Staff to Mull Flexibility, Investor Concerns In Review of Shareholder Proposal Provision

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By Yin Wilczek

Feb. 10 — In its review of the “directly conflicting” exclusion in the SEC's shareholder proposal rule, one issue the staff may consider is whether there are “structural limitations” in the current requirements that make it difficult to have side-by-side comparisons of conflicting resolutions, a senior official said Feb. 10.

Should the Securities and Exchange Commission amend its proxy rules “to permit more flexibility than a thumbs up or thumbs down approach?” asked Keith Higgins, director of the SEC Division of Corporation Finance.

To address investor concerns that management may be using the exclusion to keep certain shareholder proposals from their proxies, should the exclusion “only be available if, for example, the board already approved its proposal for inclusion before it received the shareholder's proposal?” he asked.

“In any event, as I hope is evident, the issues are not black and white and what it means to ‘directly conflict,' and the consequences of such a conclusion, deserve careful study,” Higgins said. He added that the SEC welcomes input on the issue, and has created a new mailbox——to receive comments.

Higgins spoke at the Practising Law Institute's Corporate Governance conference in New York. He said his remarks were his own and were “very preliminary” considering that the staff review has just begun.

Suspension of Relief 

The SEC announced Jan. 16 that it has suspended its no-action relief process under 1934 Securities Exchange Act Rule 14a-8(i)(9) while the staff reviews the exclusion. The provision allows companies to omit from their proxy materials shareholder resolutions that directly conflict with a management proposal.

The review was prompted by investor concerns that certain companies, including Whole Foods Market Inc., may have used the exclusion to exclude proxy access proposals submitted by shareholder proponents in lieu of management proposals with more-stringent eligibility thresholds.

Business representatives say the suspension of no-action relief has been very disruptive, coming as it does in the middle of the proxy season.

During the conference, Higgins said that the staff has heard some concerns that corporate executives year after year may propose slightly different resolutions to keep certain shareholder proposals from the company's proxy materials.

“While we have not yet seen this concern materialize, it is certainly not beyond the realm of possibility,” he said. “Should the commission consider addressing this concern by, for example, amending Rule 14a-8(i)(9) so that the exclusion is not available to a company two years in a row for the same shareholder proposal or perhaps another shareholder proposal on the same subject matter?”

Higgins also said the division must consider whether investors are getting the information they need to make informed voting decisions when they receive proxy statements that include management proposals, but exclude shareholder proposals on the same subject. He suggested that one approach may be for the commission to require that when management uses the exclusion to omit a shareholder resolution, it should include in its proxy statement “background” discussion to explain why management crafted its proposal in the way it did. Another approach may be to allow the shareholder proponent to include a statement opposing the management proposal, he said.

Wal-Mart Litigation 

In other discussions, Higgins offered “one observation” about the ongoing litigation between Wal-Mart Stores Inc. and Trinity Wall Street over another shareholder proposal rule provision that allows companies to omit shareholder resolutions that involve ordinary business matters.

The district court presiding over the case found—contrary to the conclusion reached by the staff—that Wal-Mart could not omit a shareholder's resolution touching on the company's sale of guns. The court reasoned that because the resolution sought board oversight of the development of corporate policy, it did not impact the day-to-day implementation of the policy and thus did not dictate what products Wal-Mart could sell.

The case now is on appeal at the U.S. Court of Appeals for the Third Circuit.

Referencing the district court opinion, Higgins noted that the commission historically has applied the “ordinary business” exclusion differently. The SEC “has stated that, in analyzing whether a proposal requesting the formation of a special committee is excludable under the ordinary business exception, the key is to consider whether the underlying subject matter of the committee involves an ordinary business matter,” he said. “I look forward to the” Third Circuit's “views on this important question.”

False, Misleading Statements 

Higgins also noted that the proxy rules' prohibition against materially false or misleading statements is garnering some attention in the shareholder proposal context. When asked to consider whether companies may exclude shareholder proposals that may be false or misleading, staff consider three factors, he said:

• Is the alleged misstatement a “fact” or an opinion or inference?

• Is it false or misleading?

• Is it material?


Higgins reminded companies that the rules bar “false or misleading”—not “unfair”—statements.

“The company bears the burden of demonstrating objectively that any false statements or omissions are material, taking into account the total mix of information,” he said. “Assessing the materiality of misstatements or omitted facts to the voting decisions of a reasonable shareholder is difficult, but if a company meets its burden the division is prepared to concur.”

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The text of Higgins' speech is available at


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