In her NYT column this past Sunday, Gretchen Morgenson provides an interesting update on the saga of James McRitchie’s proxy access proposal submitted to Whole Foods.
When we last tuned in, the SEC staff had granted the no-action request of Whole Foods Market, Inc., allowing the company to omit from its proxy statement McRitchie’s proposal to allow shareholders (or groups) that, for the preceding three years, have continuously held at least 3% of the company’s voting securities to nominate up to 20% of the Board (or no less than two directors in the event the Board reduced the size of the current Board). The successful basis for exclusion was that the company planned to submit a conflicting, more challenging proxy access proposal.
In its no-action request to the SEC, Whole Foods advised that it had determined to submit for a vote of its shareholders, at the same meeting, a proxy access proposal that would allow any single shareholder owning at least 9% of the company’s common for five years to submit nominations to be included in the company’s proxy statement. Proxy access would be available to nominate the greater of one director or 10% of the Board. Notably, groups would not be allowed to aggregate their holdings to reach the threshold, and therefore, based on its most recent stockholder table, no shareholder would be able to make use of Whole Foods’ proposed process. Nevertheless, the SEC staff agreed with Whole Foods, on the basis of Rule 14a-8(i)(9), that its proposal directly conflicted with the McRitchie shareholder proposal and that submission of both proposals would have the potential for inconsistent and ambiguous results.
But the events surrounding the shareholder proposal have suddenly become more interesting and more uncertain. As Morgenson’s column describes, on December 30, Whole Foods filed its preliminary proxy statement but, notably, reduced the thresholds for eligibility to take advantage of proxy access under its own management proposal. Under the revised management proposal, any single shareholder or group of funds under common management (but not a group of shareholders) owning at least 5% of the common stock continuously for five years would be eligible to nominate Board candidates for inclusion in the company’s proxy statement. While the proxy statement does not directly address the fact of the change from management’s original proposal as described in the no-action letter request, it does discuss the rationale for the threshold ultimately selected. These reasons include the views of shareholders expressed in the course of the company’s shareholder engagement process; the fact that, based on a review of the most recent Schedule 13F filings, the lower threshold means that proxy access may be immediately available; and the views of commentators on the SEC’s last failed proxy access proposal, such as the concern expressed that “further lowering the bar provides activist shareholders and special interest groups with a relatively low-cost avenue to disrupt board composition and corporate strategy. Some activist shareholders have a short-term or narrow agenda—such as demands that a company declare extraordinary dividends or enter into a sale transaction—that are not necessarily in the best interest of all of our shareholders.” Since a subsequent proxy access proposal would likely not be excludable on the same basis in subsequent years (because there would likely not be a conflicting proposal on the ballot), we might speculate that the company also considered whether adoption of a management proposal with a threshold at the original levels would effectively invite proponents to resubmit a proposal with a lower threshold next year and invite shareholders to vote in favor of it. In addition, Morgenson indicates that the proposal reflecting lower thresholds was filed only a “few days after [she] had asked Whole Foods why it had chosen an onerous 9 percent threshold.” Morgenson also reports that 10 other companies have now taken the same path on proxy access proposals as Whole Foods, requesting that the SEC allow exclusion on the same basis.
A development that is perhaps even more interesting (or curious, depending on your point of view) is the response by McRitchie to the SEC staff’s no-action response: on December 23, as Morgenson reports, McRitchie appealed the SEC staff’s decision to the entire Commission. He argued that the staff’s “interpretation effectively limits shareholders to consideration of proposals sponsored by the board of directors and eliminates any opportunity for shareholders to present alternative criteria. The interpretation is an unnecessary limitation on the shareholder franchise, effectively depriving shareholders of rights that exist under state law, and is inconsistent with the Commission’s intent in adopting subsection (i)(9).” In addition, he asserts that, in prior no-action letters, the staff has made clear that exclusion on the basis of conflicting proposals “could not be used as a tactical weapon in order to exclude shareholder proposals. To the extent company proposals were developed ‘in response to’ a proposal submitted by shareholders, the subsection was unavailable.” He also contends that there is no real conflict between the two proposals, since his proposal is only precatory and the differences relate only to numeric thresholds. (However, the management proposal includes a number of other requirements beyond any included in the McRitchie proposal.)
Cited by McRitchie,17 CFR 202.1(d) provides for the possibility of obtaining “an informal statement of the views of the Commission…. The staff, upon request or on its own motion, will generally present questions to the Commission which involve matters of substantial importance and where the issues are novel or highly complex, although the granting of a request for an informal statement by the Commission is entirely within its discretion.” (See also this discussion by Keith Bishop regarding the absence of any formal appellate process at the SEC with regard to Rule 14a-8 no-action letters.) With the Whole Foods meeting scheduled for March 10 and the 10-day preliminary proxy waiting period soon to lapse, it remains to be seen whether the full SEC will respond to McRitchie’s request for reconsideration on a timely basis, or respond at all.