The staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance (the “SEC Staff”) recently announced that it would refuse to grant no-action relief during the 2015 proxy season to companies seeking to exclude any shareholder proposal on the basis that the shareholder proposal conflicts with a management proposal. The announcement coincided with Chair Mary Jo White’s directive to the SEC Staff to review its long-standing views on when a shareholder proposal conflicts with a management proposal on the same topic and thus may be excluded from a company’s proxy materials. Chair White’s directive was made amid growing criticism from investor groups over the SEC Staff’s decision in December 2014 to grant a no-action letter to Whole Foods, permitting it to exclude a shareholder proposal on proxy access by including its own less-investor-friendly proposal on the subject.
Background
Exchange Act Rule 14a-8(i)(9) permits a company to exclude a shareholder proposal that directly conflicts with a management proposal on the same topic, even when the management proposal may have certain more restrictive terms.
On December 1, 2014, the SEC Staff granted a no-action letter to Whole Foods, permitting it to exclude a shareholder proposal that would give a group of shareholders owning 3 percent of the company’s shares for three years the right to include nominees in the company’s proxy statement. The company successfully argued that Rule 14a-8(i)(9) supported exclusion of the shareholder proposal because it would conflict with the company’s proposal, which would allow any single shareholder owning at least 9 percent of the company’s shares for five years to submit director nominees for inclusion in the proxy statement.
The Whole Foods decision prompted more than 20 companies to submit similar no-action letters requesting exclusion of proxy access shareholder proposals on the basis that they conflicted with the company’s own more restrictive proxy access proposal. In response, investor groups, including the Council of Institutional Investors, began pressuring the SEC to reconsider the Whole Foods decision. Immediately following Chair White’s directive, the SEC Staff reversed the Whole Foods decision (which previously had been appealed by the proponent) and stated that it “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”
Where are we now?
Companies hoping to exclude a shareholder proposal on the basis of a direct conflict with a management proposal on the same topic will have to proceed without the benefit of the Rule 14a-8 process. It should be noted, however, that companies are not required to obtain staff no-action relief to validly exclude a shareholder proposal submitted under Rule 14a-8. Rather, a company need only notify the SEC of its intent to exclude the shareholder proposal and its rationale(s) 80 calendar days (or later upon good cause shown) before it files its definitive proxy statement. Moreover, SEC Staff historical practices recognize that no-action responses to Rule 14a-8 submissions “reflect only informal views” and “determinations reached in these no-action letters do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”
Potential responses
There is no one-size-fits-all response for companies facing a proxy access shareholder proposal. Each company will need to evaluate a number of facts and circumstances in determining its response, including, but not limited to: the parameters of the proposal and its potential impact on the company, the proposal’s likelihood of success if submitted to a vote of the shareholders, the likely recommendations of ISS and Glass Lewis, the risks and costs of litigation (from the perspective of the company and the proponent) and the fact that any competing proposal exclusion strategy will not be available should the proponent subsequently resubmit a less restrictive proxy access proposal in the future.
Among the various potential responses, we believe most companies will focus on three alternatives, all of which involve including management’s proxy access proposal in the company’s proxy materials:
- Excluding the competing shareholder proposal unilaterally.
- Excluding the competing shareholder proposal after seeking a declaratory judgment in court.
- Including the competing shareholder proposal.
Companies that unilaterally exclude a proxy access shareholder proposal should be prepared to incur litigation costs and potential delays should the shareholder proponent sue to compel inclusion of its proposal in the company’s proxy materials. Companies that seek declaratory relief should be prepared to face similar litigation costs and potentials delays. In either case, companies must carefully weigh how their shareholders and the proxy advisory firms (ISS and Glass Lewis) will respond to the company’s decision to exclude the competing proxy access shareholder proposal. We understand that each of ISS and Glass Lewis may issue guidance in the near future addressing how such exclusions may impact their voting recommendations.
Companies that are considering including a competing proxy access shareholder proposal, on the other hand, will need to consider not only how to best ensure the success of management’s proposal but also certain of proxy statement disclosure issues related to the general effect of management’s binding proposal versus the precatory (advisory) nature of the proponent’s proposal.
Next steps
Each company facing a proxy access shareholder proposal will have to tailor a response that best fits its particular facts and circumstances. Any decision will be especially challenging until the proxy advisory firms publicly announce the factors they will consider in determining their voting recommendations in these situations. If possible, companies should consider waiting for public guidance from these proxy advisory firms.