SEC Staff Issues No-Action Letter to Closed-End Funds Seeking to Exclude Activist Shareholder Proposals to Declassify Board

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

Quick TakeThe staff of the SEC’s Division of Investment Management (Staff) recently granted no-action relief to three closed-end funds confirming that the Staff will not pursue an enforcement action if the funds exclude from their annual shareholder meeting proxy materials a shareholder proposal by an activist investor to declassify the funds’ board, in reliance on Rule 14a-8(b)(1) under the Securities Exchange Act. Rule 14a-8(b)(1) requires that in order to be eligible to have a proposal included in a company’s proxy materials, a shareholder must hold “securities entitled to vote on the proposal.”


The funds’ request for no-action relief stated that the activist investor submitted a non-binding advisory proposal for inclusion in the funds’ proxy materials that would, if approved, require the board of trustees of the funds to “take all necessary steps in its power to declassify the [b]oard so that all directors are elected on an annual basis.” Although the funds set forth multiple bases under Rule 14a-8 to exclude the proposal, the Staff approved the exclusion based only on Rule 14a-8(b)(1), declining to address the alternative bases for exclusion.

As explained in the request letter, (i) all of the funds are Massachusetts business trusts, (ii) the rights of a shareholder of a Massachusetts business trust are defined primarily by the trust’s governing documents, and (iii) each fund’s declaration of trust specifies that shareholders are only permitted to vote on specific matters enumerated in the declaration. For each fund, declassification of the fund’s board is not included in the list of enumerated items on which shareholders are permitted to vote. Thus, according to the funds, the proposal could be excluded under Rule 14a-8(b)(1) because the investor was not a holder of securities entitled to vote on that type of proposal. The Staff agreed.

The activist investor also corresponded with the Staff, reciting a history of litigation between the parties, arguing that Rule 14a-8’s utility in protecting shareholders is at an “existential crossroads” and urging the Staff to decline the funds’ request and reverse its prior conclusions reached in other analogous no-action letters (and cited by the funds in their request letter). According to the activist investor, the Staff’s interpretation of Rule 14a-8 provides closed-end funds too much discretion to limit the scope of shareholder proposals. The Staff declined this invitation to revisit its prior conclusions and affirmed that it would not recommend enforcement action if the funds excluded the proposal to declassify the funds’ board from their proxy materials. The Staff provided its informal guidance on shareholder proxy submissions, which notes that the parties can pursue the dispute in federal district courts.

The Staff’s no-action letter and links to the funds’ no-action request can be found here.

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