Among the many things Commission-related going on as of late, here’s a round of up some of the more notable proxy-related matters from the week that was February 9th.
The Upcoming Proxy Voting Roundtable
A Little Insight Into CorpFin’s Current Thoughts on Rule 14a-8 Courtesy of Division Director Keith Higgins
On Tuesday Keith Higgins, Director of the Securities and Exchange Commission’s Division of Corporation Finance, gave an insightful little talk at PLI’s Program on Corporate Governance entitled “Rule 14a-8: Conflicting Proposals, Conflicting Views“. The speech isn’t all that long and worthy of a full read-through, but I’ll highlight some of the more salient points here anyway.
After making note of the interrelationship between state corporate law and the federal proxy regulatory scheme, Higgins addresses the staff’s role as an “informal arbitrator” in the shareholder proposal process and walks us through a bit of the staff’s thought process when considering company exclusions.*
Of Rule 14a-8’s thirteen substantive bases for excluding a shareholder proposal, Higgins focuses on three in particular: 14a-8(i)(7) (proposals dealing with a matter relating to ordinary business operations), 14a-8(i)(9) (proposals that directly conflict with one of a company’s own proposals) and Rule 14a-8(1)(3) (proposals or supporting statements that are contrary to the proxy rules, including 14a-9’s prohibition on materially false or misleading statements).
Rule 14a-8(i)(7) Ordinary Business Operations
The first, Rule 14a-8(i)(7), comes in the context of the recent Delaware District Court decision in Trinity Wall Street v. Wal-Mart Stores, Inc. Briefly by way of background, Wal-Mart sought to exclude a shareholder proposal seeking to amend the charter of its compensation, nominating and corporate governance committee to task that committee with:
Providing oversight concerning the formulation and implementation of, and the public reporting of the formulation and implementation of, policies and standards that determine whether or not the Company … should sell a product that: (1) especially endangers public safety and well-being; (2) has the substantial potential to impair the reputation of the Company; and/or (3) would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.
CorpFin did not object to Wal-Mart excluding the proposal, concurring with company counsel that it involved an area of ordinary business operations in that it related to “products and services offered for sale by the company.”
The Delaware District Court, however, did not agree. Relying on the Commission’s adopting release from the plain-English Q&A amendments to Rule 14a-8, the Court ultimately ruled that the proposal had been improperly excluded. The Court reasoned, in part, that the proposal only sought board oversight of the development and implementation of a policy, leaving the day-to-day aspects of implementation, the ordinary business operations, to Wal-Mart’s officers and employees.
Contrasting the Court’s thinking with CorpFin’s, Higgins summarizes as follows:
In the court’s view, a board committee’s formulation and implementation of a policy is not a ‘task … so fundamental to management’s ability to run a company on a day-to-day basis that [it] could not, as a practical matter, be subject to direct shareholder oversight,’ which is the standard for the ordinary business exclusion. By contrast, the Commission has stated that … the key is to consider whether the underlying subject matter of the committee involves an ordinary business matter.
Higgins also notes that Wal-Mart has appealed to the Third Circuit (Docket # 14-4764), so we may have the opportunity to revisit this one in the future.
Rule 14a-8(i)(9) Directly Conflicting Proposals
The second basis for exclusion that Higgins addresses, Rule 14a-8(i)(9), comes in the context of the Commission’s issuance of a no-action letter to Whole Foods Market, Inc. (concerning proxy access), the shareholder proponent’s appeal of its issuance to the full Commission, followed by the Commission’s decision to review Rule 14a-8(i)(9), CorpFin’s concomitant announcement that, in light of the Commission’s review, it will not be expressing views on the application of Rule 14a-8(i)(9) this proxy season and culminates in the Commission withdrawing the Whole Foods no-action letter and Whole Foods postponing its annual meeting.
Interestingly, Higgins informs us that “[u]ntil relatively recently, the Rule 14a-8(i)(9) exclusion has been used infrequently …”, mostly in the context of stock compensation plan proposals. Beginning in 2009, however, the Rule 14a-8(i)(9) exclusion became popular in the context of proposals addressing the right of shareholders to call special meetings and, most recently, it was used by Whole Foods in the context of a proposal addressing shareholder proxy access.
Historically, CorpFin has concurred with the exclusion of a shareholder proposal where “the company demonstrates that its subject matter directly conflicts with all or part of one of management’s proposals.” (alteration in original). It is not necessary that the proposal be “identical in scope or focus … .” Rather CorpFin’s analysis, the analysis it used in the Whole Food’s case, revolves around “whether the inclusion of both the shareholder proposal and the management proposal create the possibility of confusing and ambiguous results. If both proposals receive majority approval, how would the board and shareholders interpret those results and how would the board determine which mandate to implement?”
Higgins discusses some of the criticism of CorpFin’s approach and the difficulties inherent in addressing those. He also leaves us with a series of questions that CorpFin is mulling over, such as: should there be structural changes to the proxy rules to better accommodate side-by-side comparisons of certain proposals; should there be options other than voting “for” or “against” a proposal; how should a management proposal that may have been introduced “in response to” a shareholder proposal be addressed in the context of a Rule 14a-8(i)(9) exclusion; should the Commission consider limiting the number of years in which a company can consecutively rely on Rule 14a-8(i)(9) for the same proposal or a proposal on the same subject matter; when Rule 14a-8(i)(9) serves as the basis for a shareholder proposal exclusion should the proxy statement include disclosure “akin to a ‘Background of the Merger’ discussion that appears in a merger proxy statement”?
If you have thoughts, Higgins invites you to write in.
Rule 14a-8(i)(3): Rule 14a-9’s Prohibition on Materially False and Misleading Statements
Finally, the third basis for exclusion that Higgins addresses, Rule 14a-8(i)(3), comes in the context of what Higgins characterizes as the recent “academic attention” received by this particular exclusion. After describing some of the difficulties in analyzing a Rule 14a-8(i)(3) exclusion request Higgins touches on the “three threshold questions [that CorpFin] consider[s] when asked to exclude a proposal or supporting statement as false or misleading. First, is it really a ‘fact’? … Second, is it false or misleading? … Finally, is it ‘material’?” Not exactly groundbreaking, nevertheless simple does not equate to easy . He goes on:
A few things are clear to the staff … . First, the fact that companies may make a rebuttal in their statements in opposition does not absolve proponents from complying with Rule 14a-9 in the proposal and supporting statement. Second, companies need to remember that Rule 14a-9 prohibits material “false or misleading” statements, not what may seem to management to be “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. 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.
CorpFin Withdraws Two Additional Previously Issued 14a-8(i)(9) No-Action Letters
One matter of note from last week: James McRitchie over at CorpGov.net reports that, in light of the Commission’s decision to review Rule 14a-8(i)(9) and CorpFin’s announcement that it will not be expressing views on the application of Rule 14a-8(i)(9) during the 2015 proxy season, CorpFin has withdrawn at least two no-action letters previously issued under Rule 14a-8(i)(9) (one to BorgWarner Inc. and the other to Illinois Tool Works, Inc.; both concerning proposals addressing the right of shareholders to call special meetings). In each case the withdrawal was made in response to a request by the shareholder proponent.
*Higgins of course issued the Commission’s standard disclaimer regarding his commentary not necessarily reflecting the views of the Commission or other members of CorpFin’s staff but also, amusingly, added that his commentary likely will not even reflect his own views (owing to the preliminary nature of CorpFin’s review of the issues).