnerships will need to consider whether any amendments need to be made to existing governing documents to address the New Rules, which may present issues for existing Delaware entities whose governing documents do not contemplate amendments to accommodate the New Rules. The extent to which Delaware entities can amend their governing documents to address the New Rules will be subject to Delaware contract construction principles and the application of the implied covenant to the amendment provisions.