This proxy season, after the Corp Fin staff permitted AES Corporation to exclude a shareholder proposal on the basis of Rule 14a-8(i)(9)—the exclusion for a proposal that directly conflicts with a management proposal—the Council of Institutional Investors sent a letter to William Hinman, director of Corp Fin, raising objections to the staff’s treatment of the proposal. (See this PubCo post.) The proposal, submitted by John Chevedden, had sought to reduce the threshold required for shareholders to call a special meeting from 25% to 10%. In its letter, CII charged that AES, by including in its proxy statement a conflicting management proposal to ratify the existing 25% threshold, was “gaming the system” and urged the SEC to revisit, once again, its approach to Rule 14a-8(i)(9). But what would be the impact of the CII letter? Would the CII letter induce the staff to revisit its prior position on the exclusion? Now, Corp Fin has issued a new no-action letter, in this instance to Capital One, once again allowing a company, following the same approach as in AES, to exclude a proposal that sought to reduce the special meeting threshold from 25% to 10% on the basis of Rule 14a-8(i)(9)—but with a twist. The question is: Is that the end of the story?
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 granted relief and, in view of the success of this approach, 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]
Accordingly, the key question 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 were not in “direct conflict.” (See this PubCo post.)
In its request for no-action, AES had sought relief permitting exclusion of the proposal on the basis that it directly conflicted with a management proposal to be submitted at the same meeting to ratify the company’s existing special meeting provisions, which included the 25% threshold. The staff agreed with the company’s position. 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%…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 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….” In addition, CII argued, 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 [a] 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.”
The approach taken by AES was also followed in Capital One. Chevedden had submitted a shareholder proposal to reduce the threshold required to call a special shareholders meeting from 25% to 10%. The board approved the inclusion in the 2018 proxy materials of a proposal to ratify the existing 25% ownership threshold, which, the company contended, directly conflicted with the shareholder proposal to lower the existing threshold to 10%. As a result, the company contended, its stockholders could not logically vote for both.
Consistent with its position under the SLB and subsequent no-action letters, the staff’s response allowed Capital One to exclude the proposal under Rule 14a-8(i)(9), concurring with the company that “a reasonable shareholder could not logically vote in favor of both ratifying the Company’s existing 25% ownership threshold for calling a special meeting and lowering the threshold to 10%.” However, this time, the relief was conditioned on the company’s making specified disclosures:
- “that the Company has omitted a shareholder proposal to lower the ownership threshold for calling a special meeting,
- that the Company believes a vote in favor of ratification is tantamount to a vote against a proposal lowering the threshold,
- the impact on the special meeting threshold, if any, if ratification is not received, and
- the Company’s expected course of action, if ratification is not received.”
(Update: Note that Corp Fin has just posted several other new no-action letters to the same effect.)
Whether the new disclosure requirement is expressly aimed at addressing any of CII’s objections is anyone’s guess, but it could be that, in attempting to suss out more information regarding the shareholder proposal and the ramifications of the vote, Corp Fin is attempting to provide shareholders, even in the absence of the alternative proposal, the opportunity to make their votes a more decided expression of preference as between a higher and lower threshold, perhaps investing the vote with a larger significance.
CII, however, was not satisfied. After issuance of the no-action relief, as noted in TheCorporateCounsel.net’s Proxy Season blog, CII then sent a letter to Capital One’s lead independent director asking the company to withdraw the management proposal and allow the vote on the shareholder proposal. CII indicated that it was “gratified that the SEC staff apparently has adjusted its guidance for this type of situation. However, we believe it would have been better for the SEC simply to have declined to agree with the company, encouraging a vote on the shareholder proposal. A vote on the shareholder proposal would be a more straightforward and useful expression of views on whether the company should reduce the special meeting threshold to 10%.” Once again contending that “the board sought ratification of the existing bylaw at this time only to block a clear shareholder vote on a proposal to reduce the threshold,” CII then took issue with the effectiveness of the SEC’s required new disclosure: “We suspect that some shareholders may not be clear that a vote for the management proposal is a vote against a reduced threshold, even if this is stated in the proxy statement as stipulated by the SEC staff. Thus, we do not believe that one could reasonably conclude that the results of such a vote would reflect shareowner intent that a vote in favor of ratification ‘was a vote against a proposal lowering the threshold.’” How this development plays out remains to be seen.