No-Action Letter for Wal-Mart Store, Inc. Permitted the Exclusion of Corporate Governance Reform Proposal
In Wal-Mart Stores, Inc., 2017 BL 87193 (March 16, 2017), Wal-Mart Stores, Inc. (“Wal-Mart”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by shareholder Jing Zhao (“Shareholder”) requesting Wal-Mart revise its corporate governance guidelines to allow the board of directors to discontinue and remove disqualified members of the board of directors in accordance with applicable laws. The SEC declined to issue the requested no action letter under Rule 14a-8(i)(10).
Shareholder submitted a proposal providing that:
RESOLVED, Shareholders recommend that Wal-Mart Stores, Inc. reform the Corporate Governance Guidelines in respect of the Director Qualifications to add guidelines to discontinue and remove disqualified members of Board of Directors, in accordance with applicable laws.
Wal-mart argued the proposal may be excluded from the company’s proxy materials under subsections (i)(2), (i)(6), (i)(3), (i)(10), and (i)(8) 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)(10) provides that the company can exclude proposals that the company has already “substantially implemented”. Substantial implementation occurs where the company’s existing policies achieved the proposal’s underlying concerns and essential objectives. For a more comprehensive discussion of the Rule, see Aren Sharifi Rule 14A-8(I)(10): How Substantial is “Substantially” Implemented in the Context of Social Policy Proposals?, 93 Denv. L. Rev. Online 301 (2016).
Wal-Mart argued Shareholder’s proposal should be excluded under Rule 14a-8(i)(10) because the essential purpose of the proposal had been substantially implemented. Specifically, Wal-Mart contended that the essential objective of the proposal was to give shareholders the ability to remove unqualified directors. Wal-Mart asserted that shareholders had the ability to remove directors through the proxy process in connection with annual meetings.
Shareholder, however, argued that Wal-Mart’s proxy materials did not disclose negative aspects about certain directors that would make them unqualified. Additionally, Shareholder argued that shareholders did not have a meaningful way to remove unqualified directors because the director elections were uncontested.
The SEC staff agreed with Wal-Mart and determined the company had substantially implemented the proposal pursuant to Rule 14a-8(i)(10). As such, the SEC concluded it would not recommend enforcement action if Wal-Mart omitted the proposal from its proxy materials. The staff justified this determination under exclusively under 14a-8(i)(10), and did not consider Rule 14a-8 subsections (i)(2), (i)(3), (i)(6), and (i)(8).
The primary materials for this post may be found on the SEC website.