Much is being made of the January 16th statement by SEC Chair Mary Jo White regarding a company’s ability to exclude a shareholder proposal from its proxy statement based on Rule 14a-8(i)(9), which allows exclusion when a shareholder proposal “directly conflicts” with a management proposal. Chair White noted that questions have arisen regarding “the proper scope and application” of that rule and directed an SEC staff review of the issues.
In response, Corp Fin announced that it “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season,” while it conducts its review and prepares its report to the SEC.
What triggered this unusual development?
Last fall, Whole Foods Market, Inc. received a shareholder proposal that would allow large shareholders to nominate directors for election (known as a proxy access proposal). In response, Whole Foods’ management put its own significantly different proxy access proposal on the ballot for its March 2015 annual meeting and sought SEC no-action relief to allow it to exclude the shareholder proxy access proposal. Its grounds for seeking exclusion was Rule 14a-8(i)(9), reasoning that the shareholder proposal was in direct conflict with management’s proposal.
The SEC staff granted the requested no-action relief. Whole Foods, therefore, did not include the shareholder proposal in its proxy materials, but did include management’s less aggressive proposal. Institutional investors expressed much concern regarding the SEC’s position, worrying that it was an open invitation for companies to rebuff a shareholder proposal by simply submitting to their shareholders a “watered down” version of their own.
Apparently, the SEC took these concerns to heart.
What does this mean in the short run?
It is standard practice any time a company seeks to exclude a shareholder proposal from its proxy materials for it to seek an SEC no-action letter as a safeguard against liability. Now, as a result of these recent announcements, any company seeking to use the “direct conflict” exclusion of Rule 14-8(i)(9) will not be able to obtain no-action relief this proxy season. Such a company, therefore, must decide whether to:
- include the shareholder proposal (either with or without its own management proposal) in its proxy materials to avoid liability risk, or
- roll the liability dice by excluding the shareholder proposal while including management’s proposal.
It is also possible for a company to seek judicial declaratory relief before making that decision, although that has traditionally been a relatively uncommon alternative.
It is important to note that the SEC’s freeze on no-action letters covers all “direct conflict” exclusions under Rule 14-8(i)(9), not just proxy access proposals of the type proposed to Whole Foods.
What does this mean in the long run?
At least for now, the scope of this issue is limited to “direct conflict” exclusions. In the long run, depending on company, institutional investor and proxy advisory firm responses, the entire landscape of Rule 14a-8 shareholder proposals could change. For example, companies may become more comfortable seeking judicial declaratory relief or simply excluding shareholder proposals without the SEC’s no-action safety net. In that case, institutional shareholders and advisory firms can be expected to perceive this as a corporate governance weakness and punish companies accordingly. The SEC’s Enforcement Division could conceivably become more active if it believes companies are violating the proxy rules. And plaintiffs’ law firms can be expected to carve out their own place in this dispute, as well.
So, much is up in the air on this issue. As always, I’ll keep you posted as it develops.