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Wednesday
Feb082017

No-Action Letter for Microsoft, Corp. Prevents Exclusion of Proxy Access Bylaw Proposal

In Microsoft, Corp., 2016 BL 320577 (Sept. 27, 2016), Microsoft Corporation (“Microsoft”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by shareholder James McRitchie ("McRitchie") requesting that the board of directors amend certain provisions of its proxy access bylaw. The SEC denied the request for no-action relief, concluding that Microsoft may not exclude McRitchie’s proposal from its annual proxy statement under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing:

RESOLVED, Shareholders of Microsoft (the “Company”) asks the board of directors (the “Board”) to adopt, and present for shareholders approval, an enhancement package of its Proxy Access for Director Nominations bylaw, with essential elements for substantial implementation as follows:

1. The number of shareholder-nominated candidates eligible to appear in proxy materials should   not exceed one quarter of the directors then serving or two, whichever is greater. Expansion of the  current number of director positions could substantially dilute the influence of shareholders under the  Company’s current proxy access provisions.

2.     No limitations on the number of shareholders that can aggregate their shares to achieve the 3% “Required Shares,” outstanding shares of the Company entitled to vote in the election of directors.  Under current provisions, even if the 20 largest public pensions funds were able to aggregate their shares, they would not meet the 3% criteria at most of the companies examined by the Council of Institutional Investors.

3.     No limitation on the re-nomination of shareholder nominees based on the number or percentage of votes received in any election.  Such limitations do not facilitate the shareholders’ traditional state law rights and add unnecessary complexity.

4.     To the extent possible, the Board should defer decisions about the suitability of the shareholder nominees to the vote of the shareholders.

Microsoft sought exclusion of the proposal from its proxy materials under subsection (i)(10) 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 provides companies thirteen substantive grounds for exclusion of the proposal. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(10) allows the exclusion of a shareholder proposal that has s already substantially implemented by the company. Specifically, companies can exclude proposals relating to matters that have already been “favorably acted upon” by the company. The SEC staff considers whether a company can demonstrate that its actions address the “essential objective” of the proposal.  For a more detailed discussion of this exclusion, see Aren Sharifi, Rule 14a-8(i)(10):  How Substantial Is “Substantially” Implemented in the Context of the Social Policy Proposals?

Microsoft argued the proposal should be excluded under subsection (i)(10) because it substantially implemented the proposal. Specifically, in August 2015, the Board adopted amendments to Microsoft’s bylaws to implement a proxy access bylaw. Microsoft’s bylaw differed from the shareholder proposal in a number of respects. While applying a 3% threshold, the bylaw permitted aggregation by no more than 20 shareholders. The bylaw also prohibited shareholders relying on proxy access from re-nominating “the same proxy access candidate for two years if that candidate failed to receive at least 25% of the votes cast for his or her election as a director.” The bylaw limited the number of directors to the greater of two or 20% and did not provide for deference to the suitability of a shareholder nominee.  

A letter on behalf of the proponent by John Chevedden took particular issue with the limit on the number of shareholders allowed to aggregate their interests. He argued that a proposal specifying a range allowed the board to implement the proposal at the high end or to round down to the nearest whole number. In the shareholder access context, however, boards should not be entitled under Rule 14a-8(i)(10) to round an infinite number of shareholders forming a group down to 20. That is not substantial implementation. In a letter by the proponent, he noted that the limit on the ability to aggregate would result in the inability of “individuals and all but the largest institutional investors” to “meaningfully participate in making proxy access nominations, except in the rarest of circumstances.”

The Commission disagreed with Microsoft’s reasoning. The Commission concluded Microsoft may not omit the proposal from its annual proxy statement in reliance on Rule 14a-8(i)(10) because Microsoft’s proxy access bylaw did not substantially implement the proposal. The staff reasoned Microsoft’s proxy access bylaw did not “compare favorably with the guidelines of the proposal.”

The primary materials for this case may be found on the SEC website.

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