No-Action Letter for McDonald's Corporation Denying Exclusion of Franchise Director Election Proposal
In McDonald's Corporation, 2017 BL 84444 (March 16, 2017), McDonald's Corp. ("McDonald's") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Marco Consulting Group Trust I ("Shareholder") requesting that McDonald's adopt a plan to issue a new series of preferred stock, entitling franchise owners to elect a franchise director. The SEC issued a no-action letter denying the exclusion of the proposal under Rules 14a-8(i)(7), 14a-8(i)(2), and 14a-8(i)(6).
Shareholder submitted a proposal providing that:
RESOLVED: that shareholders of McDonald's Corporation (“McDonald’s” or the “Company”) request that the Board take the necessary steps (including initiating appropriate amendments to the certificate of incorporation and bylaws and excluding those steps that must be taken by shareholders) to adopt a plan to give the Owner/Operators of McDonald's restaurants who pay royalties to McDonald's (hereinafter, “Franchisees”) the power to elect one new member of the Board, by issuing to Franchisees shares of a new series of preferred stock (“Franchise Preferred”), whose holders are entitled to elect the new director (the “Franchise Director”).
Shareholders requests that the Company’s amended governing documents provide that:
(i) one share of the Franchise Preferred should be issued to each Franchisee, for each franchised restaurant;
(ii) consideration for the Franchisee Preferred should be a minimal amount.
(iii) the Franchisee Preferred should be redeemable by the Company at nominal cost when a Franchisee ceases to own a franchised restaurant;
(iv) the Franchisee Preferred should entitle the holder to no amount upon liquidation, termination or dissolution of the Company;
(v) the Franchisee Preferred should not be transferable to anyone other than McDonald’s and should not entitle its holder to vote on any matter other than the election of the new Franchisee Director; and
(vi) the Franchisee Preferred holders have the authority to nominate and elect the Franchisee Director, who may be required to satisfy director qualifications applicable generally to independent directors.
This proposal should be implemented in a way that does not violate the terms of any existing agreement.
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 indicates thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC & The Shareholder Proposal Rule and the SEC (Part II).
Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company's "ordinary business operations." This section understands "ordinary business" to mean issues that are fundamental to a company's daily management abilities. Thus, proposals dealing with issues dealing in "ordinary business" are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).
Additionally, Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. See Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law. Furthermore, Rule 14-8(i)(6) permits the exclusion of proposals where a company lacks the power and authority to implement the proposal. If a company must violate the law to implement a proposal, then the company authority to comply with the shareholder request. See Donovan Gibbons, Excluding Proposals in the Absence of Corporate Authority.
McDonald's argued the proposal should be excluded under Rule 14a-8(i)(7) because proposals asking a company to issue a new series of preferred stock relates to the management of a company's capital structure, thereby constituting "ordinary business” operations. Additionally, McDonald's argued proposals seeking corporate governance reforms “in a manner that involve[d] a company’s ordinary business” had consistently been excluded. Finally, McDonald's argued that electing a new director would amount to corporate governance reform under the rule.
Shareholder disagreed, arguing that the main thrust of the proposal was seeking to provide board representation for franchisees, not to address the company’s capital structure. Shareholder further argued that issuing shares of a new class of preferred stock is the mechanism proposed to affect the representation on the board and that this type of governance reform was “not the kind of day-to-day tasks on which the ordinary business exclusion seeks to preclude shareholder oversight.”
McDonald's also argued for exclusion under Rule 14a-8(i)(2) and Rule 14a-8(i)(6), arguing the terms of the new stock did not confer preferences, which was required by Delaware law, the company’s state of incorporation. Thus, McDonald’s lacked the power and authority to implement a proposal that violated Delaware law.
Shareholder, however, argued a redemption can constituted preference, and Franchise Preferred stock provided for redemption.
The SEC did not agree with McDonald’s arguments that the proposal would fall under normal business operations, and that they would to violate state law to implement requirements of the proposal. Therefore, the SEC recommended enforcement action if McDonald’s omitted the proposal from its proxy materials.
The primary materials for this post can be found on the SEC website.