On October 22, 2015, the Staff of the SEC’s Division of Corporation Finance issuedStaff Legal Bulletin 14H. SLB 14H narrows the Staff’s prior approach to interpreting the Rule 14a-8(i)(9) basis for excluding shareholder proposals that “directly conflict” with a management proposal. The Staff also confirmed that its views on the scope and application of Rule 14a-8(i)(7) as a basis for excluding shareholder proposals related to a company’s “ordinary business operations” are unchanged by the Third Circuit’s opinion in Trinity Wall Street v. Wal-Mart Stores, Inc.
Interpretation of “Directly Conflicts” under Rule 14a-8(i)(9)
Rule 14a-8(i)(9) permits companies to exclude shareholder proposals “[i]f the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting.”
During the 2015 proxy season, several companies sought to exclude shareholder “proxy access” proposals from their proxy statements on the basis that such proposals directly conflicted with management proposals for a different formulation of proxy access because they would lead to “inconsistent and ambiguous results.” These companies’ no-action requests followed the reasoning applied by the Staff in no-action letters since the late 1970s that have focused on the “potential for shareholder confusion and inconsistent mandates.”
Consistent with prior interpretations, early in the 2015 proxy season the Staff initially granted no-action relief to Whole Foods Market, permitting the company to exclude a shareholder’s proxy access proposal because management intended to submit an alternate formulation of proxy access to shareholders. Several other companies submitted similar no-action requests, generating significant controversy among some investors about the use of Rule 14a-8(i)(9). In response to that controversy, in January 2015 Chair Mary Jo White called for a review of the rule, and the Staff announced that it would express “no view” on no-action requests based on Rule 14a-8(i)(9) during the 2015 proxy season. Following its review, the Staff indicated its belief that Rule 14a-8(i)(9)’s purpose is more narrow than the purpose expressed in Staff’s prior interpretations and should be limited to preventing a shareholder from circumventing the proxy rules governing solicitations.
Under SLB 14H, the Division will only allow companies to exclude a shareholder proposal under Rule 14a-8(i)(9) “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.” Expressed differently, under SLB 14H, the exclusion will only apply where a management proposal and a shareholder proposal are “mutually exclusive.” The Staff will not allow the exclusion of shareholder proposals that “propose different means of accomplishing an objective, but do not directly conflict.” By the Staff’s own acknowledgment, the position expressed in SLB 14H represents a higher burden for companies to meet than under Staff interpretations articulated in prior no-action letters.
The Staff also noted that certain factors, namely, whether the proposal was binding or precatory and whether the shareholder submits a proposal before the company approves its proposal, would not affect the availability of the exclusion.1
SEC Examples Applying SLB 14H
The Staff provided four examples to illustrate how it would apply the interpretation in SLB 14H. The examples highlight two recent hot-button issues—proxy access and vesting provisions for executive compensation—where the Staff will no longer provide no-action relief based on Rule 14a-8(i)(9):
- Exclusion does not apply:
- Proxy access—A company does not currently allow proxy access. A shareholder proposal that would permit a shareholder or group of shareholders holding at least 3% of the company’s outstanding stock for at least 3 years to nominate up to 20% of the directors would not be excludable if a management proposal would allow shareholders holding at least 5% of the company’s stock for at least 5 years to nominate for inclusion in the company’s proxy statement 10% of the directors.
SEC Explanation—“[B]oth proposals generally seek a similar objective, to give shareholders the ability to include their nominees for director alongside management’s nominees in the proxy statement, and the proposals do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals.”
- Equity award vesting—A shareholder proposal asking the compensation committee to implement a policy whereby equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards.
SEC Explanation—“[A] reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.”
- Exclusion applies:
- Merger proposal—A management proposal seeking shareholder approval of a merger would directly conflict with a shareholder proposal asking shareholders to vote against the merger.
- Separation of Chair and CEO roles—A shareholder proposal that asks for the separation of the company’s chairman and CEO would directly conflict with a management proposal seeking approval of a bylaw provision requiring the CEO to be the chair at all times.
Under this new guidance, we expect that few companies will be able to rely on Rule 14a-8(i)(9) going forward. As a result, where two proposals are included on the same topic, companies should consider explaining in the proxy statement the manner in which the board intends to interpret voting. In a footnote to SLB 14H, the Division commented:
Where a shareholder proposal is not excluded and companies are concerned that including proposals on the same topic could potentially be confusing, we note that companies can, consistent with Rule 14a-9, explain in the proxy materials the differences between the two proposals and how they would expect to consider the voting results. As always, we expect companies and proponents to respect the Rule 14a-8 process and encourage them to find ways to constructively resolve their differences.
SLB 14H does not affect Rule 14a-8’s other bases for excluding shareholder proposals. For a company that faces a directly conflicting shareholder proposal, please note that the Staff may require more information than was previously the case under Rule 14a-8(i)(9) no-action requests, including a complete copy of the company’s proposal.
Ordinary Business Operations Exclusion and Trinity Wall Street v. Wal-Mart Stores, Inc.
The Staff confirmed in SLB 14H that it would not change its historical approach to evaluating proposals that relate to “ordinary business operations” under Rule 14a-8(i)(7) following the U.S. Court of Appeals for Third Circuit’s decision in Trinity Wall Street v. Wal-Mart Stores, Inc.
For the 2014 proxy season, Trinity Wall Street submitted a shareholder proposal to Wal-Mart stores concerning the company’s policies regarding the sale of products that endanger public safety, have substantial potential to impair the company’s reputation or would be reasonably considered by many to be offensive to the family and community values integral to the company’s promotion of its brand, including firearms with “high capacity magazines.” Wal-Mart sought and received the Staff’s concurrence that the proposal was excludable under Rule 14a-8(i)(7) because it related to Wal-Mart’s ordinary business operations. Wal-Mart argued that even if touching on a significant policy issue, the proposal was overly broad in nature and failed to distinguish between a manufacturer of firearms and a retailer. The Staff noted that “the proposal relates to the products and services offered for sale by the company” and that proposals “concerning the sale of particular products and services are generally excludable” under that rule.
Trinity Wall Street challenged Wal-Mart’s exclusion of the proposal in U.S. District Court for the District of Delaware, and in late 2014 that court ruled that the proposal could not be excluded from the company’s 2015 proxy materials. The District Court found that the proposal addressed a significant policy issue under the SEC’s prior guidance. However, the court did not analyze the issue at length. The District Court also emphasized that the proposal did not seek to “micro-manage” the company through setting a specific policy; rather, it merely requested that the board of directors develop a policy.
Third Circuit Opinion
In July 2015, a three-judge panel of the Third Circuit reversed the lower court. The Third Circuit concluded that the subject matter of the shareholder proposal related to ordinary business operations, namely “a potential change in the way Wal-Mart decides which products to sell.” In addressing the significant policy exception to the ordinary business operations exclusion, the majority opinion provided a new two-part test, stating that “a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.” Under that test, for a significant policy issue to transcend a company’s ordinary business, the issue must be “divorced from how a company approaches the nitty-gritty of its core business.”
The concurring judge disapproved of the majority’s two-part test, nothing that under SEC guidance and Staff practice “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.” The concurring judge described the concepts of significance and transcendence as “interrelated, rather than independent.”
Staff’s View on the Significant Policy Exception
The Staff disagreed with the majority’s two-part part test and indicated that the concurring judge appropriately summarized the Commission’s approach and the Division’s practice regarding the Rule 14a-8(i)(7). That approach and practice has been and remains that “proposals focusing on a significant policy issue are not excludable under the ordinary business exception ‘because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.’” Accordingly, “a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’”