March 23, 2016

Shareholder Proposals: Corp Fin Issues 1st No-Action Letter Under the New (i)(9) Standard

Back in October, Corp Fin issued Staff Legal Bulletin No. 14H, which set forth a new “direct conflicts” standard for counterproposals. As noted in this blog, 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.”

On Monday, Corp Fin posted the first no-action letter issued under this new standard – this response to Illumina that allows the company to exclude a Jim McRitchie proposal that had requested that the board take the steps necessary so that each voting requirement in the company’s charter and bylaws that calls for a greater than simple majority vote be eliminated and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. The Staff’s response allowed exclusion under Rule 14a-8(i)(9) because it “directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals.”

Does this letter foretell a new strategy by companies to bar shareholder proposals? Here’s an excerpt from this Cooley blog on that topic:

Does this letter outline an approach that may appeal to other companies seeking to exclude a shareholder proposal? Of course, in some – or perhaps many – cases, companies may be reluctant to submit to their shareholders management proposals to ratify a position that is the opposite of one that governance activists and institutional holders are ardently promoting as de rigueur. Nevertheless, this approach is apparently just what Mr. Chevedden fears. In one of his many letters to the staff regarding this no-action request, Mr. Chevedden recognized what may well represent a strategy for the future: “Implicit in the company argument is the concept that henceforth any rule 14a-8 governance proposal topic, that often obtains a majority vote, might be kept off the ballot by simply asking shareholders to ratify the opposite of the rule 14a-8 proposal.”

Ironically – from the perspective of proponents of shareholder proposals (some of whom prompted the staff’s reexamination of the conflicting proposals exclusion) – under the staff’s prior approach, companies seeking to exclude a shareholder proposal would have submitted as a management proposal a moderated version of the shareholder proposal that at least took some steps in the proponent’s direction but, under the new approach, companies seeking exclusion will now need to submit management proposals that completely reject the proponent’s position.

Meanwhile, Jim McRitchie has penned an interesting blog entitled “‘Substantial Implementation’ Will Backfire“…

Proxy Cards: Corp Fin’s New CDI on “Clear & Impartial” Proposal Descriptions

Yesterday, Corp Fin issued this CDI 301.01 about how a proxy card should “clearly identify and describe the specific action on which shareholders will be asked to vote” for both management & shareholder proposals. The CDI provides six examples of what not to do. This is one of those examples that doesn’t satisfy Rule 14a-4(a)(3): “A shareholder proposal on executive compensation.” The CDI doesn’t clarify whether it applies to VIFs – but it likely does. Here’s an excerpt from this Gibson Dunn blog:

The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card. For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3). Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card.

Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card. Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) that a company’s Notice of Internet Availability contain a “clear and impartial identification of each separate matter intended to be acted on.” Similarly, to the extent that companies are involved in reviewing and commenting on the form of voting instruction card that is distributed to street name shareholders, best practice is to conform the descriptions of proposals on the voting instruction card to the descriptions on the company’s proxy card. Companies also are subject to the general standard of avoiding misleading statements when identifying or describing proposals within the body of the proxy statement.

Notably, the SEC does not have a rule on the form and content of the state law notice that appears at the front of companies’ proxy statements. Thus, if a company has determined that a generic description of shareholder proposals is sufficient for the notice page of the proxy statement under state law, such as stating that the shareholder meeting agenda includes a “shareholder proposal, if properly presented,” the C&DI does not prevent that practice. As a result, the description (if any) of those proposals on the notice page may differ from how each proposal is identified on the proxy card.

Coincidentally, this follows my blog on the “Proxy Season Blog” last week about this topic…

Corp Fin’s New Enforcement Liaison Chief: Tim Henseler

It’s been five months since Mary Kosterlitz retired as the long-time Chief of the Corp Fin’s Office of Enforcement Liaison – and now Corp Fin has a new Chief for that Office: Tim Henseler. Tim moved over from serving as the SEC’s Director of the Office of Legislative and Intergovernmental Affairs.

Broc Romanek