No-Action Letter for Caterpillar Inc. Denied Exclusion of Permanent Independent Chairman Proposal

In Caterpillar Inc., 2017 BL 103240 (Mar. 28, 2017), Caterpillar Inc. (“Caterpillar”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by John Chevedden (“Shareholder”) requesting the board to adopt a permanent policy of requiring the chair of the board of director to be an independent member of the board whenever possible. The SEC declined to issue the no action letter allowing for exclusion of the proposal under Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6).  

Shareholder submitted a proposal providing that:

 RESOLVED: Shareholders request our Board of Directors adopt as permanent policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it does not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all necessary steps be taken to accomplish the above.

Caterpillar sought the exclusion of the proposal from its proxy materials under subsections (i)(1), (i)(2), (i)(3), and (i)(6) 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).

 A shareholder proposal may be omitted under Rule 14a-8(i)(1) if the proposal is not a proper subject for action by shareholders under the laws in the jurisdiction of the company's organization. Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.” Furthermore, Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it. For additional discussion on Rule 14a-8(i)(2), see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law, 93 DU Online L. Rev. 213 (2016).

 Caterpillar argued Shareholder’s proposal should be excluded under Rule 14a-8(i)(1) and 14a-8(i)(2) because it would result in violations of Delaware law. Implementation of any permanent policy inherently prevents a future board of directors from altering the policy, even it if is later determined the proposal is no longer in the best interests of the company or its shareholders.

 Caterpillar further argued the proposal should be excluded under Rule 14a-8(i)(6) because Caterpillar does not have the authority to implement the proposal, and doing so would violate Delaware law. Shareholder disagreed, arguing that Caterpillar’s existing company guidelines allow “permanent” changes, including the appointment of a “permanent” chairman.

Finally, Caterpillar argued the proposal should be excluded under Rule 14a-8(i)(3) because between 2015 and 2016, 38 other companies included proposals with an identical title as Shareholder’s proposal, although only the Shareholder’s proposal requested a unique “permanent” policy. According to Caterpillar, the similarity in title of the Shareholder’s proposal but deviation in its content would lead to confusion if shareholders were permitted to vote on it.

 Ultimately, the SEC disagreed with Caterpillar, and concluded Caterpillar may not exclude the proposal in reliance on Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6). The staff commented the proposal was not so inherently vague or indefinite that neither the shareholders or Caterpillar would be unable to determine with any reasonable certainty exactly what actions or measures the proposal required.

The primary materials for the post may be found on the SEC Website.