No-Action Letter for Cardinal Health, Inc. Exclusion of a Report Describing Controlled Distribution Systems
In Cardinal Health, Inc., 2017 BL 273153 (Aug. 4, 2017), Cardinal Health, Inc. (“Cardinal”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Ronald O. Mueller (“Shareholder”), requesting a report regarding Cardinal’s controlled distribution system “to prevent the diversion of restricted medicines to prisons for use in executions, and its process for monitoring and auditing these systems”. The SEC issued the requested no action letter, finding some basis for exclusion under Rule 14a-8(i)(7).
Shareholder submitted a proposal providing that:
RESOLVED, Shareholders request that Cardinal: Issue a report at reasonable expense, and excluding confidential information, describing the controlled distribution systems it implements on behalf of manufacturers to prevent the diversion of restricted medicines to prisons for use in executions; and its process for monitoring and auditing these systems to check for and safeguard against failure.
Cardinal sought exclusion of the proposal from its proxy materials under subsection (i)(7) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).
Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if it deals with a matter relating to the company’s “ordinary business operations.” The SEC has previously permitted exclusion of a shareholder proposal under Rule 14a-8(i)(7) on the grounds that it “relates to the sale and distribution of particular products” to customers. The SEC has consistently recognized proposals relating to the sale and distribution of particular products to be related to a company’s ordinary business operations. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016); Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).
Cardinal argued Shareholder’s proposal related to ordinary business operations because the broad scope of the proposal implicates Cardinal’s relationship with its suppliers. Cardinal further argued the managing these relationships is such a fundamental task to running the company on a daily basis that it is impractical to be subject to direct shareholder oversight. Lastly, Cardinal argued the proposal is excludable because its relationships with suppliers is a core function of its management and therefore impacts ordinary business operations.
The SEC determined the proposal may be excluded under Rule 14a-8(i)(7) because it related to Cardinal’s ordinary business operations. Specifically, the proposal addressed the sale and distribution of products to its customers.
The primary materials for this post may be found on the SEC website.