Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): The Unnecessary Encouragement of Precatory Proposals (Part 9)
The guidance has some Delphic language suggesting that the staff may take a harsher view towards shareholder proposals phrased in mandatory terms. The effect is to encourage shareholders to submit precatory rather than mandatory proposals.
Footnote 16 to the guidance noted that "there may be instances in which a binding shareholder and management proposal would directly conflict." This would likely occur where both proposals were binding. Id. ("We do not believe that a reasonable shareholder would logically vote for two proposals, each of which has binding effect, that contain two mutually exclusive mandates.").
The guidance, however, made clear that in those circumstances, "the Division’s practice under Rule 14a-8(i)(1), our no-action response may allow proponents to revise a proposal’s form from binding to nonbinding." Where this was done within a specified time and "a reasonable shareholder could otherwise logically vote for both proposals, the shareholder proposal would not be excludable under Rule 14a-8(i)(9)."
On the one hand, the guidance demonstrates staff flexibility. Shareholders caught in a "conflict" can amend their proposal and, at least in some circumstances, avoid exclusion by rendering the proposal precatory.
On the other, this essentially allows management to exclude a binding proposal simply by submitting a proposal with conflicting "mandates." This seems different than "directly conflicts" and arguably applies anytime the terms of the proposals have differences that prevent the implementation of both.
Take for example a binding proposal by management to provide access to any shareholder owning 9% of the shares for at least five years. To the extent that shareholders want to submit a binding alternative at 3%/three years, the guidance creates the possibility that (i)(9) would apply since both "mandates" cannot be implemented if both are adopted. On the other hand, if the shareholders submits a 3%/three year proposal that is precatory, (i)(9) would not apply. They can give advice but not mandate. Unfortunately, the "advice" in the form of a precatory proposal can be ignored.
The outcome of this hypothetical depends upon what the staff means by "mandate." Moreover, under the "reasonable shareholder" analysis, shareholders would presumably have a reason to vote for both access proposals, even if mandatory.
To the extent that the footnote is intended to allow for the exclusion of proposals that are mandatory and that contain mutually inconsistent terms, the guidance is inconistent with the "reasonble shareholder" test. Moreover, the guidance effectively reinstates the previously disclaimed analysis by allowing for the exclusion of alternatives rather than opposites. The approach would also be premised upon the possibility that shareholders could adopt two binding proposals that are inconsistent with each other (only one possible outcome out of many). As the seven examples during the last proxy season illustrated, however, this is an unlikely outcome. Shareholders as a general matter are sophisticated enough to avoid this result. As the empirical evidence indicates, a more likely outcome is that only one of the proposals will receive majority support.
The guidance nonetheless encourages the use of precatory proposals. While most proposals are precatory, there will be an increasing need for, and interest in, binding proposals that seek to modify management efforts, particularly in the context of shareholder access. With management adopting more and more access provisions, shareholders will have an interest in modifying the terms to make them more investor friendly. These types of proposals would, at least in some cases, be mandatory.
Whether a shareholder chooses to submit a precatory or binding proposal should be determined by the best interests of the corporation and its shareholders, not by the requirements of a proxy rule.