« The Fifth Circuit Court of Appeals Dismisses Sessa Capital’s Injunction Appeal as Moot | Main | No-Action Letter for Walgreens Boots Alliance, Inc. Allowed Exclusion of Report Assessing the Risks of Continued Tobacco Sales »
Wednesday
Aug232017

No-Action Letter for Apple, Inc. Denied Exclusion of Request for Apple to Retain Additional Compensation Consultants

In Apple Inc., 2016 BL 360609 (Oct. 26, 2016), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Jing Zhao (“Shareholder”) requesting that Apple retain additional independent compensation consultants to reform its executive compensation policies. The SEC declined to issue a no action letter, concluding Apple could not exclude the proposal under Rules 14a-8(i)(3), 14a-8(i)(6), or 14a-8(i)(7).

Shareholder submitted a proposal providing that:

RESOLVED, shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.

Apple sought exclusion under subsections (i)(3), (i)(6), or (i)(7) of Rule 14a-8.

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. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC (2016).

Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to any of the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it.

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if the proposal relates to the company’s “ordinary business operations.” This section understands that certain tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The staff considers “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

Apple argued for exclusion under Rule 14a-8(i)(3) because the proposal failed to define “Outside Independent Experts,” “Resources,” and “General Public.” Absent definitions, these terms subjected the proposal to multiple interpretations regarding the manner of implementation.  Apple also asserted that the proposal was ambiguous to whom it applied – the company or the board of directors.

Apple also sought exclusion under Rule 14a-8(i)(6) because the company lacked the power to implement the proposal. Specifically, the implementation would cause the company to violate SEC rules relating to compensation committees, as well as the listing standards of the NASDAQ stock market, the principal exchange for Apple’s shares.

Apple further argued for exclusion under Rule 14a-8(i)(7) because the proposal urged the company to change the process for making compensation decisions.  Therefore, the proposal sought to mandate a hiring decision, which the staff consistently allowed exclusion of under subsection (i)(7).

In response, Shareholder argued that the key terms were defined or commonly used words.  Moreover, any lack of specific definitions gave the company flexibility in implementing the proposal. In addition, Shareholder argued the company had the power and authority to implement the proposal without violating applicable laws and rules. Finally, Shareholder urged the proposal dealing with compensation policies was not related to the company’s hiring decisions, and thus was not an ordinary business matter.

The SEC disagreed with Apple’s arguments, and concluded Apple may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(3), (i)(6), or (i)(7). The staff noted the proposal was not “so inherently vague or indefinite” that the shareholders or the company would not be able to determine exactly what actions or measures the proposal requires. In addition, the staff did not agree with Apple that the company lacked the power or authority to implement the proposal. While the proposal focused on senior executive compensation, the staff determined it could not be excluded as ordinary business matters.

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

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
All HTML will be escaped. Hyperlinks will be created for URLs automatically.