SEC Speaks on Proxy Access

The Securities and Exchange Commission has fired off another round of decisions about no-action letters companies have submitted looking to keep shareholder proposals off the proxy statement—including a few proposals about shareholder access to the proxy statement overall.

Corporate governance experts are paying close attention to the SEC's response to no-action requests this year because this is the first year that shareholders are eligible to give themselves access to the proxy statement by filing proposals to change the bylaws to that effect.

Companies routinely ask for the SEC's permission to take no action on shareholder proposals—that is, to keep the proposals off the proxy statement—citing two reasons. First, they may argue that the proposal pertains to routine business, and therefore isn't something shareholder should decide. Or the company can argue that the shareholder's proposal has already been substantially implemented, and therefore doesn't need to be decided at an annual meeting.

In a batch of letters posted on March 7, the SEC responded to a series of no-action requests regarding questions about Rule 14a-8 of the Exchange Act, which allows shareholders to use the company proxy statement to nominate directors.

The SEC supported the requests to ignore the proposals in three of the cases, and denied them in two others. In some cases the no-action request was granted more on procedural terms, rather than because of any philosophical disagreement the SEC has with shareholder proxy access in general. For example, the SEC agreed with claims by Bank of America, Goldman Sachs, and Textron that the proposals submitted to these companies contained more than one action that the proponents wanted the companies to take.

In its response to Bank of America's request, the SEC wrote, “We note that paragraphs one through five and seven of the submission contain a proposal relating to the inclusion of shareholder nominations for director in Bank of America's proxy materials, and paragraph six of the submission contains a proposal relating to events that would not be considered a change in control.” As a result, the SEC staff would not recommend enforcement action if the company omitted the submission from its proxy materials.

Under SEC Rule 14a-8, a proposal must cover just one corporate action that the shareholder would like to see, says Robert Heim, a former SEC regional director and now at the law firm Meyers & Heim. This restriction allows shareholders to know exactly what they're voting for, he adds. Was the SEC's response a close call? Heim says no. “I think the SEC's rejection of these shareholder proposals was within the guidelines.”

The SEC staff also agreed with no-action requests filed by Chiquita Brands, MEMC Electronic Materials, and Sprint Nextel, that the proposals they had received were “vague and indefinite.” The proposals in question referred to SEC Rule 14a-8(b), which requires shareholders to have continuously held at least $2,000 in market value, or 1 percent, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date of submitting the proposal. Also, the shareholder must continue to hold those securities through the date of the meeting.”

Although the proposals refer to this SEC rule, they didn't describe or explain it. That omission may be because the proposals are limited to just 500 words, says David Lynn, co-chair of the public companies and securities practice with the law firm Morrison Foerster.

The SEC's response indicated that simply referring to the rule was insufficient. “While we recognize that some shareholders voting on the proposal may be familiar with the eligibility requirements of rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirement based on the language of the proposal,” the SEC letter reads.

More companies appear to be raising a “vagueness” argument this year, says Ted Allen, head of publications and governance counsel with ISS Governance. Shareholder proposals are often subject to challenges of being overly vague until companies know exactly how the SEC will respond, he says. “Companies are getting a little more creative in finding potential ways that proposals can be read.”

“Don't go rushing to implement shareholder access. You don't know that it will help you.”

—David Lynn,

Co-Chair, Securities Practice,

Morrison Foerster

The SEC's no-action letters on the three 14a-8(b) cases “shocked” some shareholders, says Glyn Holton, executive director at U.S. Proxy Exchange, a nonprofit in favor of shareowner rights. “All we did was cite an SEC rule, which is readily available on the Internet, is half a page long and is written in plain English. So, how did Commission staff conclude, on that basis alone, that neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires?” he asks.

Holton says that his organization will work with shareowners to write future proposals with this concern in mind. The U.S. Proxy Exchange doesn't submit shareholder proposals, Holton says; it only offers a model proxy access proposal that shareholders can use in developing their own proposals.

In other cases where companies tried to gain permission to omit shareholder proposals, or portions of them, on technical grounds, the SEC didn't go along. For example, the SEC denied a request by some companies to exclude from their proxy materials a reference to the Website of the proponents behind a proposal. In its response to Wells Fargo, the SEC said that the bank “has not asserted that the content to be included on the Website is false or misleading.” As a result, the company could not exclude this portion of the proposal.

The SEC also denied a request by KSW that the company be allowed to omit a proposal because it had substantially implemented it anyway. In this case, the proposal sought to amend KSW's bylaws to include in its proxy materials anyone nominated for election to the board by a shareholder that owns 2 percent of the company's common stock. KSW had adopted a bylaw that would allow a shareholder owning five percent of common stock to include a nomination for director in the proxy materials. Given the difference between KSW's bylaw and the proposal, the SEC said it was “unable to concur that the bylaw adopted by KSW substantially implements the proposal.”

NO-ACTION LETTERS

Below is the SEC's definition of what constitutes a “no action” letter:

An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a "no-action" letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual's or entity's original letter. The SEC staff sometimes responds in the form of a no-action letter to requests for clarification of the legality of certain activities.

You can find a compilation of Staff No Action, Interpretive, and Exemptive Letters from the Divisions of Corporation Finance, Investment Management, and Market Regulation and the Office of Chief Accountant in the "Staff Interpretations" section of [the SEC's] Website.

Source: SEC.

The SEC response wasn't surprising, Allen says. “If there's a meaningful difference in thresholds, it's not surprising that the SEC didn't allow the company to omit it.”

Lynn says companies that plan to implement higher thresholds as an end-run on proxy access can take something from the SEC's response. “Don't go rushing to implement shareholder access. You don't know that it will help you.”

Smarter Proposals Coming

Governance experts say that this round of no-action letters and denials indicates the SEC is focused on process. “The SEC is upholding the letter of the rules and laws,” Heim says. “They're requiring shareholders to really comply to a very high degree with all the requirements before the SEC will allow them to be included.”

While that may lead to more no-action letters now, it doesn't bode well for companies that want to exclude shareholder proposals on these grounds going forward, since it's likely that future proposals will address these concerns, Lynn says. “The proponents get smarter, and shareholders realize that their wording led to a proposal being excluded,” he says.

In fact, the U.S. Proxy Exchange already is reworking its model proxy access proposal, Holton says. “This is best opportunity for improving corporate governance that we've had in a long time,” Holton says. “Say-on-pay, which was the prevalent issue for 2011, was largely theatrics, as the votes are advisory only. In contrast, proxy access has the potential to put people on the board.”