SEC Staff Splits the Difference in October Rule 14a-8 Requests


Public companies filed 11 no-action requests to the Securities and Exchange Commission last month to exclude shareholder proposals from their proxy materials under Exchange Act Rule 14a-8. The filings produced a mixed bag of results, with the staff denying the requests for relief in four cases, and siding with the issuers in three instances involving nearly identical proposals. The proponents withdrew the remaining four submissions.

Ordinary Business Exclusion—Rule 14a-8(i)(7)

The staff denied a request from Hormel Foods Corp. to exclude a proposal that would have required the company to amend its governing documents to provide that a simple majority of all votes cast for and against would be sufficient to approve all nonbinding matters presented by shareholders. Rather surprisingly, the company relied on the ordinary business exclusion to dispose of the corporate governance proposal.

The proponent characterized Hormel's argument as extraordinary, because the voting proposal had nothing to do with Hormel's operations of manufacturing consumer food products. According to the proponent, "the setting of the requisite vote to pass a matter at the annual shareholder meeting is a matter of corporate governance, not a matter of the registrant’s ordinary business." The staff rejected Hormel's argument that the proposal amounted to an attempt to micromanage the company because it denied management the opportunity to structure its voting standards "to provide the best advice to the management depending on the nature of the proposal."

The staff also found that a request by Acuity Brands, Inc. to exclude a proposal calling on the board to increase the dividend to reflect the company’s recent success did not fall within the scope of the ordinary business provision. Acuity unsuccessfully argued that dividend declarations, including the amount of any cash dividends, were integral parts of its capital management and financing activities and were therefore related to its ordinary business operations. The company also could not exclude the proposal under Rule 14a-8(i)(13) concerning matters dealing with specific amounts of cash or stock dividends.

Apple Inc. also could not exclude a recommendation by a shareholder for the company to engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices. The ordinary business exclusion did not apply, according to the staff reply, because the proposal focused on senior executive compensation.

Vague or Indefinite Proposals—Rule 14a-8(i)(3)

The proposal in the Apple Inc. letter on compensation consultants mentioned above was also not subject to exclusion for being too vague or indefinite. Apple argued that the proponent’s statement that the company would have the flexibility to select multiple independent experts or sources did not remedy the vagueness problem, stating that the “inclusion of such a broad delegation of authority does not cure the underlying defect in a vague and indefinite proposal.” The company also unsuccessfully argued that the proposal was not clear as to whether action would be required by management or the board. The staff concluded that the proposal was not “so inherently vague or indefinite that neither the shareholders voting on the proposal, nor the company in implementing the proposal, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

Cisco Systems, Inc., Microsoft Corp. and Walgreens Boots Alliance, Inc. all prevailed on vagueness objections to similar proposals connected to prominent activist John Chevedden. The staff allowed the companies to exclude proposals that would prohibit the board from taking any action whose primary purpose was to prevent the effectiveness of shareholder vote without a compelling justification for the action.

Substantially Implemented—Rule 14a-8(i)(10)

In a separate request, the staff did not allow Apple to exclude a proposal put forth by James McRitchie on proxy access under the “substantially implemented” provision of Rule 14a-8(i)(10). Currently, Apple allows a shareholder, or a group of up to 20 shareholders, owning at least three percent of the company's outstanding common stock for at least three years, to nominate candidates for up to 20 percent of the board. With Apple's 8-member board, this provision allowed for one shareholder nominee.

The McRitchie proposal would have allowed a qualified shareholder to nominate at least two board candidates, and the proposal would not limit the number of shareholders that could be aggregated to meet the ownership threshold. The staff stated that "we are unable to conclude that Apple’s proxy access bylaw compares favorably with the guidelines of the proposal."

For more on the Apple shareholder proposals, see Apple Can't Omit Executive Pay, Proxy Access Proposals.