by Cydney Posner
Corp Fin today posted Staff Legal Bulletin 14H providing guidance on two key issues regarding shareholder proposals under Rule 14a-8:
- the scope and application of Rule 14a-8(i)(9) (the exclusion for conflicting proposals); and
- the scope and application of Rule 14a-8(i)(7) (the exclusion for ordinary business) in light of Trinity Wall Street v. Wal-Mart Stores, Inc.
With regard to Rule 14a-8(i)(9), the staff narrowed the application of the exclusion by redefining the meaning of “direct conflict.” The question then under the new guidance is “whether a reasonable shareholder could logically vote for both proposals” because both seek a similar objective. If so, the proposals are not in “direct conflict.” The staff’s new interpretation will certainly make it more challenging for companies to rely on the exclusion.
With regard to Rule 14a-8(i)(7), the staff disagreed with the analysis of the Third Circuit (who may regret having asked the SEC to “issue fresh interpretive guidance on this issue”) in Trinity Wall Street v. Wal-Mart and advised that proposals that focus on a significant policy issue – even if the significant policy issue relates to the “nitty-gritty of its core business” – transcend a company’s ordinary business operations and are not excludable under Rule 14a-8(i)(7).
Rule 14a-8(i)(9)
Rule 14a-8(i)(9) permits a company to exclude a proposal “[i]f the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” As you may recall, during the last proxy season, there was a surprising conflict over the application of the “conflicting proposals“ exclusion that arose originally in the context of a shareholder proposal for proxy access.
Sidebar: With regard to a proxy access proposal submitted to Whole Foods, the SEC staff had originally granted the company’s no-action request, confirming that it could omit the shareholder’s proposal from its proxy statement. That proposal would have permitted shareholders holding at least 3% of the company’s voting securities to nominate up to 20% of the board and to include those nominees in the company’s proxy statement. In its no-action request to the SEC, Whole Foods advised that it was submitting a proxy access proposal at the same meeting that included different terms; for example, it would allow any single shareholder owning at least 9% of the company’s common to submit nominations to be included in the company’s proxy statement. In view of its success, a significant number of companies then followed the Whole Foods model – including a number that were among the 75 companies that received proxy access proposals from the NYC comptroller’s office — although most opted for lower thresholds in their conflicting management proposals. The Whole Foods shareholder proponent then requested that the entire SEC reconsider and reverse the Whole Foods decision. (See these PubCo posts: 12/8/14, 1/5/15, 1/20/15, 2/11/15, and 3/19/15.)
In light of the questions that arose about the Staff’s interpretation of rule 14a-8 (i)(9), Chair Mary Jo White issued a Statement directing Corp Fin to review the proper scope and application of the rule, and Corp Fin indicated that it would express no views on the application of Rule 14a-8(i)(9) during that proxy season. In addition, the staff even reconsidered its prior no-action letter to Whole Foods, effectively withdrawing its prior favorable letter and indicating instead that it would express no opinion on the question of whether there was any basis for exclusion of the proposal. (See this PubCo post.)
As part of its review, Corp Fin examined the history of the exclusion. Based on that examination, the staff believes “that it was intended to prevent shareholders from using Rule 14a-8 to circumvent the proxy rules governing solicitations. When a shareholder solicits in opposition to a management proposal, the Commission’s proxy rules contain additional procedural and disclosure requirements that are not required by Rule 14a-8. We do not believe the shareholder proposal process should be used as a means to conduct a solicitation in opposition without complying with these requirements.”
The SLB also recognizes that many no-action letters granting relief “under the exclusion have expressed the view that a shareholder proposal was excludable if including it, along with a management proposal, could present ‘alternative and conflicting decisions for the shareholders’ and create the potential for ‘inconsistent and ambiguous results.’” The staff notes that, by the 1990s, these concepts reflected the staff’s “most recent articulation of what constitutes a direct conflict.”
Although some of these historic letters “focused on the potential for shareholder confusion and inconsistent mandates, instead of more specifically on the nature of the conflict between a management and shareholder proposal,” the staff now believes
“that any assessment of whether a proposal is excludable under this basis should focus on whether there is a direct conflict between the management and shareholder proposals. For this purpose, we believe that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal. While this articulation may be a higher burden for some companies seeking to exclude a proposal to meet than had been the case under our previous formulation, we believe it is most consistent with the history of the rule and more appropriately focuses on whether a reasonable shareholder could vote favorably on both proposals or whether they are, in essence, mutually exclusive proposals.” [emphasis added]
In considering future no-action requests under Rule 14a-8(i)(9), the staff “will focus on whether a reasonable shareholder could logically vote for both proposals.” What does this mean? To illustrate, the staff selects examples that are clear-cut: proposals in favor of a merger and against a merger or proposals for separation of the company’s chair and CEO and for requiring the CEO to be the chair at all times.
But what are examples of proposals that are not directly conflicting, where a shareholder could logically vote in favor of both? Exactly the types of proposals that were at issue in Whole Foods. Significantly, the staff will not
“view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both. For example, if a company does not allow shareholder nominees to be included in the company’s proxy statement, 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. This is because both proposals generally seek a similar objective, to give shareholders the ability to include their nominees for director alongside management’s nominees in the proxy statement, and the proposals do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals. Similarly, a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards. This is because a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.” [emphasis added]
By contrast, a direct conflict would exist only where a vote for one proposal is tantamount to a vote against the other proposal. To illustrate this concept, the staff provided the following examples: “where a company seeks shareholder approval of a merger, and a shareholder proposal asks shareholders to vote against the merger, we would agree that the proposals directly conflict. Similarly, a shareholder proposal that asks for the separation of the company’s chairman and CEO would directly conflict with a management proposal seeking approval of a bylaw provision requiring the CEO to be the chair at all times.”
These examples of proposals immediately above will require boards to consider what to do if both proposals are approved by shareholders, but the staff does not view them as “the kind of ‘direct conflict’ the rule was designed to address.” To avoid shareholder confusion, the staff notes, “companies can, consistent with Rule 14a-9, explain in the proxy materials the differences between the two proposals and how they would expect to consider the voting results.”
With regard to precatory as opposed to binding shareholder proposals, that staff recognizes that, in some cases, a binding shareholder proposal could “directly conflict’ with a management proposal, but might not directly conflict if styled as a precatory proposal. In that case, the staff may allow proponents to revise a proposal’s form from binding to nonbinding. If, as revised, a reasonable shareholder could logically vote for both proposals, the shareholder proposal would not be excludable under Rule 14a-8(i)(9). However, the staff also believes that precatory proposals may still “directly conflict with a management proposal on the same subject if a vote in favor is tantamount to a vote against management’s proposal.”
The staff rejected suggestions to make the exclusion inapplicable when the shareholder proposal is submitted before the company approves its proposal because that approach would still permit solicitations in opposition under this exclusion, in contravention of the proxy rules governing solicitations. The staff viewed other suggestions to continue its historic application or to adopt a broader, subject matter exclusion as approaches that “do not take full account of the language of the exclusion because they may allow the exclusion of proposals that propose different means of accomplishing an objective, but do not directly conflict.”
Rule 14a-8(i)(7)
in Trinity Wall Street v. Wal-Mart Stores Inc, a shareholder proposal submitted by Trinity Wall Street requested that Wal-Mart’s board develop a policy regarding the sale of high-capacity firearms and other dangerous products. Wal-Mart sought to exclude the proposal from its proxy statement under the “ordinary business operations” exclusion of Rule 14a-8(i)(7), and the SEC staff took a no-action position permitting exclusion. Trinity challenged the exclusion in court, and the federal district court in Delaware enjoined Wal-Mart from excluding Trinity’s shareholder proposal from Wal-Mart’s 2015 proxy materials, notwithstanding the no-action position of the SEC staff. On appeal, the Third Circuit vacated the injunction and permitted Wal-Mart to exclude Trinity’s proposal from its 2015 proxy materials. (See this PubCo post for a discussion of the Third Circuit’s analysis, this PubCo post for a discussion of the oral argument and this PubCo post for a more detailed discussion of the procedural and other background of the case.) Trinity has since filed a petition for cert, questioning the Third Circuit’s interpretation of the “ordinary business” exclusion and the “transcendent social policy“ exception. (See this PubCo post for a discussion of the petition.)
In the SLB, the staff agrees with the Third Circuit’s conclusion that the proposal’s subject matter—although styled as promoting a board policy for improved governance—”goes to the heart of Wal-Mart’s business: what it sells on its shelves.” The staff believes that this aspect of the analysis is consistent with its historical analyses of the ordinary business exclusion, focusing on the underlying subject matter of a proposal’s request for board or committee review regardless of how the proposal is framed, even if, as in this case, the proposal was framed as a request to formulate a board policy.
However, the staff disagreed with the panel majority’s analysis of the application of the “significant policy exception” to the ordinary business exclusion. More specifically, the staff did not endorse the opinion’s “new two-part test, concluding that ‘a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.’ The majority opinion found that to transcend a company’s ordinary business, the significant policy issue must be ‘divorced from how a company approaches the nitty-gritty of its core business.’” The staff viewed this approach to be inconsistent with SEC statements on the ordinary business exclusion as well as with Corp Fin practice. Instead, the staff agreed with the analysis employed in the concurring opinion, that is, “’whether a proposal focuses on an issue of social policy that is sufficiently significant is not separate and distinct from whether the proposal transcends a company’s ordinary business. Rather, a proposal is sufficiently significant ‘because’ it transcends day-to-day business matters.’ The judge also explained that the Commission ‘treats the significance and transcendence concepts as interrelated, rather than independent.’”
Even though the Corp Fin staff had previously granted Wal-Mart’s no-action request, concluding that the significant policy exception did not apply to the proposal, in the SLB, the staff indicates that it is
“concerned that the new analytical approach introduced by the Third Circuit goes beyond the Commission’s prior statements and may lead to the unwarranted exclusion of shareholder proposals. Whereas the majority opinion viewed a proposal’s focus as separate and distinct from whether a proposal transcends a company’s ordinary business, the Commission has not made a similar distinction. Instead, as the concurring judge explained, the Commission has stated that proposals focusing on a significant policy issue are not excludable under the ordinary business exception ‘because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.’ Thus, a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’ Therefore, proposals that focus on a significant policy issue transcend a company’s ordinary business operations and are not excludable under Rule 14a-8(i)(7). The Division intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division’s prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion.”
