Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): The Conundrum of Precatory Proposals (Part 6)
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).
In issuing the guidance, the staff addressed one of the two issues raised in the Whole Foods appeal. The shareholder argued that a “conflict” could not arise when the proposal submitted by shareholders was precatory. As the staff reasoned: “We believe that a precatory shareholder proposal, while not binding, may nevertheless directly conflict with a management proposal on the same subject if a vote in favor is tantamount to a vote against management’s proposal.”
The analysis illustrates some of the difficulties associated with the reasonable shareholder standard. It may be true that a reasonable shareholder would not vote for opposites, whether mandatory or precatory. But the language of Rule 14a-8(i)(9) speaks to proposals that "directly conflict" with each other. It is still difficult to understand how a precatory proposal, which only provides the board with advice, directly conflicts with a management proposal.
Moreover, there are benefits in allowing shareholders to vote on "opposite" proposals, particularly if one of them is precatory. For example, if the company proposes to combine the chair and CEO positions, shareholders can register their opposition and vote against the proposal. A negative vote, however, cannot necessarily be interpreted to mean that shareholders favor the combining of the two positions. Shareholders may simply oppose a categorical rule that the two positions be combined.
An alternative proposal to prohibit the combining of the two positions, therefore, would allow shareholders to provide management with additional information about their views that will not necessarily be conveyed in a no vote on the management proposal. It is possible, for example, that both management's and the shareholder's proposal could fail, providing the company with a greater understanding of the views of shareholders.
The risk that both would pass assumes that shareholders would make decisions that are inconsistent and ambiguous. But as the votes in the seven companies with competing access proposals showed, this is an unrealistic and unlikely assumption. Precatory proposals provide information; they do not create conflicts.