Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): Overview (Part 1)

The staff just issued the long awaited guidance on subsection (i)(9) of Rule 14a-8, just in time for the upcoming proxy season.

The guidance is a thoughtful attempt to return subsection (i)(9) to its original roots.  The analysis under (i)(9) will now focus entirely on whether proposals are direct conflict.  A direct conflict exists "if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal."  The guidance for the most part ensures that the subsection will be used to exclude conflicting rather than alternative proposals. 

The guidance makes clear, therefore, that reasonable variations in proposals will not be sufficient to create a conflict.  Thus, for example, special meeting proposals that differ on the percentage of voting shares needed to call a meeting will not be deemed to be in a conflict, effectively overturning a long line of no action letters that had taken the opposite position.  In addition, the guidance makes clear that the subsection cannot be used to exclude a shareholder access proposal because of modest differences in share ownership, holding periods and number of directors subject to nomination. 

The guidance went beyond the concerns over subsection (i)(9).  The guidance effectively overturned the holding of the majority opinion in Trinity v. Wal-Mart.  In applying the public policy exception to the ordinary business exclusion, the Third Circuit majority had required that the subject matter of the proposal "transcend" the company's ordinary business.  The staff concluded that the test "differ[ed] from the Commission’s statements on the ordinary business exclusion and Division practice" and that it would not be applied in the no action process.

Over the next several posts, we will discuss the guidance in more detail.  In addition, we will include some observations concerning matters not addressed in the guidance. To the extent there are lacunae in the analysis, answers will likely emerge during the proxy season as companies use the no action letter process to test the boundaries of the guidance.  

J Robert Brown Jr.