On December 1, 2014, the staff of the SEC granted Whole Foods Market, Inc.’s no-action request submitted on October 23, 2014 to exclude from the company’s proxy statement a shareholder proposal seeking a non-binding vote on adopting a proxy access provision in the Whole Foods by-laws that would permit a shareholder or group of shareholders who have held at least 3% of Whole Foods’ shares continuously for at least three years, the right to include nominees for up to 20% of the entire board of Whole Foods or at least two nominees in the company’s proxy statement. The SEC staff agreed with the Whole Foods position that the shareholder proposal was excludable under Rule 14a- 8(i)(9) under the Securities Exchange Act because it would directly conflict with management’s proposal to be presented at the same meeting to adopt a proxy access by-law provision that would permit a single shareholder (and not a group) holding at least 9% of Whole Foods’ shares for at least five years, the right to include the greater of one nominee or 10% of the entire board in the company’s proxy statement. As noted by the shareholder proponent in Whole Foods, the largest single shareholder owns approximately 5.4% of Whole Foods’ shares.
The SEC staff’s decision on the Whole Foods no-action request has been eagerly anticipated as the application of the Rule 14a-8(i)(9) exclusion to a proxy access shareholder proposal had not been previously addressed. In addition, 75 public companies that have received proxy access shareholder proposals from the Office of the Comptroller of the City of New York this year have been waiting to see if the Whole Foods approach of preemptively adopting a management proxy access proposal with more stringent requirements represents a viable response to the Comptroller’s proposal, which is in substance very similar to the shareholder proposal received by Whole Foods.
Some commentators expect that the ability to exclude a proxy access shareholder proposal under Rule 14a-8(i)(9) would severely curtail the private ordering of proxy access. It remains to be seen whether shareholders would support a management proxy access proposal with ownership requirements and the number of permitted nominees more stringent than the 3%/3-year and 20-25% of the board standard that shareholders are increasingly supporting. If management’s proposal does not pass, the company and shareholder proponents may try to repropose competing proxy access proposals the next year and find themselves repeating the same process as before. It also remains to be seen whether the SEC staff would establish any limits on the differences between management’s proposal and the shareholder proposal in order to find a management proxy access proposal to be sufficient to exclude a shareholder proposal as conflicting under Rule 14a-8(i)(9). In addition, shareholders and proxy advisory firms such as ISS, which generally supports 3%/3-year proxy access provisions, may have negative views on directors of companies that propose more stringent alternatives.
Proxy access is likely to be one of the hot button issues of the upcoming proxy season and we are likely to see more proxy access shareholder proposals submitted beyond the 75 submitted by the NewYork City Comptroller so far. The Whole Foods no-action letter provides companies receiving proxy access shareholder proposals an additional path to consider in responding to these proposals.
A copy of the correspondence relating to the Whole Foods no-action request can be found here.