No-Action Letter Granted for Apple Allowing Exclusion of Proposal Connecting Sustainability and Diversity Metrics with Executive Compensation 
Friday, February 16, 2018 at 05:47PM
Rachel Neumann

In Apple Inc., 2017 BL 452782 (Dec. 15, 2017), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Zevin Asset Management, LLC, on behalf of Eli Plenk (“Shareholders”) that would integrate sustainability and diversity metrics with the performance measures of Apple’s executive compensation plans. The SEC issued the requested no action letter allowing for the exclusion of the proposal from Apple’s proxy statement under Rule 14a-8(i)(12)(ii).

Shareholders submitted a proposal providing that:

RESOLVED, Shareholders request the Board Compensation Committee prepare a report assessing the  feasibility of integrating sustainability metrics, including metrics regarding diversity among senior  executives, into the performance measures of the CEO under the Company’s compensation incentive  plans. For the purposes of this proposal, “sustainability” is defined as how environmental and social  considerations, and related financial impacts, are integrated into long-term corporate strategy, and  “diversity” refers to gender, racial, and ethnic diversity. 

Apple argued the proposal may be excluded from the company’s proxy materials under subsections (i)(12)(ii) and (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 and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(12)(ii) permits a company to omit a shareholder proposal from its proxy materials if it deals with "substantially the same subject matter as another proposal or proposals that has or have been previously included in the company's proxy materials within the preceding 5 calendar years" and the most recent proposal received "[l]ess than 6% of the vote on its last submission to shareholders if proposed twice within the preceding 5 calendar years."

Additionally, Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company’s ordinary business operations, which are interpreted to mean the issues that are fundamental to a company’s management abilities on a daily basis and would thus be impracticable for shareholder oversight. For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Online L. Rev. 263 (2016).

With regard to (i)(12)(ii), Apple argued the proposal’s characterization of diversity at the executive level as a “sustainability issue” was simply a repackaging of prior proposals by the same Shareholders that aimed to “influence [Apple’s] diversity policy.” Apple asserted the inclusion of a proposal substantially similar to a failed prior proposal would enable Shareholders to “skirt” the 8(i)(12) exclusion. Apple’s second basis for exclusion, (i)(7), was that the sustainability objectives at the center of Shareholders’ proposal “merely ask the company to do what it already does every day” and thus fit plainly in the definition of Apple’s ordinary business operations.

In response to Apple’s argument that the proposal violated the (i)(12) rule, Shareholders responded that Apple failed to demonstrate the proposal was anything other than an inquiry into the feasibility of linking sustainability metrics to executive compensation. Shareholders also disagreed that (i)(7) permitted exclusion, arguing that the Apple Board’s assessment of the Company’s sustainability objectives was inadequate. They added that Apple failed to prove the proposal was not a significant policy matter that would have warranted presentation to the company’s shareholders.

Ultimately, the SEC agreed with Apple, concluding it would not recommend enforcement action if Apple omitted the proposal from its proxy materials. The SEC justified this determination under Rule 14a-8(i)(12)(ii), and did not address Apple’s other arguments under Rule 14a-8(i)(7).

The primary materials for the post can be found on the SEC Website.

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