No Action Letter for Acuity Brands, Inc. Advised Against Exclusion of Dividend Proposal
In Acuity Brands, Inc., 2016 BL 342505 (Oct. 12, 2016), Acuity Brands, Inc.’s (“Acuity”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by shareholder Stephen Kraus (“Kraus”) requesting that Acuity’s board of directors approve a dividend increase that would be commensurate with the company’s recent success. The Commission concluded it was unable to concur with Acuity that the proposal should be excluded from its proxy materials under Rule 14a-8(i)(7) and 14a-8(i)(13).
Kraus’s proposal provided:
- RESOLVED: Shareholders request the Board of Directors to: Approve a dividend increase that is commensurate with this success that will not jeopardize future potential capital investment returns or attractive strategic acquisition opportunities but will allow the existing shareholders to deploy the company’s excess cash in a manner they find most appropriate.
Acuity sought to exclude the proposal from its proxy materials under subsections (i)(7) and (i)(13) 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. Additionally, companies may exclude proposals that fall under one of thirteen substantive exceptions provided in Rule 14a-8(i). For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.
Rule 14a-8(i)(7) allows for the exclusion of proposals that relate to the company’s “ordinary business operations.” The Commission understands “ordinary business” to mean the issues that are fundamental to the company’s management abilities on a daily basis. Thus, proposals dealing with issues relating to “ordinary business” are not subjected to shareholder oversight. For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Online L. Rev. 263 (2016).
Rule 14a-8(i)(13) allows for the exclusion of proposals that relate “to specific amounts of cash or stock dividends.” The Commission interprets this phrase to include limit amounts or ranges of dividends, or formulas for determining dividends.
Acuity argued the proposal should be excluded under 14a-8(i)(7) because the proposal related to its ordinary business operations. Acuity pointed to how the staff has recognized decisions regarding the declaration and payment of dividends as a “core management function.” As such, it reasoned that dividend decisions are essential to the company’s capital management, financial activities, and growth strategies and are therefore integral to ordinary business operations.
Acuity also asserted that 14a-8(i)(13) allowed exclusion because “the Proposal relates to a specific amount of dividends.” Specifically, it argued the staff previously permitted exclusion of proposals that seek to increase the dividend or payout ratio because such proposals have the effect of establishing a formula for dividends. Acuity cited a dividend table Kraus included in his supporting statement as amounting to a formula to calculate the specific amount of dividend increases. Thus, it argued the proposal “seeks to tie future dividends to a specific formula based on historical performance.”
In response, Kraus argued dividend decisions do not affect the day-to-day operations of a company, but rather are decisions that rest with the Board of Directors. As such, a dividend policy is subject to shareholder oversight. Kraus further pointed to the fact that he qualified his proposal by excluding increases that could jeopardize “potential capital investment returns or attractive strategic acquisition opportunities.” Kraus also argued that the table he included in his supporting statement was not a proposal for specific dividend increases, but merely illustrates important information relevant to making dividend decisions.
The Commission agreed with Kraus’s reasoning, and concluded Acuity may not omit the proposal from its proxy materials in reliance on 14a-8(i)(7) and 14a-8(i)(13). The staff noted the proposal involved a “matter of policy outside the realm” of Acuity’s business operations. In addition, the Commission determined the proposal did not relate to “specific amounts of cash or stock dividends.”
The primary materials for this post can be found on the DU Corporate Governance website.