On January 16, 2015, the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) announced that, in light of a directive from SEC Chair Mary Jo White, it will express “no views” on the application of Rule 14a-8(i)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the current proxy season.
Under the Exchange Act rules, shareholders are permitted to submit to issuers for inclusion in an issuer’s proxy statement proposals to be voted on by shareholders at the issuer’s special or annual meeting. If an issuer intends to exclude a shareholder’s proposal from its proxy materials, it must notify the SEC of its intention and its basis for doing so. One such basis for exclusion, Rule 14a-8(i)(9), permits an issuer to exclude from its proxy statement shareholder proposals that directly conflict with one of the issuer’s own proposals to be submitted to shareholders at the same meeting.
During the current proxy season issuers have sought to exclude under Rule 14a-8(i)(9) shareholder proposals seeking to require an issuer to include shareholder-nominated directors on the issuer’s proxy card alongside the issuer’s director nominees, more commonly known as “proxy access,” on the basis that such shareholder-submitted proxy access proposals would conflict with the issuer’s own (often more restrictive) proxy access proposal.
One such issuer, Whole Foods Market, Inc., sought and received no-action relief from the SEC relating to the exclusion of a shareholder-submitted proposal to provide proxy access to groups of shareholders owning 3% of the outstanding shares for three years. Specifically, Whole Foods sought such relief on the basis that the shareholder’s proxy access proposal would conflict with Whole Foods’ proposal to provide proxy access to a single shareholder owning 9% of the company’s shares for five years. Despite the differences between the ownership thresholds, group and holding periods, the SEC initially agreed with Whole Foods and granted Whole Foods no-action relief, which appears to have encouraged at least 18 other public companies to seek the same relief using similarly restrictive proxy access proposals.
Facing an outcry from many investors and corporate governance advocates upset that the SEC had granted no-action relief despite the obvious differences between the proposals, Chair White directed the SEC’s staff to review and report on Rule 14a-8(i)(9) “due to questions that have arisen about the proper scope and application of [such rule].” The SEC also withdrew its no-action relief in the Whole Foods matter and informed the shareholder proponent that the Division of Corporation Finance now expresses no view concerning whether Whole Foods may exclude the proposal from its proxy materials.
The SEC’s current “no views” policy extends to all proposals that issuers may have sought to exclude based on the Rule 14a-8(i)(9) exemption; it is not limited to proxy access proposals. As a result, issuers seeking relief from the SEC to exclude, for example, a competing benefit plan proposal from a shareholder proponent will not be able to obtain no-action relief from the SEC under Rule 14a-8(i)(9) this proxy season. This does not mean that issuers cannot attempt to rely on the Rule 14a-8(i)(9) exemption. Rather, issuers now do so at their own heightened risk since they will not be able to obtain comfort that the SEC will not pursue an enforcement action against them if they were to exclude a proposal pursuant to Rule 14a-8(i)(9). This new exposure to enforcement action is in addition to the issuer’s traditional risk that the shareholder whose proposal is excluded might challenge the exclusion in court. It remains to be seen if the SEC’s revised position will result in greater accommodations from issuers for shareholder-submitted proposals. Issuers and their directors should consider whether the overly-aggressive use of the Rule 14a-8(i)(9) exemption may focus unwanted investor attention on them.