No-Action Letter for International Business Machines Corp. Allowed Exclusion of Proposal Requesting Resignation of the Company’s Chief Executive Officer.

In International Business Machines Corp., 2016 BL 382928 (Nov. 16, 2016), International Business Machines Corporation (“IBM”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by shareholder, Joseph B. Tadjer (“Shareholder”) requesting the resignation of IBM’s current Chief Executive Officer, Virginia Rometty (“Rometty”). The SEC agreed to issue a no action letter allowing IBM to exclude the proposal under Rule 14a-8(i)(7).  

Shareholder submitted a proposal providing that: 

RESOLVED, I proposed, in the form of a nonbinding resolution, that Virginia Rometty resign her position as chief executive officer of the Company as soon as is practical and convenient. Under my proposal Mrs. Rometty's status as a member and chairman of the Board of Directors would not be affected.

IMB sought exclusion of the proposal under Rule 14a-8(i)(7).

Rule 14a-8 provides shareholders with the right to insert a proposal in companies’ proxy materials 17 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.

Subsection (i)(7) permits exclusion of shareholder proposals that involve matters pertaining to “ordinary business” operations, including “management of the workforce” and “termination of employees.” This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Ordinary business matters are a fundamental component of management’s role in effectively running the company on a daily basis, and thus are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

IMB argued Shareholder’s proposal seeks to remove the Chief Executive Officer and therefor relates to ordinary business matters involving employment policies.  In addition, as senior management, the CEO’s role included directing and overseeing the company’s operations. In the event of resignation, IMB would have difficulty finding a replacement because future office holders would not want to hold a position “micro-manage[d]” by shareholders.

In response, Shareholder urged that his proposal does not require the company to enforce CEO’s retirement. Rather, the proposal sought to provide the board with the views of shareholders on the leadership of the company. Shareholder emphasized that, if the company chose to act on the majority vote, the company could determine the timing of the CEO’s retirement.  Moreover, under the Proposal, nothing prevented the CEO from maintaining her Board position.

The SEC agreed with IBM’s reasoning, and concluded IBM may exclude Shareholder’s proposal under Rule 14a-8(i)(7). The staff noted the proposal related to ordinary business matters because it involved the “termination, hiring, or promotion of employees.”

The primary materials for this post can be found on the SEC Website

Tara Hawkes