During the September meetings of the ABA Business Law Section, representatives of the SEC’s Division of Corporation Finance confirmed two important points regarding exceptions to Rule 14a-8, the SEC proxy rule enabling shareholders to submit proposals for inclusion in a company's proxy materials: (1) the SEC intends to issue guidance or make an announcement before November addressing the application of Rule 14a-8(i)(9), which permits companies to exclude shareholder proposals that directly conflict with the company’s own proposals, in order to provide clarity for the 2016 proxy season; and (2) the SEC will continue to apply current analysis and precedent with respect to no-action relief and guidance under Rule 14a-8(i)(7), which permits companies to exclude shareholder proposals relating to the company’s ordinary business operations.
Rule 14a-8(i)(9) “Directly Conflicts” Exception
The SEC Staff took the unusual step of expressing no views on the application of the Rule 14a-8(i)(9) “directly conflicts” exception during the 2015 proxy season when Chair White, in reaction to the well-publicized debate surrounding a proxy access proposal received by Whole Foods, instructed the SEC Staff to review the application of the Rule.
Rule 14a-8(i)(7) “Ordinary Business” Exception
The interpretation of the Rule 14a-8(i)(7) “ordinary business” exception came under scrutiny as a result of the litigation in Trinity Wall Street vs. Wal-Mart Stores, Inc. In July, the U.S. Court of Appeals for the Third Circuit released its opinion permitting the exclusion of Trinity’s shareholder proposal relating to the sale of high capacity assault rifles and other dangerous products. The Court’s decision largely reinforced the SEC’s interpretation of the exception and was welcome news to issuers and advisors who were concerned that proponents would submit “corporate governance” proposals to address issues that traditionally had been interpreted by the SEC as matters of day-to-day business. However, the Court’s majority opinion differed from SEC precedent by permitting exclusion of proposals only if they both raise significant policy issues and also transcend day-to-day business. The court recommended that the SEC revise its regulations and issue new interpretive guidance in this area, leading to concerns that the SEC’s interpretation of the Rule 14a-8(i)(7) exception could be in flux at a time when companies are preparing for the 2016 proxy season.
Representatives of the SEC’s Division of Corporation Finance have confirmed that they do not currently intend to change their interpretation of the Rule 14a-8(i)(7) exception. Consistent with the concurring opinion in the Third Circuit decision, the evaluation of whether a proposal raises an issue of significant social policy will not be separated from whether it transcends a company’s day-to-day business; a proposal “is sufficiently significant ‘because’ it transcends day-to-day business matters.”