October 26, 2015
On October 22, 2015, the Securities and Exchange Commission’s ("SEC" or "Commission") Division of Corporation Finance (the "Division") issued Staff Legal Bulletin No. 14H ("SLB 14H"), setting forth a dramatically different standard for when it will concur that a shareholder proposal that conflicts with a company proposal can be excluded from the company’s proxy statement under Rule 14a-8(i)(9). The Division also reaffirmed its views on the application of the "ordinary business" standard in Rule 14a-8(i)(7). SLB 14H is available here.
I. Rule 14a-8(i)(9)
Background. Pursuant to Rule 14a-8(i)(9), a company may exclude a shareholder proposal if the proposal "directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting." Since the adoption of this exclusion in 1967, the staff of the Division (the "Staff") consistently has permitted companies to exclude a shareholder proposal where the proxy statement also contained a company proposal that would "present alternative and conflicting decisions for shareholders" and "create the potential for inconsistent and ambiguous results." However, in response to concerns raised by some shareholders over the application of Rule 14a-8(i)(9) in the context of proxy access shareholder proposals, in January 2015, SEC Chair Mary Jo White announced that she was directing the Staff to review Rule 14a-8(i)(9) and report to the SEC on its review.[1] Concurrently with this announcement, the Staff announced that pending its review, it would no longer express a view during the 2015 proxy season on the availability of Rule 14a-8(i)(9).[2] The Staff received 19 comment letters related to its review.[3] We discussed these developments in detail in our January 16, 2015 blog post and July 15, 2015 client alert.
"Mutually exclusive" proposals. In a reversal of decades of Staff interpretations of Rule 14a-8(i)(9), the Division takes the position in SLB 14H that a direct conflict exists for purposes of Rule 14a-8(i)(9) only if "a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal" because "they are, in essence, mutually exclusive proposals." In contrast, a direct conflict will not exist if a shareholder proposal and a company proposal contain different terms but "generally seek a similar objective." This approach is significantly more restrictive than the Staff’s prior approach and, as demonstrated by the examples included in SLB 14H and described below, essentially will eliminate the availability of Rule 14a-8(i)(9) as a basis for excluding shareholder proposals.
Examples. As set forth in SLB 14H:
- Proxy access. Where a company does not allow shareholder nominees to be included in the company’s proxy statement, a proxy access shareholder proposal with specific terms (such as 3% ownership/3 years/20% of the board) would not be viewed as directly conflicting with a company proxy access proposal with different terms (e.g., 5% ownership/5 years/10% of the board) because "both proposals generally seek a similar objective" (i.e., to give shareholders the ability to include their director nominees in the company’s proxy statement) and thus "do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals."
- Vesting of equity awards. Similarly, a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not be viewed as directly conflicting with a company proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards. This is because "a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan."
- Chairman/CEO separation. Conversely, a shareholder proposal that asks for the separation of the roles of chairman and CEO would directly conflict with a company proposal seeking approval of a bylaw amendment that requires the CEO to be the chair at all times.
Binding vs. non-binding proposals. The Division observes that a binding company proposal and a non-binding shareholder proposal may nevertheless directly conflict if a vote in favor of the shareholder proposal "is tantamount to a vote against" the company proposal, despite the non-binding nature of the shareholder proposal. Where this is the case, the non-binding shareholder proposal would be excludable under the new standard announced in SLB 14H. However, if a binding company proposal and a binding shareholder proposal would directly conflict solely because, if implemented, the proposals would present two mutually exclusive alternatives, the Division now will allow the shareholder proposal to be revised to be non-binding, and therefore not excludable under Rule 14a-8(i)(9).
Staff discretion. Notably, the standard introduced by the Division in SLB 14H is, to a large degree, highly subjective and gives the Staff discretion to speculate as to what a reasonable shareholder would view as the objective of a proposal and as to the comparability of alternative approaches to an issue, which may lead to results that are inconsistent with the views of shareholder proponents and shareholders voting on a proposal. For example, while some shareholders have voted for proxy access proposals with a 5% ownership standard and against proxy access proposals with a 3% ownership standard, the Division’s new standard represents a potentially unfounded judgment that these shareholders instead reasonably could support a 3% ownership standard.
Similarly, in the example from SLB 14H discussed above regarding differing standards for vesting terms of equity awards, the Staff appears not to view the proposals as directly conflicting on the issue of whether a compensation committee should or should not have discretion in setting vesting terms on equity awards. Instead, the Staff concludes that "a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan."
The Division acknowledges that the standard it has promulgated in SLB 14H "may be a higher burden for some companies" to meet, but the Division indicates that it "believe[s] it is most consistent with the history of the rule" and its intention to "prevent shareholders from using Rule 14a-8 to circumvent the proxy rules governing solicitations." Nevertheless, the new standard shifts the analysis away from whether there are competing views by a shareholder proponent and a company’s board on how to address a particular topic. As a result, the Division’s new standard effectively creates the situation that Rule 14a-8 was designed to prevent by permitting shareholders to use the company’s proxy materials to compete with the company’s board on how to address any topic. The best example of this occurred during the 2015 proxy season when, as a result of the Division declining to issue no-action letters under Rule 14a-8(i)(9), seven companies included both a shareholder proposal and a company proposal on proxy access in the company proxy statement. In all seven of those contests between a shareholder and a company proxy access proposal, the company in its proxy statement recommended voting against the shareholder proposal and in five of those contests the shareholder proponent filed soliciting materials recommending that shareholders vote against the company proposal.[4]
II. Rule 14a-8(i)(7) and Trinity Wall Street v. Wal-Mart Stores, Inc.
Background. Under SEC Rule 14a-8(i)(7), a company may exclude from its proxy materials shareholder proposals relating to the company’s ordinary business operations. Under SEC Rule 14a-8(i)(3), a company may exclude proposals that are so vague or indefinite that neither shareholders voting on the proposal nor a company in implementing the proposal would know exactly what actions or measures the proposal requires. As discussed in our July 15, 2015 client alert, on April 14, 2015, the U.S. Court of Appeals for the Third Circuit ruled in Trinity Wall Street v. Wal-Mart Stores, Inc. that a shareholder proposal submitted to Wal-Mart was excludable under Rule 14a-8(i)(7) and Rule 14a-8(i)(3), reversing a December 2014 judgment by the U.S. District Court for the District of Delaware.[5]
Different analyses for significant policy exception to ordinary business exclusion. The Third Circuit’s three-judge panel unanimously held that the proposal was excludable under Rule 14a-8(i)(7). The Third Circuit panel also unanimously held that the proposal did not fall within the significant policy exception to the Rule 14a-8(i)(7) exclusion, although one judge wrote a concurring opinion to explain that she applied a different analysis to reach that conclusion. In the majority opinion, the Third Circuit employed a two-part test to assess whether the significant policy exception to the ordinary business exclusion applied, stating 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."[6] In contrast, the concurring opinion noted that "whether a proposal focuses on an issue of social policy that is sufficiently significant is not separate and distinct from whether the proposal transcends a company’s ordinary business."[7] On September 11, 2015, Trinity Wall Street filed a petition seeking the United States Supreme Court’s review of the Third Circuit’s opinion. Wal-Mart has until November 16, 2015 to file its response to Trinity Wall Street’s petition.[8]
Division’s view: business as usual. In SLB 14H, the Division reaffirmed its view that its earlier determination that the Trinity Wall Street proposal properly was excludable under Rule 14a-8(i)(7) is consistent with the views the SEC has expressed on how to analyze proposals under the ordinary business exclusion. The Division also stated that the two-part test applied in the majority opinion differs from the Division’s practice, and that the Division "intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division’s prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion."
[1] The Division has not publicly issued a report to the Commission on its review other than the announcements in SLB 14H, and SLB 14H states that the Commission "has neither approved nor disapproved its content."
[2] Statement from Chair White Directing Staff to Review Commission Rule for Excluding Conflicting Proxy Proposals (Jan. 16, 2015), available at http://www.sec.gov/news/statement/statement-on-conflicting-proxy-proposals.html; Division of Corporation Finance Will Express No Views under Exchange Act Rule 14a-8(i)(9) for Current Proxy Season (Jan. 16, 2015), available at http://www.sec.gov/corpfin/announcement/cf-announcement—rule-14a-8i9-no-views.html.
[3] These comment letters are available at http://www.sec.gov/comments/i9review/i9review.shtml.
[4] See the Notice of Exempt Solicitation on form PX14A6G jointly filed by the shareholder proponent and another institutional shareholder with respect to AES Corp. (filed on Apr. 17, 2015), Chipotle Mexican Grill, Inc. (filed on Apr. 28, 2015), Cloud Peak Energy Inc. (filed on Apr. 28, 2015), Exelon Corp. (filed on Apr. 20, 2015), and Visteon Corp. (filed on May 20, 2015).
[5] See Trinity Wall Street v. Wal-Mart Stores, Inc., No. 14-4764 (3d Cir. July 6, 2015). Gibson Dunn represented Wal-Mart in obtaining the SEC no-action letter, before the district court and on appeal before the Third Circuit.
[6] Trinity Wall Street v. Wal-Mart Stores, Inc. at *50 (citation omitted).
[7] Id. at *3 (Schwartz, J., concurring).
[8] See Supreme Court of the United States, Docket, available at http://www.supremecourt.gov/Search.aspx?FileName=/docketfiles15-323.htm (accessed on Oct. 22, 2015).
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group:
Brian J. Lane - Washington, D.C. (202-887-3646, [email protected])
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
James J. Moloney - Orange County, CA (949-451-4343, [email protected])
Elizabeth Ising – Washington, D.C. (202-955-8287, [email protected])
Lori Zyskowski – New York (212-351-2309, [email protected])
Gillian McPhee – Washington, D.C. (202-955-8201, [email protected])
Julia Lapitskaya – New York (212-351-2354, [email protected])
Sarah E. Fortt – Washington, D.C. (202-887-3501, [email protected])
Kasey L. Robinson – Washington, D.C. (202-887-3587, [email protected])
© 2015 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.