Whether it eases confusion or creates more of it remains to be seen, but the Securities and Exchange Commission’s Division of Corporation Finance issued a staff legal bulletin on Thursday to clarify its application of Rule 14a-8(i)(9), which permits the exclusion of shareholder proposals that directly conflict with the company’s own proposals, in order to provide clarity for the 2016 proxy season. In large part, the changes are viewed as more favorable to shareholders.
The rule, adopted back in 1967 and revised several times since, permits a company to exclude a proposal “if the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” During the most recent proxy season, questions arose about the Division’s interpretation of the exception, leading Chairman Mary Jo White to put a hold on granting related no-action letters while a review of the rule’s application was conducted.
“After reviewing the history of [the rule]) and based on our understanding of the rule’s intended purpose, we believe that any assessment of whether a proposal is excludable under this basis should focus on whether there is a direct conflict between the management and shareholder proposals,” the resulting guidance says. “For this purpose, we believe that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals because a vote for one proposal is tantamount to a vote against the other proposal. 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.”
In considering no-action requests, the SEC will now focus on whether a reasonable shareholder could logically vote for both proposals. For example, if a company seeks shareholder approval of a merger, and a shareholder proposal asks shareholders to vote against the merger, it would agree that the proposals directly conflict. Similarly, a shareholder proposal that asks for the separation of the company’s chairman and CEO would directly conflict with a management proposal seeking approval of a bylaw provision requiring the CEO to be the chair at all times.
It will not, however, view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although preferring one recommendation over the other, is presented with proposals that generally seek a similar objective. For example, 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.
When a shareholder proposal is not excluded and companies are concerned that including proposals on the same topic could potentially be confusing, the bulletin recommends including an explanation in the proxy materials of the differences between the two proposals and how they would expect to consider the voting results. “We expect companies and proponents to respect the Rule 14a-8 process and encourage them to find ways to constructively resolve their differences,” it says.
Among those reacting to the policy change, and unfavorably so, is the Business Roundtable. “The SEC’s traditional application of this rule appropriately balanced the interests of shareholders and the responsibility of boards of directors,” John Hayes, CEO of Ball Corporation and chairman of the Business Roundtable’s Corporate Governance Committee said in a statement. “The SEC’s new approach risks confusing shareholders while intruding upon the fiduciary duties of directors. We are particularly disappointed that this departure from long-established practice was adopted without a formal rulemaking process.”