Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): Analysis of the (i)(9) Guidance (Part 5)
We are discussing the staff guidance issued in Staff Legal Bulletin No. 14H (CF) on shareholder proposals. Specifically, the Bulletin provided guidance on subsections (i)(7) (ordinary business) and (i)(9) (directly conflicts).
The analysis under Rule 14a-8(i)(9) will now focus on the actions of a reasonable shareholder. A direct conflict will exist where "a reasonable shareholder could not logically vote in favor of both proposals." As the guidance indicates, this is clearest in the case of opposites. Where management proposed to combine board chair and CEO, a shareholder proposal that sought to separate the two positions would directly conflict. Proposals involving opposites, therefore, can be excluded; mere alternatives cannot.
The unanswered question concerns proposals that involve the same subject matter but include terms that are so extreme that no reasonable shareholder would vote for both. Thus, for example, the no action letter that instigated the staff review, Whole Foods, involved a shareholder proposal calling for access at 3% of the voting shares with a three year holding period. The management alternative set out in the no action letter request sought to provide access rights to a single shareholder with at least 9% of the voting shares (Whole Foods later dropped the percentage to 5%). At the time, no shareholder would have qualified under the terms of the proposal.
The management alternative in Whole Foods, therefore, could be viewed not as a proposal designed to provide access but as a proposal designed to deny the right of access. To the extent perceived in this manner, reasonable shareholders would be unable to vote simultaneously for access (the shareholder proposal) and against access (the management proposal). The guidance, therefore, leaves open the possibility that companies submitting alternative proposals can obtain exclusion of a shareholder proposal by arguing that the two proposals have sufficiently antagonistic terms, even though seeking the same broad goal. Indeed, the guidance made no mention of the Whole Foods no action letter, leaving it unclear whether, under the new guidance, the result would have been any different.
The staff intended to avoid the use of (i)(9) to exclude alternatives. Presumably the two proposals discussed in the Whole Foods no action request would qualify as alternatives and, as a result, the shareholder proposal would not be subject to exclusion.
Nonetheless, this shows the tension over the reasonable shareholder test. The staff may find itself, in the short term, inundated with requests arguing that the management alternative is just different enough from the shareholder proposal that no reasonable shareholder would support both. The staff will need to be firm on this issue, employing a very broad definition of reasonable shareholder. Otherwise, the subsection will again be used to prevent shareholders from having effective choice in the voting process.