The Council of Institutional Investors has sent a letter to William Hinman, director of Corp Fin, raising objections to the staff’s treatment of a recent shareholder proposal. The staff permitted the company, the AES Corporation, to exclude a shareholder proposal submitted by John Chevedden that sought to reduce the threshold required for shareholders to call a special meeting from 25% to 10%. The basis for exclusion was Rule 14a-8(i)(9), which allows a shareholder proposal to be excluded if it directly conflicts with a management proposal to be submitted for a vote at the same shareholders meeting. In its letter, CII charged the company with “gaming the system to exclude a vote on a legitimate proposal that receives substantial shareholder support when it is voted on at other companies – to reduce the threshold for calling a special meeting,” and urged the SEC to revisit, once again, its approach to Rule 14a-8(i)(9).
You might recall that in 2015, the staff issued Staff Legal Bulletin 14H, narrowing the application of the 14a-8(i)(9) exclusion by redefining the meaning of “direct conflict.” The SLB had followed a proxy season during which there was a surprising clash over the application of the “conflicting proposals“ exclusion. The conflict arose originally in the context of a shareholder proposal for proxy access submitted to Whole Foods that would have permitted shareholders holding at least 3% of the company’s voting securities to nominate up to 20% of the board. In its no-action request to the SEC, Whole Foods advised that it was submitting a management 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. The SEC permitted exclusion and, in view of its success, a significant number of companies then followed the Whole Foods model. However, after the proponent requested reconsideration, the SEC withdrew its favorable letter and, following a period of review, the new SLB was issued, in which the staff took the position
“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] (See this PubCo post.)
The question then under the new guidance was “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.
In 2016, 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.” 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.” (See this PubCo post.)
Precisely the same approach taken in Illumina was taken in AES. Chevedden had submitted a shareholder proposal to reduce the threshold required to call a special shareholders meeting from 25% to 10%. However, AES sought no-action relief permitting exclusion of the proposal because it directly conflicted with a management proposal to be submitted at the same meeting to ratify the company’s existing special meeting provisions. The staff agreed. (Although, not noted in the CII letter, the staff also permitted exclusion of a similar proposal from Chevedden to CF Industries on the basis of the same rule, where CF adopted the same approach of submitting its existing bylaw provision for shareholder ratification.)
In its letter to the staff, CII first argued that, in light of the relatively high favorable vote totals for proposals of this type, the Chevedden proposal to reduce the threshold for calling shareholder meetings raised a “real issue.” Presumably explaining its view that AES was “gaming the system,” CII speculated that “it is highly likely that AES developed its ratification proposal after receiving the shareholder proposal, with the purpose of blocking a shareholder vote to reduce the threshold to 10%.” To support that theory, CII notes that
“AES put its current special meeting bylaw in effect in November 2015, and did not seek shareholder ratification at its 2016 or 2017 annual meetings, but now found it important to do so. If the proposal is refiled for 2019, it will be interesting to see if the company proposes ratification yet again, and whether the SEC would permit exclusion on a vote to reduce the threshold then and, presumably, every year the company chooses to use this ploy. This is exactly the kind of game-playing that prompted the SEC review that led to Staff Legal Bulletin No. 14H (CF) (SLB 14H) as the appropriate guidance for determining the proper scope of Rule 14a-8(i)(9).”
CII identified two problems with the AES no-action position. First, it contended that AES shareholders could logically vote for both proposals, thereby signaling that they favor AES’s existing special meeting bylaw generally, but prefer that the “25% of the outstanding shares of common stock” provision be replaced by “10%.” CII also pointed out that, in the past proxy season, shareholders did vote on shareholder proposals for 10% or 15% thresholds as well as management proposals for 25% thresholds (although CII did not indicate whether the management proposals were ratifications).
Second, CII maintained that a company seeking no-action relief based on 14a-8(i)(9) “should be required to provide evidence that it contemplated proposing the relevant management proposal on a date earlier than receipt of the shareholder proposal. To do otherwise is to invite game-playing by corporate issuers….” Given that, as indicated in the SLB, the purpose of the exclusion was to prevent shareholders from circumventing the rules applicable to solicitations in opposition to management proposals, CII argued, it
“is difficult to see how shareholders could use shareholder proposals to circumvent rules on a subject on which the board had no intention of submitting a proposal. The staff’s AES determination effectively forces shareowners into a dilemma in which they only have the management proposal vote opportunity, but no opportunity to express a preference on a different formulation in a related shareowner proposal. Thus, the staff’s approach in AES curtails shareowner’s ability to suggest different terms for an item currently addressed in a company’s bylaws or charter, thereby frustrating ‘private ordering’ that has often proven to be beneficial to all parties.”
CII concluded by requesting that the staff reconsider its approach. Of course, it was a request for reconsideration that triggered the last review of Rule 14a-8(i)(9) by the staff. Notably, however, in issuing SLB 14H, the staff had expressly considered and rejected suggestions from commenters to make the exclusion inapplicable when the shareholder proposal was submitted before the company approved its proposal because that approach would then allow shareholders to conduct solicitations in opposition without complying with the proxy rules governing those types of solicitations. In addition, under the new administration, SEC Chair Jay Clayton has indicated that the SEC will be taking a hard look at the shareholder proposal rules. As reported in thedeal.com, Clayton advised that it is “very important to ask ourselves how much of a cost there is….how much costs should the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of other [investors].” (See this PubCo post.) And recently, the staff has taken steps that could have the effect of expanding the availability of other exclusions, such as the “ordinary business exclusion,” which may (or may not) signal that the staff is not inclined to retrench further on the availability of exclusions. (See this PubCo post.) Only time will tell whether, in light of the CII request, the staff will revisit its prior position on Rule 14a-8(i)(9).