Just in time for calendar year companies to begin receiving shareholder proposals, the SEC staff has released Staff Legal Bulletin No. 14H, which closes the loop on the controversy initiated by a Whole Foods proxy access shareholder proposal.
A brief summary of the controversy…
In the fall of 2014, Whole Foods Market, Inc. received a proxy access shareholder proposal. In response, Whole Foods’ management put its own more restrictive 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 under Rule 14a-8(i)(9), reasoning that the shareholder proposal was in direct conflict with management’s proposal. When the SEC staff granted the requested no-action relief, institutional investors expressed (loudly) concern regarding the SEC’s position, worrying that it was an open invitation for companies to rebuff a shareholder proposal by simply submitting a “watered down” version of their own.
In response, on January 16th SEC Chair Mary Jo White issued an unusual statementnoting that questions had arisen regarding “the proper scope and application” of Rule 14a-8(i)(9) and directed an SEC staff review of the issues. Corp Fin then announced that it “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season,” while it conducted its review and prepared its report to the SEC. As a result, any company seeking to rely on the (i)(9) “directly conflicts” exclusion for no-action relief was in guidance limbo, left to decide for themselves 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.
SLB 14H’s new standard for “directly conflicts” exclusion…
SLB 14H is the culmination of Chair White’s mandated review of (i)(9). It says that Corp Fin will allow a shareholder proposal to be excluded from the company’s proxy statement only “if a reasonable shareholder could not logically vote in favor of both proposals.” Essentially, in order to exclude a proposal as being in direct conflict with management’s proposal, it must be that a vote for one proposal is “tantamount to a vote against the other proposal.” The staff goes so far as to admit that “this articulation may be a higher burden” than previously existed.
SLB 14H provides examples of how to interpret this new “directly conflicts” standard, including one specific to proxy access proposals:
“For example,…a shareholder proposal that would permit a shareholder or group of shareholders holding at least 3% of the company’s outstanding stock for at least 3 years to nominate up to 20% of the directors would not be excludable if a management proposal would allow shareholders holding at least 5% of the company’s stock for at least 5 years to nominate for inclusion in the company’s proxy statement 10% of the directors.”
The staff says that, in this case, both proposals “generally seek the same objective” and that a reasonable shareholder could conceivably vote in favor of both, even though he or she might prefer one over the other.
It is fair to say that the staff has substantially limited the circumstances under which a shareholder proposal may be excluded in reliance on (i)(9), perhaps to the degree that (i)(9) will be rarely used by companies going forward. It is also clear that, under the new standard, the Whole Foods shareholder proxy access proposal would not have been excludable as directly conflicting with management’s more restrictive proxy access proposal.
The implications of SLB 14H…
This clear shift in policy by the SEC staff is not good news for companies just before the beginning of a proxy season that already promised to be awash in proxy access proposals. SLB 14H will encourage even more such proposals since the automatic exclusion of a management alternative proposal no longer exists under (i)(9). And it is possible that these proposals will be even more aggressively pro-shareholder.
If you suspect that your company is a candidate for a proxy access shareholder proposal this year, it may make sense, now more than ever, to get out in front of this issue by voluntarily adopting a proxy access bylaw on terms acceptable to the company (see this Doug’s Note).
- First, the existence of such a bylaw could discourage all but the most committed shareholders from pursuing a more shareholder-favorable version.
- Second, voluntary adoption may allow the company to utilize the shareholder proposal exclusion under Rule 14a-8(i)(10) for matters that have been “substantially implemented.”
Furthermore, there is anecdotal evidence that more and more companies are deciding to throw in the towel and stop fighting proxy access proposals. The rationale appears to be that proxy access is now inevitable and it is pointless to spend lots of time and money to oppose it. Though time will tell, it is quite possible that these companies are right.