In a surprise move by the Securities and Exchange Commission—and one it apparently knew would be controversial given its announcement at 5:30 p.m. on the Friday before a three-day weekend—the Division of Corporation Finance has reversed itself on an earlier no-action letter that allowed Whole Foods to replace a shareholder proposal for proxy access with one of its own.
A Jan.16 statement by CorpFin explains that a directive from SEC Chairman Mary Jo White demanded that it review the current Exchange Act rule for excluding conflicting proxy proposals “due to questions that have arisen about the proper scope and application.” Staff will review the rule and report back to the commissioners. CorpFin “will express no views on the application of [the rule] during the current proxy season.”
The Whole Foods matter involved dueling proposals to let shareholders place their own director nominees on the proxy: one from activist investor James McRitchie granting proxy access to any shareholder who owns at least 3 percent of the company for at least three years; and a counter-proposal from Whole Foods itself setting the threshold at 9 percent of company stock for least five years. In an initial no-action letter, CorpFin sided with Whole Foods in its claim that McRitchie’s proposal “directly conflicts” with its own and would “present alternative and conflicting decisions for the stockholders and would create the potential for inconsistent and ambiguous results.” It promised not to pursue enforcement action if the Texas-based grocery chain omits the proposal from its proxy materials.
The Whole Foods victory initially signaled that the SEC was willing to take a more business-friendly view on what constitutes a substantially similar company proposal, shifting away from the widely accepted “three-and-three” threshold of 3 percent ownership by a shareholder for at least three years. McRitchie appealed the decision and, subsequently, Whole Foods amended its counterproposal to 5 percent ownership for five years.
A backdrop to all this is that New York City Comptroller Scott Stringer, on behalf of the $160 billion New York City pension funds, announced an initiative to win shareholders the right to nominate directors not backed by the company for inclusion on the proxy ballot. The proxy access proposals request bylaw changes that give shareholders who meet a threshold of owning three percent of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on the company’s ballot. Thus far, 18 companies have struck against the effort by proposing their own proxy access guidelines and seeking SEC approval to replace Stringer’s proposal with their own on the grounds that they would conflict.
Big questions now await those companies and any others looking to wiggle away from shareholder proposals, especially as White’s directive seems to apply to all no-action requests. Options on the table, for both companies and activist shareholders, include turning to courtrooms to settle the matter. Companies may also have to decide whether to present both plans, choose one, or offer nothing at annual meeting in the absence of SEC guidance—keeping in mind that how proxy advisors ISS and Glass Lewis might respond is not yet known. Because the SEC’s no-action letters, despite the weight they carry, are still considered “informal guidance” companies do have the option to base whatever decision they make on past precedent and hope they prevail.
For companies that turn to the courts, there is a current case to keep an eye on. A November decision by the U.S. District Court for the District of Delaware slapped down a no-action letter that sided with Walmart’s exclusion of a shareholder proposal at its 2014 annual meeting. That proponent was Trinity Wall Street, an organization associated with New York City’s Trinity Church.
In December 2013, Trinity submitted a proposal aimed at pressuring Walmart’s board of directors to decide whether the company should keep selling guns with magazines able to hold more than 10 rounds of ammunition. Walmart asked the SEC for a no-action letter that would allow it to omit the proposal on the basis it “deals with matters relating to the company’s ordinary business operations.” The SEC agreed and granted the no-action letter. Trinity turned to the court in protest and prevailed. Judge Leonard Stark noted, however, that the SEC’s exclusion criteria can be overly broad and “only a court can decide whether a company is obligated to include shareholder proposals in its proxy materials.” On Jan. 8, Walmart appealed the decision, an expedited process that is expected to be completed by mid-February.