Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): The Guidance on (i)(9) (Part 4)
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).
Last week, the staff issued the requisite guidance. The guidance covered two topics: The interpretation under (i)(9) and the interpretation adopted by the Third Circuit in the Trinity case.
With respect to the (i)(9) issue, the staff concluded that, as adopted, the subsection “was intended to prevent shareholders from using Rule 14a-8 to circumvent the proxy rules governing solicitations.” The staff reaffirmed the reasoning of the interpretation. Id. (“We do not believe the shareholder proposal process should be used as a means to conduct a solicitation in opposition without complying with these requirements.”).
The guidance conceded that the provision had been used to exclude proposals that could result in “alternative and conflicting decisions for the shareholders” and create the potential for “inconsistent and ambiguous results.” In doing so, application of the exclusion “focused on the potential for shareholder confusion and inconsistent mandates, instead of more specifically on the nature of the conflict between a management and shareholder proposal.” The staff opted to return the interpretation to the original meaning and focus on conflicts rather than alternative and conflicting decisions.
The staff would do so by focusing on whether the proposal submitted by shareholders resulted in a “direct conflict” with management’s proposal. In making the determination, the staff determined that a “direct conflict” would exist where “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.” As the guidance explained:
- While this articulation may be a higher burden for some companies seeking to exclude a proposal to meet than had been the case under our previous formulation, we believe it is most consistent with the history of the rule and more appropriately focuses on whether a reasonable shareholder could vote favorably on both proposals or whether they are, in essence, mutually exclusive proposals.
Likewise, the guidance specifically addressed proposals that involved overlapping subject matters and could be supported by reasonable shareholders. One involved a compensation plan. See Id. (“Similarly, a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards. This is because a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.”).
The other involved shareholder access, the type of proposal that instigated the reexamination. The guidance concluded that shareholders could support different proposals with different terms. The example involved competing access proposals with different percentage thresholds, different holding periods, and different number of nominees. Id. (“if a company does not allow shareholder nominees to be included in the company’s proxy statement, a shareholder proposal that would permit a shareholder or group of shareholders holding at least 3% of the company’s outstanding stock for at least 3 years to nominate up to 20% of the directors would not be excludable if a management proposal would allow shareholders holding at least 5% of the company’s stock for at least 5 years to nominate for inclusion in the company’s proxy statement 10% of the directors.”).
As the staff reasoned, “both proposals generally seek a similar objective, to give shareholders the ability to include their nominees for director alongside management’s nominees in the proxy statement, and the proposals do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals.”
The guidance makes clear, therefore, that reasonable alternatives will not be subject to exclusion under the subsection. In those circumstances, shareholders may vote for both proposals, even when preferring one over the other. Thus, the possibility that both may pass will no longer be a stand alone basis for exclusion.
We will analyze the guidance in the next posts and note some remaining open issues.