No Action Letter for ITT Inc. Permitting Exclusion of Shareholder Proposal
In ITT Inc., 2017 BL 84441 (March 16, 2017), ITT Inc., (“ITT”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit ITT to omit a shareholder proposal submitted by John Chevedden (“Shareholder”) requesting that ITT place a proposal on ITT’s proxy statement permitting a group of up to 50 shareholders to aggregate their shares to equal 3% of ITT stock owned continuously for 3-years in order to make use of shareholder proxy access. The SEC issued the requested no-action letter permitting ITT to exclude the proposal under Rule 14a-8(i)(10).
Shareholder submitted a proposal providing that:
RESOLVED, Shareholders request that our board of directors take the steps necessary to enable up to 50 shareholders to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to make use of shareholder proxy access.
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)(10) allows a company to exclude a shareholder proposal from its proxy statement if the company has substantially implemented the proposal. The rule allows shareholders to avoid considering matters which have already been favorably acted upon by management of the company. Rule 14a-8(i)(10) does not require a company to implement every detail of a proposal in order for the proposal to be excluded so long as the company has already addressed the essential objective of the proposal. 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 DU L. Rev. Online 301 (2016).
ITT argued the proposal should be excluded under 14a-8(i)(10) because its board approved amendments to its by-laws to implement a proxy access by-law consistent with the specifications in the Shareholder’s proposal. Additionally, ITT argued that the SEC has permitted exclusions of proposals seeking implementation or modification of proxy access by-laws even when not every element of the shareholder proposal was adopted, including those relating to aggregation, as long as the essential elements were adopted. Regarding the current Shareholder proposal, ITT asserted that it adopted two of the three requests (three-year holding period requirement and 3% ownership requirement) in the company’s by-law amendment. The only difference in ITT’s amendment and Shareholder’s proposal was the Shareholder’s desired increase in the shareholder aggregation limit to 50 shareholders. ITT believed the increase from 20 to 50 shareholders would not benefit shareholders in a way the current Shareholder’s proposal desired.
Shareholder disagreed, arguing that ITT provided no evidence of past activism on the part of large individual shareholders included in its no-action request data. Further, Shareholder claimed that ITT had failed to meet its burden of proof and requested an opportunity to give additional responses to combat the expedited request of ITT.
The SEC agreed with ITT’s reasoning and concluded ITT may omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(10) because the Shareholder proposal compares favorably with ITT’s policies, practices, and procedures. Therefore, ITT had substantially implemented the Shareholder’s proposal. Accordingly, the SEC indicated it would not recommend enforcement action if ITT omitted the proposal from its proxy materials.
The primary materials for this post can be found on the SEC website.