by Cydney Posner
In September, I blogged about several pending no-action requests seeking exclusion of proposals from the McRitchie/Chevedden group to revise existing proxy access bylaws on the basis that they had been “substantially implemented” under Rule 14a-8(i)(10). As I described it back then, the burning question was whether there would be any “evolution” in Corp Fin’s position in H&R Block, in which the staff refused to grant no-action relief to a proposal to amend the company’s existing proxy access bylaw — a so-called “fix-it” proposal. In particular, there were two pending no-action requests that applied different approaches in efforts to overcome the result in H&R Block (and two more similar requests have subsequently been submitted). Corp Fin has now acted on all four of these letters. One of them received a favorable response.
As you may recall, the fix-it proposal at issue in H&R Block (which also came from the prolific James McRitchie) requested that the board amend its existing proxy access bylaw provisions as specified in the proposal. The company sought to exclude the proposal on the basis that it had already been “substantially implemented” under Rule 14a-8(i)(10), contending that the staff had previously allowed exclusion of dozens of proposals as substantially implemented based on the companies’ representations that the proxy access bylaws that had been adopted addressed the proposals’ “essential objective.” (See this PubCo post.) No-action relief was granted in those cases so long as the companies’ bylaw provisions contained the same percentage and duration of ownership thresholds (3%/3 years) as in the proposal, even though the bylaws also included “certain procedural limitations or restrictions that were inconsistent with or not contemplated by the proposals.” In the case of the fix-it proposal at issue in H&R Block, however, the Corp Fin staff refused to allow the company to exclude the proposal, responding that it was unable to conclude that the company had “met its burden of establishing that it may exclude the proposal under Rule 14a-8(i)(10).” (See this PubCo post.) As a result, companies that adopted versions of proxy access that McRitchie et al viewed as “proxy access lite” have begun to see new proposals for amendments to those proxy access bylaws. According to Agenda, fix-it proposals have now been submitted to over three dozen companies.
Keep in mind that, where the proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion under Rule 14a-8(i)(10), even where the proponent has identified specific elements of the proposal that he views to be essential. For example, in this letter, in an apparent effort to avoid exclusion, the proposal requested adoption of a proxy access bylaw “with essential elements for substantial implementation,” which are identified in the proposal through the use of italics. The question here was whether the identification of specific elements as “essential” would distinguish this proposal for initial adoption from the many others (discussed in this PubCo post) that received favorable no-action letters from Corp Fin; that is, would this presentation deter the staff from concluding that the proposal has been substantially implemented if any of the terms deemed “essential” by the proponent were not included. The company’s no-action request followed the pattern of the prior (i)(10) no-action requests, distinguishing H&R Block as a proposal to amend. The staff granted no-action relief.
Faced with the unfavorable result for fix-it proposals in H&R Block, companies have tried different approaches, hoping to convince the staff that a different result should obtain. In Walgreens Boots Alliance, Inc. (November 3, 2016), the company received a proposal to amend its existing bylaws, with five specific “essential elements for substantial implementation” identified. The company argued that one of two exclusions must necessarily apply: either the proposal really comprised several proposals and, therefore, it could be excluded under Rule 14a-8(c) (which provides that a stockholder may submit only one proposal for any one shareholder meeting), or, alternatively, the company had substantially implemented the proposal under Rule 14a-8(i)(10) because it had satisfied the proposal’s essential objective of “Proxy Access for Director Nominations.” And, the company argued, “while either paragraph of Rule 14a-8 provides a reasonable basis for exclusion, the analyses underlying the application of the two paragraphs present themselves as mutually exclusive.” At the end of the day, the company concluded, “it is not possible to survive both analyses.” The staff, however, was not persuaded: “In our view, the proponent has submitted only one proposal. Accordingly, we do not believe that Walgreens Boots Alliance may omit the proposal from its proxy materials in reliance on rule 14a-8(c).” In addition, the staff was unable to concur that the company could exclude the proposal under rule 14a-8(i)(10) or that the company’s proxy access bylaw compared favorably with the guidelines of the proposal. No-action requests from Walt Disney and Whole Foods made similar arguments and received similar responses from the staff.
Contrast those results with the staff’s response in Oshkosh Corporation (November 4, 2016). The fix-it proposal to Oshkosh sought adoption of an “enhancement package” that requested six specific changes to existing proxy access bylaws, all characterized as “essential elements for substantial implementation.” In response to the proposal, the company amended its proxy access bylaws to implement three changes — half of the changes requested in the proposal. Specifically, the bylaws were amended to reduce the eligibility threshold from 5% to 3%, eliminate the 25% votes-received threshold for re-nomination and eliminate the requirement that the nominating shareholder represent its intent to continue to own the shares for one year following the annual meeting. However, three proposed amendments — also deemed “essential elements” — were not changed in response to the proposal: the company did not raise the cap on the percentage of shareholder-nominated candidates permitted to the greater of 25% of directors then serving or two, as requested, but instead retained the cap at the greater of 20% of directors or two. Similarly, the company did not eliminate the 20-person cap on aggregation or the requirement that, to count loaned securities as owned, there must be a right to recall the shares on five business days’ notice (where the proposal had requested that the power-to-recall requirement be removed). The company argued, in light of the amendments it had implemented, that it had satisfied the proposal’s essential objective — to expand the ability of shareholders to use proxy access — and thus had substantially implemented the proposal. In particular, the company noted that, of the three proposed amendments adopted, one was a reduction of the minimum ownership eligibility requirement from 5% to 3%, an amendment “which has generally been considered to be one of the most ‘essential’ elements of proxy access.” The company alluded to NVR, Inc.(granted on recon., Mar. 25, 2016), in which the company was permitted to exclude a proposal for an amendment after the company amended its proxy access bylaws, on its own initiative after being denied relief by Corp Fin, to adopt some, but not all, elements of the amendment proposal and to conform its bylaws to the terms of bylaws that had previously received favorable no-action letters (including a reduction of the eligibility threshold from 5% to 3%, but excluding elimination of the 20-person cap on aggregation). The company also distinguished its facts from those in H&R Block by arguing that, in H&R Block, no amendment was implemented in response to the fix-it proposal. Moreover, the company maintained, the new amendments it had adopted were enough to satisfy the essential objective of the proposal, even though not all of the elements of the proposal were addressed. The staff concluded that Oshkosh could exclude the proposal under rule 14a-8(i)(10): “Based on the information … presented, it appears that Oshkosh’s policies, practices and procedures compare favorably with the guidelines of the proposal and that Oshkosh has, therefore, substantially implemented the proposal.”
Unfortunately, Oshkosh does not exactly settle the fix-it proposal question. For example, was the reduction of the eligibility threshold from 5% to 3% — called out in the request letter as “one of the most ‘essential’ elements” — critical to the SEC’s favorable response? Or, will the SEC view the “substantial implementation” standard to be satisfied if at least half of the changes requested in the proposal have been implemented? More likely, the materiality of changes will be a crucial factor, but how will Corp Fin assess the materiality of those changes in determining whether the bylaws compare favorably with the proposal? In this case, the staff allowed exclusion of the fix-it proposal, even though the company retained the 20-person cap on aggregation, the 20%/two cap on the number of shareholder-nominated directors and the right-to-recall requirement for loaned shares. Does that signal that the staff does not view retention of any of those provisions as preclusive of a favorable response in the context of a fix-it proposal? Or will the result depend entirely on the nature of the fix-it proposal that has been submitted? We’ll have to wait to see the SEC’s responses to additional letters that may follow the Oshkosh approach to tease out the criteria or baseline necessary to win no-action relief in different circumstances.
Going forward, a company that receives a fix-it proposal will need to assess whether it would prefer to take the risk of submitting it to a vote of shareholders — they are precatory proposals — or take the risk of making some responsive changes to its existing proxy access bylaws and submitting a no-action request to Corp Fin. In that regard, companies should consider engaging with their key shareholders to understand their views on the fix-it proposal. Companies may find that many of them are sympathetic and might not necessarily support the fix-it proposal. For example, the proxy access bylaws of BlackRock, one of the largest asset managers, include some of the provisions that the fix-it proposals are seeking to change, including a 20-person cap on aggregation, a right-to-recall requirement for loaned shares and a votes-received threshold for renomination, which just might affect its perspective in voting on a fix-it proposal.
Don’t forget to vote!!!