No-Action Letter for Kewaunee Science Corporation. Allowed Exclusion of Proposal to Eliminate Directors’ Insurance Benefits
In Kewaunee Sci. Corp., 2017 BL 184610 (May 31, 2017), Kewaunee Science Corporation (“Kewaunee”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by The Article 6 Marital Trust under The First Amended and Restated Jerry Zucker Revocable Trust Dated April 2, 2007 (the “Marital Trust”) requesting the board of directors to include a proposal in the proxy statement that would eliminate health and life insurance participation by non-employee directors. The Commission issued the requested no-action letter and concluded it would not recommend enforcement action if Kewaunee excluded the proposal under Rule 14a-8(i)(10).
The Marital Trust submitted a proposal that stated:
Presently, non-employee members of the Board of Directors may elect to participate in the Company's health insurance program and are provided life insurance coverage of $20,000 under the Company's life insurance program, all at no cost to them. This form of compensation is costly for the Company, is not standard in the industry, and interferes with the fiduciary responsibility required by directors. In fact, such compensation could be considered a clear conflict of interest for directors.
Non-employee members of the Board of Directors shall no longer be eligible to participate in the Company's health insurance and life insurance programs.
Kewaunee sought to exclude the proposal from its proxy materials under Rules 14a-8(i)(10) and 14a-8(i)(1).
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 provides 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).
Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy material “if the company has already substantially implemented the proposal.” In applying this standard, the staff considers whether the company’s policies, practices, and procedures “compare favorably” with the guidelines of the proposal. The staff also considers whether the company has satisfied 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 Law Rev. Online 301 (2016).
Additionally, Rule 14a-8(i)(1) permits a company to exclude a shareholder proposal “[i]f the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.” This allows the omission of proposals in instances where the proposal would violate a law of the state the company is incorporated under.
Here, Kewaunee argued the proposal should be excluded under subsection (i)(10) because the company previously adopted a policy that compared favorably with the proposal. Specifically, on March 10, 2017, Kewaunee’s Board of Directors adopted a policy discontinuing the option for nonemployee directors of the company to participate in the company’s health, or life, insurance programs after December 31, 2017. As such, Kewaunee asserted this policy satisfied the proposal’s essential objectives.
Kewaunee also argued the proposal should be excluded under subsection (i)(1) because § 141(a) of the General Corporation Law of the State of Delaware states that a company’s board of directors, not its stockholders, manage the business affairs of the company. Consequently, Kewaunee argued that discontinuing the option allowing nonemployee directors to participate in the company’s health or life insurance programs is not subject to action from its stockholders.
The Commission agreed with Kewaunee and concluded it would not recommend enforcement action if Kewaunee omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(10). The SEC noted Kewaunee’s policies, practices, and procedures compare favorably with the proposal’s guidelines and determined the company had substantially implemented the proposal. The SEC did not comment on Kewaunee’s argument to omit the proposal pursuant to subsection (i)(1).
The primary materials for this post can be found on the SEC website.