On Friday – after the SEC’s closing bell of 5:30 pm – the SEC issued a statement (and Corp Fin posted this reconsideration letter to Whole Foods), prompting me to post my first-ever nighttime blog. Now I find myself blogging on a holiday. Here are the top 5 questions that I have been fielding:
1. How Big a Deal Is This? – Certainly it’s bigger than Tiny Courtney Lee. For companies dealing with counterproposals – proxy access or otherwise – it’s huge because they have challenging decisions to make right now. Looking at the bigger picture, it could be monumental as the future of the 14a-8 process might be in play. That might be an exaggeration – and hopefully it is – but perhaps the house of cards falls down if companies begin to routinely exclude proposals without consulting the Corp Fin Staff if they comfortably believe a proposal fits an exclusion. At the end of the day, this isn’t likely to come about for a host of reasons, including the expense of litigating and the threat of SEC’s Enforcement Division getting into the fray. Not to mention earning the ire of shareholders and proxy advisors. But it is a possibility.
2. Has the SEC Ever Done This Before? – There have been a handful of Commission reversals of Corp Fin Staff positions in the shareholder proposal arena over the years. This situation isn’t that – at least, not yet. But even the SEC taking a proxy season off to ponder a reversal isn’t unprecedented either. As noted in this memo, the SEC took a similar approach in ’07 with Hewlett-Packard’s shareholder proposal after the AFSCME v. AIG court decision because the Staff hadn’t yet firmed up its views (this was the 1st proxy access shareholder proposal after the 2nd Circuit handed down its decision nullifying part of the SEC’s proxy access rule). As I recall, H-P decided to include the proposal in its proxy statement rather than exclude without no-action relief. But it’s a rare occurrence. I went back to review the Cracker Barrel saga in the early ’90s and I believe employment-related proposals under (i)(7) played out like this too, with the SEC taking a powder for a season (see pages 149-150 of my “Shareholder Proposal Handbook“).
Bear in mind that the appeals process for shareholder proposals is vague as there are no formal procedures (as covered on pages 39-41 of my Handbook). Also note that it’s unclear if this was a decision by Chair White alone or a majority of Commissioners.
3. Can Companies with Counterproposals Just Exclude Them & See If They’re Sued By the Proponent? – Companies with counterproposals appear to have 5 options:
1. Exclude the shareholder proposal but also not include their own proposal (not likely to be chosen as it completely flouts the law)
2. Exclude the shareholder proposal after seeking declaratory relief from a court & include their own proposal
3. Exclude the shareholder proposal without court relief & include their own proposal
4. Include the shareholder proposal & include their own proposal too
5. Include the shareholder proposal but not include their own proposal
Let’s deal with the 2nd & 3rd options. Here’s a paragraph from one law firm memo I saw:
“It is important to note that companies are not required to obtain no-action relief from the staff in order to exclude a proposal under Rule 14a-8. The relevant SEC rule, Rule 14a-8(j), requires only that the company “file its reasons” with the SEC no later than 80 calendar days before it files its definitive proxy statement. Furthermore, the SEC staff has expressly confirmed that “the staff’s no-action responses to Rule 14a-8(j) submissions reflect only informal views. 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. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”
The traditional thinking has been that companies don’t exclude a shareholder proposal unless they get no-action relief from the Corp Fin Staff. But there have been cracks in that thinking in recent years as a smattering of companies have sought declaratory relief from a court instead of following the Staff process – or even going as far as excluding a proposal without seeking court relief either – so there is precedent for going forward without no-action relief. Note that Rule 14a-8 doesn’t require that a company obtain a favorable no-action response. And then there’s the recent matter of Trinity v. Wal-Mart, where the Staff granted no-action relief to the company – but the proponent then won in court to compel inclusion. In other words, the court overturned Corp Fin’s decision – so the value of obtaining a no-action response perhaps has become somewhat tainted. [As noted in this blog, that court decision currently is being appealed.]
Early rumblings from over the weekend indicate some companies may take one of the 2nd or 3rd routes. The 2nd route has litigation risk and would entail proponents incurring litigation costs if they sued to compel inclusion of their proposals. The 3rd route ensures that the company will incur litigation costs even if the proponent doesn’t. There probably isn’t much of a SEC enforcement risk as there have been law suits in recent years that illustrate how the SEC is unlikely to take action in the shareholder proposal area. That, of course, could change – but unlikely given the SEC’s statement on Friday. Both of these routes are tempting because the law (and courts unfamiliar with shareholder proposals) appear to favor companies (to fully explain this sentence would take a whole series of blogs; the counterproposal area is much more challenging than you would think – it’s not black and white like it appears on its face).
But I urge caution for companies tempted to step into the morass. Think of what your shareholders will think (and do) if the company starts excluding proposals without going through any sort of regulatory or judicial process. And perhaps even a bigger risk is what ISS and Glass Lewis do. A few years ago, as noted in this blog, Kinetic Concepts pointed to a court ruling that KBR won and said they wouldn’t include a shareholder proposal because the circumstances were similar, so they didn’t bother asking for a no-action letter. ISS then said they would recommend voting against the entire board. Kinetic capitulated and adopted the proposal. If ISS still maintains the same position, this should be determinative in my opinion. You don’t want your board under siege. The key is to engage your shareholders and see what they want you to do. Don’t exclude a shareholder proposal by only engaging with your advisors.
4. Can Companies Include the Counterproposals But Also Include Their Own Proposal To Give Shareholders an Alternative? – Yes, they can – this is option #4 from above. And it’s something that shareholders might view as a preferable alternative. There would be a few things to think about, with a primary one being what to do if both proposals garner a majority vote? In that scenario, I imagine the company proposal would be considered implemented because it’s binding and the shareholder proposal would be precatory – even if the shareholder proposal received more votes than the company proposal. But the optics of that aren’t good if the shareholder proposal majority winds up being higher than the company’s proposal majority. This is uncharted territory and needs to be thought through before you file your proxy statement as the disclosure should be fulsome about the possible voting outcomes.
Other disclosure considerations include: Would the company include a statement in opposition of the proponent’s proposal – or would it use its own proposal for that purpose (or also allow the proponent to include a statement in opposition to the company’s proposal). How would the proxy card look (and don’t forget to give Broadridge a head’s up to ensure their systems can handle that)? I presume management would put its proposal first.
5. Does the SEC’s New Position Impact Counterproposals That Aren’t Proxy-Access Related? – The answer here is “yes.” There are a bunch of other (i)(9) letters beyond proxy access (eg. special meeting and pro rata vesting proposals) and it looks like those are collateral damage for this proxy season. According to this Gibson Dunn blog, there are 49 no-action requests pending that argue for exclusion under Rule 14a-8(i)(9), 41 of which assert (i)(9) as the only basis for exclusion. All (i)(9) requests are impacted by the SEC’s statement – not just the proxy access ones – based on this language in the SEC’s statement: “we will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.” In fact, the SEC’s announcement doesn’t even mention proxy access proposals specifically…
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2015 Proxy Season”
Tune in tomorrow for the always entertaining webcast – “Pat McGurn’s Forecast for 2015 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS (the proxy season expert) to recap what transpired during the 2014 proxy season and what to expect for 2015. And yes, there will be discussion about proxy access. Please print off this deck before the program…
– Broc Romanek