Last year, controversy ensued following the SEC’s issuance of no-action relief to Whole Foods Market, Inc. with respect to its exclusion of a shareholder proposal for proxy access on the basis that, under SEC Rule 14a-8(i)(9), it “directly conflicted” with the company’s own proposal to provide proxy access on different (more restrictive) terms. As a result, in January 2015, the SEC announced that, pending a review of the “proper scope and application of Rule 14a-8(i)(9),” the SEC would not be issuing any no-action letters with respect to conflicting proposals during the 2015 proxy season. The SEC staff has now issued a Staff Legal Bulletin stating its policy on conflicting proposals for the 2016 proxy season. The policy stated in the SLB represents a change in the SEC’s longstanding approach to conflicting proposals and, as discussed below, the limits of its application are, at this time, uncertain.
SEC issues new SLB applicable to 2016 proxy season. Staff Legal Bulletin No. 14H, issued on October 22, 2015, states that, for the 2016 proxy season, companies may obtain no-action relief to exclude shareholder proposals that “directly conflict” with a company proposal that will be submitted to shareholders at the same meeting only if “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”—that is, “they are, in essence, mutually exclusive proposals.”
Change in SEC’s longstanding approach to conflicting proposals. Acknowledging that SLB14H represents a change in the SEC staff’s longstanding approach to the “conflicting proposals” exemption under Rule 14a-8(i)(9), the staff makes clear in the SLB that the exemption cannot be used to exclude proposals that “propose different means of accomplishing an objective, but do not directly conflict” with a company proposal or where “a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both.” (The SLB also clarifies that the availability of the exclusion will not be affected by whether the shareholder proposal is binding or precatory or was submitted before or after the company proposal had been developed.) Accordingly, it appears that companies will no longer be able to exclude under Rule 14a-8 many of the proposals that in the past have been excludable on the basis that they directly conflicted with a company proposal because the proposed terms were different.
Lack of clarity as to the limits of the SEC’s new approach. We note that the extent of the change that will result from the SEC’s new interpretation is not yet clear. The SEC did not clarify in the SLB whether there would be a point (and, if so, what that point would be) at which, although a shareholder proposal and a company proposal are logically consistent in terms of subject matter (e.g., both are in favor of a specified matter), the terms of the two proposals are so different that they could be regarded as being in conflict. In the SLB, the staff gave the following as an example of proposals that would not be in conflict:
(a) a shareholder proposal for proxy access that would permit shareholders holding at least 3% of the stock for at least 3 years to nominate up to 20% of the directors and (b) a company proposal for proxy access that would allow shareholders holding at least 5% of the stock for at least 5 years to nominate up to 10% of the directors. The company could not exclude the shareholder proposal, the staff explained in the SLB, because: “[B]oth proposals generally seek a similar objective, to give shareholders [proxy access] and the proposals do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals.”
Would the proposals be deemed to conflict, however, if the company proposal would permit only shareholders holding 10% of the stock for at least 10 years to have proxy access? Those terms, which are so far from the terms of the shareholder proposal, could reasonably be regarded, as a substantive matter, as being a proposal to not provide proxy access, rather than as a proposal to provide proxy access albeit on different terms. How the staff will deal with this issue awaits further developments.