The Securities and Exchange Commission has sided with Whole Foods in a closely watched effort to submit its own proxy access proposal at annual meeting, superseding one sought by an activist shareholder. The Commission's recent no-action letter has likely made it far more difficult for other campaigns to give shareholders greater influence over director nominations.
A proposal by influential activist investor Jim McRitchie sought to give proxy access to any group of shareholders that collectively owns at least 3 percent of the company’s shares continuously for at least three years, allowing them to place nominees on the ballot for up to 20 percent of the board. Whole Foods countered with a proposal of its own: amending its bylaws to limit access to individual, not aggregated, shareholders who maintain a 9 percent ownership for at least five years. The counter proposal limits nominations to 10 percent of the board or one director if the board is less than 10 members.
The SEC sought to give shareholders greater proxy access with 2010 rulemaking, but it was vacated following a successful lawsuit by the Business Roundtable and U.S. Chamber of Commerce. The SEC, showing little appetite for a rewrite, instead allows “private ordering” proxy access, meaning that shareholders need to pass a resolution at individual companies to win the right to nominate their own director candidates on the proxy. Public companies, faced with a shareholder proxy access proposal, can request a no-action letter, relief that allows them to exclude a proposal from proxy ballots. Among the criteria for granting this relief is if a shareholder proposal “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”
In a no-action letter, posted this week, the SEC’s Division of Corporation Finance 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 will not pursue enforcement action if the Texas-based grocery chain omits the shareholder proposal from its proxy materials.
The Whole Foods victory appears to signal that the SEC is willing to take a broader, business-friendly view 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. That metric, the general threshold used by proxy advisory firms in making recommendations at annual meeting, was the same formula used by the SEC in its abandoned proxy access rule.
“SEC staff effectively cut the road, giving a free pass to every group of entrenched board members and managers that seeks to prevent proxy access and direct accountability to shareowners,” McRitchie wrote on his CorpGov.net website. “Whole Foods might as well condition proxy access on the Earth and Mars switching orbits… With the largest shareholder owning 5.4 percent of Whole Foods and the average holding period in America now down to about one year, it is highly unlikely that any single shareholder will ever meet the conditions of the proxy access proposal [it submitted].”