I guess it’s a two post kind of week.

I previously predicted that one way the Trump Administration could attack proxy advisors would be from the client side, i.e., to make it more difficult from a regulatory perspective for clients to follow proxy advisor recommendations, but I didn’t anticipate this from Commissioner Uyeda:

With regard to proxy voting, practices that directly or indirectly result in coordinated voting should be evaluated with respect to compliance with reporting requirements under the Securities Exchange Act. Shareholders form a group if they act together for the purpose of voting the equity securities of an issuer. Depending on the facts and circumstances, funds and asset managers using PVABs for voting decisions may have formed a group for purposes of Section 13(d)(3) or Section 13(g)(3) of the Securities Exchange Act.  Indeed, the Commission itself raised this issue in 2020 when it stated that “[u]se of a proxy voting advice business by investors as a vehicle for the purpose of coordinating their voting decisions regarding an issuers’ securities” would raise issues under the SEC’s beneficial ownership rules. Of course, a group is not formed simply because a shareholder independently determined how it wants to vote on an issue, announced its voting decision, or advised others on how it intended to vote. The key is that the vote is based on an independent decision by the shareholder itself. If, in lieu of such independent decision-making, funds and asset managers automatically vote shares solely based on PVAB recommendation regarding shareholder proposals that have the purpose or effect of influencing control over the company and the aggregated voting power of such persons exceeds 5% beneficial ownership, such persons may have formed a group and need to file a Schedule 13D even if they beneficially own less than 5% on an individual basis.

To the extent that funds and asset managers are engaging in “robo-voting” based on PVAB recommendations, such practices should be reviewed to determine whether they comply with the Exchange Act and SEC rules. The evaluation of whether a group has been formed should take into account the business realities of the arrangements, particularly if robo-voting results in coordination of voting practices where owners of the same securities vote in tandem with each other with the effect of influencing control of an issuer. The substance of such arrangements has implications under Section 13(d) of the Exchange Act and we should not shy away from scrutinizing such consequences.

Now, let’s leave aside the issue of how common it is for shareholders to blanketly accept proxy advisor recommendations with no further analysis or refinement (my guess is, not very common, but it does exist among smaller funds).

The suggestion, as I understand it, is even if the shareholders have no agreement with each other, so long as they have individually and independently decided to defer to the recommendations of Glass Lewis, they are now all a 13(d) group.

It’s not clear to me where the agreement is, exactly.  The shareholders have no understanding with each other.  They don’t even have an understanding with the proxy advisor – Glass Lewis doesn’t care if you actually take its recommendation, it gets paid regardless.

At best, the theory here is something like what Delaware calls a “daisy chain” in the context of advance notice bylaws and poison pills – if Shareholder A has an agreement with Shareholder B, and Shareholder B has an agreement with Shareholder C, then Shareholder A and C are in agreement.  Here, it would be a kind of hub and spoke model, I guess, with Glass Lewis at the center.

Well, when these daisy chain provisions come up in Delaware law, courts tend to become concerned that they demand more of shareholders than they reasonably know or could discover.  See, e.g., Kellner v. AIM Immunotech, 320 A.3d 239 (Del. 2024); Wright v. Farello, 2025 WL 3012956 (Del. Ch. Oct. 27, 2025).

More relevantly, though, federal courts interpret 13(d) and Rule 13d-5 to require an actual agreement among the shareholders. See e.g., Wellman v. Dickinson, 682 F.2d 355 (2d Cir.1982) (requiring “a formal or informal understanding between Dickinson and others holding beneficial ownership of more than 5% of Becton stock for the purpose of disposing of the shares under their control”; “an express or implied understanding…between the group members”; “the touchstone of a group within the meaning of Section 13(d) is that the members combined in furtherance of a common objective”); Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207 (2d Cir.1973) ( “[A]bsent an agreement between them a ‘group’ would not exist.”).

Under this standard, it is not sufficient to say that an understanding exists merely because putative group members are aware that other putative members are behaving a certain way.  Indeed, Section 13(d) does not even capture “conscious parallelism,” whereby members are not only aware of each other but intentionally coordinate. See John C. Coffee, Jr. & Darius Palia, The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance, 41 J. Corp. L. 545 (2016).  The SEC has taken the position that conscious parallelism counts, but, oddly, though it proposed amending the rules to say that explicitly, it didn’t actually adopt those amendments, and the judicial definition under current law doesn’t back the SEC up.

And in this case, of course, Commissioner Uyeda proposes to go much further than conscious parallelism (or even SEC guidance, which requires shareholders act with a “purpose” to do something), since no one is intending to parallel anyone; at best, it’s merely consciousness.  But even under that standard, we fall short: no one Glass Lewis client has any knowledge that any other Glass Lewis client is voting a particular way – at best, they know in an abstract sense that some Glass Lewis clients take Glass Lewis recommendations, but they have no insight into the level of process those shareholders employ before adopting the recommendation, which (according to Commissioner Uyeda) should be the touchstone for determining coordination.

(Sorry, just had a moment imagining advance notice bylaws and poison pills that triggered when enough investors followed a Glass Lewis recommendation.)

So, you know.  I don’t think the SEC can get there without, at minimum, more rulemaking, and possibly not even that – but it can certainly make life difficult for investors and proxy advisors along the way.