United States: The SEC Staff's Response To Shareholder Proposals On Proxy

The SEC issued responses on March 7, 2012 to a series of no-action requests related to shareholder proposals on the right of shareholders to include director nominees in a company's proxy materials, often referred to as proxy access. These responses are the latest chapter in the long-running proxy access saga and follow the SEC's adoption in 2010 of two new rules related to proxy access.

The first of these rules, new Rule 14a-11, provided shareholders with a mandatory right of proxy access where the shareholder, or group of shareholders, owned at least 3 percent of the company's securities for at least three years. The second rule was an amendment to existing Rule 14a-8 permitting shareholders to include proposals related to proxy access in the company's proxy statement.

Almost immediately upon being adopted, Rule 14a-11 was challenged in court. The SEC then voluntarily stayed the implementation of both rules pending resolution of this challenge, which came on July 22, 2011, when the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11. Although the court's decision was only directed at Rule 14a-11, it raised questions as to whether the amendment to Rule 14a-8 also had been undermined. The SEC answered these questions in September 2011, when the Chairman of the SEC issued a statement indicating that, while the SEC would not appeal the court's decision about Rule 14a-11, it would proceed with implementing new Rule 14a-8.

With the expiration of the SEC's voluntary stay on the amendment to Rule 14a-8, twenty shareholder proposals related to proxy access were submitted to companies during the 2012 proxy season. These proposals varied, some were submitted as binding proposals while others were precatory or non-binding, the ownership thresholds allowing an investor to nominate a director varied between 1 and 2 percent, and the holding period ranged from one to two years. In response to these proposals, 13 companies submitted no-action letters to the SEC Staff, requesting that the SEC take no action if the companies excluded these proposals from their 2012 proxy statements. The SEC Staff has recently responded to 10 of these requests, with its responses acting as the first meaningful guidance on the practical application of the Rule 14a-8.

Of the 10 companies that received responses from the SEC Staff, six had received proposals based on a model created by the United States Proxy Exchange, which would grant proxy access to investors who own 1 percent of company shares for two years or to a group of 100 or more investors who each own $2,000 in market value of company shares for one year. In each of these six responses, the SEC Staff did not object to the company's plan to exclude the proposal. These responses were issued on two grounds:

1. Under Rule 14a-8(c), shareholders may only submit one proposal per meeting. The SEC Staff allowed three companies to exclude proposals that included both a proposal related to proxy access and a proposal that a change in board composition would not constitute a change of control. In letters issued to Bank of America Corporation and Goldman Sachs Group, Inc., for instance, the SEC Staff took this position on the grounds that these two proposals were sufficiently distinct as to violate Rule 14a-8(c).

2. Under Rule 14a-8(i)(3), shareholder proposals can be excluded if they are vague and indefinite. The SEC Staff allowed Chiquita Brands, Inc., MEMC Electronic Materials, Inc., and Sprint Nextel Corporation to exclude proxy access proposals because they failed to sufficiently describe the eligibility requirements of Rule 14a-8(b) for shareholders wishing to nominate directors, and were therefore vague and indefinite.

The proposals submitted to the other four companies that have since received responses from the SEC Staff were binding proposals. In the case of The Charles Schwab Corporation, Wells Fargo and Company, and The Western Union Company, shareholders who owned 1 percent or more of the company shares for one year would be permitted to nominate up to 25 percent of company directors. In the case of KSW Mechanical Services, Inc., the proposal would allow a shareholder, or group of shareholders owning at least 2 percent of company shares for one year, to nominate an unlimited number of nominees.

The SEC Staff denied no-action relief to all four of these companies, rejecting the companies' arguments that the proposals could be excluded on the following grounds:

1. Under Rule 14a-8(i)(3), shareholder proposals cannot be materially false or misleading. The three companies attempting to exclude binding 1/25 percent proposals argued that the proposals were inaccurate because they included an internet addresses that did not lead to an active webpage. The SEC Staff rejected this argument because the proponents had provided the relevant information to populate that internet page, which would be available upon filing of the proxy statement.

2. Under Rule 14a-8(i)(10), a shareholder proposal can be excluded if it has been substantially implemented. In attempting to exclude the 2 percent/unlimited proposal, KSW Mechanical Services, Inc. argued that the proposal had been substantially implemented because the company had already adopted a bylaw allowing shareholders owning more than 5 percent of company stock to nominate a director. The SEC Staff rejected this argument due to the differing ownership levels required for eligibility.

While the SEC Staff has not yet published responses to all no-action letters related to proxy access, these early responses have begun to provide some level of guidance. This guidance will likely continue to develop during the 2013 proxy season, particularly if a number of these proposals succeed at this year's shareholder meetings, thereby leading to additional proposals next year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.