The staff of the Securities and Exchange Commission has officially changed course on its interpretation of the "conflicting proposal" grounds for exclusion of a shareholder proposal from an issuer’s proxy statement. In new Staff Legal Bulletin (SLB) No. 14H issued on October 22, 2015, the staff described its recent review of the "proper scope and application" of Rule 14a-8(i)(9) as directed by Commission Chair Mary Jo White in January of 2015, and articulated a new and narrowed standard. See our client alert of January 20, 2015 reporting on Chair White’s directive and the controversy preceding that action. Since Chair White’s directive, the Division of Corporation Finance has expressed no views on the application of this exclusion.
The staff has narrowed the exclusion and, going forward, will only acquiesce in application of the "conflicts with management proposal" exclusion where the issuer can establish that "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."
Also included in SLB 14H is the staff’s response to the opinion of the Third Circuit in the Trinity Wall Street v. Wal-Mart Stores, Inc. case. The staff announced that it will not follow the more issuer-friendly test articulated by the majority of the Third Circuit panel when analyzing whether a proposal involving a significant policy issue is excludable under the ordinary business exclusion.
Taken together, it is clear that the staff of the Division of Corporation Finance is making exclusion of shareholder proposals more difficult for issuers, at least in the areas covered by these exclusions.
Application of the Rule 14a-8(i)(9) Exclusion
Rule 14a-8(i)(9) permits an issuer to exclude a shareholder proposal from the issuer’s proxy statement if the proposal "directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting." Before Chair White’s directive to reconsider the staff’s approach to this exclusion, the staff took the position that the "conflicts with management proposal" exclusion was applicable when presentation of both proposals would require "alternative and conflicting decisions for the shareholders" and create the potential for "inconsistent and ambiguous results." SLB 14H citing SBC Communications, Inc. (Feb 2, 1996).
Staff Legal Bulletin 14H, however, traces the origin of the exclusion to a 1967 codification of the view that Rule 14a-8 "does not apply . . . to counter proposals to matters to be submitted by the management." The staff concludes that the purpose of the exclusion was to prevent shareholders from circumventing the proxy rules governing competing solicitations by submitting a conflicting shareholder proposal under Rule 14a-8.
Based on this conclusion, the staff states that a qualifying conflict would exist only "if a reasonable shareholder could not logically vote in favor of both proposals." The staff states that it will not view a shareholder proposal as directly conflicting with a management proposal "if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both." The prior standard of avoiding "inconsistent and ambiguous results" and shareholder confusion has thus been narrowed considerably.
By way of illustration, and to make perfectly clear that the 14a-8(i)(9) exclusion will not be available for the type of proxy access "competing proposal" which was the subject of the original controversy, the staff provides the following examples:
- Company seeks shareholder approval of a merger, and a shareholder proposals asks shareholders to vote against the merger: Direct conflict and excludable
- Shareholder proposal seeking separation of the CEO and Chair positions, and a company proposal seeking approval of a bylaw provision requiring the CEO to be the Chair at all times: Direct conflict and excludable
- Shareholder proposal to permit a shareholder or group of shareholders holding at least 3% of the company’s outstanding stock for at least 3 years to nominate up to 20% of the directors, and management proposal allowing shareholders holding at least 5% of the company’s stock for at least 5 years to nominate up to 10% of the directors: Not a direct conflict and not excludable under 14a-8(i)(9)
- Company proposal to approve an incentive plan giving the compensation committee the discretion to set the vesting provision for equity awards, and a shareholder proposal asking the compensation committee to implement a policy imposing a minimum four-year annual vesting of all equity awards: Not a direct conflict and not excludable under 14a-8(i)(9)
The staff concedes that the result of this interpretation may be that differing proposals are both approved by shareholders, putting company management in the position of considering the effects of both. There also may be some potential for confusion of the shareholders if such proposals are both presented. This, according to the staff, is not what the rule was intended to address. As a result, company boards will be left to sort that out. The staff also acknowledged that this articulation of the exclusion imposes a higher burden for companies seeking to exclude a proposal, but stated that the new standard was most consistent with the history of the rule.
Application of Rule 14a-8(i)(7) after Trinity Wall Street
Staff Legal Bulletin 14H also addresses the recent Third Circuit Court of Appeals decision in the case of Trinity Wall Street v. Wal-Mart Stores, Inc., 792 F.3d 323 (3d Cir. 2015). In that case, the Third Circuit reversed a lower court ruling that a shareholder proposal could not be excluded by Wal-Mart under the "ordinary business" exclusion because it related to a significant policy issue – here the overall issue of gun safety – which is a long-standing exception to the "ordinary business" exclusion.
The Third Circuit reversed, holding that Wal-Mart could exclude Trinity’s proposal calling for greater board oversight of Wal-Mart firearm sales, because even if gun safety was an issue of broad social significance, it did not "transcend" the company’s ordinary business. The majority concluded there was a two-part test to the application of the ordinary business rule: first, establish a significant policy issue is raised by the proposal, and second, establish that it transcends the company’s ordinary business by being "divorced from how a company approaches the nitty-gritty of its core business." The concurring judge analyzed the issue using the staff’s traditional approach.
The staff used the opportunity provided by the SLB 14H to announce that it will not analyze the significant policy exception to the ordinary business exclusion using the majority’s two-part analysis because of concerns that this would unduly limit the exception. Instead, the staff stated that proposals focused on a significant policy issue would not be excludable as ordinary business regardless of whether they related to the "nitty gritty" of an issuer’s core business.