100 F Street

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

On Thursday the Commission announced the panelists for its upcoming Proxy Voting Roundtable which is scheduled for this coming Thursday, February 19, 2015, beginning at 9:30 a.m. ET.

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.

(citations omitted).

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).

Yesterday the Securities and Exchange Commission announced the adoption of proposed rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which addresses disclosure of company policies related to employee and director hedging transactions.

The proposed rules would add a new subparagraph (i) to Item 407 (corporate governance) of Regulation S-K which would require disclosure in any proxy or consent solicitation materials or information statement relating to director elections regarding whether an issuer’s employees (including officers) and directors, or any of their designees, are permitted to purchase financial instruments or otherwise engage in transactions designed to hedge or offset any decrease in the market value of equity securities granted as compensation or otherwise directly or indirectly held from whatever source acquired.

The term “equity securities” would mean the equity securities (as defined in Section 3(a)(11) of the Securities Exchange Act of 1934 and Exchange Act Rule 3a11-1) of the issuer, as well as any subsidiary, parent company or subsidiary of a parent company of the issuer, that are registered under Section 12 of the Exchange Act.

The proposed rules would apply to emerging growth companies, smaller reporting companies, business development companies and registered closed-end investment companies listed and registered on a national securities exchange, but not other investment companies, such as ETFs or mutual funds, or to foreign private issuers.

The text of the proposed rules are set forth below.

Of course not much that the Commission does these days is without a bit of controversy, so accompanying the proposed rules we have a statement from Commissioner Aguilar and a joint statement from Commissioners Gallagher and Piwowar.

Highlights from Commissioner Aguilar’s statement:

By allowing corporate insiders to protect themselves from stock declines while retaining the opportunity to benefit from stock price appreciation, hedging transactions could permit individuals to receive incentive compensation, even where the company fails to perform and the stock value drops.

Just as problematic, hedging transactions can be structured so that executives or directors monetize their shareholdings while they still technically own the stock, which makes the fact that the hedging took place less transparent to investors. … Accordingly, the proposed hedging rules are intended specifically to address this lack of transparency, and attempt to provide greater clarity to investors regarding employees’ and directors’ actual incentives to create shareholder wealth. … [B]etter information about equity incentives could be useful for investors’ evaluation of companies, enabling investors to make more informed investment and voting decisions.

It is important to note what the proposed rules do not do: they do not prohibit hedging transactions by employees or directors of public companies.

(citations omitted)

And, from Commissioners Gallagher and Piwowar’s statement:

While we ultimately voted to support the issuance of this proposal, our position should not be taken as unqualified support … [i]ndeed, we remain quite concerned by several aspects of the proposal … .

First, the proposed rules do not exempt emerging growth companies (EGCs) or smaller reporting companies (SRCs). …

[T]he direct costs of disclosure may fall disproportionately on EGCs and SRCs because they are less financially able to bear disclosure’s fixed costs. The indirect costs of disclosure may also disproportionately disfavor EGCs and SRCs … [as they] appear less likely to have hedging policies already in place, and our new disclosure requirement could make them feel compelled to adopt policies prohibiting hedging. … [P]rohibiting hedging could misalign the incentives of EGCs’ and SRCs’ employees and directors with those of investors. … [T]he release does not analyze whether the incremental cost of this disclosure … may have negative effects on overall capital formation … .

…

Second, the proposed rule would require certain investment companies (listed, closed-end funds) to make the disclosures contemplated by the rule. … [T]he utility of a disclosure about the alignment of incentives between investors and directors based on whether hedging of shares is permitted is questionable … . We would not have included these funds within the scope of the rule.

…

Third, we believe the Commission should have exercised its statutorily-granted exemptive authority to exempt from the rule disclosures relating to employees that cannot affect the company’s share price. …

Fourth, we are concerned that the release’s coverage of securities not just of the issuer, but also of the issuer’s affiliates–including subsidiaries, parents, and brother-sister companies–is overbroad. …

Finally, we would be remiss if we did not note that the determination to move forward with this release reflects a prioritization of the Commission’s work that we do not share. …

One thing everyone did seem to be in agreement on is the desire to receive public comment.

(Download File)

The Securities and Exchange Commission announced today that it will host a proxy voting roundtable on Thursday, February 19, 2015 (that was quick), to explore ways to improve the proxy voting process, with a focus on universal proxy ballots and retail participation in the proxy process.

The roundtable will be divided into two panels:

• The first panel will focus on the state of contested director elections and whether changes should be made to the federal proxy rules to facilitate the use of universal proxy ballots by management and proxy contestants. This panel also will discuss the state law, logistical, and disclosure issues presented by a possible universal proxy ballot process.

• The second panel will focus on strategies for increasing retail shareholder participation in the proxy process. This panel will discuss how technology – by providing better access to information or easier means of voting – might affect retail participation. In addition, this panel will discuss whether the format of disclosure could be improved to increase the engagement of shareholders and how the mechanics of voting could be improved to affect retail shareholder participation.

More details, including the agenda and list of participants, will be forthcoming.

CorpFin issued two new Compliance and Disclosure Interpretations (C&DIs) on Friday, one presents a somewhat niche scenario involving application of the resale limitations set forth Rule 905 of Regulation S, and the other, of more general utility, addresses the treatment of non-searchable graphics in EDGAR filings.

Regulation S-T, Rule 304: Using Graphics and Images in EDGAR Filings 

Regulation S-T sets forth the rules governing electronic filings in the Commission’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) system. The EDGAR Filer Manual is promulgated by the Commission under Rule 301 of Regulation S-T.

EDGAR filings are made in two formats ASCII (e.g., this MSFT 10-K from 2000) and HTML (e.g., this MSFT 10-K from 2014). ASCII filings don’t support the use of graphics or images, but HTML filings do. Neither ASCII nor HTML filings support the use of audio or video materials.

Rule 304 of Regulation S-T provides, in part, that where graphics, images, audio or video materials are used in a document delivered to investors but are not reproduced in the EDGARized version of that document, the EDGARized version “must include a fair and accurate narrative description, tabular representation or transcript of the omitted material.” Further, Rule 304(e), the subject of the Commission’s latest C&DI, prohibits (except in certain specified cases) the use of graphics or images to submit information that must be searchable or downloadable in a spreadsheet format (e.g., financial statements).

C&DI question 118.01 asks whether a filing can ever contain graphics or images that include non-searchable information.

To which CorpFin opines:

In our view, ‘information such as text or tables that users must be able to search and/or download’ [Rule 304(e)] consists of all information that the filer is required to include in the particular filing, such as disclosures in response to applicable form and Regulation S-K items and any additional information required to be included under Securities Act Rule 408 or Exchange Act Rule 12b-20.

We recognize that registrants may present information in Commission filings in formats such as bar graphs or other graphics that are not text-searchable but that they believe may be more useful to readers than tables or paragraphs that present the same information in searchable form. We welcome the use of graphic and image files to make information more accessible for users, provided that the filing complies with applicable EDGAR … requirements and the filer’s use of graphics does not interfere with a user’s ability to search required information. Therefore, with regard to required disclosures, a filer may present required information using graphics that are not text-searchable and still comply with Rule 304(e) if the filer also presents the same information as searchable text or in a searchable table within the filing. … Any additional information that the filer chooses to include in the filing and that is not required to be disclosed may be presented graphically without a separate text-searchable presentation.

(emphasis added).

Regulation S, Rule 905: The Application of Resale Limitations to Former FPIs

Regulation S provides an exclusion from Securities Act registration for offerings and sales of securities made outside of the United States. Both domestic and foreign issuers can use Regulation S.

Rule 905 of Regulation S provides, in part, that equity securities acquired from a domestic issuer, underwriter, dealer or other offering participant, or any of their respective affiliates, in a Regulation S offering are “restricted securities” within the meaning of Rule 144 and remain so following an offshore resale pursuant to either Rule 901 or 904 of Regulation S.

C&DI question 279.01 asks whether restricted securities acquired in a Rule 144 transaction (other than Rule 144(a)(3)(v), which addresses equity securities acquired from domestic issuers subject to the conditions of Rule 901 or 903 of Regulation S) from an issuer that was a foreign private issuer at the time of the acquisition, but is now a domestic issuer, may be resold in an offshore transaction under Rule 904 without regard Rule 905.

CorpFin’s answer: “Yes. Rule 905 only applies to equity securities that, at the time of issuance, were those of a domestic issuer.”