The SEC has issued its much-anticipated Staff Legal Bulletin on two rules impacting shareholder proposals. You can find the SLB here. The SLB looks a bit more benign than some had feared; in other words, it’s got some bad news, but the good news is that it’s not as bad as some feared.
The SLB deals with two areas of SEC Rule 14a-8 – the Rule governing shareholder proposals. The first area relates to Rule 14a-8(i)(9), which addresses what happens when a shareholder proposal “directly conflicts” with a company proposal. This issue reared its head during the 2015 proxy season, when the SEC withdrew a no-action letter it had granted to Whole Foods permitting it to exclude a shareholder proposal on proxy access and, at the direction of SEC Chair White, declared a moratorium on issuing no-action letters under Rule 14a-8(i)(9).
The SLB takes a narrow view of “directly conflict”. Basically, if a “reasonable” shareholder could “logically” vote for both proposals, even though they differ in some respects, they will not “directly conflict”. In other words, the shareholder proposal will be excludable only if “a vote for one proposal is tantamount to a vote against the other proposal”. For example, if a company proposed a proxy access by-law with a 5% ownership threshold and a shareholder proposed one with a 3% ownership threshold, they would not “directly conflict.”
That’s the bad news. The good news is that the SEC did not go as far as some advocated. For example, there was concern within the issuer community that the SLB would require companies to have taken the “directly conflicting” action before the shareholder proposal is submitted, or would determine that a precatory shareholder proposal could never “directly conflict” with a company proposal that was binding. The SEC has not gone that far.
Rule 14a-8(i)(7) – Ordinary Business
The SLB also addresses Rule 14a-8(i)(7), which permits the exclusion of a shareholder proposal if it deals with the company’s “ordinary business operations”. At issue was a shareholder proposal submitted to Wal-Mart that sought to prohibit the sale of certain products (in this case, firearms), albeit by the circuitous route of amending the charter of Wal-Mart’s Compensation, Nominating and Governance Committee to give the Committee authority to specifically oversee the matter. After Wal-Mart was granted no-action relief to exclude the proposal on the grounds that decisions as to the products to be sold constitutes “ordinary business,” the proponent appealed to the U.S. District Court for the District of Delaware, which found that the proposal transcended “ordinary business.” Wal-Mart appealed to the Third Circuit Court of Appeals, which reversed the District Court but which generated majority and concurring opinions that used different approaches to arrive at the same place.
The majority opinion applied a two-prong test to reach its conclusion; simply stated, the first prong is whether the subject matter is ordinary business, and the second is whether the proposal raises a significant social issue and separately transcends day-to-day business matters. The concurring opinion reasons that the only question is whether the proposal transcends such matters.
The SLB recites the history of the exclusion, noting that its approach has been that of the concurring opinion, and states that it will continue to follow that approach.