United States: Corp Fin Further Refines Rule 14a-8(i)(9) Exclusion

Last Updated: April 11 2018
Article by Cydney Posner

In past few years, after Corp Fin issued Staff Legal Bulletin 14H redefining the meaning of "direct conflict" under the Rule 14a-8(i)(9) exclusion for "conflicting proposals," the staff has continued to fill in the outline of what works and what doesn't work under the new interpretation of the exclusion. In American Airlines Group (avail. April 2, 2018), the staff concluded that the approach taken by the company was coloring outside the lines and denied no-action relief.

You might recall that, in 2015, the staff issued Staff Legal Bulletin 14H, narrowing the application of the 14a-8(i)(9) exclusion by redefining the meaning of "direct conflict." The SLB had followed a proxy season during which there was a surprising clash over the application of the "conflicting proposals" exclusion. The conflict arose originally in the context of a shareholder proposal for proxy access submitted to Whole Foods that would have permitted shareholders holding at least 3% of the company's voting securities to nominate up to 20% of the board. In its no-action request to the SEC, Whole Foods advised that it was submitting a management proxy access proposal at the same meeting that included different terms; for example, it would allow any single shareholder owning at least 9% of the company's common to submit nominations to be included in the company's proxy statement. The SEC granted relief and, in view of the success of this approach, a significant number of companies then followed the Whole Foods model. However, after the proponent requested reconsideration, the SEC withdrew its favorable letter and, following a period of review, the new SLB was issued, in which the staff took the position

"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. For this purpose, we believe that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, i.e., 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." [emphasis added]

Accordingly, the key question under the new guidance was "whether a reasonable shareholder could logically vote for both proposals" because both seek a similar objective. If so, the proposals were not in "direct conflict." (See this PubCo post.)

After issuance of the SLB, the staff addressed its applications in Illumina, Inc. (avail. March 18, 2016), AES Corporation (avail. December 19, 2017), CF Industries Holdings (avail. January 30, 2018) and Capital One (avail. Feb 21, 2018), in each case granting no-action relief to the company under Rule 14a-8(i)(9).

Illumina, Inc. provided the staff with its first opportunity to apply the new test under Rule 14a-8(i)(9). In Illumina, the shareholder proposal (from the John Chevedden group) requested that the "board take the steps necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws." After the proposal was received, Illumina's board approved a management proposal, to be submitted for shareholder ratification on an advisory basis at the 2016 annual meeting, to retain eight provisions that were already in the company's charter and bylaws that required a supermajority (66-2/3%) vote. The request for no-action relief contended that the "shareholders could not logically vote for the Shareholder Proposal and the Company Proposal" and that "a vote for the Shareholder Proposal is tantamount to a vote against the Company Proposal and vice versa." Moreover, the request argued, "an affirmative vote on both the Shareholder Proposal and the Company Proposal would result in exactly the kind of conflict that Rule 14a-8(i)(9) was designed to prevent." Granting no-action relief, the staff concurred with Illumina's view: "In our view, the proposal directly conflicts with management's proposal because a reasonable shareholder could not logically vote in favor of both proposals." (See this PubCo post.)

Precisely the same approach taken in Illumina was taken in AES, CF Industries and Capital One. There, Chevedden had submitted shareholder proposals to reduce the threshold required to call a special shareholders meeting from 25% to 10%. However, each of the companies sought no-action relief permitting exclusion of the proposal because it directly conflicted with a management proposal to be submitted at the same meeting to ratify the company's existing special meeting provisions. The staff agreed with the companies' arguments and granted no-action relief (although, in Capital One, the relief was conditioned on the company's making specified additional disclosures.) Notably, in all of those cases, the provisions that the companies were submitting to the shareholders for ratification already existed in the companies' governing documents. As a result, the companies were seeking only shareholder ratification; no further shareholder action was necessary to implement the charter and bylaw provisions that were being submitted for ratification. (See this PubCo post and this PubCo post.)

That was not the case in American Airlines. There, Chevedden had submitted a shareholder proposal asking the company's board to take the steps necessary to amend the bylaws and other governing documents to give holders in the aggregate of 10% of the company's outstanding common stock the power to call a special shareholders meeting.

Like many companies, however, American had a charter provision that prohibited shareholders from calling special meetings—only the board or the CEO could call a special shareholders meeting. That meant that, to provide shareholders with any right to call special meetings in either the bylaws or certificate, the board not only needed to amend the company's bylaws, but also had to amend its certificate of incorporation, which, of course, required shareholder approval.

Accordingly, the board adopted a resolution amending the company's certificate of incorporation to remove the existing prohibition and instead permit the holders of at least 20% of the voting power to call a special meeting and directing that it be submitted to the shareholders for approval at the annual meeting. The board also amended its bylaws to permit holders of 20% to call a special meeting (together with a number of disclosure requirements) and directed that the shareholders be asked to ratify the "retention" of the bylaw amendment. The company then argued in its request for no-action that, because a rational shareholder could not logically vote for both the shareholder proposal and either the amendment to the certificate or the company's proposal to ratify the bylaw provision—as they represented "mutually exclusive choices"—the shareholder proposal could be properly excluded under Rule 14a-8(i)(9). However—and here's the rub—neither the amendment to the certificate nor the amendment to the bylaws could become effective until the certificate amendment was approved by the shareholders.

Corp Fin was having none of it. Notwithstanding the use of the magic words like "ratification" and "retention," neither the certificate nor the bylaws currently permitted shareholders to call special meetings. As a result, this configuration of company proposals and shareholder proposal was closer to the type of no-action request that Corp Fin had ruled out under the SLB; in effect, Corp Fin said, they all sought a similar objective of allowing shareholders to call a special meeting:

"We are unable to concur in your view that the Company may exclude the Proposal under rule 14a-8(i)(9). We note that the Company's governing documents do not currently permit shareholders to call a special meeting and that the Bylaw Amendments will only become effective upon shareholder approval of the Certificate Amendment. Accordingly, the management and shareholder proposals seek a similar objective; to give shareholders the ability to call a special meeting. Therefore, the proposals do not present shareholders with conflicting decisions such that a reasonable shareholder could not logically vote in favor of both proposals. Accordingly, we do not believe that the Company may omit the Proposal from its proxy materials in reliance on rule 14a-8(i)(9)."

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