No-Action Letter for The Cato Corp. Permitted Exclusion of Shareholder Proposal Explicitly Prohibiting Discrimination Based on Sexual Orientation and Gender Identity
In The Cato Corp., 2017 BL 63285 (Feb. 28, 2017), The Cato Corporation (“Cato”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Walden Asset Management (“Shareholder”) requesting the board amend its written equal employment opportunity (“EEO”) policy to explicitly prohibit discrimination based on sexual orientation and gender identity or expression and report on its programs to substantially implement this policy. The SEC issued the no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(10).
Shareholder submitted a proposal providing that:
The Shareholders request that Cato Corp. amend its written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and gender identity or expression and report on its programs to substantially implement this policy.
Cato argued the proposal may be excluded from the company’s proxy materials under subsections (i)(10) and (i)(7) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy materials17 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 and The Shareholder Proposal Rule and the SEC (Part II).
A company may exclude a shareholder proposal from its proxy material in reliance on Rule 14a-8(i)(10) “if the company has already substantially implemented the proposal.” For a proposal to be substantially implemented, the actions of the company must compare favorably to the guidelines and essential purposes 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).
Additionally, Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if it “deals with a matter relating to the company’s ordinary business operations.” However, when a proposal relates to the company’s operations but also raises important issues of public policy, the SEC will reject the requested no action relief. For additional explanation of this exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (216), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU L. Rev. Online 263 (2016).
Cato first argued its existing EEO policy prohibited discrimination based upon an individual’s sex or any other legally protected classifcation and therefore substantially implemented the Shareholder proposal under 14a-8(i)(10). Cato further argued that because its employment policies and practices already achieve the objectives of Shareholder’s proposal, any further modification would be superfluous and unnecessary.
Additionally, Cato argued that Shareholder’s proposal should be excluded under Rule 14a-8(i)(7) because the proposal interfered with the right to conduct conduct ordinary business practices specifically by infringing upon the relationship between a company and its employees. Cato further argued Shareholder’s proposal disrupted the company’s ability to draft and communicate certain workplace policies with its employees in a manner beyond the purview of shareholders, without relating to a sufficiently significant policy issue.
In response, Shareholder argued Cato’s current EEO policy was insufficient to be considered substantially implemented because Cato failed to explicitly prohibit discrimination based on sexual orientation and gender identity, and the current status of legally protected categories does not result in consistent protection for the LGBT community. Therefore, according to Shareholder, Cato failed to substantially implement the proposal. Furthermore, Shareholder argued the proposal could not be excluded under 14a-8(i)(10) because it addressed a significant policy issue.
The SEC agreed with Cato’s reasoning and concluded Cato may exclude the proposal from its proxy materials in reliance on Rule 14a-8(i)(10) because Cato had substantially implemented the proposal through their policies and actions. The SEC expressed no position on whether the proposal deals with matters relating to Cato’s ordinary business operations. Accordingly, the SEC concluded it would not recommend enforcement action if Cato omitted the proposal in reliance on Rule 14a-8(i)(10)
The primary website for the post may be found on the SEC Website.