You might recall that, in November last year, Corp Fin issued new Staff Legal Bulletin No. 14I, Shareholder Proposals, which, among other things, addressed the “economic relevance” exclusion of Rule 14a-8(i)(5). That rule permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” The rule had been largely moribund for several decades, as the staff’s most recent restrictive interpretation generally deterred companies from invoking it. Now we have what appears to be the first successful use of the exclusion since the new SLB attempted to rejuvenate it. The letter is to Dunkin’ Brands Group.
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?
When we last left the saga of proxy access, we had just started a new chapter on so-called “fix-it” shareholder proposals—efforts to revise existing proxy access bylaws to make them more “shareholder-friendly.” You might recall that, in 2016 and 2017, John Chevedden et al. submitted a slew of fix-it proposals that requested amendments to proxy access bylaws to raise the cap on the number of shareholders that could aggregate their shares to reach the necessary 3% ownership level. Target companies, in turn, submitted no-action requests seeking to exclude those proposals on the basis that they had already been “substantially implemented” under Rule 14a-8(i)(10). In response to the requests for relief, the SEC staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number. This time, the staff rejected H&R Block’s no-action request. In essence, it appears that the staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. (For more history on these fix-it proposals, see this PubCo post.) This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
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).
In 2016, the AFL-CIO submitted several shareholder proposals designed to curb the impact of stock buybacks on executive compensation. (See this PubCo post.) The question at the time was whether we would see many more of these proposals. However, amid significant media and academic criticism, as well as relatively high stock valuations, the levels of stock buybacks declined, and the anticipated wave of proposals on buybacks did not materialize. However, the new tax act is expected to trigger a new spike in the levels of stock buybacks. (See this MarketWatch article.) Perhaps with that in mind, one of the most prolific proponents of shareholder proposals has submitted a proposal to eliminate the impact of stock buybacks in determining executive compensation. Will these proposals now become a thing?
While the topic of last week’s fourth SEC-NYU Dialogue on Securities Markets was shareholder engagement—focusing on the roles of institutional and activist investors— the real hot topic was the recent letter to CEOs from BlackRock’s Laurence Fink, which was at least mentioned on every panel. (See this PubCo post.)