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From Securities Regulation Daily, November 2, 2015

Panelists discuss shift in thinking since SEC’s proxy access ruling

By John Filar Atwood

The SEC staff’s pronouncement in Staff Legal Bulletin 14H on how it will handle Rule 14a-8(i)(9) requests in the coming proxy season is a complete reversal of its long-held position and has caused companies to rethink their approach to the proxy access issue, according to Martin Dunn, a partner at Morrison & Foerster. Dunn and other disclosure experts discussed the impact of SLB 14H at Practising Law Institute’s conference on securities regulation.

Background. Rule 14a-8(i)(9) allows a company to exclude a shareholder proposal from its proxy materials if it directly conflicts with a management proposal. Dunn said that for as long as he can remember the staff’s position was that if the proposals address the same core issue, the staff allowed the company to exclude the proposal.

That began to change in the 2015 proxy season with the proxy access proposal submitted to Whole Foods Corp., in which the company countered a proposal for access to shareholders that owned three percent of the company’s shares for at least three years with a nine percent for five years proposal. The controversy surrounding the onerous terms of Whole Foods’ proposal prompted SEC Chair Mary Jo White to direct the staff not to rule on 14a-8(i)(9) requests until the staff could study the issue further. The staff released its new (i)(9) approach October 22nd in SLB 14H.

New approach. In SLB 14H, the staff of the Division of Corporation Finance said that the decision to exclude a proposal will be based on whether a reasonable shareholder could not logically vote in favor of both proposals. The standard applies if both proposals move in the same direction, such as where a reasonable shareholder may prefer one of the proposals. The staff acknowledged that the new standard may be stricter than its prior guidance, but it believes it is necessary to prevent shareholders from trying to circumvent the proxy rules.

Dunn said that it used to be that the terms of a proposal did not matter under (i)(9), but now they do. For the proposals to conflict, he noted, a vote for one must be a vote against the other. That means that a proxy access proposal with thresholds of three percent and three years does not conflict with a proposal with thresholds of five percent and five years. Although a shareholder may prefer the three percent for three years scenario, he or she can live with the five percent and five years thresholds, he said.

This is a major change, according to Wilmer Hale’s Meredith Cross, the former director of the Division of Corporation Finance. Everyone thought that if the proposals had different terms, they would conflict, she said. Now a company with similar but not identical proxy access proposals will have to include them both, she added.

Evolution in thinking. Cross said that SLB 14H has caused a rapid evolution in companies’ thinking in the few weeks since its issuance. Companies went from just having a proxy access proposal ready, to wanting to go ahead and implement a proxy access by-law to get out in front of the issue. There also has been continuous benchmarking going on, she said, where companies are changing the terms of their proxy access proposals based on what other companies are adopting.

Neila Radin, general counsel of JPMorgan Chase & Co., said that her company’s board of directors has asked her to have a proxy access proposal ready for consideration in the wake of SEC’s pronouncement in SLB 14H. One problem she foresees with companies adopting by-laws to get ahead of the curve is that the company still may get a proposal with alternative thresholds from shareholders. It is unclear right now if the staff will allow a company to exclude any such proposal under the “substantially implemented” standard, she noted.

Dunn agreed that there is a possibility that if shareholders are dissatisfied with the terms of a company’s proxy access by-law, such as the aggregation or ownership thresholds, they may submit proposals to change specific aspects of the by-law. It will be interesting to watch what the staff does in these situations in the coming proxy season, he said.

Cross said that she is not specifically advising her clients on whether to adopt a proxy access by-law or not. However, if they choose to adopt a by-law she will recommend that they keep the thresholds close to the accepted norms. The more the terms of the program raise red flags with shareholders, the more likely the company will see shareholder proposals in response, she concluded.

Companies: Whole Foods Corp.; JPMorgan Chase & Co.

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