No-Action Letter for General Electric Company Allowed Exclusion of Litigation Strategy Proposal

In General Electric Co., 2016 BL 32440 (Feb. 3, 2016), General Electric Co. (“GE”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by the Sisters of St. Dominic of Caldwell, NJ, among others (“Shareholders”) requesting an independent evaluation assessing potential sources of liability related to PCB discharges into the Hudson River.  The SEC agreed to issue a no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(7). 

Shareholder submitted a proposal providing that:

RESOLVED, shareholders request that GE at reasonable expense undertake an independent evaluation and prepare an independent report by October 2016, demonstrating the company has assessed all potential sources of liability related to PCB discharges in the Hudson River, including all possible liability from NRD claims for PCB discharges, and offering conclusions on the most responsible and cost-effective way to address them.

GE sought exclusion under subsections (i)(7) and (i)(3). 

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 rquirements of the Rule, see The Shareholder Proposal Rule and the SEC.  

Rule 14a-8(i)(7) permits a company to omit a proposal that relates 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.

Rule 14a-8(i)(3) permits the exclusion of proposals or supporting statements 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. In addition, the subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.   

GE argued the proposal should be excluded under 14a-8(i)(7) because it related to GE’s “litigation strategy.” GE asserted that the proposal “implicate[d] the Company’s litigation strategy in, pending lawsuits involving the Company.”  GE also asserted that the proposal could be excluded because it sought “to micro-manage the manner in which a company complies with its legal obligations.” 

In addition, GE argued the proposal could be omitted under 14a-8(i)(3) because the proposal was vague.  GE contended the proposal would result in a bifurcated request with undefined reference as to what conclusions should be reached and who should undertake the independent evaluation.

Shareholders disagreed.  Shareholders contended that matters that were “the subject of litigation” could nonetheless raise “a significant policy issue for the corporation and its shareholders.”  Shareholders argued that excluding all proposals related to litigation would function as a “get out of jail free” card for companies.

The SEC agreed and concluded it would not recommend enforcement action if GE omits the proposal from its proxy materials in reliance on Rules 14a-8(i)(7).  The staff noted “that the company is presently involved in litigation relating to the subject matter of the proposal.”  

The primary materials for this post can be found here.

Kema Johnson