No-Action Letter for BlackRock, Inc. Did Not Permit Exclusion of Executive Compensation Proxy Voting Practices Proposal
In BlackRock, Inc., SEC No-Action Letter, 2016 BL 110890 (Apr. 6, 2016), the Commission staff (the “Staff”) declined to issue BlackRock, Inc. (“BlackRock”) the requested no action letter to exclude the proposal submitted by the Stephen M Silberstein Revocable Trust (“Proponent”). Proponent’s proposal requested that BlackRock’s Board of Directors issue a report evaluating the options for bringing the investment management company’s proxy voting practices regarding “say on pay” in line with its stated principle of linking executive compensation and performance. The Staff did not concur with BlackRock’s view that it could exclude the proposal under Rule 14a-8(i)(3). Further, the Staff did not concur with BlackRock’s view that it could exclude the proposal under Rule 14a-8(i)(7).
Proponent’s proposal requested that the Board issue a report including adopted changes to BlackRock’s proxy voting guidelines. Specifically, the proposal requested that:
the Board of Directors issue a report to shareholders by December 2016, at reasonable cost and omitting proprietary information, which evaluates options for bringing its voting practices in line with its stated principle of linking executive compensation and performance, including adopting changes to proxy voting guidelines, adopting best practices of other asset managers and independent rating agencies, and including a broader range of research sources and principles for interpreting compensation data. Such report should assess whether and how the proposed changes would advance the interests of its clients and shareholders.
BlackRock sought exclusion of the proposal from its proxy materials under subsections (i)(3) and (i)(7).
Rule 14a-8 permits shareholders to include proposals in the company’s proxy statement. 17 C.F.R. § 240.14a-8. Shareholders, however, must meet certain procedural and ownership requirements. Additionally, the Rule contains thirteen substantive grounds for exclusion, which a company may rely on as grounds for excluding a shareholder proposal. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.
Under Rule 14a-8(i)(3), a shareholder proposal may be excluded if the proposal or supporting statement is contrary to any of the Commission’s proxy rules. This subsection applies to Rule 14a-9, which prohibits materially false or misleading statements in a company’s proxy materials. In addition, the subsection permits the exclusion of proposals that are vague and indefinite, rendering a company’s duties and obligations unclear.
Rule 14a-8(i)(7) permits the exclusion of a shareholder proposal that relates to a company’s “ordinary business” operations. Ordinary business refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. A proposal may not be excluded, however, when it addresses significant policy issues, such as executive compensation. To determine whether a proposal addresses significant policy issues, the Staff considers whether the proposal “would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” For additional explanation of these exclusions, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 Denv. L. Rev. Online 263 (2016), http://static1.1.sqspcdn.com/static/f/276323/26982504/1461117567937/Megan+Livingston_Ordinary+Business.pdf?token=YQG69tTsL1R5FBKzw3bxKKtYQcU%3D, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7), 93 Denv. L. Rev. Online 183 (2016), http://static1.1.sqspcdn.com/static/f/276323/26992100/1461618846850/Adrien+Anderson_14a-8_FINAL.pdf?token=xOn1y2jI0dR+jaX6hdye2VaLaZo=.
BlackRock argued the proposal was materially false and misleading in violation of Rule 14a-9 and should be excluded under subsection (i)(3). 17 C.F.R. § 240.14a-9. BlackRock asserted the proposal substantially mischaracterized BlackRock’s voting policies by using the term “will” instead of “may.” The Proponent responded by requesting that the Staff allow for revision to substitute the term “may” for “will” to prevent any potential that the language could mislead investors.
In addition, BlackRock argued the proposal should be excluded under subsection (i)(7) because it dealt with the company’s proxy voting policies and practices, delving into the company’s ordinary business matters. In particular, BlackRock argued it has already established a committee that determines voting guidelines. BlackRock also argued voting policies should not be subject to direct shareholder oversight. In response, the Proponent asserted that the proposal focused on senior executive compensation, which the Staff has regarded as a significant policy issue and, thus, fell under the policy exception to the ordinary business exclusion. BlackRock rejected this argument, claiming that the proposal merely touched on a significant policy issue, but the significant policy issue was not the focus of the proposal.
The Staff did not permit BlackRock to omit the proposal under Rule 14a-8(i)(3) because it did not demonstrate objectively that the proposal was false or misleading. Moreover, the Staff did not permit BlackRock to omit the proposal under Rule 14a-8(i)(7) because the proposal focused on senior executive compensation.
The primary materials for this post may be found on the SEC website.