Tag Archives: Rule 14a-8

Shareholder proposal process in the crosshairs

by Cydney Posner

According to this report in Bloomberg BNA,  the plans for changing the shareholder proposal process in the Financial CHOICE Act 2.0 are quite dramatic and could effectively curtail the process, if that is, the current version of the provision ever makes it into law.   Continue reading

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Individual shareholder proposals—why do they do it?

by Cydney Posner

This recent paper from the Rock Center for Corporate Governance at Stanford University, “Gadflies at the Gate: Why Do Individual Investors Sponsor Shareholder Resolutions?” attempts to answer a question I’ve been wondering about for quite a while: why do individual investors invest their time and energy pursuing shareholder proposals? Given how prolific some of these shareholders are—reportedly, the group associated with John Chevedden and James McRitchie accounted for approximately 70% of all proposals sponsored by individuals among Fortune 250 companies in 2014—these investments must be substantial. Since, in most cases, there’s not really any financial incentive involved, what drives them to do it? Continue reading

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Corp Fin issues new SLB providing guidance on Rule 14a-8 exclusions for “conflicting proposals” and “ordinary business”

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). Continue reading

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White shares observations on shareholder activism, the shareholder proposal process and fee-shifting bylaws

by Cydney Posner

Today, SEC Chair Mary Jo White spoke at Tulane’s Corporate Law Institute, sharing her observations on the current state of shareholder activism, the shareholder proposal process and fee-shifting bylaws. The common theme: her aversion to gamesmanship and close-minded, reflexive behavior on all sides, which, she believes, can be harmful to companies and shareholders and contribute to unfair results. Continue reading

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Kerfuffle over “conflicting proposal” exclusion: what does it mean for pending shareholder proposals?

by Cydney Posner

As we described in our last post on the saga of James McRitchie’s proxy access proposal submitted to Whole Foods Market, Inc., the SEC staff had granted the no-action request of Whole Foods, confirming that the company could omit McRitchie’s proposal from its proxy statement. That proposal would have permitted shareholders (or groups) that, for the preceding three years, had continuously held 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. The basis for exclusion was Rule 14a-8(i)(9), which permits omission of a proposal where company management plans to submit a conflicting proposal. In its no-action request to the SEC, Whole Foods advised that it had determined to submit for a vote of its shareholders, at the same meeting, a proxy access proposal that would allow any single shareholder owning at least 9% of the company’s common for five years to submit nominations to be included in the company’s proxy statement — threshold levels that would have made proxy access unavailable to any current shareholder. 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. McRitchie then requested that the entire Commission reconsider and reverse the Whole Foods decision, arguing that the staff’s “interpretation effectively limits shareholders to consideration of proposals sponsored by the board of directors and eliminates any opportunity for shareholders to present alternative criteria. The interpretation is an unnecessary limitation on the shareholder franchise, effectively depriving shareholders of rights that exist under state law, and is inconsistent with the Commission’s intent in adopting subsection (i)(9).”

The Council of Institutional Investors also jumped into the fray. CII sent a letter to Corp Fin criticizing the SEC staff’s interpretation to the “conflicting proposal” exclusion as too broad an approach.  Rather, CII asserted, the exclusion should be available in only two circumstances: where there are two binding proposals on the same topic or, if the shareholder proposal is merely precatory, then, to be excluded, it must propose the opposite of the management proposal. (E.g., in the face of a shareholder proposal for proxy access, management’s proposal would, in effect, need to be against proxy access.) But, CII contended, where the proposals suggest reform in the same direction and just contain different thresholds or other terms, there is no real danger of “conflict”; the message is clear. In fact, CII argued, having only a single proposal blunts the communicative value of the vote shareholders do have. Certainly adding to the pressure on the SEC was Gretchen Morgenson’s column, characterizing the SEC in this instance as not fulfilling its role as a “defender of shareholder interests,” but rather “siding with companies keen to keep investors out of the nomination process.”

On Friday afternoon, the SEC responded, posting a “Statement” from SEC Chair Mary Jo White advising that, “[d]ue to questions that have arisen about the proper scope and application of Rule 14a-8(i)(9), I have directed the staff to review the rule and report to the Commission on its review.”  In response, Corp Fin announced that “[i]n light of Chair White’s direction to the staff to review Rule 14a-8(i)(9) and report to the Commission on its review, the Division of Corporation Finance will express no views on the application of Rule 14a-8(i)(9) during the current 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. (Really, in light of all this commotion, what are the chances that the SEC will ultimately maintain the status quo?)

What does this mean for all of the pending proxy access and other proposals that would otherwise seek to rely on the “conflicting proposal” exclusion, not to mention the continued viability of the exclusion itself?  The exclusion has been available as currently interpreted for a number of years and has been successfully used by companies in several contexts – the right of shareholders to call shareholders’ meetings, elimination of supermajority voting provisions, and until now, proxy access. Now, companies desiring to exclude any of these types of proposals on the basis of a conflicting proposal are essentially on their own. There is no requirement that companies obtain a favorable no-action position from the SEC in advance of excluding the shareholder proposal in reliance on the exclusion; companies need only advise the staff of their intent to exclude and provide their rationales for exclusion. As the staff regularly states in its responses to no-action requests on shareholder proposals, the “determinations reached in these no-action letters do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholders proposals in its proxy materials.” Continue reading

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