Until yesterday, there were five no-action requests regarding proxy access proposals from the McRitchie/Chevedden group awaiting responses from Corp Fin as to whether the proposals could be excluded on the basis that they had been “substantially implemented” under Rule 14a-8(i)(10). The burning question was whether there would be any “evolution in Corp Fin’s position in H&R Block? Corp Fin has now acted on three of them, and the answer to the question is “not yet.”

As you may recall, the 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 H&R Block proposal to amend, 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 would view as “proxy access lite” could expect to be seeing new proposals for revisions to proxy access bylaws. That expectation has already materialized for several companies.

In one of the Corp Fin responses to no-action requests posted yesterday, the shareholder proposal requested adoption of amendments to the company’s existing proxy access bylaw, identifying in the proposal specific changes characterized as essential elements for substantial implementation. The issue, as framed in the request, was whether the existing proxy access bylaw substantially implemented the essential objective of the proposal because the additional changes sought in the proposal were the types of minor variation that are inconsistent with the policy underlying Rule 14a-8(i)(10). But the request for no-action suffered the same fate as H&R Block, as Corp Fin was unable to concur that the proposal to amend could be excluded under Rule 14a-8(i)(10). As of now, the score for proposals to amend existing proxy access bylaws: company-0 proponent-2.

However, where the proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion, 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 requests 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 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 same fact pattern was presented in this letter, where the proposal was likewise for initial adoption of proxy access. Here, the company’s no-action request expressly noted “the Proposal’s emphasis, in italicized font, of the words ‘essential elements for substantial implementation’ in the lead-in paragraph and its similar emphasis of the phrases ‘unrestricted number of shareholders forming a group,’ ‘one quarter of the directors then serving or two, whichever is greater,’ and ’three years,’ as well as the sentence, ‘[n]o additional restrictions shall be imposed on re-nominations when nominees fail to receive a specific percentage of votes.’ The implication of the emphasized language is that the Proposal cannot be substantially implemented without fully addressing each and every one of those particular elements of the Proposal. However, the Commission specifically rejected the notion that the actions requested by a proposal need to be fully effected in each and every respect for that proposal to be substantially implemented. Indeed, as the precedent described above demonstrates, a proposal is substantially implemented when its essential objective is satisfied, even if the proposal has not been implemented exactly as proposed.” In both these instances, notwithstanding the identification in the two proposals of “essential elements for substantial implementation,” the SEC allowed exclusion, agreeing with the companies that there was some basis for the view that the proposals could be excluded under rule 14a-8(i)(10) and noting the companies’ representations that the boards had adopted proxy access bylaws that addressed the proposals’ essential objectives. As of now, the score for proposals to initially adopt: company-approx.39 proponent-3.

Two letters, both of which could add new layers of complexity in the context of proposals to amend existing proxy access bylaws, are still awaiting responses from the staff. In this instance, the proposal requested adoption of an “enhancement package” to revise existing proxy access bylaws with six specific changes requested. In response, the company amended its proxy access bylaws to implement some, but not all, of the changes requested in the proposal. Specifically, the bylaw was amended to reduce the eligibility threshold from 5% to 3%, to eliminate the 25% votes-received threshold for re-nomination and to eliminate the requirement that the nominating shareholder represent its intent to continue to own the shares for one year following the annual meeting. The aspects of the proposal that were not addressed included increasing the number of shareholder-nominated candidates permitted, eliminating the cap on aggregation and counting of loaned securities as owned, if there is a right to recall the shares (with no time limitation). The company argued, in light of the amendments it had implemented, that it had satisfied the essential objective of, and thus substantially implemented, the proposal. The company alluded to NVR, Inc. (granted on recon., Mar. 25, 2016), in which the company was permitted to exclude a proposal for initial adoption of proxy access after it amended its proxy access bylaws, on its own initiative after being denied relief by Corp Fin, to conform the bylaw provisions to those that had previously received favorable no-action letters (including a reduction of the eligibility threshold from 5% to 3%). In essence, the company distinguished itself from H&R Block by arguing that the new amendments already implemented satisfied the essential objective of the proposal, even though not all of the elements of the proposal were addressed. (In contrast, in H&R Block, no amendment was implemented in response to the proposal.) Will the staff just follow its approach in H&R Block for revisions to existing bylaws or will the staff instead assess whether the failure to adopt some of the provisions in the proposal is nevertheless acceptable because they are not essential to the proposal?

This letter, also awaiting response from the staff, offers a different analysis. Here, the company also 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). 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.” That is, the company contended, the proponent was seeking to argue that the five requests in the proposal were “unified by a single, well-defined unifying concept and as such, it survives scrutiny under Rule 14-8(c), yet it has no essential objective and, instead, consists of five separate essential elements, each of which must be implemented for there to be substantial implementation, and, as such, survives scrutiny under the Staff’s Rule 14a-8(i)10) analysis for proxy access proposals because there is no essential objective to implement. This presents a fundamental inconsistency that cannot be resolved.” At the end of the day, the company concluded, “it is not possible to survive both analyses.” Rather, looking at the language of the proposal, the company argued that it was actually five requests, each of which was an essential element that must be “substantially implemented” individually and that the language “makes clear that there is no single unifying element….” The company observed that the staff has consistently allowed exclusion under Rule 14a-8(c) where the proposal combines “separate and distinct elements which lack a single well-defined unifying concept, even if the elements are presented as part of a single program and relate to the same general subject matter.” However, the company maintained, if the staff disagreed and did view the proposal to have a single unifying concept for purposes of Rule 14a-8(c), it must have a single essential objective, and that objective, the company argued, has been substantially implemented for purposes of Rule 14a-8(i)(10): if viewed as a single proposal, the proposal and the company’s bylaw “have identical proxy access eligibility thresholds (both in terms of percent and duration of ownership), but differ on a list of specific, procedural terms regarding the administration and implementation of proxy access. These differences do not have an impact on the basic determination that the Company has substantially implemented the essential objective….” Whether the staff will be persuaded by these arguments to temper its position in H&R Block remains to be seen.