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Wednesday
Nov162016

No-Action Letter for Cardinal Health, Inc. Allowed Exclusion of Proxy Access Bylaw Proposal

In Cardinal Health Inc., 2016 BL 239828 (July 20, 2016), Cardinal Health (“Cardinal”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Kenneth Steiner (“Shareholder”) requesting adoption of a “proxy access” bylaw requiring the company, in certain circumstances, to include in its proxy materials the name and certain information regarding candidates nominated by shareholders owning at least 3% of the outstanding shares.  The SEC agreed to issue a no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(10). 

Shareholder submitted a proposal providing that:          

RESOLVED, shareholders request the board of directors to adopt, and present for shareholder approval, a “proxy access” bylaw as follows:

Require Cardinal to include in the proxy materials prepared for shareholder meetings at which directors are to be elected, Disclosure and Statement (as defined herein) of any person nominated for election to the board by a shareholder or an unrestricted number of shareholders forming a group (“Nominator”) that meets criteria established below.

The number of shareholder-nominated candidates appearing in the proxy materials should not exceed one quarter of the directors then serving or two, whichever is greater. This bylaw should supplement existing rights under Cardinal’s bylaws, providing that a Nominator must has beneficially owned 3% or more of Cardinal’s outstanding stock continuously for a least three years, and give Cardinal written notice of the information required by the bylaws and SEC rules about the nominee, and the nominator (“Disclosure”). The Nominator may submit with the Disclosure a statement not exceeding 500 words in support of the nominee (“Statement”). 

Cardinal sought exclusion under subsection (i)(10). 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. The University of Denver has published an entire issue on the various requirements of Rule 14a-8.  See  The Shareholder Proposal Rule and the SEC (2016).

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy materials if the company has substantially implemented the proposal. The SEC has depended on "particular policies, practices, and procedures [that] compare favorably with the guidelines of a proposal" to determine "substantially implemented." For a thorough discussion of the evolution of the exclusion, see Aren Sharifi, Rule 14a-8(i)(10): How Substantial is "Substantially" Implemented in the Context of Social Policy Proposals?, 93 DU Online L. Rev. 301 (2016).  

Cardinal argued the proposal should be excluded under Rule 14a-8(i)(10) because the board had adopted a proxy access bylaw that addressed the proposal’s essential objective. Unlike the shareholder proposal, the Company limited the number of shareholders that could collectively submit a proposal to 20.  In addition, the Company’s version allowed for the nomination of not more than 20% of the board (compared with 25% in the shareholder proposal).  Cardinal further argued its no-action request should be granted because the proposal does not raise any novel issues.

The SEC agreed and concluded it would not recommend enforcement action if Cardinal omitted the proposal from the proxy materials in reliance on Rule 14a-8(i)(10). The staff noted that Cardinal’s Board had already “adopted a proxy access bylaw that addresses the proposal’s essential objective.” 

The primary materials for this no action letter can be found on the SEC Website.

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