Under pressure from institutional investors, the Securities and Exchange Commission has agreed to reconsider earlier guidance that threatened to further stifle investors’ voices in the boardroom, offering hope to shareholders looking to nominate candidates for corporate boards.
SEC Chair Mary Jo White’s January 16 statement, in which she directed SEC staff to revisit a rule allowing a company to exclude a shareholder proposal that “directly conflicts” with a company proposal, is the latest twist in a long fight over what is known as “proxy access.” At issue is whether companies should allow some large, long-term investors to submit proposals for inclusion in the voting materials, known as proxy statements, mailed to shareholders before annual meetings. Though some companies have relented, most corporate boards maintain complete control over proxy access, making it difficult for board candidates not favored by management to earn nomination, let alone election.
The current skirmish arose when an investor in Whole Foods sought to put forward a proxy proposal establishing a procedure for director nominations by shareholders. The proposal by James McRitchie would allow a shareholder or group of shareholders who have held 3% or more of Whole Foods’ common stock for at least three years to nominate two directors to the company’s board. In response, Whole Foods decided to sponsor a competing proposal with a much higher threshold–one that no shareholder currently meets–requiring a single shareholder to own at least 9% of its stock for at least five years. (Whole Foods later lowered the threshold to a single shareholder owning 5% for five years.)
Whole Foods then asked the SEC to allow the company to exclude McRitchie’s proposal pursuant to SEC Rule 14a-8(i)(9), which permits such exclusion if a shareholder proposal directly conflicts with a management proposal to be submitted at the same meeting. On December 1, the SEC Division of Corporation Finance provided Whole Foods with a no-action letter stating that there appeared “to be some basis” for excluding McRitchie’s proposal from the proxy materials under the rule and that it would “not recommend enforcement action to the Commission” if Whole Foods omitted it.
Both companies and investor activists reacted quickly and strongly to the no-action letter. By January 15, at least 24 companies, emboldened by the SEC’s decision, were arguing that they should be allowed to make similar exclusions due to competing proposals, according to the Council of Institutional Investors (CII), a shareholder education and advocacy group. CII called the Whole Food proposal a “dangerous precedent” and sent letters to the companies asking them to desist. It also wrote the SEC urging reconsideration. On January 16, SEC Chair White concurred, issuing a statement announcing the review: “Due to questions that have arisen about the proper scope and application of Rule 14a-8(i)(9), I have directed the staff to review the rule and report to the Commission on its review.” The Division of Corporation Finance also announced that it will express no views on the application of Rule 14a-8(i)(9) during the current proxy season. It also issued a letter stating that it had “reconsidered its position” with respect to the exclusion request from Whole Foods, and it “express[ed] no view concerning whether Whole Foods may exclude the proposal under rule 14a-8(i)(9).”
“We are extremely pleased the SEC has reconsidered,” CII Deputy Director Amy Borrus was quoted as stating. “Shareholders should have the right to seek different terms for a reform that management itself is proposing.”
In the wake of the SEC’s actions and in light of the uncertainty surrounding the exclusion, the Business Roundtable has asked the proxy advisory services Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC to hold off on issuing proxy voting recommendations based on company use of the exclusion. The advisory services have not agreed to comply with the request, and Glass Lewis stated that “in limited cases [it] may recommend voting against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale.”
That the SEC, which considers itself an advocate for investors, found itself opposing meaningful proxy access, if only temporarily, is especially odd considering its most recent history on the issue. In 2010, the Commission adopted a proxy access rule with the same 3% and three-year stock ownership threshold sought by Whole Foods shareholder McRitchie. That effort was thwarted in 2011, when the D.C. Circuit Court of Appeals struck down the rule, holding in Business Roundtable v. Securities and Exchange Commission that the SEC “acted arbitrarily and capriciously for having failed … adequately to assess the economic effects of a new rule.”