An October 22 Staff Legal Bulletin
released by the SEC’s Division of Corporation Finance says shareholder proposals on company’s proxy ballots that are similar to management proposals on the same ballots can be omitted only if “a reasonable shareholder could not logically vote in favor of both proposals.” The guidance sets the bar higher for companies trying to exclude shareholder proposals.
The bulletin, issued just in time for the 2016 proxy season, reasons that no-action assessments using Rule 14a8(i)(9) should focus on whether there is a direct conflict between the management and shareholder proposals, and whether the resolutions are mutually exclusive. In essence, it says a vote for one proposal would have to be tantamount to a vote against the other.
The bulletin used the following examples of instances when the SEC would not give companies the green light to omit shareholder proposals:
• A shareholder proposal that would permit a shareholder or group of shareholders holding 3 percent of a company’s outstanding stock for at least three years to nominate up to 20 percent of the directors would not be excludable if the same proxy ballot contained a management proposal allowing shareholders holding at least 5 percent of the company’s stock for at five years to nominate 10 percent of the directors. The bulletin says the proposals seek a similar objective and “do not present shareholders with conflicting decisions such that a reasonable shareholder could not vote logically in favor of both proposals.”
• A shareholder proposal asking a compensation committee to implement a policy that equity awards would have no less than a four-year annual vesting would not be excludable if the same proxy ballot contained a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards.
The bulletin acknowledges that boards may have to decide what to do if both proposals are approved by shareholders, but says such a decision would not represent the kind of direct conflict Rule 14a8(i)(9) was designed to address.
Attorney Con Hitchcock predicts the SEC bulletin will enhance dialogue between shareholders and boards, especially on compensation issues that contain so many variables. The inclusion of both shareholder and management proposals on similar issues would “give boards more nuanced ideas of what shareholders think about specific topics,” he said.
Last December, the SEC staff stirred up controversy by giving Whole Foods Markets permission to omit a proxy access proposal submitted by proponent James McRitchie. The commission’s staff said the proposal could be excluded because it directly conflicted with one the company planned to put up for a shareholder vote that would allow proxy access but under much more restrictive circumstances.
Before this SEC decision came to light, the New York City Comptroller’s Office had filed 75 proxy access proposals at companies. When many of these companies got wind of the SEC’s ruling at Whole Foods, they requested no-action relief on the same grounds.
CII then sent a letter
to the SEC January 9 urging the commission to alter its interpretation of Rule 14a(i)(9).
Shortly thereafter on January 16, the commission’s Division of Corporation Finance issued a statement
indicating that during the 2015 proxy season it would not express any views on the proxy rule allowing companies to omit from their proxy statements shareholder proposals that conflict with management proposals. Ever since that statement was issued, shareholders have been urging the SEC to provide clarity on Rule 14a8(i)(9).
“This is a tremendously important decision and a victory for investors,” said Michael Garland, assistant comptroller for the New York City Comptroller’s Office. “It ensures that companies will not be able to game the rules to deny investors a vote on key reforms,” he added. Garland gave SEC Chairman Mary Jo White and the SEC staff credit for taking action and addressing shareholder concerns while protecting the integrity of the shareholder proposal process.
McRitchie was less enthusiastic about the bulletin. He said it still provides some “wiggle room” for companies to game the system, but “should curtail most of the abuse of shareowner rights we have seen regarding use of the conflicting resolution exception in recent years.”