Yesterday, Corp Fin released its first Staff Legal Bulletin on shareholder proposals in three years – Staff Legal Bulletin No. 14H. The heart of this SLB wraps up Corp Fin’s review of Rule 14a-8(i)(9) that kicked off in January after Chair White announced that the Staff would take “no view” on (i)(9) proposals during this past proxy season. This exclusion basis relates to counterproposals – and the use of it came under fire when companies attempted to battle against proxy access shareholder proposals by floating their own access proposals with terms more amendable to them. We’ll be posting the oodles of memos in our “Shareholder Proposals” Practice Area as they come in.
Under the SLB’s new “direct conflicts” standard for counterproposals, Corp Fin will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict.” The SLB provides four examples about how a shareholder proposal & management proposal may be found to directly conflict – or not. In the proxy access context, the upshot is that a more restrictive management proposal – like the one that Whole Foods came up with – will not be considered by Corp Fin as conflicting (and thus won’t be excludable). Overall, (i)(9) will rarely be used as an exclusion basis going forward.
So how will companies that need to place two different types of proxy access proposals on the same ballot explain this confusing scenario to shareholders? Explanatory disclosure, as noted in footnote 22 of the SLB as follows:
Where a shareholder proposal is not excluded and companies are concerned that including proposals on the same topic could potentially be confusing, we note that companies can, consistent with Rule 14a-9, explain in the proxy materials the differences between the two proposals and how they would expect to consider the voting results. As always, we expect companies and proponents to respect the Rule 14a-8 process and encourage them to find ways to constructively resolve their differences.
If companies still seek to rely on (i)(9) because they believe they face “directly conflicting” proposals, they need to consider when to implement their “proposal” to illustrate the conflict to Corp Fin. This timing issue is brought home by footnote 15, which states:
We remind companies that the staff may need a complete copy of a company’s proposal to evaluate a no-action request under Rule 14a-8(i)(9) and that the staff may not be able to agree that the company has met its burden of demonstrating that a shareholder proposal is excludable if those materials are not included with the company’s no-action request. This same principle applies when the staff evaluates no-action requests under Rule 14a-8(i)(10).
The SLB also touches on the Rule 14a-8(i)(7) litigation playing out in Trinity Wall Street v. Wal-Mart by disagreeing with how the majority in the Third Circuit applied the “significant policy exception” to the ordinary business exclusion. More specifically, Corp Fin didn’t endorse the majority’s “new two-part test, concluding that ‘a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.’” As noted in this Cooley blog, the Third Circuit’s opinion requested Corp Fin’s views in this area – and now they have it…
I’ll update my 225-page “Shareholder Proposals Handbook” for this new SLB in the near future…
Pay Ratio: Chamber of Commerce Not Suing (At Least Not Yet)
Here’s news from this WSJ article:
The U.S. Chamber of Commerce isn’t planning to mount a legal challenge to the Securities and Exchange Commission’s pay ratio rule. The rule, required by the Dodd-Frank Act of 2010, will force companies to disclose the gap between their chief executive’s pay and that of their median employee by 2017. It formally took effect on Monday, after the Securities and Exchange Commission approved it by a 3-2 vote in August. “We decided not to move forward on [the legal challenge],” said Tom Quaadman, senior vice president for Capital Markets Competitiveness at the U.S. Chamber of commerce. The pay ratio rule won’t affect most companies until 2018, Mr. Quaadman said. The political landscape around the rule could also change in Congress and the White House following the 2016 election, he added. Last month, the House Financial Services Committee sent a bill to overturn the rule to the floor. A vote is still pending.
For now, the Chamber said it is more important to move forward with litigation surrounding its challenge of another Dodd-Frank disclosure rule, the one on conflict minerals, he said. The conflict minerals case “has implications for the pay ratio,” Mr. Quaadman said. The conflict minerals litigation focuses on whether it violates corporate free speech rights by forcing companies to declare their supply chains contain minerals blamed for fueling violence in the Democratic Republic of the Congo. A U.S. Appeals Court reaffirmed a ruling in August that struck down conflict minerals disclosure requirements. But the U.S. Securities and Exchange Commission and Amnesty International filed another challenge against the rule this month. Mr. Quaadman said other groups could still move forward.
Since the pay-ratio rule just took effect, that “opens the door” for a legal challenge from someone, said James Barrall, a compensation attorney at law firm Latham & Watkins LLP. Companies are concerned about the rule because finding their median employee will force them to navigate different payroll systems and wage and benefits rules across disparate countries. They also worry that the disclosure will be hard to compare between companies and industries and will be difficult to explain to their workforce. “This is a complex process that will require significant time and resources, particularly as companies work to report this information for the first time,” said Mike Stevens, a partner in law firm Alston & Bird’s employee benefits and executive compensation group.
Speaking of the rulemaking process, the SEC’s Chief Economist delivered this speech yesterday about economic analysis for rules…
Proxy Advisors: Only Half of Investors Globally Use Them
These survey results from Proxy Insight appear to call into question those that believe that most institutional investors routinely follow the recommendations of proxy advisors to cast their votes, including:
– Only 21% of investors use proxy advisor voting policies
– 71% of investors vote according to their own policies
– 9% of investors delegate voting to sub-advisors or other asset managers
– Nearly 50% use at least one proxy advisor for research or recommendations based on their own policy
I’ve blogged a bit on this topic over the years, arguing that ISS’s influence on voting results is overstated…
– Broc Romanek