SEC Chair White Directs Staff to Review the Exclusion of Conflicting Shareholder Proposals in Light of Concerns Over Proper Scope and Application; Whole Foods Proxy Access Determination Reversed
The staff of the Division of Corporation Finance of the Securities and Exchange Commission announced today that it would not be providing no-action relief this proxy season on any shareholder proposal on the basis that it directly conflicts with a management proposal. Instead, the SEC staff will provide “no view” as to excludability on this basis while it conducts a review of the relevant rule as directed by SEC Chair Mary Jo White.
The relevant rule, Rule 14a-8(i)(9) under the Securities Exchange Act of 1934, has attracted significant attention recently due to its use by companies to exclude proxy access shareholder proposals as conflicting with management proposals on the same topic but with more restrictive terms. In December, the SEC staff concurred with Whole Foods as to the excludability of a shareholder proposal that would give a group of shareholders owning 3% of the company’s shares for three years the right to include nominees in the company’s proxy materials. Whole Foods expressed its intent to put forward its own proxy access proposal, applying to a single shareholder owning 9% of the company’s shares for five years. The staff agreed that there was a basis for the company’s conclusion that the two proposals were conflicting and granted no-action relief on December 1, 2014. Following the SEC staff’s determination, a significant number of other companies submitted similar letters seeking to exclude proxy access proposals on the basis that they would conflict with management proposals with a range of more restrictive terms.1
Given the prominence of proxy access as a corporate governance initiative, the SEC staff’s application of Rule 14a-8(i)(9) in this context was subject to criticism and requests for reconsideration by a number of shareholder groups. Chair White’s announcement today indicated that her decision to direct the staff to review the rule and report to the SEC on its findings was spurred by “questions that have arisen about the proper scope and application” of the rule.2 Following Chair White’s statement, the staff reversed the Whole Foods determination and indicated that it will express no views on the application of Rule 14a-8(i)(9) this proxy season.3
The staff’s original position in the Whole Foods letter was consistent with its longstanding application of Rule 14a-8(i)(9) to a broad range of proposals, including proposals to give shareholders the right to call special meetings or act by written consent. Companies have consistently been permitted to exclude such proposals on the basis that they conflicted with proposals put forth by the company on the same topic but with more restrictive terms. Similarly, companies commonly were permitted to exclude proposals seeking to prohibit single-trigger change-in-control acceleration of equity awards on the basis that they conflicted with the greater flexibility set forth in equity compensation plans that the companies were putting up for a shareholder vote at the same time.
It is important to note that companies are not required to obtain no-action relief from the staff in order to exclude a proposal under Rule 14a-8. The relevant SEC rule, Rule 14a-8(j), requires only that the company “file its reasons” with the SEC no later than 80 calendar days before it files its definitive proxy statement. Furthermore, the SEC staff has expressly confirmed that “the staff’s no-action responses to Rule 14a-8(j) submissions reflect only informal views. The determinations reached in these no-action letters do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”4