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By Yin Wilczek
June 11 — Five top law firms and business representatives have asked the Securities and Exchange Commission to reinstate, without change, a rule allowing companies to exclude conflicting shareholder proposals from their proxy materials.
The SEC staff is reviewing 1934 Securities Exchange Act Rule 14a-8(i)(9) and no-action relief under the provision has been suspended since January.
In a June 10 letter, the law firms say the rule and the SEC staff's pre-2015 application of it “are entirely appropriate and should be reaffirmed.” They also asked the SEC to wrap up its assessment of the provision and announce the results early enough so that shareholders and companies can plan and prepare for next proxy season.
Should the SEC change the way it traditionally administers the rule, it should do so only under an Administrative Procedure Act rulemaking, said the firms—Gibson Dunn & Crutcher LLP, Sidley Austin LLP, Wilmer Cutler Pickering Hale & Dorr LLP, Morrison & Foerster LLP and Skadden, Arps, Slate, Meagher & Flom LLP.
In a separate June 10 letter, the Business Roundtable said it would be unnecessary for the SEC to amend the rule. The rule “and the Staff's long-standing interpretation of it remain appropriate in light of: (a) the purpose of the rule; (b) the role of the board in corporate governance; and (c) the current proxy system,” states the letter, signed by BRT President John Engler.
SEC Chairman Mary Jo White called for the review in response to investor concerns about the rule's scope and application.
SEC spokesman John Nester declined to comment on the status of the review.
Shareholder advocates had suggested that companies were using the provision to strategically exclude shareholder proxy access resolutions after Whole Foods Market Inc. successfully obtained relief on a resolution submitted by shareholder activist James McRitchie.
McRitchie had asked the SEC to review the Whole Foods decision, charging that the staff's traditional interpretation of Rule 14a-8(i)(9) unnecessarily limited shareholder rights.
Among other observations, the law firms and the BRT warned that requiring companies to present multiple resolutions on the same topic and limiting shareholders to voting for, voting against or abstaining will create confusion for both boards and shareholders.
The BRT noted, for example, that this season several companies received significant votes in response to conflicting shareholder/management resolutions, “resulting in no clear guidance from shareholders.”
The law firms also argued that companies and shareholders alike have come to understand and rely on the SEC's “extensive body of no-action letters” involving Rule 14a-8(i)(9). The concerns raised by proxy access advocates are “unwarranted” and do not justify a rule change, they added.
“While we recognize that the topic of proxy access is particularly significant to certain investor groups, we do not believe there is a principled reason to view proxy access shareholder proposals as having raised new or unique considerations from any other proposal topics that have been considered under Rule 14a-8(i)(9) or to alter the Staff’s application of Rule 14a-8(i)(9) on this basis,” the firms said.
However, McRitchie told Bloomberg BNA that the SEC should interpret a “conflicting” resolution as one where the company and shareholders both proposed binding resolutions that directly conflict on their terms. He also suggested that where conflicts are identified, shareholders should be free to resubmit their proposal as nonbinding.
Moreover, “companies should not be able to invoke the rule if their own proposal is ‘in response' to a shareholder proposal, only where they are already on record with their own written proposal,” McRitchie said in an e-mail.
McRitchie also noted that White's decision to suspend the provision created an “experiment” in which the “world did not end.” In the context of proxy access proposals, some companies negotiated with proponents and reached agreements, he observed. Others placed both the management and shareholder measures on the ballot, while still others simply opposed such measures.
“As far as I know,” all this occurred without any company going to court and shareholders “have largely embraced proxy access,” McRitchie said.
Support for shareholder-submitted access proposals has jumped this season, hovering at around 56.1 percent, according to recent statistics. Another recent report found that proxy access is fueling overall support for shareholder proposals at the largest U.S. companies.
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The letters are available at http://www.sec.gov/comments/i9review/i9review.shtml.
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