No-Action Letter for Pfizer Inc. Permitted Exclusion of Shareholder Proposal Seeking Report on the Risks from Raising Drug Prices
In Pfizer Inc. 2018 BL 030118 (March 1, 2018), Pfizer Inc. ("Pfizer") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Trinity Health (“Proponents”) requesting Pfizer disclose the risks from rising pressure to contain U.S. prescription drug prices and explain how Pfizer plans to mitigate those risks. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).
The Shareholder submitted a proposal providing that:
RESOLVED, that shareholders of Pfizer Inc. (“Pfizer”) ask the Board of Directors to report to shareholders by December 31, 2018, at reasonable cost and omitting confidential or proprietary information, on the risks to Pfizer from rising pressure to contain U.S. prescription drug prices, including the likelihood and potential impact of those risks as applied to Pfizer, the steps Pfizer is taking to mitigate or manage those risks and the Board’s oversight role. The report should address risks created by payer cost-effectiveness analysis, patient access concerns, outcomes-based pricing, and price sensitivity of prescribers, payers and patients.
Pfizer sought to exclude the proposal under subsections (i)(7) and (i)(10) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to include a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholder, however, must meet certain procedural and ownership requirements. Moreover, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirement 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) allows the exclusion of a shareholder proposal from the company's proxy material “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 exclusion of 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).
Pfizer argued for omission of the proposal under Rule 14-a-8(i)(7) because the SEC has allowed exclusions under this subsection when the proposal related to product pricing decisions or requesting a report on how the company plans to respond to regulatory, legislative and public pressures relating to pricing policies or price increases. Specifically, Pfizer asserted that the proposal "delves much more deeply into the day-to-day affairs of Pfizer" beyond requesting information regarding general business strategy with the goal of providing affordable access to prescription drugs. While Pfizer acknowledged that a proposal might not be excluded under this rule if it focuses on a significant policy issue, it alleged the proposal focused on ordinary business matters.
Pfizer also argued for omission under Rule 14-a-8(i)(10) because it had already substantially implemented the proposal. Pfizer contended that its Regulatory and Compliance Committee is tasked with "overseeing current and emerging risks and regulatory and enforcement trends that may affect Pfizer’s business operations, performance, or strategy,” and this meets the objective of the proposal requesting Pfizer assess risks relating to pricing decisions. The public disclosures from the committee appear in its annual report on Form 10-K for 2016, quarterly report for the quarter ending on Oct. 1, 2017, and in the 2017 proxy statement.
In response, Proponents argued drug-pricing decisions do not fall within the protection of section (i)(7) because drug pricing is a significant policy issue that constitutes more than an ordinary business decision. Proponents also asserted that the (i)(10) exclusion does not apply because the disclosed materials do not address the concerns related to the risks of payer cost effectiveness, patient access, or price sensitivity of prescribers.
The SEC agreed that Pfizer substantially implemented the proposal and decided it would not recommend enforcement action if Pfizer omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(10).
The primary materials for this post may be found on the SEC website.