On Friday, January 16, the Securities and Exchange Commission
(SEC) issued a statement
from Chair Mary Jo White directing the SEC staff to review
the application of Exchange Act Rule 14a-8(i)(9), the rule that
allows a company to exclude a shareholder proposal on the basis
that it conflicts with a management proposal. Concurrently
with the Chair's statement, the SEC's Division
of Corporation Finance announced that it will
"express no views on the application of Rule 14a-8(i)(9)
during the current proxy season," which means that the staff
will not be providing no-action relief for the many pending
no-action requests relating to proxy access proposals or on any
other pending no-action requests relying on Rule
14a-8(i)(9).
Rule 14a-8(i)(9) permits exclusion of shareholder proposals that
"directly conflict[] with one of the company's own
proposals to be submitted to shareholders at the same
meeting." As historically interpreted, a shareholder and
management proposal need not be identical in scope or focus for the
exclusion to be available. Rather, the staff has interpreted
the rule to permit the exclusion of any shareholder proposal if the
inclusion of the management proposal and the shareholder proposal
in the same proxy statement could "present alternative and
conflicting decisions for shareholders" or if "submitting
both proposals to a vote could provide inconsistent and ambiguous
results." This has been interpreted to be the case even
where a shareholder proposal and a management proposal take
completely opposing approaches to a topic.
This proxy season, Rule 14a-8(i)(9) has been subject to an unusual
level of attention as a number of companies have sought to rely on
the exclusion to omit proxy access shareholder proposals. The term
"proxy access" generally refers to procedures that
require a company to include shareholder-nominated directors on the
company's proxy card alongside the company's nominees. In a
letter dated December 1, 2014, Whole Foods received no-action
relief from the staff to exclude a shareholder proposal to allow
proxy access for a group of shareholders owning 3% of the
company's shares for three years on the basis that it would
conflict with the company's proposal to provide proxy access
for a single shareholder owning 9% of the company's shares for
five years. This letter generated a great deal of discussion about
the application of Rule 14a-8(i)(9), and resulted in requests from
both the proponent and others, including the Council of Institutional
Investors, for Commission review of the staff's position.
While the SEC's statement does not mention Whole Foods or the
many other pending proxy access no-action letters directly, the
statement notes that Chair White is requesting the review
"[d]ue to questions that have arisen about the proper scope
and application" of the rule.
In addition to announcing the staff review of, and suspension of
no-action relief under, Rule 14a-8(i)(9), the staff also posted on
Friday its grant of the request for reconsideration of the Whole Foods letter. In
granting the request for reconsideration, the Division noted it was
doing so consistent with its announcement that "the Division
would not express any views under rule 14a-8(i)(9) for the current
proxy season."
The staff's decision not to provide no-action relief for
conflicting shareholder proposals this season will impact the
treatment not only of proxy access proposals, but also the
treatment of any other proposal topics that may conflict with a
management proposal (e.g., proposals relating to shareholders'
ability to call a special meeting). This may leave many
companies scrambling to revise their plans for how to respond to a
shareholder proposal that they previously planned to omit in
reliance on Rule 14a-8(i)(9). A possible approach that a
company could consider would be to include its proposal and omit
the conflicting shareholder proposal, either with or without
seeking declaratory relief from a court that the proposal may be
omitted. While companies are not required to seek or obtain
no-action relief from the staff to exclude shareholder proposals
under Rule 14a-8—the rule requires only that a company that
plans to exclude a proposal "file its reasons" for
excluding the proposal with the SEC—historically the vast
majority of companies exclude shareholder proposals only after
requesting and receiving no-action relief from the
staff. Other possible approaches are to include both proposals
with an explanation for shareholders (e.g., that the company's
proposal would be binding if passed); include the shareholder
proposal with a recommendation that it not be approved by
shareholders; or negotiate with the proponent.
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