On January 16, 2015, the Securities and Exchange Commission (SEC) announced that, for the 2015 proxy season, the Division of Corporation Finance will not express any views as to whether a company may exclude a shareholder proposal from its annual meeting proxy statement based on Exchange Act Rule 14a-8(i)(9). The announcement was issued in connection with a statement issued by Chair White that, in light of questions about the proper scope and application of the Rule, she directed the SEC staff to review the rule and report to the Commission. As a result the Whole Foods no-action letter, discussed below, was withdrawn and issuers will not have an easy path in addressing “proxy access” proposals from their shareholders for the 2015 proxy season (and perhaps in subsequent proxy seasons).
Rule 14a-8(i)(9) permits a company to exclude a shareholder proposal that “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” The Staff has historically granted no-action relief under Rule 14a-8(i)(9) where a shareholder proposal and a company/management proposal present alternative and conflicting decisions for shareholders and where the inclusion of both proposals could lead to inconsistent and ambiguous results.
The SEC’s action comes on the heels of a letter, published on January 4, 2015, by the Council of Institutional Investors asking the SEC staff to review the application of Rule 14a-8(i)(9) in light of the SEC staff’s issuance of the Whole Foods no-action letter. In that letter, the SEC Staff took a no-action position to the exclusion of a shareholder proxy access proposal under Rule 14a-8(i)(9). The shareholder proposal would have amended Whole Foods’ governance documents to allow shareholders holding 3% of the company’s stock for a period of three years to include in the annual meeting proxy statement nominees for up to 20% of Whole Foods’ directors. Whole Foods’ competing proposal would have provided shareholders holding 9% of the company’s stock for a period of five years the right to include such nominees. Conveniently for Whole Foods, its proposal would have significantly limited the universe of its shareholders who would be entitled, in 2015 and in the future, to proxy access under its amendment. Following the issuance of the Whole Foods no-action letter, a number of companies sought no-action relief from the Staff in connection with similar shareholder proxy access proposals; however, the Whole Foods no-action letter was subsequently withdrawn in connection with the Staff’s announcement of its review of Rule 14a-8(i)(9) and the staff noted in its responses to the other Rule 14a-8(i)(9) requests that it could not express a view in light of the recent announcement.
Despite the lack of no-action relief from the SEC staff for the 2015 proxy season, companies may still utilize a number of mechanisms to exclude shareholder proposals:
- A company may continue to rely on Rule 14a-8(i)(9) – including complying with the timing and notice requirements of Rule 14a-8 – to exclude the shareholder’s proposal, but without the comfort of a SEC no-action letter.
- A company may seek judicial relief to exclude the shareholder’s proposal – a challenging path that will involve potentially significant expense and could also result in negative publicity.
- In addition, a company could, in theory, choose to include its own proposal and the shareholder’s proposal in its annual meeting proxy. This, however, is a novel approach involving significant considerations (including practical and disclosure considerations).
- Lastly, a company could adopt its own proxy access mechanism (assuming that the company’s board has the authority to amend the relevant portions of the company’s governance documents) and seek to exclude a shareholder’s proposal under Rule 14a-8(i)(10) on the grounds that the Company “has already substantially implemented the proposal.” This exception is not subject to the SEC’s current suspension of no-action relief for Rule 14a-8(i)(9) matters; however this alternative may strike some as waiving the white flag.
Consistent with Rule 14a-8, a company seeking to exclude a shareholder proposal under Rule 14a-8(i)(9) or (10) must still submit a no-action request to the SEC staff (technically, the company is required to submit to the SEC its reasons for excluding the proposal), with a copy of the request provided simultaneously to the proposing shareholder, at least 80 days before the company files its definitive proxy statement and form of proxy. A company seeking such relief should also be mindful that proposing shareholders may challenge the company’s exclusion of their proposals in federal court. Courts often give deference to SEC staff positions, including no-action letters, and, in the absence of such no-action letters for the 2015 proxy season, an institutional shareholder whose proposal is excluded from a company’s annual meeting proxy under Rule 14a-8(i)(9) may be more likely to initiate litigation to challenge the exclusion.