From a drop in shareholder proposals to renewed activism:

Investor engagements and 13D-G filings

Even as the season overall suggests more company-friendly trends, some notable challenges have surfaced. 

McGowan points to the change in rules around the SEC’s update to Compliance and Disclosure Interpretations (C&DIs) for Schedules 13D and 13G, which has significant implications for the subject matter of a shareholder’s engagement with an issuer and the context in which the engagement occurs.

In the past, an investor owning more than 5% of a company’s stock was not necessarily required to file a 13D solely for having an engagement. That has now changed. If an institutional owner with more than 5% of outstanding shares engages with an issuer in a way that pressures the issuer to adopt certain measures or ties support for directors to the adoption of certain provisions, it must disclose its ownership in a Schedule 13D filing. McGowan explains that “under the new guidance, the context of the engagement has become highly relevant” and has had implications for engagement. 

The new guidance created ‘a momentary pause’ in investor-company engagement. “Some managers stopped requesting meetings or engagements as they would have in prior years,” says McGowan. “This created an environment where it was really up to the company to set up the engagement and be more proactive.”

For those engagements that did happen, investors increasingly took the line that while companies can say what they want, investors were not going to talk about how they were going to vote or what companies can do to change that vote. “Some managers were in listen-only mode during proxy season,” continues McGowan, “so it really was incumbent on the company to set the agenda for that meeting, that engagement, and make the points they wanted to cover very clear.”

An activism resurgence

Another key challenge is a renewed enthusiasm from shareholder activists – something Bowering says companies must stay alert to. 

“We are seeing activism both increase and evolve across different markets, with what we would describe as a greater sophistication on the campaign side. Today’s campaigns are more nuanced, while traditional activists are increasingly being backed by institutional investors who are more comfortable in questioning boards. At the same time, the stigma of being on the activist slate has faded and we are seeing a better class of candidate put up for election.”

In the US specifically, the effect of the universal proxy card – now in its third year – is being felt. “Activists are honing their focus,” says McGowan. “They are campaigning against fewer directors but winning more often.”

At the same time, the uncertainty created by universal proxy cards has fostered an environment in which companies are more willing to settle with activists, to avoid the risks and costs associated with a full- fledged proxy contest. She suggests companies should be more proactive in addressing potential vulnerabilities on their board. 

The off season should be viewed as an opportunity to assess the skills and experience of existing board members, and how those are being evaluated outside the company.

“Heading into this proxy season, we saw proxy advisors and some of the largest asset managers being less prescriptive around matters like diversity at the board level,” she highlights as an example of this. “We do not know whether this will continue in the off season but it is important to monitor and really keep yourself apprised of what investors are thinking going into the next annual meeting season.”

Referencing the changes in investor attitudes to engagement brought on by the updated CD&Is for 13D-G, McGowan says companies really need to get proactive in their engagement. “Issuers should prepare accordingly. They need to be more involved in setting the agenda for their investor engagements,” she says. “Typically, the explanation for vote rationale is included in investor engagements, and while we believe this will be the case in off-season engagement this year, we do not yet know if there is going to be as much of a dialogue as in prior years. Until some of these engagements happen, there is that bit of uncertainty.”