On January 16, 2015, the Division of Corporation Finance (the Division or Staff) announced that, for the 2015 proxy season, it will not express any views on whether a company may exclude a shareholder proposal from its annual meeting proxy statement on the grounds that management is putting forth a proposal to be voted on by shareholders that “directly conflicts” with the shareholder proposal, as permitted by Exchange Act Rule 14a-8(i)(9). The context in which this basis for exclusion typically arises is where a shareholder submits a proposal (either precatory or binding) to amend the bylaws to implement some governance change, such as the right to act by written consent or to call a special meeting, and the company counters with its own proposal on the same topic, but with a different threshold to meet.
This year, numerous companies have requested no-action relief under Rule 14a-8(i)(9) with regard to shareholder proposals seeking the implementation of proxy access. For the first time with respect to a proxy access proposal, the Division granted such relief to Whole Foods Market, Inc. in December 2014. Whole Foods argued that the shareholder’s three percent/three years proxy access proposal may be excluded from its proxy statement because management intends to submit a bylaw amendment to a shareholder vote that would permit proxy access for holders of nine percent holding for five years.
This use of Rule 14a-8(i)(9) to exclude shareholder proxy access proposals has faced criticism from the institutional investor community. On January 16, 2015, Chair White announced that, “Due 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 a choreographed response, the Division in turn announced that it would express no views on Rule 14a-8(i)(9) during the 2015 proxy season and effectively withdrew its grant of no-action relief to Whole Foods by informing the company that the Division expresses no view concerning whether Whole Foods may exclude the proposal under Rule 14a-8(i)(9).
The consequence of these developments is that companies will be “on their own” if they determine to exclude a shareholder proposal from their proxy statements on the basis that it directly conflicts with management’s proposal. On the one hand, the Division will not express any view as to whether a company is or is not justified in excluding the shareholder proposal on this basis. On the other hand, a shareholder could file suit to enjoin the company from excluding its proposal on the basis of Rule 14a-8(i)(9). It is not clear, even if the company’s decision to exclude is consistent with the Division’s precedents, whether a federal district court would give deference – or the extent to which it would give deference – to these precedents at a time when the Chair of the SEC has directed the Division to review the rule, which would presumably include the Division’s interpretation and administration of the rule.
Rule 14a-8(i)(9) provides that a company may exclude a shareholder proposal if “the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” For many years, the Staff has provided no-action relief to companies on this basis when the company indicates that it plans to introduce a proposal that pertains to the same governance-related topic as a proposal submitted by a shareholder. For example, with respect to proposals relating to the shareholders’ right to call special meetings, what typically occurs is that a company receives a shareholder proposal calling for steps to be taken to give shareholders holding a certain percentage of common stock (such as 10 percent) the right to call a special meeting. The company seeks no-action relief from the Division on the grounds that it intends to include its own proposal seeking to give that right to shareholders, typically with a higher ownership percentage (such as 25 percent). The Staff has routinely granted no-action relief on these facts. This pattern has also been followed with regard to proposals seeking to give shareholders the right to act by written consent and to lower supermajority voting thresholds.
Whether or not a company would have included its special meeting proposal in the proxy statement absent receiving the shareholder’s special meeting proposal has generally not been a relevant factor in Rule 14a-8(i)(9) jurisprudence because the fact remains that, whatever the reason behind management’s decision to include its proposal in the proxy statement, the inclusion of both a 10 percent special meeting proposal and a 25 percent special meeting proposal would present alternative and conflicting decisions for shareholders, and create the potential for inconsistent and ambiguous results. Indeed, in Whole Foods Market, Inc. (Dec. 1, 2014, withdrawn Jan. 16, 2015), the shareholder who submitted the proxy access proposal argued unsuccessfully that “[b]oards shouldn’t be able to game the system with proposals simply meant to thwart the will of shareowners.”
Prior to the 2015 proxy season, the Division had not had occasion to decide whether to grant no-action relief under Rule 14a-8(i)(9) regarding a proxy access proposal. For the 2015 proxy season, the number of proxy access proposals and the publicity relating to them have increased sharply, largely due to the Comptroller of the City of New York, which submitted proxy access proposals to 75 companies. The Comptroller’s proposals seek to permit a shareholder or group of shareholders that have held at least three percent of the company’s stock for at least three years to include director nominees for up to 25 percent of the company’s directors in the company’s proxy statement.
At the beginning of the 2015 proxy season, Whole Foods submitted such a request. Whole Foods received a proposal from an individual shareholder proponent asking the Whole Foods board to amend the company’s governance documents to permit a shareholder or group of shareholders holding at least three percent of the company’s stock for at least three years to include in the company’s proxy statement nominees for up to 20 percent of the company’s directors. Whole Foods responded with a request for no-action relief indicating that it planned to introduce its own proposal to provide proxy access to a shareholder or group of shareholders holding at least nine percent of the company’s stock for more than five years. On December 1, 2014, the Division indicated that it would not recommend enforcement action if Whole Foods excluded this shareholder proposal pursuant to Rule 14a-8(i)(9).
This grant of no-action relief generated concern among certain institutional investors. Perhaps in response to this concern, Whole Foods amended the terms of the proxy access proposal it included in its preliminary proxy statement filed on December 30, 2014 by reducing the nine percent ownership threshold, as described in its request for no-action relief, to five percent. This change did not entirely satisfy Whole Foods’ critics. On January 8, 2015, for example, the Council for Institutional Investors (CII) sent to Whole Foods and made public a letter expressing its “deep disappointment” with Whole Foods’ initial response at the nine percent/five years level and indicating that it was “not comforted” by its subsequent inclusion of a five percent/five years model in its preliminary proxy statement. The following day, the CII sent a letter to the SEC urging the Staff to “alter its interpretation of” Rule 14a-8(i)(9) which the CII considers “overly broad and inconsistent with the purpose of the Rule.”
Contemporaneously with these developments, approximately twenty-four companies have sought no-action relief under Rule 14a-8(i)(9) in connection with proxy access proposals. Many, but not all, of these have been at the five percent/five years level.
Considerations for Companies Currently Evaluating Options Regarding Shareholder Proposals
Rule 14a-8(i)(9) is still available as a basis to exclude a shareholder proposal from a company’s proxy statement even though the Staff will not provide Rule 14a-8(i)(9) no-action relief for the 2015 proxy season. The Division’s precedents interpreting and applying Rule 14a-8(i)(9) remain outstanding and have not been withdrawn (other than Whole Foods Market, Inc.). In many situations, companies may be able to conclude that they are justified, consistent with the Division’s precedents, in excluding shareholder proposals on the basis that they directly conflict with managements’ proposals. Companies that elect to exclude a proposal on this basis should note that a submission to the Division will still be required under Rule 14a-8(j). Such a submission would, however, be styled as a notice of omission rather than a request for no-action relief.
As has always been the case, however, shareholders whose proposals are omitted on the basis of a competing management proposal may challenge the omission in federal court. While proponents have rarely done this in situations in which the Staff has granted no-action relief,1 for the 2015 proxy season, the Staff will not play any role when it comes to Rule 14a-8(i)(9) exclusions. No matter how confident companies are in the strength of their positions under Rule 14a-8(i)(9), they will have to assess whether excluding a shareholder proposal – particularly if it relates to the controversial issue of proxy access – on that basis is worth the risk of litigation. Although federal district courts should give deference to the Division’s analysis and administration of Rule 14a-8(i)(9), the rule is now under review at the direction of the Chair of the SEC – and such a review would presumably include the reasonableness of the Division’s precedents analyzing and applying the rule – and the Division will not express any view on the applicability of Rule 14a-8(i)(9). As a result, it is possible that a federal district court deciding such a lawsuit today may give less deference to the agency’s interpretation than would otherwise be the case.