Recently, the US District Court for the Eastern District of Missouri granted a motion to exclude a shareholder proposal from a company's 2014 proxy materials, finding that misstatements in the supporting statement for the proposal were misleading and not in compliance with SEC rules and regulations. The company was permitted to exclude the shareholder proposal because the criteria for exclusion under Rules 14a-8(i)(3) and 14a-9 were met (Express Scripts Holding Co. v. Chevedden (No. 13–2520, (E.D. Mo. Feb. 18, 2014)).

The motion was brought by the petitioner, Express Scripts Holding Company, a Missouri corporation. On November 11, 2013, the respondent, John Chevedden, a shareholder in Express Scripts, had submitted a proposal to Express Scripts seeking adoption of a policy requiring the chairman to be independent of company management. Chevedden also submitted a statement in support of the proposal. On receipt of the proposal, Express Scripts sent Chevedden a deficiency letter notifying him that certain information in the supporting statement was false and misleading and asking him to correct the factual inaccuracies in his statement.

The petitioner and the respondent engaged in several rounds of correspondence, including the company's reference to its prior SEC filings for accurate descriptions of the information that Chevedden had cited and further requests for Chevedden to correct his statement. However, no updated proposal was received by the petitioner by the November 28th deadline for submitting shareholder proposals. The petitioner extended the deadline for Chevedden to submit a revised proposal to December 17, 2013. At no time did Chevedden indicate that he was withdrawing the original proposal.

The petitioner did not seek no-action relief from the SEC's Division of Corporation Finance. Instead, on December 18, 2013, Express Scripts notified the Division of Corporation Finance of its intent to exclude Chevedden's proposal from its 2014 proxy materials and filed the instant action:

On December 30, 2013, Chevedden sent an updated supporting statement for his proposal.

Section 14(a) of the Exchange Act makes it unlawful to solicit proxies in violation of the SEC's rules and regulations. Rule 14a-8(a) requires a company to include a shareholder's proposal in the company's proxy statement. However, under Rule 14a-8(i)(3), a company may exclude a shareholder proposal if the proposal or its supporting statement is contrary to any of the SEC's proxy rules. At issue in the case was Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials, thereby ensuring that the contents of the proxy statement reflect accurately all the issues that would properly arise at the annual meeting. The Court noted that the SEC has explicitly stated that "[o]nly a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials."

The general standard of materiality contemplates a showing of substantial likelihood that under all the circumstances, a reasonable shareholder would consider the omitted facts or misstatements of fact important in deciding how to vote. The Court evaluated whether Express Scripts was entitled to exclude Chevedden's proposal under Rule 14a-8 because it contains untrue statements of material fact.

The Court accepted Express Scripts' demonstration, using its SEC filings, that Chevedden's supporting statement included misstatements. The Court held that, "when viewed in the context of soliciting votes in favor of a proposed corporate governance measure, statements in the proxy materials regarding the company's existing corporate governance practices are important to the stockholder's decision whether to vote in favor of the proposed measure." On this basis, the Court found Chevedden's misstatements to be material and not in compliance with SEC rules and regulations. Accordingly, the Court determined that the criteria for exclusion under SEC Rules 14a-8(i)(3) and 14a-9 had been met.

Furthermore, the Court held that the only proposal properly before the Court was the original November 11, 2013 proposal, citing SEC Staff Legal Bulletin No. 14F at D.2 ("[i]f a shareholder submits revisions to a proposal after the deadline for receiving proposals under Rule 14a-8(e), the company is not required to accept the revisions."). However, the Court noted that even if Chevedden's revised proposal were considered timely, it still included substantial misstatements that would have permitted Express Scripts to exclude the revised proposal under Rules 14a-8 and 14a-9.

The Express Scripts v. Chevedden decision is notable as the Court made a substantive determination concerning the materiality of supporting statements for shareholder proposals. The SEC's Division of Corporation Finance has not always granted no-action relief to companies trying to exclude shareholder proposals (particularly proposals by the same proponent) on the same substantive basis. While the process of seeking relief through court action may be more costly, the ability to obtain a more favorable result may be of some appeal to companies.