In Proctor & Gamble Co., 2016 BL 271869, (Aug. 16, 2016), Procter & Gamble Co. (“P&G”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by NorthStar Asset Management, Inc. Funded Pension Plan (the “Shareholders”) requesting a report on the risks and costs to P&G caused by “enacted or proposed state policies supporting discrimination against LGBT people”, and strategies to protect its LGBT employees. The SEC declined to issue the requested no action letter, concluding P&G could not exclude the proposal under Rule 14a-8(i)(3) and Rule 14a-8(i)(7).
Shareholders submitted a proposal providing that:
RESOLVED, shareholders request that P&G issue a public report by April 1, 2017, detailing the known and potential risks and costs to P&G caused by any enacted or proposed state policies supporting discrimination against LGBT people, and detailing strategies above and beyond litigation or legal compliance that P&G may deploy to defend its LGBT employees and their families against discrimination and harassment that is encouraged or enabled by these policies.
P&G sought to exclude the proposal under subsections (i)(3) and (i)(7) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to insert a proposal in an issuer’s proxy statement. 17 CFR 240.14a-8. The shareholder, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.
Rule 14a-8(i)(3) permits the exclusion of proposals that are contrary to any of the SEC’s proxy rules or regulations. The subsection applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. This subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.
Additionally, Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company’s “ordinary business operations”, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight. For a more detailed discussion of this exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7) and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure.
P&G argued the proposal should be excluded under subsection (i)(7) because the scope of the proposal extended into ordinary business matters. While it acknowledged the proposal involved discrimination concerns, P& G argued the proposal also encompassed matters fundamental to its day-to-day business. Specifically, P&G asserted the proposal and its supporting statement relates to hiring and workplace practices, litigation risks, and location of operations, all of which are ordinary business matters.
The Shareholders disagreed and contended the proposal addressed a significant policy issue – LGBT discrimination policies. They argued the proposal did not attempt to “micro-manage” P&G operations by prescribing specific actions, but only sought reporting and analyses on relevant issues. The Shareholder further argued state LGBT discrimination policies have a clear nexus to P&G because it has operations in states with discriminatory laws.
P&G also argued the proposal should be excludable under subsection (i)(3) because the language of the proposal was ambiguous and vague. Specifically, the proposal did not define or explain exactly which policies P&G must consider. P&G questioned whether the proposal meant P&G to report on policies that form an “outright attack” on the LGBT community, or those policies that may not directly address LGBT rights, but could conceivably lead to policies that impact these rights in the future.
In response, the Shareholders argued the proposal was neither vague nor indefinite. They contended the inclusion of bills that may impact future LGBT rights in the proposal presented no problematic ambiguity in the scope of the report. The Shareholders also argued the proposal language clearly calls for disclosure of the impact of both proposed and enacted policies.
The SEC agreed with Shareholders that the proposal was not excludable under either subsection (i)(3) or (i)(7). The SEC noted the proposal was not “so inherently vague or indefinite” that P&G would not be able to determine what actions it must take to implement the proposal. In addition, the SEC noted the proposal did not relate to the company’s ordinary business operations under (i)(7).
The primary materials for this post can be found on the SEC Website.