On October 22, 2015, the Securities and Exchange Commission (the SEC) staff issued Staff Legal Bulletin No. 14H, providing guidance on important issues arising under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Staff Legal Bulletins represent the views of the Division of Corporation Finance (the Division) of the SEC and do not constitute a rule, regulation or statement of the SEC. Specifically, the bulletin provides the staff’s current views on the scope and application of Rule 14a-8(i)(9) and the scope and application of Rule 14a-8(i)(7) following the 2015 decision of the U.S. Court of Appeals for the Third Circuit inTrinity Wall Street v. Wal-Mart Stores, Inc.
By way of background, during the 2015 proxy season, the SEC staff declined to issue guidance under Rule 14a-8(i)(9) relating to when an issuer could properly exclude a shareholder proposal under Rule 14a-8(i)(9) as “directly conflicting” with a competing management proposal, following the issuance and then reversal of a no-action letter under that rule to Whole Foods. SEC Chair White directed the Division of Corporation Finance of the SEC to review and provide guidance on the application of the rule.
The new staff guidance states that, based on the history of Rule 14a-8(i)(9) and the staff’s understanding of the rule’s intended purpose, whether a shareholder proposal is excludable under the rule should focus on whether there is a direct conflict between the management and shareholder proposals, which the staff believes “would exist 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.” The staff notes that this may be a higher burden for some companies than under the staff’s previous formulation. As an example, a shareholder proposal that would permit a shareholder or group of shareholders holding at least 3 percent of the company’s common stock for at least three years to nominate up to 20 percent of the company’s directors would not be excludable on the basis of “directly conflicting” with a management proposal that would allow shareholders holding at least 5 percent of the company’s stock for at least five years to nominate up to 10 percent of the directors. The staff noted that although a shareholder might prefer one proposal over the other, a reasonable shareholder could logically vote for both proposals as advancing a similar objective. The bulletin notes that the SEC staff will focus on this formulation in considering future no-action requests under Rule 14a-8(i)(9).
In Trinity Wall Street v. Wal-Mart Stores, Inc., the Third Circuit, reversing a lower court decision, held that a shareholder proposal submitted to Wal-Mart was properly excludable under Rule 14a-8(i)(7) as relating to Wal-Mart’s ordinary business operations. The Third Circuit’s decision was consistent with the SEC staff’s earlier guidance to Wal-Mart that the proposal could be excluded under Rule 14a-8(i)(7). In reaching its decision, the Third Circuit considered whether the significant policy exception to the ordinary business exclusion applied. In doing so, the majority opinion utilized a new two-part test and concluded that to be outside the ordinary business exclusion, the significant policy “must do more than focus on a significant policy issue; the subject matter of the proposal must ‘transcend’ the company’s ordinary business operations” – i.e., the significant policy issue must be “divorced from how a company approaches the nitty-gritty of its core business.” This two-part analysis differs from the SEC’s articulation and application of the scope of the ordinary business exclusion.
In addition to the majority opinion, Trinity v. Wal-Mart had a concurring opinion that was consistent with the SEC staff’s prior approach to the exclusion. As stated in the concurring opinion, “whether a proposal focuses on an issue of social policy that is sufficiently significant is not separate and distinct from whether the proposal transcends a company’s ordinary business. Rather, a proposal is sufficiently significant ‘because’ it transcends day-to-day business matters.” Applying this approach, the staff’s view is that proposals that focus on a significant policy issue may transcend a company’s ordinary business operations (and, therefore, not be excludable under the ordinary business exception) if they are so significant that they would be appropriate for a shareholder vote. The bulletin concludes by advising companies that the SEC staff intends to continue to apply its historic analysis in considering future no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion, as endorsed by the concurring opinion in Trinity v. Wal-Mart.
Here is a link to the SEC staff bulletin.