Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): Gaming the System (No. 7)

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 Whole Foods appeal raised two issues, once concerning the precatory nature of the proposal, the other pointing to staff precedent permitting the exclusion of proposals submitted by management "in response to" the shareholder proposal.  

The staff did not explicitly respond to the second argument.  The staff did state that some commentators had “suggested that the exclusion should not apply when a shareholder submits his or her proposal before the company approves its proposal.”  The timing of the submission would not affect whether the proposals conflicted.  As the staff reasoned:  "This approach would not necessarily prevent a shareholder from submitting a proposal opposing a management proposal, in contravention of the proxy rules governing solicitations."

Some commentators did raise the timing issue.  See Letter from Domini (noting that the exemption was "based on the sequencing of proposals"). See also Letter from US SIF (“The potential for exclusion under Rule 14a-8(i)(9) should not apply to shareholder proposals that were submitted prior to the public announcement of an allegedly conflicting management proposal.”).

But timing was for the most part a substitute for motive. The "in response to" argument sought to prevent companies from using the exclusion as a tactical device only designed to exclude the shareholder proposal.  See Letter from McRitchie (“Staff also made clear that subsection (i)(9) could not be used as a tactical weapon in order to exclude shareholder proposals. To the extent company proposals were developed 'in response to' a proposal submitted by shareholders, the subsection was unavailable.”); Letter from Mack, et al (“The Rule’s purpose is not to provide an avenue for management to develop after-the-fact “counterproposals” for the purpose of excluding properly submitted shareholder proposals.7 A broad interpretation of the type put forward by the corporate bar would reverse the Rule’s original intent, and permit this sort of gamesmanship.”); see also Letter from Law Firms (“One of the criticisms of the Whole Foods no-action letter and similar no-action letters under Rule 14a-8(i)(9) has been that such position allows companies that may not otherwise have intended to bring a matter to a shareholder vote to avoid including controversial shareholder proposals in the company’s proxy materials.”).

Thus, motive for the most part is not resolved exclusively through consideration of the timing of the submission of a proposal.  A company considering an access proposal for an upcoming meeting may only complete the consideration after receipt of the shareholder proposal.  That can be contrasted with a company that has no intention of implementing an access proposal but decides to do so only as a means of obtaining the exclusion of the shareholder proposal. 

Motive is an area where the staff would like to avoid.  It means essentially acting as a fact finder on the purpose of a particular proposal.  This problem commonly occurred in the past when the staff had to determine whether a proposal was submitted as a result of a personal grievance, particularly where the proposal was one that otherwise would be included under Rule 14a-8.  

Nonetheless, there are circumstances where the tactical use of the exclusion would likely be clear on its face. See Keith F. Higgins, Rule 14a-8:  Conflicting Proposals, Conflciting Views, PLI Program on Corporate Governance, NY, NY (Feb. 10, 2015) ("There may be a concern that, where management opposes the substance of the shareholder’s proposal, the company will present a proposal principally to prevent shareholders from expressing their views on it. For example, if in response to a proposal to allow holders of 10% of the outstanding shares to call a special meeting of shareholders, management proposes a threshold of 90%, which appears totally unworkable, one might reasonably wonder whether the motive in presenting that proposal was solely to have a basis to exclude the shareholder proposal.").  

Moreover, if the exclusion could be used in such a tactical fashion, companies could submit the same unworkable proposal year after year.  Id. ("We have heard the concern expressed that management could continue year after year to come up with a slightly different proposal for the purpose of keeping the shareholder proposal from ever making it into the proxy materials. While we have not yet seen this concern materialize, it is certainly not beyond the realm of possibility.").

The subsection should not be allowed to be used in such a fashion.  Nonetheless, the guidance is silent on the subject. 

J Robert Brown Jr.