As reported by thecorporatecounsel.net blog, on December 1, the SEC staff granted the no-action request of Whole Foods Market, Inc., allowing the company to omit from its proxy statement a non-binding shareholder proposal to permit proxy access. The proposal was submitted by James McRitchie, who delegated all authority to the ever prolific John Chevedden. More specifically, McRitchie’s proposal was to amend the company’s governing documents 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.
You might recall that, in 2010, after almost a decade of failed efforts, the SEC adopted so-called “proxy access,” changes to the federal proxy rules to allow eligible shareholders to include their nominees in companies’ proxy materials. The amendments were designed to address the common complaint that procedures currently available to shareholders for director nominations, such as waging a costly proxy contest, do not afford a practical mechanism for shareholders to participate effectively in the nomination process. The prevalence of plurality voting has also limited the effectiveness of “vote no” campaigns. Failing these efforts, it has been argued, shareholders dissatisfied with board performance may be left with selling their shares as the only option. Under the SEC rules, to be eligible, a shareholder or shareholder group would have needed to hold at least 3% of the outstanding voting power and to have continuously held the shares for at least three years. Shareholders could nominate up to 25% of the board, or one nominee, whichever is greater. However, when challenged in the courts, the SEC’s proxy access rules went down in flames, as the court concluded that the SEC had acted “arbitrarily and capriciously” in issuing the rule when it failed to provide an adequate cost/ benefit analysis. Instead of reproposing new proxy-access rules, the SEC implemented changes to Rule 14a-8 to allow shareholder proposals for proxy access to go forward, in effect permitting each company and its shareholders to make the decision on proxy access — and the applicable standards for proxy access — on an individual basis (so-called “private ordering”).
Interestingly, while there have been a number of shareholder proposals for proxy access, the anticipated flood of proposals had never really materialized. But that may be changing. In November, NYC Comptroller Scott Stringer, acting on behalf of several New York City pension funds, submitted proxy access proposals to 75 companies. The form of proposal is similar to the proposal at issue in Whole Foods and to the SEC’s overturned rules, requiring a threshold of 3% ownership for three years, with shareholders having the right to nominate up to 25% of the Board.
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 are not 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. While the SEC staff has not previously addressed this line of argument with respect to proxy access proposals, the staff has granted no-action relief on the basis of conflicting proposals in connection with a number of proposals to call special meetings of shareholders. The staff apparently concurred that its conclusions regarding special meetings were analogous to the proxy access proposal and granted the Whole Foods no-action request.
Companies targeted by proxy access proposals may look closely at the Whole Foods approach as a potential model for excluding the proposal –at least for this year. However, companies will need to analyze their individual situations, including likelihood of passage of the shareholder proposal, the potential reactions of ISS and Glass Lewis and whether adoption of a management proposal with a threshold at levels comparable to Whole Foods will essentially invite proponents to resubmit a proposal with a lower threshold next year. In addition, in light of the recent decision by a federal district court in Trinity Wall Street v. Wal-Mart (see this post) to override the SEC staff’s advice that exclusion of a shareholder proposal was permissible, the question arises as to whether there will be any further court challenge of the SEC’s Whole Foods decision permitting the exclusion of this proxy access proposal.