by Cydney Posner
Well, we finally have some insight into what the Corp Fin staff had in mind in Staff Legal Bulletin 14H – of course, that’s the SLB in which Corp Fin narrowed the application of Rule 14a-8(i)(9), the exclusion for conflicting proposals. It turns out that what they had in mind – and perhaps only what they had in mind – was exactly what they said.
As discussed at length in this PubCo post, in the SLB, the staff described the history and development of Rule 14a-8(i)(9), ultimately concluding that, going forward, the exclusion for conflicting proposals should be available only for shareholder and management proposals that “direct conflict.” The test for whether proposals directly conflict under this new guidance was articulated as “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.” For example, a shareholder proposal for proxy access with a 3% eligibility threshold, a 3-year holding period and an ability to nominate up to 20% of the board would not, in the staff’s view, directly conflict with a 5%/5-year/10% management proposal. That’s 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.”
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.” The staff’s new interpretation made it quite challenging to rely on the exclusion and, as a result, there were few attempts this proxy season.
As noted in thecorporatecounsel.net blog, in Illumina, Inc. (March 18, 2016), the staff finally had occasion to grant no-action relief applying the new test under Rule 14a-8(i)(9). In Illumina, the shareholder proposal (from the John Chevedden group) requested that the “board take the steps necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws.” After the proposal was received, Illumina’s board approved a management proposal, to be submitted for shareholder ratification on an advisory basis at the 2016 annual meeting, to retain eight provisions in the company’s charter and bylaws that require a supermajority (66-2/3%) vote. The request for no-action relief contended that the “shareholders could not logically vote for the Shareholder Proposal and the Company Proposal” and that “a vote for the Shareholder Proposal is tantamount to a vote against the Company Proposal and vice versa.” Moreover, the request argued, “an affirmative vote on both the Shareholder Proposal and the Company Proposal would result in exactly the kind of conflict that Rule 14a-8(i)(9) was designed to prevent.”
The no-action request maintained that the fact pattern presented in Illumina, although unusual – for now anyway – is not entirely unprecedented: “For example, in Herley Industries, Inc., (November 20, 2007) the SEC agreed with Herley that it could rely on Rule 14a-8(i)(9) to exclude a shareholder proposal that sought to amend the bylaws to provide for a majority vote standard for the election of directors. Herley’s arguments in that letter were predicated on the fact that Herley intended to submit for stockholder approval at the annual meeting a proposal to amend its bylaws to maintain the plurality vote standard then in place and to add a director resignation policy.”
Granting no-action relief, the staff concurred with Illumina’s view: “In our view, the proposal directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals.”
Does this letter outline an approach that may appeal to other companies seeking to exclude a shareholder proposal? Of course, in some – or perhaps many – cases, companies may be reluctant to submit to their shareholders management proposals to ratify a position that is the opposite of one that governance activists and institutional holders are ardently promoting as de rigueur. Nevertheless, this approach is apparently just what Mr. Chevedden fears. In one of his many letters to the staff regarding this no-action request, Mr. Chevedden recognized what may well represent a strategy for the future: “Implicit in the company argument is the concept that henceforth any rule 14a-8 governance proposal topic, that often obtains a majority vote, might be kept off the ballot by simply asking shareholders to ratify the opposite of the rule 14a-8 proposal.” Ironically from the perspective of proponents of shareholder proposals (some of whom prompted the staff’s reexamination of the conflicting proposals exclusion), under the staff’s prior approach, companies seeking to exclude a shareholder proposal would have submitted as a management proposal a moderated version of the shareholder proposal that at least took some steps in the proponent’s direction but, under the new approach, companies seeking exclusion will now need to submit management proposals that completely reject the proponent’s position.