SEC’s No-Action Position on Proxy Access Amendment Proposals

John Newell is Counsel and Manager of Public Company Practice at Goodwin Procter LLP. This post is based on a Goodwin publication by Mr. Newell, Daniel P. AdamsDavid H. Roberts, and Bradley C. Weber.

The staff of the Division of Corporation Finance of the Securities and Exchange Commission has issued three additional responses to company no-action requests to exclude shareholder-proposed amendments to proxy access bylaw provisions previously adopted by the company. Each of the three SEC responses states that the SEC staff does not believe that the company can exclude the shareholder proposals on the basis that either:

  • the shareholder’s proposed amendments (which included three or five specific amendments) constitute more than one proposal and could therefore be excluded by the company in reliance on Rule 14a-8(c); or
  • the company had substantially implemented the shareholder’s proposed amendments through its initial adoption of a proxy access bylaw that differed in its ancillary provisions from the amendments subsequently proposed by the shareholder.

In our recent client alert Update on SEC Proxy Access No-Action Letters (November 2, 2016), we summarized SEC no-action responses published in July, September and October 2016 that indicate that companies are unlikely to receive no-action relief from the SEC staff for exclusion of shareholder-proposed amendments to an existing proxy access bylaw on the basis of substantial implementation. This contrasts with the continuing position of the SEC staff that companies may continue to exclude proposals for initial adoption of a proxy access bylaw from the company’s proxy statement on the basis of “substantial implementation” under Rule 14a-8(i)(10), consistent with the position taken by the SEC staff during late 2015 and 2016, if the company has adopted, or proposes to adopt, a proxy access bylaw that includes ownership threshold and holding period standards that are at least as favorable as those included in the proxy access shareholder proposal.

Recent Developments

Three subsequent SEC no-action responses, each dated November 3, 2016, confirm the position the SEC staff previously took on how the staff will apply “substantial implementation” to shareholder proposals to amend previously adopted proxy access bylaw provisions in the H&R Block, Microsoft and Apple no-action responses. In addition, however, each of these three letters states that the company may not treat the proposal for multiple amendments as multiple shareholder proposals, which Rule 14a-8(c) permits a company to exclude from its proxy statement.

The three most recent letters—Walgreens Boots Alliance, Inc. (November 3, 2016), The Walt Disney Company (November 3, 2016) and Whole Foods Market, Inc. (November 3, 2016)—involve the same proponent, who argued that the multiple proposed amendments were part of a “unified” proposal and had to be considered together. In each case, the shareholder proposed substantially similar amendments to the company’s previously adopted proxy access bylaw. The proposed amendments sought to:

  • increase the number of shareholder nominees to the greater of 25% of the directors then serving or two, up from 20% (Walgreens and Whole Foods) or the greater of 20% or two (Walt Disney);
  • remove any limitation on the number of shareholders whose shares can be aggregated to achieve the 3% ownership threshold (Walgreens, Walt Disney and Whole Foods); and
  • remove any limitation on renomination of shareholder nominees based on the number or percentage of votes received in a prior director election (Walgreens, Walt Disney and Whole Foods).

In addition, the shareholder-proposed amendments received by Walgreens would have (1) permitted loaned securities to be counted toward the 3% ownership threshold if the shareholder represents that it had the legal right to recall the securities for voting purposes, would vote the securities at the shareholder meeting and would hold those securities through the date of the annual meeting and (2) removed a requirement that the shareholder provide a written undertaking agreeing to own the shares counted toward the 3% ownership threshold through the date of the annual meeting.

“More Than One Proposal” and “Substantial Implementation” Arguments

Substantial Implementation—No Change in SEC Staff Position. As noted above, Walgreens, Walt Disney and Whole Foods each argued that the company could exclude the shareholder-proposed amendments on the basis that the differences between the proposed amendments and the company’s previously adopted proxy access bylaw provisions were relatively insignificant to shareholder proxy access under the company’s proxy access bylaw. Each company therefore urged the SEC staff to conclude that the company could exclude the proposed amendments under Rule 14a-8(i)(10) on the basis that the company had previously substantially implemented the shareholder’s proposed amendments. The negative response of the SEC staff in these three letters continues the position previously taken by the SEC staff with respect to similar shareholder-proposed amendments where the company had taken no action in response to the shareholder proposal.

“More Than One Proposal” Argument Rejected by SEC Staff. The new argument made by the companies in Walgreens, Walt Disney and Whole Foods was that the SEC staff should view the multiple proposals as a single submission that the company could exclude from its proxy materials under Rule 14a-8(c), which permits a shareholder to submit only one proposal per shareholder meeting. There is a long-standing series of no-action letters in which the SEC staff has permitted companies to exclude a shareholder proposal that combines separate and distinct elements that lack a single, well-defined unifying concept, even if the elements of the proposal are presented as part of a single program and relate to the same general subject matter.

The companies argued that the various proposed amendments were—consistent with the shareholder proponent’s argument that each proposed amendment, which stated that each of the proposed amendments should be viewed individually as an essential element of the proposal—unrelated to any “single well-defined unifying concept.” Rather, the companies argued, the only claim that the shareholder could make to support viewing the various amendments as a single proposal was that they addressed a single part of the company’s bylaws relating to proxy access and would in the aggregate ensure more “meaningful proxy access” for more shareholders.

In each of the three cases, the SEC staff declined to accept the company’s argument that the proposals constituted more than a single proposal, and therefore advised that the staff did not believe the company could omit the proposal from its proxy materials in reliance on Rule 14a-8(c).

Proxy Access and the 2017 Proxy Season

During the 2017 proxy season, companies that previously adopted proxy access bylaw provisions may be targets of shareholder proposals that seek to amend provisions such as those targeted in Walgreens, Walt Disney and Whole Foods (and those targeted earlier in H&R Block, Microsoft and Apple). It appears that companies will face difficulties excluding these proposals on the basis of substantial implementation under Rule 14a-8(i)(10) or on the basis that the amendments are more than a single proposal under Rule 14a-8(c), at least in cases where the facts are similar to these six no-action letters and the company has taken no action in response to the shareholder proposal to amend the company’s proxy access bylaw.

Even if companies cannot exclude shareholder-proposed amendments from their proxy statements, however, it is difficult to predict whether these proposals will attract significant shareholder support. At the time this alert was published, only one of the six companies that have received the shareholder proposals subject to these no-action letters—H&R Block—has held its annual meeting. The H&R Block proposal sought to amend its proxy access bylaws (1) to remove limitations on the number of shareholders whose shares can be aggregated to satisfy the 3% ownership threshold, (2) to increase the maximum number of shareholder-nominated directors to 25% or two directors, (3) to eliminate restrictions on renominating director candidates who have previously received the votes of less than 25% of the company’s shareholders, and (4) to provide that loaned securities should be counted toward the 3% ownership threshold. ISS recommended that shareholders vote in favor of this proposal. Nevertheless, the proposal only received the support of approximately 30% of the votes cast and was not approved.

If subsequent shareholder votes on shareholder proposals for proxy access bylaw amendments fare similarly, companies with proxy access bylaws may continue to feel comfortable that they have appropriately addressed shareholders’ desire for meaningful proxy access even if their proxy access bylaw provisions do not incorporate all of the ancillary terms contained in the recent shareholder-proposed amendments.

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