Something shocking happened at the SEC yesterday. SEC Chair Mary Jo White directed the SEC Staff to review its long-standing position on when a shareholder proposal conflicts with a company proposal and may be excluded from the proxy statement. As a result, the SEC’s Division of Corporation Finance withdrew a no-action letter that had given Whole Foods the green light to exclude a shareholder proposal on proxy access by including its own (less shareholder-friendly) proposal on the subject. Corp Fin also said that it would not be issuing any additional no-action letters under the rule in question. It’s worth noting that these actions were taken at a sensitive time, as calendar-year companies approach peak proxy season and a major investor campaign is under way to impose proxy access upon companies that have been resisting it.
The SEC’s shareholder proposal rules are very complex, and I won’t go into details here. However, as a general matter, the rules lay out the process by which eligible shareholders can submit proposals for inclusion in a company’s proxy statement. Relevant here is that (1) the rules provide certain conditions under which a company can exclude a proposal and (2) companies can avail themselves of a “no-action” process to get the SEC’s permission to exclude a proposal if the conditions are satisfied. It’s worth noting that the no-action process isn’t dispositive; the proponent or the company can take the matter to court, and there are usually a couple of cases each year in which that happens.
I’m informed that Chair White’s action (and Corp Fin’s reaction), while rare, are not unprecedented, but that doesn’t make them inconsequential. The Whole Foods no-action letter generated a strong negative reaction from the investor community – not surprising given the sensitivity on proxy access and the differences between the two versions of the proposal. Thus, some may see it as a victory for the investor community, and to an extent it is. On the other hand, the actions leave everyone in limbo – not just companies, but also the investors pressing for proxy access and, of course, the shareholders generally. From the company’s perspective, it has the right to exclude the shareholder proposal if the conditions of the rule are met, but by doing so it risks litigation and, in the worst-case scenario, having to distribute additional proxy materials and even postponing the annual meeting. Does it include both proposals in its proxy statement in the hope that both pass, presumably meaning that the company’s proposal (binding) will trump the shareholder proposal (precatory)? Investors are also in a quandary, as the degree of certainty that generally results from the no-action process won’t be present, and different companies may decide to tackle the problem differently (and the investors will not know until the company’s proxy statement is final or close to it). And pity the poor run-of-the-mill shareholders, who may find themselves reading a proxy statement that has two similar but not identical proposals and has to figure out what to do. All in all, it’s kind of a mess.
I would, however, offer a limited ray of sunshine (hence the reference to chicken salad). Whatever you think of Chair White’s directive, it’s clear (and has been clear for a long, long time) that the shareholder proposal rules are desperately in need of updating. The submission and re-submission thresholds are outdated, and any number of grounds for exclusion (including this one and the “ordinary business” exclusion, among others) take up tons of SEC Staff time each year that arguably should be used for more productive purposes. However, the entire area is so fraught with politics that the SEC has understandably stayed away from it.
Given that background, I offer a modest proposal: Chair White’s directive should be extended to the shareholder proposal rules in their entirety. We would likely end up with a still-imperfect system, but wouldn’t some improvement be better than none?