Though SEC Reviewing Proxy Omission Rule, Experts Predict Cos. May Proceed Unfazed

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By Yin Wilczek

Jan. 20 — In response to investor protests, the SEC will review a rule that allows companies to omit from their proxy materials resolutions that directly conflict with a management proposal and has reconsidered a staff response to a controversial Whole Foods-related request.

Securities and Exchange Commission Chairman Mary Jo White said in a Jan. 16 statement that due “to questions that have arisen about the proper scope and application” of 1934 Securities Exchange Act Rule 14a-8(i)(9), “I have directed the staff to review the rule and report to the Commission on its review.”

On the same day, the SEC Division of Corporation Finance told shareholder activist Jim McRitchie that it has reconsidered the staff response allowing Whole Foods Market Inc. to exclude, based on the rule, a proxy access proposal he submitted in lieu of a conflicting management resolution. In light of White's directive, “we express no view concerning whether Whole Foods may exclude the proposal under rule 14a-8(i)(9),” said Corp. Fin.'s letter, signed by chief counsel David Fredrickson.

In a separate statement, the division also said it “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”

An SEC spokesman declined to comment on when the staff review may be completed. A Whole Foods representative also declined to comment on the developments.

Unprecedented Move?

It is not unprecedented for the SEC staff to suspend no-action relief regarding certain shareholder proposal exclusionary grounds or for the staff to reconsider no-action relief that it has provided.

However, the staff's latest statement, coming in the middle of the proxy season, leaves companies in the lurch with respect to conflicting shareholder and management proposals. The “conflicting proposal” exclusion is frequently invoked not only for proxy access, but also for other governance matters that may have a broader impact on companies. Attorneys told Bloomberg BNA that despite this development, many companies likely will proceed with their management-proposed access resolutions.

In recent days, proxy access proponents—including McRitchie—have faulted the staff's interpretation of Rule 14a-8(i)(9) in the Whole Foods case, saying companies are using the rule as a “calculated tactic” to counter shareholder-proposed access resolutions with management resolutions that have more-stringent eligibility thresholds.

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.

The 3 percent/three years threshold is one supported by many investors, as evidenced from the 2014 proxy season. The Council of Institutional Investors Jan. 13 wrote to 22 companies asking them to scale back their management access proposals to “be respectful of what U.S. shareholders increasingly regard as the norm”.

Proponents React

McRitchie said he was “delighted” by the SEC's response to his request that the staff reconsider the Whole Foods decision. He told BBNA Jan. 20 that the staff's interpretation of the exclusion has “significantly broadened” in recent years, starting with proposals by shareholder activist John Chevedden and others on special meetings.

“I am quite confident that once” the SEC completes its review, it will recognize that for the staff to continue to apply its recent interpretation, it will “need to go through the rulemaking process,” McRitchie said. “However, I would recommend simply going back to the original narrow application of [Rule 14a-8(i)(9)] and issuing a staff legal bulletin to clarify the narrow focus of the rule.”

In a statement, New York City Comptroller Scott Stringer suggested that the SEC's review will mean that the almost 100 companies that received proxy access proposals this season “can no longer exploit an overly-broad interpretation of the competing proposal rule to disenfranchise shareowners.”

“Boards that decide to exclude these proposals anyway not only face opposition to their director nominees from institutional investors, including the City's pension funds, they now also do so without the cover of SEC no-action letters,” said Stringer, who has led an initiative responsible for 75 proxy access resolutions this season. 

Approval Not Required

However, attorneys stress that companies are not required to obtain no-action relief from Corp. Fin. in order to exclude shareholder proposals. Instead, the shareholder proposal rule merely requires a company to notify the SEC that it intends to exclude a resolution.

“The determinations reached in these no-action letters do not and cannot adjudicate the merits of a company's position with respect to the proposal,” Sullivan & Cromwell LLP said in a Jan. 16 client memorandum. “Only a court such as the U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”

Attorneys also said the suspension of no-action relief will not stop companies from offering a management access resolution and omitting from their proxy materials conflicting proposals submitted by shareholders.

Ron Mueller, a Washington-based attorney at Gibson, Dunn & Crutcher LLP, told BBNA that because companies do not need the staff's concurrence to omit a proposal under the rules, companies will have some flexibility in how to respond. “I expect we will see a full range of responses, both on the proxy access proposals and other proposals where Rule 14a-8(i)(9) arguments were made,” he said. “Companies will take into account the nature of their own proposal and how the shareholder proposal conflicts, as well as any discussions with investors and views of their institutional investors on the subject of the proposal.”

Many to Go Ahead?

Keir Gumbs, a Washington-based partner at Covington & Burling LLP, suggested that there will be many companies that will decide to go ahead with their management access proposals.

“This particular exclusion is one where the precedent is very strong, very consistent and very clear,” said Gumbs, a former special counsel at Corp. Fin. Gumbs also noted that although the staff is reviewing the exclusion, it remains part of the shareholder proposal rules.

“If companies have a good shareholder engagement program, and they’re confident that what they plan on proposing is something that their shareholders support, then they should feel relatively comfortable from a governance perspective in moving forward” to exclude a conflicting shareholder proposal, he said. “All they’re doing is following the law, which allows them to exclude a shareholder resolution under Rule 14a-8(i)(9) if they are proposing a resolution that conflicts with the shareholder resolution.”

Gumbs also suggested that corporate management give a heads up to their boards and governance committees to alert them to the risks of moving forward with a management proposal in lieu of one from a shareholder proponent. Most companies already are doing that, he added.

According to Gumbs, companies face two risks in moving forward on the exclusion without staff no-action relief: an SEC enforcement action or shareholder litigation. However, the possibility of SEC enforcement is remote where companies act reasonably and in line with precedent, he said. He added that shareholder litigation, although more probable, has occurred even in circumstances where the staff has provided the company with no-action relief.

To contact the reporter on this story: Yin Wilczek in Washington at mailto:%20ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

White's statement is available at http://www.sec.gov/news/statement/statement-on-conflicting-proxy-proposals.html#.VL6oXy4mST4.

Corp. Fin.'s letter is available at http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2015/jamesmcritchiecheveddenrecon011615-14a8.pdf.

Sullivan & Cromwell's client memo is available at http://www.sullcrom.com/siteFiles/Publications/SC_Publication_SEC_Staff_Suspends_No_Action_Relief_on_Conflicting_Shareholder_Proposals.pdf.