Assessing Vague Shareholder Proposals Under Rule 14a 8(i)(3)

Posted by John F. Olson and Amy L. Goodman, Gibson, Dunn & Crutcher LLP, on Thursday March 28, 2013 at 9:22 am
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Editor’s Note: John F. Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center; Amy L. Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman, Elizabeth Ising, Brian Lane, and Ronald Mueller.

During the 2012 proxy season, the SEC staff concurred that a number of high profile shareholder proposals could be excluded from company proxy statements because various key terms in the proposals were not adequately defined or explained within the text of the proposal and supporting statement. See e.g., WellPoint, Inc. (SEIU Master Trust) (avail. Feb. 24, 2012, recon. denied Mar. 27, 2012) (concurring with exclusion of an independent chair proposal that referred to the New York Stock Exchange standard of independence without defining it because “neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”); Textron Inc. (avail. Mar. 7, 2012) (arguing that a reference to the Rule 14a-8 eligibility requirements in a proxy access shareholder proposal was vague and indefinite, although the staff ultimately concurred with the exclusion of the shareholder proposal on other grounds); Dell Inc. (avail. Mar. 30, 2012) (concurring with the exclusion of a similar proxy access shareholder proposal because the proposal’s reference to the Rule 14a-8 eligibility requirements was vague and indefinite). While these no-action letters reflected long-standing SEC staff precedent, in the current proxy season, there has continued to be a large number of no-action requests arguing that various terms in shareholder proposals are undefined or vague and therefore excludable under Rule 14a-8(i)(3).

The SEC staff, in concurring with the exclusion of a number of shareholder proposals in response to no-action requests submitted by Gibson Dunn and others, provided detailed guidance to both shareholder proponents and issuers of the analysis it followed in concurring that the proposals, which contained undefined terms, were vague and indefinite under Rule 14a-8(i)(3). The staff’s guidance came in response to no-action requests to exclude shareholder proposals requesting that the chairman of the company’s board of directors be an independent director within the meaning of the definition of independence used by the New York Stock Exchange (NYSE). In each instance, the shareholder proposal failed to provide any explanation about the substance of the NYSE definition. Thus, consistent with previous no-action letters, the SEC staff concurred that the independent chair shareholder proposals submitted to several companies could be excluded under Rule 14a-8(i)(3).

These no-action letters are noteworthy because the SEC staff explained in more detail than it had with past independent chair shareholder proposals its rationale for granting no-action relief under Rule 14a-8(i)(3). Most notably, the SEC staff stated that it views the definition of independence requested by the shareholder proposal as “a central aspect of the proposal” and that in “evaluating whether a proposal may be excluded on this basis, we consider only the information contained in the proposal and supporting statement and determine whether, based on that information, shareholders and the company can determine what actions the proposal seeks.” The no-action letters also state that the shareholder proposals’ failure to “provide information about what the New York Stock Exchange’s definition of ‘independent director’ means” led the SEC staff to conclude that “shareholders would not be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

The full text of the SEC’s explanation, which was largely the same in each of the no-action letters, is as follows:

There appears to be some basis for your view that [the company] may exclude the proposal from its proxy materials under rule 14a-8(i)(3), as vague and indefinite. In arriving at this position, we note that the proposal refers to the [New York Stock Exchange listing standards] for the definition of an “independent director,” but does not provide information about what this definition means. In our view, this definition is a central aspect of the proposal. As we indicated in Staff Legal Bulletin No. 14G (Oct. 16, 2012), we believe that a proposal would be subject to exclusion under rule 14a-8(i)(3) if neither the shareholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with reasonable certainty exactly what actions or measures the proposal requires. In evaluating whether a proposal may be excluded on this basis, we consider only the information contained in the proposal and supporting statement and determine whether, based on that information, shareholders and the company can determine what actions the proposal seeks. Accordingly, because the proposal does not provide information about what the New York Stock Exchange’s definition of “independent director” means, we believe shareholders would not be able to determine with any reasonable certainty exactly what actions or measures the proposal requires. Accordingly, we will not recommend enforcement action to the Commission if [the company] omits the proposal from its proxy materials in reliance on rule 14a-8(i)(3).

See e.g., Chevron Corp. (avail. Mar. 15, 2013).

  1. Would the proponents have been successful with the SEC if they had provided the web address for Section 303A.02 of the NYSE Listing Standards?

    Comment by William J Mostyn — March 28, 2013 @ 11:23 am

 

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