Preserving Shareholder Engagement as We Know It

“Our approach to this issue is informed by our understanding that a vote on a duly submitted shareholder proposal provides materially important information to both shareholders and the Board in regard to  policy alternatives and shareholder preferences.”

Investors representing associations with $2.16 trillion in assets under management (“AUM”), and individual institutions with $280.8 billion AUM submitted a comment letter to the SEC today, which offered four important recommendations to the Commission as it reviews interpretation of Rule 14a-8(i)(9).

A negative re-interpretation of this Rule could threaten shareholder engagementas it has come to be known over the past half century.

Read the full Investor Comment Letter, with recommendations, on Rule 14a-8(i)(9)

Background:

Rule 14a-8(i)(9) (the “Rule” or “(i)(9)”) concerns ‘Conflicts with company’s proposal’, and has been the subject of intense scrutiny this year as companies and their attorneys tried to re-interpret the Rule to enable them to exclude essentially any shareholder proposal from the proxy.

Originally established in the 1970’s to prevent shareholders from submitting proposals that conflicted with management-sponsored items already destined for the proxy, the original restriction was narrowly defined and it was designed to prevent shareholders from achieving an end-run around existing proxy solicitation rules.

Over the intervening years the SEC Staff has allowed companies to argue (i)(9) and receive no-action ‘relief’ from time-to-time.  However, especially in the last decade, a number of these rulings were issued with far too much laxity when compared to the original intent of the Rule.

Actions in 2015

Fast forward to 2015, when a major set of 75 proxy access proposals was placed on company ballots.  Corporate lawyers seized upon a new, very broad, interpretation of (i)(9) as a possible means for excluding these proposals, and then proceeded to challenge them with abandon.

It came to a head when the SEC initially granted a no-action request to Whole Foods, but upon appeal by James McRitchie (the proponent and a leading corporate governance thought leader) the SEC reversed itself, rescinded the no-action approval, and announced on January 16th that the entire (i)(9) rule would be suspended for review.  That review has been underway and is now nearing its conclusion.

Enter Gibson Dunn & the corporate bar

On June 10th 2015, a set of corporate law firms submitted a lengthy letter to the SEC which called for the institutionalization of a set of overly broad interpretations of (i)(9).  The law firms assert that the rules should allow a company to exclude a shareholder proposal from the proxy by simply asserting that it intends to offer a proposal of its own on the same subject matter.

The corporate bar would have it that this assertion could be made after the shareowner proposal has been received, it would not have to be presented for examination (or even be in existence) at the time of a no-action challenge, and it would only need to be generally related to the same subject matter.  A company proposal could seek the opposite of the shareholder proposal, or could deviate so much from it that none of the proponent’s original intent or arguments were addressed.

The impact of such an interpretation

This could allow companies, in response to receiving a shareholder proposal on essentially any topic, to easily exclude it by making the assertion that they plan to offer their own similar proposal.  To reiterate, the company proposal would not need to exist, and its wording would not need to be presented for examination.

In fact, during the 2015 proxy season quite a number of companies attempted to do just that – tried to have shareholder proposals excluded because of ones the company said it planned to present.  When they were denied no-action relief, many of these companies failed to subsequently present their own proposals.  SEC Chair Mary Jo White referenced such “gamesmanship” when announcing the suspension and review of (i)(9), as well as in subsequent speeches.

On June 18th 2015 a number of shareholder advocates (including Investor Voice) participated in a roundtable meeting with the SEC at which (i)(9) was a major topic of discussion.  It is clear that the SEC is accelerating its efforts to clarify its interpretation of the Rule.  Hence, this effort of investors to influence the SEC’s review.

The investor sign-on letter is straightforward and direct, but it makes four key recommendations for how the SEC should interpret Rule 14a-8(i)(9) – recommendations which would return the Rule to its original intent, and avoid company gamesmanship or abuse.  

Read the full Investor Comment Letter, with recommendations. on Rule 14a-8(i)(9)

Acknowledgements

The quality of the investor letter owes a tremendous debt of gratitude to Sanford Lewis in his capacity as lead counsel for the effort, and to Adam Kanzer, General Counsel of Domini Social Investments, for providing significant review of both the strategy and materials.  Bruce Herbert of Newground Social Investment and Investor Voice organized the investor sign-on, and served as the letter’s lead editor.

Thanks also goes to others for their strategizing and comments along the way, including: Danielle Fugere, Rob McGarrah, Jim McRitchie, Paul Neuhauser, Tim Smith, Beth Young, and Rosanna Landis Weaver.