SEC Gets Off the Sidelines - Publishes Guidance on Shareholder Proposal Exclusions

Yesterday, just in time for the start of the proxy season, the Securities and Exchange Commission published its eagerly-awaited guidance on two shareholder proposal exclusions – Rule 14a-8(i)(9) (“directly conflicts” exclusion) and Rule 14a-8(i)(7) (“ordinary business operations” exclusion).  Both exclusions have been under review and the subject of much debate over the past year.  The guidance significantly narrows the scope of 14a-8(i)(9) and reaffirms the Staff’s interpretation of 14a-8(i)(7).  Staff Legal Bulletin No. 14H (“SLB 14H”) can be found here.

Rule 14a-8(i)(9) – Permits exclusion of a shareholder proposal that "directly conflicts" with a management proposal

In January 2015, following questions about the Staff’s interpretation of 14a-8(i)(9) in the Whole Foods no-action letter, Chair White directed the Division of Corporation Finance to review the scope and application of the exclusion. Shortly thereafter, the Staff announced that they would express no view on no-action requests relying on 14a-8(i)(9) during the 2015 proxy season.  This created significant frustration and uncertainly for a number of companies.  Although companies may be relieved that the Staff is no longer sitting on the sidelines with respect to 14a-8(i)(9) no-action requests, the Staff’s new requirements will be difficult to satisfy. Therefore, we expect far fewer shareholder proposals will be excluded on this basis.  

Under the Staff’s prior interpretation, as expressed in numerous no-action letters, a shareholder proposal could be excluded if the shareholder proposal and the management proposal presented “alternative and conflicting decisions for the shareholders” which might have “inconsistent and ambiguous results.”  

Under the new and much more strict interpretation announced in SLB 14H, the Staff believes “that any assessment of whether a proposal is excludable under this basis should focus on whether there is a direct conflict between the management and shareholder proposals.  For this purpose, we believe that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal.” (emphasis added)  In other words, the new test becomes: are the shareholder proposal and the management proposal “mutually exclusive”?

Staff’s Examples of Proposals Which Conflict and May Be Excluded

Staff’s Examples of Proposals Which Do Not Conflict and May Not Be Excluded

Under the Staff’s more strict interpretation in SLB 14H, we expect fewer shareholder proposals will be able to be omitted under 14a-8(i)(9).  As a result, in the event that both of the shareholder and management proposals are approved, the board of directors will be required to determine how, or whether, to implement either or both proposals.  

Rule 14a-8(i)(7) – Permits exclusion of a shareholder proposal that relates to company’s "ordinary business operations"

Rule 14a-8(i)(7) allows a company to exclude proposals relating to a company’s ordinary business operations. However, the Staff has recognized a “significant social policy” exception to the exclusion “in those cases in which a proposal's underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote.”

In light of the opinion in Trinity Wall Street v. Wal-Mart Stores, Inc. by the U.S. Court of Appeals for the Third Circuit, the Staff reaffirmed its prior interpretation of 14a-8(i)(7). The Staff’s interpretation differs from the new, two-part, “significant social policy” test outlined in the majority opinion in Trinity.  The two-part test in Trinity asks first if the proposal focuses on a significant policy and if so, whether the significant policy issue transcends the company’s ordinary business operations.  Most significantly, the Third Court’s majority opinion noted that the Court believed that the SEC used the term “transcend” “to refer to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.”  Therefore, if a proposal related to the “nitty-gritty” of the company’s business, it could never pass the two-part test.

The Staff disagreed with this interpretation and noted in SLB 14H that the concurring judge in Trinity endorsed the Staff’s interpretation of Rule 14a-8(i)(7).  The Staff does not view the issues of “significance” and “transcendence” independently, and does not agree that a proposal must be divorced from a company’s business in order to “transcend the day-to-day business matters.”  The Staff noted in SLB 14H that “a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business’.”  

It is worth noting that the majority opinion in Trinity suggested that the SEC issue new interpretive guidance on 14a-8(i)(7).  In fact, the Staff (i) rejected the articulation of the social policy exception in Trinity, (ii) stated that it will continue to apply 14a-8(i)(7), in a manner consistent with their past practice, and (iii) provided no fresh interpretive guidance regarding 14a-8(i)(7) in SLB 14H.