The US Securities and Exchange Commission (SEC) recently issued a new Compliance and Disclosure Interpretation, Question 103.12 (C&DI), that may significantly impact how public companies engage with their shareholders. Released on February 11, 2025, this C&DI focuses on the eligibility criteria for reporting beneficial ownership on Schedule 13G compared to Schedule 13D.

In light of the new guidance, several major institutional investors temporarily paused their scheduled shareholder engagement meetings to reassess their strategies and ensure compliance.  It has been reported that these meetings have now resumed.

This shift may have profound implications on how institutional investors will engage with public companies, and how public companies will manage shareholder relations. Below, we break down the C&DI requirements and thoughts about compliance going forward.

Understanding the new C&DI

The SEC’s new C&DI expands the scope of activities that could be considered as “influencing control of the issuer,” thereby affecting a shareholder’s eligibility to report on Schedule 13G. Traditionally, Schedule 13G, which requires less onerous reporting than Schedule 13D, has been used by passive investors who held securities for investment purposes only, while Schedule 13D was reserved for those intending to influence or control management. The new guidance, however, introduces a more nuanced and stringent interpretation of what constitutes “influencing control.” 

According to the new C&DI, shareholders who engage with management on specific governance or policy issues, including those related to environmental, social, and governance (ESG) matters, may now be seen as attempting to influence control. This shift is significant because it blurs the lines between passive and active investment, making it more challenging for institutional investors to maintain their 13G reporting status. 

Key changes and their implications for public companies

1. Expanded definition of “influencing control”

The new C&DI clarifies that shareholders who exert pressure on management to implement specific measures or changes to a policy, may be considered as influencing control. This includes actions such as recommending the removal of a staggered board, switching to a majority voting standard, eliminating a poison pill plan, changing executive compensation practices, or advocating for specific social, environmental, or political policies. If a shareholder conditions its support for director nominees on the adoption of these recommendations, it may lose its eligibility to report on Schedule 13G. 

2. Context matters

The context in which shareholder engagement occurs is also crucial. The SEC’s guidance states that merely discussing views on a particular topic and how these views may inform voting decisions does not disqualify a shareholder from using Schedule 13G. However, if the engagement goes beyond discussion and involves pressuring management, it could be seen as an attempt to influence control. 

Practical considerations for public companies

1. Keep channels of communications open

While institutional investors continue to assess how this new SEC guidance will impact their interactions with public companies, public companies should consider whether more proactive outreach strategies are warranted to maintain open channels of communication with their largest shareholders. This is particularly important in the context of proxy contests and other forms of traditional activism, as well as approval of executive compensation matters such as say-on-pay votes and equity incentive plan proposals, where transparency and alignment on key governance and matters can be critical. Companies should consider providing more detailed information on their governance practices, and other relevant policies to preemptively address shareholder concerns. 

2. Clarifying engagement policies

Given the new SEC guidance, public companies are encouraged to review their internal engagement policies and to work closely with their legal advisors as they make any necessary adjustments in light of the updated SEC guidance. This may also include updating of engagement protocols, and ensuring that all communications with shareholders are carefully documented and reviewed. 

3. Training and awareness

Companies are encouraged to invest in training for their investor relations teams and board members to ensure they are fully aware of the new guidance and their implications. This training should cover how to handle shareholder engagements, what constitutes “pressure” under the new guidance, and how to document interactions to avoid any misinterpretations that could lead to regulatory scrutiny. 

4. Strategic communication

Public companies are encouraged to adopt a strategic approach to communication, ensuring that they convey their governance and other policies clearly and consistently. This could help mitigate shareholders’ need to exert pressure for changes. By proactively addressing potential concerns and demonstrating a commitment to good governance and responsible business practices, companies can foster a more collaborative relationship with their shareholders.

Conclusion

The SEC’s new C&DI marks a significant shift in the regulatory landscape for shareholder engagement. By expanding the definition of what constitutes “influencing control,” the SEC has introduced new complexities for public companies in managing their relationships with institutional investors. The temporary pause in engagement meetings by some investors underscores the immediate impact of these changes and highlights the need for companies to adapt their strategies accordingly. 

As the new guidance takes effect, public companies are encouraged to stay informed and take proactive measures, including by reviewing their engagement policies, investing in training, conducting regular legal reviews, and adopting strategic communication practices.