On October 22, 2015, the Division of Corporation Finance (the “Division”) from the Registration (SEC) issued clarifying guidance upending previous interpretations concerning the exclusion of conflicting shareholder proposals and shedding light around the Division’s views from the ordinary business operations grounds for excluding shareholder proposals as a direct consequence from the Trinity Wall Street v. Wal-Mart Stores, Corporation. (“Wal-Mart”) decision. Staff Legal Bulletin No. 14H (“SLB 14H”) narrows the scope from the Division’s interpretation of Rule 14a-8(i)(9), restricting this grounds for exclusion of shareholder proposals to direct conflicts between your proposal along with a management proposal. The Division in SLB 14H also addressed the scope from the Rule 14a-8(i)(7) grounds for exclusion of shareholder proposals, saying yes with viewing concurring opinion in Wal-Mart that the proposal that pertains to their ordinary business operations still might not be excludable when the proposal concentrates on a substantial policy issue.
Conflicting Shareholder Proposals
Rule 14a-8(i)(9) enables a business to exclude a shareholder proposal posted pursuant to Rule 14a-8 from the proxy statement when the proposal “directly conflicts and among their own proposals to become posted to shareholders in the same meeting.” In past responses to demands without-action relief, the Division had mentioned that the shareholder proposal was excludable if including it, plus a management proposal, could present “alternative and conflicting decisions for that shareholders” and may create the opportunity of “inconsistent and ambiguous results.” This method to Rule 14a-8(i)(9) is visible clearly within the Division’s questionable grant of no-action relief to Whole-foods Market, Corporation. (“Whole Foods”) in December 2014 (the “Whole Foods Letter”). Within the Whole-foods Letter, the Division agreed that Whole-foods could exclude a shareholder proposal seeking a proxy access bylaw, because management had also posted a proxy access proposal, although the management proposal would impose stricter possession needs for shareholder nominations compared to shareholder proposal. The shareholder proposal might have permitted a shareholder or number of shareholders that with each other have held 3 % or a lot of company’s shares for 3 many years to include director nominees within the company’s proxy statement, whereas the entire Foods management proposal might have permitted a shareholder (although not several shareholders) which has held 9 % or a lot of company’s shares for 5 years to incorporate director nominees within the proxy statement.
Following a uproar brought on by the entire Foods Letter, SEC Chair Mary Jo White-colored directed the Division to examine its interpretation of Rule 14a-8(i)(9), and also the grant of no-action relief supplied by the entire Foods Letter was withdrawn. The Division’s review led to the revised interpretation present in SLB 14H. Underneath the new interpretive approach described in SLB 14H, the Division will concur within the exclusion of shareholder proposals pursuant to Rule 14a-8(i)(9) only when an immediate conflict exists between your shareholder proposal and also the management proposal so that an acceptable shareholder couldn’t logically election in support of both proposals. For instance, an immediate conflict would exist from a shareholder proposal choosing the separation from the company’s chairman and Chief executive officer along with a management proposal seeking approval of the bylaw provision requiring the Chief executive officer is the chairman whatsoever occasions. However, proxy access proposals posted by a shareholder and management wouldn’t present an immediate conflict exclusively since the proposals contained differing share possession needs. The Division concludes that the shareholder could logically election for proxy access proposals, simply because they ask for the same general objective. Even though the company’s Board of Company directors (the “Board”) might have to think about the results of both proposals if both of them are went by shareholders, the Division mentioned that this type of decision through the Board doesn’t create the kind of “direct conflict” Rule 14a-8(i)(9) was meant to address.
Ordinary Business Operations Grounds for Exclusion
Rule 14a-8(i)(7) enables a business to exclude a shareholder proposal posted pursuant to Rule 14a-8 from the proxy statement when the proposal “deals having a matter concerning the company’s ordinary business operations.” The Division issued clarifying assistance with this grounds for exclusion in SLB 14H because of the next Circuit’s This summer 2015 decision in Wal-Mart. For the reason that situation, the Division had formerly granted no-action relief to Wal-Mart Stores, Corporation. (“Wal-Mart”), concurring within the exclusion of the proposal associated with Wal-Mart’s ordinary business operations and also the shareholder proponent sued to want the organization to incorporate the proposal in the proxy statement. The proposal searched for oversight and reporting by Wal-Mart to pay for policies and standards that might be relevant to figuring out whether the organization should sell guns outfitted rich in-capacity magazines. The U.S. District Court for that District of Delaware concluded, inter alia, that, even though the proposal could change up the core of Wal-Mart’s business-decisions regarding which products to market-the proposal wasn’t excludable since it centered on sufficiently significant social policy problems that transcend day-to-day business matters.
The Next Circuit reversed the district court’s ruling, using the majority opinion concluding the proposal was excludable, since the proposal’s subject material intruded on Wal-Mart’s making decisions concerning the products it sells, and also the social policy issues elevated through the proposal’s subject material don’t transcend their ordinary business operations. Most opinion establishes a 2-part test for that significant policy exception to Rule 14a-8(i)(7), asking first if the proposal concentrates on a substantial policy issue and 2nd, when the proposal does concentrate on a substantial policy issue, asking if the significant policy issue transcends their ordinary business operations.
The Division in SLB 14H rejects the majority’s two-part test, stating that it’s sporadic using the SEC’s statements around the ordinary business operations exclusion and past Division guidance. The Division rather concurs using the views expressed within the concurring opinion in Wal-Mart that whether an offer concentrates on a problem of social policy that’s sufficiently significant isn’t separate and dissimilar to if the proposal transcends a company’s ordinary business, but instead, the importance and transcendence concepts are interrelated. Based on the concurring opinion, to transcend ordinary business, an offer could connect with their ordinary business as lengthy because it concentrates on an insurance policy issue that, in certain “transcendent” way, overcomes ordinary business in importance. The Division concludes that the proposal may transcend a company’s ordinary business operations even though the functional policy issues elevated through the proposal connect with the main from the company’s business. If your proposal concentrates on a substantial policy issue, the Division will conclude it transcends a company’s ordinary business operations and isn’t excludable under Rule 14a-8(i)(7).
SLB 14H likely have a significant effect on how companies react to shareholder proposals within this proxy season, because the guidance causes it to be a lot more hard to exclude an offer under Rule 14a-8(i)(9), and firms face ongoing uncertainty regarding Rule 14a-8(i)(7), because the Division within the no-action process seems to possess broad discretion to find out which policy issues are significant and whether an offer that implicates a company’s ordinary business operations concentrates on a substantial policy issue.