With a single statement the SEC upended the private ordering of how shareholder proposals are often dealt with in the height of proxy season. Historically, it has been well settled that companies may exclude shareholder proposals on the basis that “the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” On January 16, 2015, the SEC issued a statement from Chair Mary Jo White indicating that, due to questions regarding the proper scope and application of that exclusion under Rule 14a-8(i)(9), she had directed the SEC staff to review the rule and report to the Commission on its review. The SEC’s Division of Corporation Finance subsequently announced that, in light of Chair White’s direction, it would express no views on the application of Rule 14a-8(i)(9) during the current proxy season. As a result of these announcements, the granting of “no action” relief for proposals that directly conflict with a company proposal effectively ceased, leaving companies to consider other options and creating uncertainty in the midst of an already hectic proxy season.
In December 2014, the SEC staff concurred with Whole Foods Market, Inc. that it could exclude a shareholder proposal on proxy access under Rule 14a-8(i)(9) on the basis that the shareholder proposal directly conflicted with the company’s own proposal. The shareholder proposal would give a group of shareholders owning 3% of the company’s shares for three years the right to include nominees for director in the company’s proxy materials. In contrast, the company proposal sought to provide proxy access for a single shareholder owning 9% of the company’s shares for five years. The SEC staff granted no action relief, but subsequently reconsidered its position and stated that it would express no views on the application of Rule 14a-8(i)(9). As a result, while the rule remains valid, the SEC staff has not granted and will not grant relief under this exclusion until it completes its review of Rule 14a-8(i)(9). This had a ripple effect beyond Whole Foods and impacted other companies attempting to determine whether they could exclude shareholder proposals. It also opened the door for advisory firms, such as ISS and Glass Lewis, to opine on the matter and to push for further strides toward shareholder-friendly governance.
The unavailability of no action relief under Rule 14a-8(i)(9) primarily impacted public companies’ reactions to shareholder proposals on proxy access, but it also implicated other important matters in corporate governance such as shareholder special meeting rights and shareholder action by written consent. This proxy season, when presented with a shareholder proposal that otherwise might be excludable under Rule 14a-8(i)(9), companies considered the following alternatives in lieu of the availability of no action relief:
- Include the shareholder proposal and exclude the company proposal;
- Include the shareholder proposal and the company proposal (dual proposals);
- Exclude the shareholder proposal after seeking declaratory relief from a court and include a company proposal;
- Exclude the shareholder proposal and include a company proposal; or
- Exclude the shareholder proposal and do not include a company proposal.
Alternatively, a company could attempt to negotiate with the proponent to have the shareholder proposal withdrawn. Some companies requested that the SEC staff reconsider their previously submitted no action requests on an alternative basis for relief, such as Rule 14a-8(i)(10) where a company had “substantially implemented” a proposal.
None of these options presented a particularly palatable approach to companies that ordinarily would have sought to exclude such proposals via the normal avenue of no action relief. In addition, the presentation of dual proposals posed potential for confusion. In cases where dual proposals were presented, great care was required to clarify in a company’s proxy statement what impact each proposal would have if approved by shareholders.
ISS and Glass Lewis clearly preferred that companies select the option most protective of shareholder rights. ISS announced that it will generally recommend a vote against one or more directors if a company omits a properly submitted shareholder proposal when the company has not obtained (a) voluntary withdrawal of the proposal by the proponent, (b) no action relief from the SEC or (c) a U.S. District Court ruling that it can exclude the proposal. Where none of these are feasible options, companies were generally left with the choices of (1) including the shareholder proposal and excluding the company proposal or (2) including the shareholder proposal and the company proposal. Otherwise, the company risks ISS recommending a vote against its directors. Likewise, Glass Lewis announced that it will review proxy access proposals, including alternative company proposals, on a case-by-case basis and will consider whether the company proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period and maximum number of nominees to determine whether the company’s response is reasonable. In certain cases, Glass Lewis may recommend against certain directors if the company proposal varies materially from the shareholder proposal without sufficient rationale.
Thus far this year, there have been mixed results. Many companies targeted by proxy access proposals opted to include the shareholder proposal and exclude a company proposal, with many recommending a vote “against” the shareholder proposal. Some companies included dual or “competing” proposals, but generally recommended voting “against” the shareholder proposal.
Shareholder proposals on proxy access voted on to date have received a slim majority of the votes on average, but some shareholder proposals have failed and, in some instances, companies have received a majority of the votes in favor of a more restrictive company proposal.
The developing story – and one that we expect to continue in the off-season and into the next proxy season – is the efforts by companies to preemptively adopt their own proxy access provisions without waiting for a shareholder proposal. Preemptive action effectively removes a company from the fray of private ordering and the uncertainty surrounding the Rule 14a-8(i)(9) exclusion, thereby enabling the company to better focus on its core business and strategic operations. Preemptive action also presents a company as responsive to shareholders and enables a company to adopt proxy access on its own terms, even if it facilitates access to the ballot. In any event, proxy access and the Rule 14a8-(i)(9) exclusion is – and will continue to be – a key issue impacting public companies and their governance efforts.