SEC's move puts all proposal exclusions at risk

Jan 27, 2015
<p>With no cover available from no-action letters for the entire 2015 proxy season, issuers may be much more vulnerable to shareholder lawsuits&nbsp; &nbsp; &nbsp; </p>

What a difference a week makes. Since my newsletter of January 7 on worries regarding proxy access, and amid heightened public debate around Whole Foods Market’s decision to exclude a shareholder’s proxy access proposal from its proxy because of its own competing proposal, the SEC has decided to halt the granting of no-action letters for the 2015 proxy season.

As the SEC’s Division of Corporation Finance wrote to the shareholder, James McRitchie, ‘The Division has reconsidered its position. On January 16, 2015, Chair [Mary Jo] White directed the Division to review the Rule 14a-8(i)(9) basis for exclusion. The Division subsequently announced, on January 16, 2015, that in light of this direction, the Division would not express any views under 14a-8(i)(9) for the current proxy season.’

That clearly sends a signal to the many other companies that, faced with similar proposals, are considering replicating Whole Foods’ tactic. It effectively warns them that without the protection of a no-action letter they would be much more vulnerable to being dragged into court by shareholders incensed by any such exclusion.

The SEC’s move met with apparent approval from the New York City Comptroller’s Office, which in November filed proxy access shareholder proposals at 75 portfolio companies of the $160 billion New York City pension funds, as part of what it called the Board Accountability Project.

‘The playing field for shareowners just got a lot more level,’ comptroller Scott Stringer said in a statement issued on Monday. ‘The SEC's review means that the nearly 100 companies that received proxy access proposals this year can no longer exploit an overly-broad interpretation of the competing proposal rule to disenfranchise shareowners.

‘Boards that decide to exclude these proposals anyway not only face opposition to their director nominees from institutional investors, including the city's pension funds, they now also do so without the cover of SEC no-action letters.’

The impact of the SEC’s move isn’t limited to counter-proposals that companies may create regarding the proxy access issue, however.

As Broc Romanek, editor of, wrote on his blog this week, ‘There are a bunch of other (i)(9) letters beyond proxy access (eg special meeting and pro rata vesting proposals) and it looks like those are collateral damage for this proxy season.’ He goes on to mention a post on Gibson Dunn’s blog that cites ‘49 no-action requests pending that argue for exclusion under Rule 14a-8(i)(9), 41 of which assert (i)(9) as the only basis for exclusion. All (i)(9) requests are impacted by the SEC’s statement – not just the proxy access ones – based on this language in the SEC’s statement.’

As a result of its review of the rule, the SEC could even end up changing its position on counter-proposals.

‘In its initial response to Whole Foods, the SEC was agreeing with the company that under (i)(9) it would be confusing to have two proposals on the ballot. However, it’s even more confusing if only the management proposal is there,’ says Michael Garland, head of corporate governance at the New York City Comptroller’s Office. ‘Do you vote for it? Do you vote against it? Our view is that it’s not really proxy access and we’re going to vote against it.

‘But if it gets defeated, what’s the takeaway for the board? Shareholders don’t want proxy access? Or they don’t want high thresholds? That confusion is eliminated when both proposals are on the ballot.’

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