SEC Withdraws No-Action: Rule 14a-8(i)(9) Suspended

Seal of SEC

The SEC has essentially suspended Rule 14a-8(i)(9) Conflicts with company’s proposal. Shareowners at Whole Foods Market and at many other companies have scored a huge victory.

Last Friday the SEC issued the following:

Statement from Chair White Directing Staff to Review Commission Rule for Excluding Conflicting Proxy Proposals

Chair Mary Jo White

Jan. 16, 2015 The Commission’s proxy rules enable shareholders to submit proposals for inclusion in a company’s proxy materials for a vote at a shareholder meeting, subject to certain procedural and substantive exclusions.  One of the exclusions, Exchange Act Rule 14a-8(i)(9), allows a company to exclude a shareholder proposal that “directly conflicts” with a management proposal.  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.

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Announcement of the Division of Corporation Finance Related to Exchange Act Rule 14a-8(i)(9) for Current Proxy Season

In light of Chair White’s direction to the staff to review Rule 14a-8(i)(9) and report to the Commission on its review, the Division of Corporation Finance will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.

I think Broc Romanek of TheCorporateCounsel.net was the first to report on the development, although I heard from several reporters within minutes of the SEC sending their response to my appeal. Broc’s post Proxy Access Punt! SEC to “Review” Counterproposal Exclusion Basis began with, “Some folks just lost their 3-day weekend. I have never blogged twice in a day – but figured I won’t be blogging until Tuesday and this SEC Statement (repeated below) – and this reconsideration letter from Corp Fin to Whole Foods – were just released.” I’m glad he thought it worth getting out right away. I took the three day weekend — but with a lot more phone calls and email interruptions than normal.

While Rule 14a-8(i)(9) is Suspended, Shareowners Should Unify

My hope is that the SEC staff will now focus on reviewing the original proposing release for subsection Rule 14a-8(i)(9).

This is a situation very much like AFSCME v SEC. However, instead of narrowing a rule to the point of blockage without promulgating a new rule, they have expanded an exclusion way beyond its original intent without issuing a new rule, as discussed in my appeal.

One thing the news coverage hasn’t picked up on so far is that since the “Division of Corporation Finance will express no views on the application of Rule 14a-8(i)(9) during the current proxy season,” that will also leave companies without cover under that subdivision for many other topics, including but not limited to the following (I see that earlier this morning Broc Romanek’s through post advising issuers, Proxy Access Punt: Top 5 Things People Are Asking):

  • Special Meetings
  • Simple Majority Vote ­
  • Recoup Unearned Management Bonuses

Additionally, the fact that review is expected to extend through the entire proxy season may be a clue that a new rulemaking is contemplated, since it should not take that long to simply review the no-action letters issued since Rule 14a-8(i)(9) was implemented and to make a finding that staff overstepped the original intent of that rule.

In the meantime, while the SEC goes back to review Rule 14a-8(i)(9) as directed, what happens this season will depend greatly on what funds and proxy advisors do. Since the SEC has withdrawn its no-action letter from Whole Foods and isn’t likely to take enforcement action against a company for excluding a proxy access proposal [or any “conflicting” proposal under Rule 14a-8(i)(9)] until they finish their review, companies may be tempted to simply exclude proposals.

The last instance I remember like that was a proposal by John Chevedden at Kinetic Concepts. Kinetic had been turned down for no-action relief. Somewhat later, a flawed court decision came down in a case involving John Chevedden in similar circumstances at KBR. Kinetic pointed to the court decision and told the SEC they were omitting Chevedden’s proposal.

ISS and, I think, Glass Lewis came out recommending that shareowners vote against all Kinetic Concepts directors. See Kinetic Concepts: Victory for Shareowners!

I hope all proxy advisors and all funds will recommend voting against any board that refuses to include proposals based on Rule 14a-8(i)(9). If they can get a no-action from the SEC on some other basis, fine. However, if they omit a duly submitted proxy proposal based on their own interpretation of the subdivision now under review by the SEC, their directors should face a vote of no confidence. If proxy advisors and funds take a fairly unified stand on the issue, companies are likely to back off until the review has been completed.

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