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From Securities Regulation Daily, January 20, 2015

SEC staff to review exclusion for shareholder proposals that conflict with management’s

By Jacquelyn Lumb

The Division of Corporation Finance will express no view on the application of Exchange Act Rule 14a-8(i)(9) during the current proxy season following a directive by Chair Mary Jo White to review the rule and report its findings to the Commission. Rule 14a-8(i)(9) allows a company to exclude a shareholder proposal that directly conflicts with a management proposal.  White directed the staff to review the rule after questions arose about its proper scope and application.

The Division responded to 14 no-action requests in 2014 relating to Rule 14a-8(i)(9) and to 28 in 2013. In the most recent no-action letter involving the rule, the staff advised on December 1, 2014 that Whole Foods Market, Inc. could omit from its proxy material a proxy access proposal which conflicted with the company’s proposal. The shareholder, James McRitchie, wrote that his proposal was the first in which the staff had to decide whether a proxy access proposal could be excluded on the basis of the company presenting its own alternative proposal.

Proxy access proposal. McRitchie’s proposal asked the board to allow shareholders to nominate up to 20 percent or the board, or no less than two members if the size of the board is reduced from its current size, if the shareholders submitting the nomination collectively held for three years, at least three percent of the securities eligible to vote. In his supporting statement, McRitchie said the majority of Whole Foods’ board had served nine years or longer, and had become entrenched and stale.

Whole Foods’ proposal. In its no-action letters seeking to omit the proposal, Whole Foods said it had decided to submit its own proposal with respect to proxy access for director nominations. Whole Foods’ proposal would permit any shareholder, but not a group of shareholders, owning nine percent or more of the common shares for five years to nominate candidates to the board. The shareholder, under Whole Foods’ proposal, would be permitted to nominate the greater of one director or 10 percent of the board.

Whole Foods then sought to omit McRitchie’s proposal under Rule 14a-8(i)(9) on the basis that his proposal directly conflicted with Whole Foods’ proposal. If both proposals were subject to a vote, Whole Foods said it would present alternative and conflicting decisions that could result in inconsistent and ambiguous results.

Gaming the system. McRitchie responded that Rule 14a-8(i)(9) was not intended to allow companies to avoid shareholder proposals by substituting their own sham proposals on the same subject. He said the company’s proposal was clearly intended to deny proxy access to shareholder nominees. He also noted that Whole Foods’ largest shareholder, as of June 30, 2014, held 5.4 percent of the outstanding shares. He said the idea that a shareholder would acquire $700 million worth of Whole Foods shares and hold them for five years is ludicrous, especially as the company’s share value continues to plunge. McRitchie said that companies should not be allowed to game the system with proposals that are aimed at thwarting the will of their shareholders.

Staff reconsideration. After the staff agreed that there was some basis for Whole Foods’ view that it could exclude the proposal under Rule 14a-8(i)(9), McRitchie sought the Division’s reconsideration of its position. The staff then advised McRitchie, in a letter dated January 16, 2015, of White’s directive that the staff review the rule as a basis for exclusion. Pending that review, the staff explained that it would not express any view during the current proxy season. Accordingly, the staff said it would express no view on whether Whole Foods may exclude the proposal under Rule 14a-8(i)(9).

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