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By Yin Wilczek
Jan. 12 — The recent spate of companies seeking no-action relief for proxy access resolutions, on the basis that the company plans to submit a conflicting management proposal, has shareholder proponents up in arms, with some calling for the Securities and Exchange Commission staff to alter its interpretation for exclusion.
In a Jan. 9 letter, the Council of Institutional Investors told Keith Higgins, director of the SEC Division of Corporation Finance, that the staff's recent no-action determination for Whole Foods Market Inc. constituted an “overly broad” interpretation of the shareholder proposal rule's counterproposal basis for exclusion.
“CII believes that exclusion based on two proposals directly conflicting is appropriate in much narrower circumstances than those encompassed by the Staff’s approach,” the group's executive director Ann Yerger stated. “In CII’s view, in the context of binding management and non-binding shareholder proposals, identifying a direct conflict requires an examination of not just the subject matter, but also the specific content, of the shareholder proposal.”
CII asked the SEC to apply its suggested approach “to open requests for no-action relief and any other requests on which reconsideration is applicable.”
SEC spokesman John Nester declined to comment on the developments.
Corp. Fin. Dec. 1 allowed Whole Foods to exclude from its 2015 proxy materials a resolution submitted by James McRitchie because the company said it intended to seek shareholder approval of its own proxy access proposal. The staff based its decision on 1934 Securities Exchange Act Rule 14a-8(i)(9), which allows companies to exclude proposals that directly conflict with one that they intend to submit to shareholders at the same meeting.
McRitchie's nonbinding resolution proposed giving shareholders who own at least 3 percent of the company stock for three or more years the right to list their director candidates on the company's ballot. Whole Foods' binding management resolution proposed a 5 percent/five-year eligibility threshold.
In the wake of Whole Foods' successful strategy, 15 companies to date have submitted similar no-action requests to the SEC, according to the commission's website. The companies' counterproposals seek more stringent eligibility thresholds than those sought by the shareholder proponents.
A small portion of CII members are prolific submitters of shareholder proposals. In 2014, council members filed about 32 percent of the resolutions submitted to U.S. companies.
In its letter, CII argued that the staff's Whole Foods action forces shareholders “into a dilemma” because they can vote only on the management proposal without having the chance to weigh in on the formulation of proxy access as suggested by shareholder proponents.
The staff's “approach not only curtails shareholders’ ability to suggest different terms for a reform already being proposed by management, frustrating the private ordering that has proved beneficial in the past, it also makes shareholders’ voting decision on the Management Access Proposal unnecessarily fraught,” it said. “CII views this as a huge loss for shareholders, companies and the markets.”
In his Dec. 23 request to the SEC to review the Whole Foods determination, McRitchie similarly faulted the staff's interpretation of Rule 14a-8(i)(9) as too broad, arguing that it effectively deprived shareholders of their voting rights.
Before 2004, most of the no-action applications invoking the rule related to compensation plans, and companies had a legitimate argument that proposals governing the same aspects of a plan could lead to ambiguous results, McRitchie told Bloomberg BNA Jan. 12. However, use of the provision “dramatically shifted” in 2004 or 2005 when companies asked the SEC staff to apply it in the context of special meeting proposals submitted by shareholder proponents.
“As I argued in my appeal, the intended definition of ‘directly conflicts'” was “limited to very narrow circumstances where adoption of competing proposals could be harmful to shareowners,” McRitchie said. In addition, the rule was never intended to allow companies to substitute their own proposals in reaction to those submitted by shareowners.
The Corp. Fin. staff “should revisit not only their recent decision on Whole Foods but also those issued regarding special meetings and later written consent,” McRitchie said. He told BBNA that the SEC has not responded to his review request.
Meanwhile, another influential shareholder proponent is adding to the calls for the SEC to rethink its Whole Foods determination.
New York City Comptroller Scott Stringer Jan. 12 told Bloomberg BNA that the companies “seeking to exclude proxy access on their corporate ballots are actually making the case as to why shareowners need a voice on their corporate boards.”
“The SEC should not enable this cynical tactic which serves to disenfranchise shareowners and fabricate the illusion of accountability,” Stringer said in an e-mail.
On behalf of the New York City Pension Funds, Stringer last fall submitted proxy access resolutions simultaneously to 75 companies for inclusion in their 2015 proxy materials.
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CII's letter is available at http://www.cii.org/files/issues_and_advocacy/correspondence/2015/01_09_15_CII_to_SEC_re_Whole_foods.pdf.
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