Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): Substantially Implemented (Part 8)
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 other issue unaddressed by the Rule was the interrelationship between subsection (i)(9) and subsection (i)(10). Subsection (i)(10) allows proposals to be excluded if "substantially implemented." A company seeking to exclude a shareholder access proposal could adopt its own version then argue that the shareholder proposal has been substantially implemented.
Where the two proposals are identical, the result under the exclusion is clear. When the two proposals differ, however, the analysis becomes more complex. The staff must determine whether the differences are substantial or insubstantial. One comment letter submitted in the (i)(9) review (submitted by the author of this post) raised concerns with staff interpretation under subsection (i)(10).
In two no action letters, the staff considered proposals seeking to give shareholders the right to call a special meeting at a specified percentage of voting shares (20% in one case; 25% in the other). The companies gave shareholders the right to call a special meeting at the requested percentage. The companies, however, limited shares eligible to call a special meeting to those held continuously for a year or more in a net long position. The no action requests did not analyze the impact of the one year holding period on the number of shares eligible to call a special meeting. It was possible, therefore, that the holding period could have made it impossible to call a special meeting.
The staff nonetheless granted the no action request, concluding that management had substantially implemented the shareholder proposal. The effect was to deny shareholders the right to vote on an alternative proposal that contained fewer restrictions or limits on the right to call a special meeting. To the extent that these interpretations remain in place, they suggest that while companies cannot obtain the exclusion of "alternatives" under (i)(9), they can under (i)(10). Presumably the staff does not mean for this to occur and will need to clarify the position through the no action process.