No-Action Letter for Ecolab, Inc. Permits Exclusion of Proxy Access Proposal but Denies Deadline Waiver
In Ecolab Inc., 2017 BL 84445 (Mar. 16, 2017), Ecolab Inc. (“Ecolab”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by John Chevedden (“Shareholder”) requesting an increase in the limitation of shareholders from 20 to 50 who can aggregate their shares for purposes of “proxy access.” The SEC issued the requested no action letter, finding “some basis” for exclusion under Rule 14a-8(i)(10).
Shareholder submitted a proposal providing that:
RESOLVED: Shareholders request that our board of directors replace the limit of 20 shareholders who are currently allowed to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to make use of our shareholder proxy access provisions adopted recently. The 20 shareholder limit is to be increased to a limit of 50 on the number of shareholders who can aggregate their shares for the purpose of shareholder proxy access.
Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria for a continuous 3-years at most companies examined by the Council of Institutional Investors. Additionally many of the largest investors of major companies are routinely passive investors who would be unlikely to be part of the proxy access shareholder aggregation process.
Under this proposal it is unlikely that the number of shareholders who participate in the aggregation process would reach an unwieldy number due to the rigorous rules our management adopted for a shareholder to qualify as one of the aggregation participants. Plus it is easy for our management to reject an aggregating shareholder because management simply needs to find one of a list of requirements lacking.
Ecolab sought exclusion of the proposal from its proxy materials under subsection (i)(10) 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. Though the shareholders 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) permits a company to exclude a shareholder proposal if the company has already “substantially implemented” the proposal. The SEC has permitted exclusion under this rule when the company’s policies, practices, and procedures compare favorably with the guidelines of the proposal or, alternatively, when a proposal has not been implemented exactly as proposed by the shareholder so long as the company has satisfied the proposal’s essential objective. For additional discussion of the exclusion, 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).
Under Rule 14a-8(j)(1), a company intending to exclude a proposal from its proxy materials must file the reasons with the SEC no later than 80 days before filing definitive proxy materials. The SEC may permit the filing of a submission later than 80 days if the company demonstrates good cause for missing the deadline. For a more detailed discussion of this requirement, see Mark G. Proust, The Evolution of Rule 14a-8(j): The Good Cause to Clarify Good Cause, 93 Denv. L. Rev. Online 289 (2016).
Ecolab argued Shareholder’s proposal should be excluded under Rule 4a-8(i)(10) because the amended and restated bylaws satisfied the proposal’s essential objective. In December 2015, Ecolab amended and restated its bylaws to adopt a Proxy Access Provision. The Provision permitted a shareholder, or a group of up to 20 shareholders, owning at least 3% stock continuously for at least three years, to nominate and include in the Company's annual meeting proxy materials director candidates constituting up to two individuals or 20% of the Board. Any 20 owners of at least 0.15% of Ecolab’s stock individually, may aggregate their holdings to meet the 3% ownership threshold. Ecolab asserted that its provision provided a meaningful proxy access right to the shareholders, satisfying the Proposal’s objective.
Ecolab also asserted the 80-day limitation set forth in Rule 4a-8(j)(1) should be waived for good cause because Ecolab submitted Proxy Access Aggregation Letters which were posted after the 80-day requirement and therefore Ecolab could not have met the 80-day requirement despite its good faith effort to minimize delay.
The SEC determined Ecolab’s amended and restated bylaws substantially implement the Proposal. As the no action letter stated: “Based on the information you have presented, it appears that Ecolab's policies, practices and procedures compare favorably with the guidelines of the proposal and that Ecolab has, therefore, substantially implemented the proposal.” Therefore, the SEC did not recommend enforcement action if Ecolab omitted the proposal in reliance on Rule 4a-8(i)(10), however the SEC was unwilling to waive the 80-day requirement of Rule 14a-8(j)(1).
The primary materials for this post may be found on the SEC website.