SEC Staff Denies Closed-End Fund’s No-Action Request Seeking to Exclude Shareholder Proposal to Declassify Board

Who may be interested: Closed-End Funds; Boards of Directors; Investment Advisers

Quick Take: The staff of the SEC’s Division of Investment Management (Staff) recently denied a closed-end fund’s request for no-action relief, which would have permitted the fund to exclude from its annual shareholder meeting proxy materials a shareholder proposal to declassify the fund’s board. The denial comes shortly after the Staff granted no-action relief to three other closed-end funds, permitting them to exclude a board declassification proposal from their proxy materials under Rule 14a-8(b)(1).

Rule 14a-8(i)(3) permits a company to omit a stockholder proposal from its proxy materials if the proposal or supporting statement violates the proxy rules, including Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The fund’s request for no-action relief maintained that the proposal should be excluded under Rule 14a-8(i)(3) because the supporting statement submitted by the activist shareholder contained false or misleading statements.

Specifically, the fund argued that the supporting statement was misleading because it:

(i) asserted without a factual basis that “the leading” independent proxy advisory firms and many, if not “the overwhelming majority” of, large institutional investors support declassified board structures;

(ii) failed to state the percentage of registered closed-end funds with staggered boards (a more relevant percentage than that provided in the statement with respect to operating companies);

(iii) failed to discuss academic papers with findings contrary to the findings of an academic paper suggesting that classified board structures are correlated with bad governance and poor shareholder returns;

(iv) asserted that an affiliate of the investment adviser to the fund had proxy guidelines advocating for annual director elections, despite that fact that the affiliate was not the fund’s adviser or sub-adviser, implying that the fund’s classified board structure is somehow internally inconsistent or self-contradictory; and

(v) referred to the fund’s governance as “anti-shareholder” without basis.

In denying the request, the SEC staff stated that it was unable to concur with the view that the shareholder proposal could excluded under Rule 14a-8(i)(3).

Of note, the fund is a Maryland corporation governed by the Maryland General Corporation Law. By contrast, the closed-end funds that recently received no-action relief were Massachusetts business trusts. In the latter instance, the Staff’s determination permitting the funds to exclude a shareholder proposal to declassify its board was based on provisions in Massachusetts law and in the governing documents of the funds.

The Staff’s denial of no-action relief to the fund can be found here.