Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): The Catalyst (Part 2)

We are discussing the staff guidance issued in Staff Legal Bulletin No. 14H (CF) on shareholder proposals. Specifically, the Bulletin provided guidance on subsections (i)(7) (ordinary business) and (i)(9) (directly conflicts).  

The guidance arose as a result of an unusual set of circumstances during the previous proxy season.

During the proxy season, a shareholder submitted a proposal to Whole Foods asking the company to amend the corporate documents to provide shareholders with a right of access.  The proposal, which was precatory in nature, called for the company to provide the right of access to shareholders owning, individually or collectively, 3% of the voting shares for at least three years. 

The company proposed an alternative, seeking to provide access rights to any shareholder holding 9% of the outstanding voting shares for at least 5 years.  Moreover, when the draft of the bylaw was actually included in the proxy statement, it required the qualifying shareholder to include a representation "with respect to maintaining qualifying ownership of the Required Shares for at least one year following the annual meeting."  

The staff issued a no action letter allowing Whole Foods to exclude a shareholder proposal under subsection (i)(9) of Rule 14a-8.  As the staff reasoned:

• You represent that matters to be voted on at the upcoming stockholders' meeting include a proposal sponsored by Whole Foods Market to amend Whole Foods Market's bylaws to allow any shareholder owning 9% or more of Whole Foods Market's common stock for five years to nominate candidates for election to the board and require Whole Foods Market to list such nominees with the board's nominees in Whole Foods Market's proxy statement. You indicate that the proposal and the proposal sponsored by Whole Foods Market directly conflict. You also indicate that inclusion of both proposals would present alternative and conflicting decisions for the stockholders and would create the potential for inconsistent and ambiguous results. Accordingly, we will not recommend enforcement action to the Commission if Whole Foods Market omits the proposal from its proxy materials in reliance on rule 14a-8(i)(9).

Thus, the staff relied on the possibility of a direct conflict and the possibility of "inconsistent and ambiguous" results as a basis for exclusion.   The letter, therefore, established a precedent for other companies to submit managerial alternatives with harsh terms as a means of obtaining exclusion of a more moderate shareholder proposal. 

Indeed, prior to the Whole Foods no action letter, a number of companies had already sought exclusion of the access proposal on similar grounds.  See Letter from Michael Garland, Assistant Comptroller, City of New York, Office of the Comptroller, July 17, 2015 ("Following Whole Foods, twenty-five additional companies (seventeen of which were responding to NYC Systems-sponsored proposals) quickly submitted requests for no-action relief under the Rule. Each request unequivocally represented that at its upcoming annual meeting, the company would be submitting for shareowner approval its own resolution to provide for proxy access."). 

Following issuance of the no action letter, the shareholder sought reconsideration by the staff and an appeal to the full Commission.  The shareholder argued that subsection (i)(9) did not apply to precatory proposals since, as advisory statements, they could not directly conflict with a management alternative.  

Relying on past staff positions, the shareholder also argued that (i)(9) did not allow for the exclusion of management proposals submitted “in response to” a shareholder proposal.  In a follow up letter, the shareholder noted that  the company had not denied “that the mandatory bylaw proposed by Whole Foods was adopted ‘in response to’ the precatory proposal submitted in this case. As a result, this is a stand-alone basis for the inapplicability of subsection (i)(9).” 

The staff granted reconsideration and withdrew the original no action letter.  In addition, the staff also withdrew a previously issued no action letter that allowed for the exclusion of a shareholder proposal under (i)(9) that addressed special meetings.  The Chair of the SEC “directed the staff to review the rule and report to the Commission on its review.”  The review required consideration of the “proper scope and application of the rule. 

As a result, the staff opted to issue no letters under subsection (i)(9) during that proxy season.  As the staff noted:  “In light of Chair White's direction to the staff to review Rule 14a-8(i)(9) and report to the Commission on its review, the Division of Corporation Finance will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”). Moreover, in one case, the staff withdrew a letter previously issued under the subsection. See BorgWarner Inc. (Feb. 6, 2015).

During the review period, the staff sought and received a number of comments. Moreover, the shareholders were, in some cases, allowed to vote for proposals on the same subject matter submitted by both shareholders and management, essentially putting in place a market test over the degree of confusion incurred by shareholders when confronted with this type of choice.