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SEC's Division of Corporation Finance Issues Staff Legal Bulletin on Shareholder Proposals
Practical Law Legal Update w-000-7097 (Approx. 4 pages)
SEC's Division of Corporation Finance Issues Staff Legal Bulletin on Shareholder Proposals
by Practical Law Corporate & Securities
| Published on 22 Oct 2015 • USA (National/Federal) |
The SEC's Division of Corporation Finance issued Staff Legal Bulletin No. 14H to provide further guidance on shareholder proposal issues arising under Exchange Act Rule 14a-8.
On October 22, 2015, the SEC's Division of Corporation Finance issued Staff Legal Bulletin No. 14H providing guidance on shareholder proposals under Rule 14a-8 under the Exchange Act. The bulletin addresses:
- The scope and application of Rule 14a-8(i)(9), following SEC Chair Mary Jo White's January 2015 request that the SEC staff review the rule.
- The scope and application of Rule 14a-8(i)(7), in light of the US Court of Appeals for the Third Circuit's ruling in Trinity Wall Street v. Wal-Mart Stores, Inc.
For more on shareholder proposals, see Practice Note, How to Handle Shareholder Proposals.
Rule 14a-8(i)(9)
Rule 14a-8(i)(9) allows companies to exclude from their proxy materials shareholder proposals that directly conflict with management proposals. In January 2015, SEC Chair Mary Jo White announced that she had directed the SEC staff to conduct a review of Rule 14a-8(i)(9) due to questions that had arisen about its proper scope and application (see Legal Update, SEC Division of Corporation Finance Suspends No-action Relief This Proxy Season on Conflicting Shareholder Proposals). The guidance on 14a-8(i)(9) comes as a result of the SEC staff's review.
The guidance indicates that the SEC staff will consider two proposals to be in direct conflict if a reasonable shareholder could not logically vote in favor of both proposals. The guidance provides the following examples of proposals that would directly conflict with each other:
- Where a company seeks shareholder approval of a merger, and a shareholder proposal asks shareholders to vote against the merger.
- Where a shareholder proposal asks for the separation of the company's chairman and CEO, and a management proposal seeks approval of a by-law provision requiring the CEO to be the chairman at all times.
The SEC staff will not, however, view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both. The guidance provides the following examples of proposals that would not directly conflict with each other:
- Where a shareholder proposal would permit a shareholder or group of shareholders holding at least 3% of the company's outstanding stock for at least three years to nominate up to 20% of the directors, and a management proposal would allow shareholders holding at least 5% of the company’s stock for at least five years to nominate for inclusion in the company's proxy statement 10% of the directors. These proposals would not conflict because:
- they both seek a similar objective (to give shareholders the ability to include their nominees for director in the proxy statement); and
- they do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals.
- Where a shareholder proposal asks the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting, and a management proposal would approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards. These proposals would not conflict because a reasonable shareholder could logically vote for both:
- a compensation plan that gives the compensation committee the discretion to determine the vesting of awards; and
- a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.
Rule 14a-8(i)(7)
Rule 14a-8(i)(7) allows companies to exclude from their proxy materials shareholder proposals that deal with matters relating to the company's ordinary business operations. In April 2015, the US Court of Appeals for the Third Circuit reversed the US District Court for the District of Delaware's November 2014 ruling in Trinity Wall St. v. Wal-Mart Stores, Inc. The District Court had ruled that a shareholder proposal by Trinity Wall Street was improperly excluded from Wal-Mart Stores, Inc.'s proxy materials for its 2014 annual shareholders meeting (for more information, see Legal Updates, Trinity v. Wal-Mart: Third Circuit Reverses District Court, Permits Wal-Mart to Exclude Shareholder Proposal under Rule 14a-8 and Trinity v. Wal-Mart: District Court Rules Shareholder Proposal Improperly Excluded under Rule 14a-8).
The guidance indicates that the SEC staff will continue to apply the significant policy exception to Rule 14a-8(i)(7) as it has done in the past and as endorsed by the concurring judge in the Third Circuit's decision. The SEC staff will not follow the new two-part test set out in the majority opinion of the Third Circuit because it believes the test may lead to the unwarranted exclusion of shareholder proposals.
As before, proposals focusing on a significant policy issue will not be excludable under the ordinary business exception to Rule 14a-8(i)(7) because they transcend the day-to-day business matters and raise policy issues so significant that a shareholder vote would be appropriate.