The Securities and Exchange Commission is crafting a proposal that could make it easier for corporate executives to talk to their companies' large shareholders about management issues.
Companies now must complete time-consuming and expensive paperwork with the agency before any discussions with more than 10 institutions.
The SEC proposal also would expand the circle of institutional investors that might want to discuss matters of common interest in companies they hold in their investment portfolios.
The proposal, expected later this year, would let top corporate executives test-market with institutional investors ideas on reconfiguring companies - altering executive pay plans or certain anti-takeover defenses, for example - before proceeding with those plans.
The caveat is that companies and investors could only discuss such matters in broad terms. Companies seeking investor support for jettisoning a business to shareholders, for example, would still need to file an outline of the proposal with the SEC first. And companies might need to file one- or two-page reports with the SEC outlining the nature of the discussions and the parties involved after the talks.
And the proposal would not waive investor protections against securities fraud. Thus, a company still could be sued for circulating false information to investors.
The work on this proposal comes almost four years after the securities watchdog loosened its rules to allow freer communication between pension funds and other large investors on targeting companies for proxy contests and developing strategies for voting shares in those companies.
Until then, institutions could only discuss issues specific to a company in groups of fewer than 10 without tripping up on the proxy rules.
Some companies already use their large shareholders as sounding boards for policy changes. But because of the fuzziness in the rules, some discussions could conceivably violate securities rules. The SEC has decided to remove any booby traps for companies wanting to keep their large shareholders informed of their plans.
"Once again, the SEC is catching up with the real world," observed Patrick McGurn, director of corporate programs at Institutional Shareholder Services Inc., Bethesda, Md., which advises investors on voting matters.
"Companies are already going out and trying to get input to pre-sell things," he said.
Consolidated Freightways Inc., for one, frequently asks investors for their views, said Maryla R. Boonstoppel, corporate secretary and head of investor relations. "I ask institutional investors whether you would rather have dividends or stock repurchases or a lot of things like that," she said.
Still, the SEC's new proposal should clear the uncertainty in the minds of some companies about just what and how much they can discuss with their shareholders.
At the time of the October 1992 changes in the proxy rules, corporate representatives argued freedom for shareholder activists to discuss matters relating to a company's management gave them a headstart on building support for their proposals, while companies could not begin peddling their own viewpoints until they distributed shareholder ballots.
Under the current securities rules, companies may, however, talk to fewer than 10 investors without tripping up on the proxy rules. If they want to discuss governance and other matters with a large group of investors that could affect the value of the company's stock, they must file proxies with the SEC showing they intend to actively seek support for those proposals.
Large groups of institutional shareholders suffer from similar constraints. Under the current rules, labor activists at a union meeting considering protest of a company plan to enrich its executive pay package while laying off workers would need exemption from the SEC's proxy rules to hold those talks.
"What I would be thinking about is to allow anybody to talk to anybody about anything so long as they don't have a proxy card in hand," said Brian J. Lane, director of the SEC's division of corporation finance, which is drafting the new rule.
SEC Commissioner Steven M. H. Wallman said the proposal mirrors his own views. The proposal would work along the lines of exemptions already granted companies for selling securities to a limited number of large, sophisticated investors.
"If a corporation can sell securities to institutional investors (under Section 144(a) of the securities rules) without the protection of securities laws, it is hard to understand why a corporation can't talk to one of those institutions about a corporate governance matter, or why those institutional investors can't talk to each other," he pointed out.
Shareholder activists and corporate advisers, for the most part, agree.
"Anything that creates a better dialogue with large investors and the companies they own is very positive. There isn't enough of that going on now," said Richard H. Koppes, principal at the American Partners Capital Group Inc., Sacramento, Calif., and former deputy executive director and general counsel at the California Public Employees' Retirement System.
Concerns about some institutional investors becoming privy to insider information could be easily blunted with thorough safeguards, Mr. Koppes said.
At the giant public pension fund, for example, executives involved in corporate governance activities are not making any stock-trading decisions, he said.
But then, institutions like CalPERS, which index a large portion of their portfolio, don't trade their holdings much. "They buy and hold, buy and hold," Mr. Koppes said.
Nell Minow, a Washington shareholder activist and principal at Lens Inc., agreed with Mr. Koppes.
"It's a great idea." Right now, companies rely on outside consultants to give a read on how shareholders would react to changes they are contemplating, she said. "It's much better for them to do their test marketing on their own."
At the same time, some corporate advisers also reacted enthusiastically. "It's a good idea," said John Wilcox, chairman of Georgeson & Co., the New York proxy advisory firm. "The only question is whether disclosure is being impaired particularly for shareholders who are not large shareholders and don't have immediate access to communications."
But the SEC's plans to require companies to file a short notice discussing the nature of the talks, and disclose the identity of other parties involved in the discussions should allay that concern, he agreed.
Still, some investors and corporate executives aren't excited about the SEC's plans.
"Companies have called us and tested the waters before on proposals, so what is new?" asked Kayla Gillan, deputy general counsel at CalPERS.