On Sept. 27, 2016, the staff of the Division of Corporation Finance issued three no-action letters in response to requests to exclude shareholder proxy access proposals on the basis that the companies had already “substantially implemented” the proposals.

Pursuant to Rule 14a-8(i)(10) under the Securities Exchange Act of 1934, a company may exclude a shareholder proposal from its proxy statement if the company has substantially implemented the proposal. The staff has clarified that a company need not implement the shareholder proposal exactly as requested, but rather it must satisfy the “essential objective” of the proposal.

In two of the three letters, the staff stated that it would not recommend enforcement action if the company excluded the shareholder proposal which requested that the company adopt a proxy access bylaw, on the basis that the company’s recently adopted proxy access bylaw addressed the shareholder proposal’s essential objective. In both cases, the company’s bylaws provided that a shareholder or group of shareholders who have held 3 percent of the company’s stock for 3 years is permitted to nominate up to 20 percent of the board. However, the staff granted no-action relief even though the company bylaws deviated from the terms of the proposal and omitted certain terms identified in the proposal as “essential elements for substantial implementation.” Specifically:

  • the company bylaws restricted the number of shareholders who could form a group to 20, whereas the proposal sought an unlimited group;
  • the company bylaws limited the number of board seats to 20 percent of the board, while the proposal would have provided access to 25 percent of the board; and
  • one of the company’s bylaws imposed a two-year restriction on the ability to re-nominate a candidate who fails to garner a certain percentage of the vote, whereas the proposal would not have imposed such restriction.

By comparison, in the third letter, the staff denied the company’s request to exclude a shareholder proposal to amend the company’s proxy access bylaw. The staff stated that it was unable to conclude that the company’s proxy access bylaw “compare[d] favorably with the guidelines of the proposal.” The proposal sought to amend certain terms of the company’s existing proxy access bylaw, which included the same key terms which were found to have addressed the essential objectives in the proposals that were the subject of the other two letters.

These three letters seem to imply that the SEC’s position with respect to the ability to exclude a shareholder proposal will differ based on whether the proposal requests that the company “adopt” a proxy access bylaw as opposed to “amend” its existing proxy access bylaw. This would seem to be the case, even if the proposal includes “essential” terms different from those included in the company’s current bylaw.