No-Action Letter for MFRI Inc. Allowed Exclusion of Share Repurchase Program Proposal
In MFRI Inc., 2017 BL 88215 (Mar. 20, 2017), MFRI Inc. (“MFRI”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Carl W. Dinger III (“Shareholder”) requesting MFRI to authorize and implement a stock repurchase program that would repurchase 1,000,000 shares of company stock. 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, the shareowners of MFRI recommend that the Board of Directors authorize and implement a three-year share repurchase program that would repurchase 1,000,000 shares of MFRI stock.
MFRI sought the exclusion of the proposal from its proxy materials under subsection (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.
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. 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).
MFRI argued that Shareholder’s proposal involved a company’s “ordinary business.” Specifically, implementation of a stock repurchase plan was part of MFRI’s capital raising, capital management, and overall financing activities. MFRI additionally argued that the proposal sought to micro-manage the company by having shareholders participate in a decision about which they are not in a position to make an informed assessment.
In response, the Shareholder argued that the proposal was not seeking to manage ordinary business operations because the repurchase program would be implemented by the senior management of MFRI. Shareholder further argued that, according to precedent, repurchase actions were fundamental to shareholders and did not fall under the ordinary business exclusion. Shareholder also asserted that repurchases involved “a significant social issue that has garnered substantial attention through national media outlets”.
Ultimately, the SEC agreed with MFRI, concluding the proposal could be excluded under Rule 14a-8(i)(7). The staff noted that the proposal relates to the implementation and particular terms of a share repurchase program, and accordingly, would not recommend enforcement action if MFRI omitted the proposal from its proxy materials.
The primary materials for the post may be found on the SEC Website.