SEC Issues Important Staff Bulletin Regarding Shareholder Proposal Exclusions

In good news for shareholders, the SEC will no longer allow companies to skirt proposals by fashioning management variations on proposals submitted by shareholders. In the first such bulletin in three years, the SEC has opined in a way that will make it harder for companies to evade proposals.

Under the provision that allows shareholders to file shareholder resolutions, the SEC also defines reasons a company may exclude a proposal (the shorthand of (i)(7), (i)(8), etc. derives from these rules.) One specific provision – Rule 14a-8(i)(9)– allows a company to exclude a proposal if it conflicts with a management proposal. The idea behind the exclusion was to avoid shareholder-run solicitations. The idea that there should not be a management proposal that says “vote for merger” and a shareholder proposal on the same ballot that says “vote against merger” is reasonable.

However, some years back a crafty lawyer came up with the idea that management could use this rationale to avoid facing shareholder proposals with the artful use of a management proposal.

Today the SEC staff wrote, “We believe 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.”

Companies had been increasing their attempts to exclude under 14a-8(i)(9) by gaming the system, particularly with proxy access. That proposal with the potential to open up corporate director elections includes a number of variables (notably percent of shareholders and length of holding) in defining best practice. Some companies preferred a higher hurdle; indeed, some may have preferred an impossibly high one. And thus management proposals were filed and i-9 exclusions were sought.

Today the SEC clarified its position. Specifically, “We will not view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both.”

The SEC, with this Bulletin has essentially said, “Enough. Stop trying to game the rules to exclude proposals.”  

On compensation proposals the staff writes:

“A shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards.  This is because a reasonable shareholder could logically vote for a compensation plan that gives the compensation committee the discretion to determine the vesting of awards, as well as a proposal seeking implementation of a specific vesting policy that would apply to future awards granted under the plan.”

Shareholders should welcome this clarification.