No-Action Letter for WGL Holdings, Inc. Prevents Exclusion of Proposal
In WGL Holdings, Inc., 2016 BL 403312 (Nov. 29, 2016), WGL Holdings (“WGL”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by As You Sow on the behalf of shareholder Samajak LP ("Samajak"). The proposal requested that WGL develop a report quantifying the financial risk posed by methane leaks in its natural gas infrastructure. The SEC denied the requested no-action letter, concluding that WGL may not exclude Samajak’s proposal from its annual proxy statement under subsections (i)(6), (i)(7), and (j)(1) of Rule 14a-8.
Shareholder submitted a proposal providing:
RESOLVED: As You Sow, on behalf of WGL shareholders, requests that the company develop a report quantifying the financial risk that methane leaks in its natural gas infrastructure pose to the Company and its investors. Shareholders request that the report estimate a) the likely cost of climate change related regulation of its methane leaks, and b) estimate the likelihood, brand damage, and cost of potential catastrophic explosions. The report should exclude proprietary information and be published by September 2018.
WGL sought exclusion of the proposal from its proxy materials under subsections (i)(6) and (i)(7) of Rule 14a-8. WGL also sought a waiver of the requirements under subsection (j)(1) 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. In addition, the Rule provides companies thirteen substantive grounds for exclusion of the proposal. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.
Rule 14a-8(i)(6) allows the exclusion of a shareholder proposal if the company lacks the power and authority to implement the proposal. Specifically, a company can exclude a proposal if the required action may breach existing contractual obligations.
Rule 14a-8(i)(7), allows the exclusion of a shareholder proposal if the proposal deals with matters relating to the company’s “ordinary business” operations. This section understands “ordinary business” to mean the issues that are fundamental to the company’s management abilities on a daily basis. Thus, proposals relating to “ordinary business” are not subjected to shareholder oversight. Specifically, a company can exclude a proposal relating to the company’s compliance with law. For additional explanation of this exclusion see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).
Rule 14a-8(j)(1) allows the company to submit reasons for excluding the proposal later than 80 days before the company files its definitive proxy statement and form of proxy, if the company demonstrates good cause for missing the deadline.
WGL argued for exclusion under subsection (i)(6) because the company lacked the power or authority to implement the proposal. WGL pointed to previous staff letters allowing for exclusion where the proposal could require a company take action that could breach an existing contractual obligation. WGL claimed the proposal required the company to release information to third parties about an accident or incident subject to an ongoing investigation by the National Transportation Safety Board (“NTSB”). The NTSB was investigating the August 11, 2016 explosion and fire at a property on Arliss Street in Silver Spring, Maryland. Until the NTSB published the final report, WGL could not disclose the probable cause of the accident and could not force the NTSB to publish a preliminary report.
WGL also argued for exclusion under subsection (i)(7) because the proposal related to the company’s compliance with laws relating to methane. Specifically, WGL asserted that the proposal “attempts to impose on the Company an obligation to re-examine its compliance with laws and regulations.” WGL further argued that the proposal’s references to “greenhouse gases” and “financial risk” did not rise to the level of significant public policy.
Finally, WGL argued the 80-day deadline under subsection (j)(1) should be waived because the company moved the annual meeting date to one month earlier than in 2016, and the company only had 93 days between the deadline to submit shareholder proposals and filing definitive proxy materials. WGL submitted the no-action request only three days short of the 80-day deadline.
The SEC disagreed with WGL’s reasoning and concluded WGL may not omit the proposal from its annual proxy statement in reliance on Rule 14a-8(i)(6) because WGL “does not lack the power or authority to implement the proposal.” The staff further concluded WGL may not omit the proposal in reliance on subsection (i)(7). Finally, the staff concluded WGL did not file its statement of objections to including the proposal at least 80 days before the filing date. The staff noted that under the circumstances, the 80-day deadline requirement was not waived.
The primary materials for this case may be found on the SEC website.