Now that Corp Fin has issued Staff Legal Bulletin 14H providing guidance that, for almost all practical purposes, eliminates the availability of Rule 14a-8(i)(9) (see this PubCo post) to exclude shareholder proposals that conflict with management proposals, there has been substantial speculation about the contours of Rule 14a-8(i)(10), the exclusion for proposals that have been “substantially implemented.” Companies have been especially breathless waiting to see whether the exclusion just might be available for the load of proxy access proposals that have been submitted this year. On Friday evening, the SEC posted on its website 18 no-action letters in connection with requests submitted to exclude proxy access proposals, 15 of which granted relief on the basis of Rule 14a-8(i)(10) and three of which did not.
In each case where relief was granted, the proposal (primarily from the Chevedden group) requested adoption of a proxy access bylaw that would allow a holder or a group of holders to nominate board candidates for inclusion in the company’s proxy statement for up to 25% of the board or 2, which was greater, provided that the shareholder or group has owned at least 3% of the company’s outstanding common stock, including recallable loaned stock, continuously for at least three years before submitting the nomination. Typically, the proposal allowed no cap on aggregation to reach the 3% threshold and also prohibited additional restrictions that did not apply to other board nominees. The bylaws adopted by the companies that received favorable responses were 3%/3-year bylaws, with a 20-holder cap on aggregation for groups of shareholders. Shareholders could nominate up to the greater of (i) two nominees or (ii) 20% of the board under this procedure.
These companies’ bylaws typically allowed the use of loaned shares but included a recall period, such as three days. The companies’ bylaws often did include additional restrictions such as, in Alaska Air, restrictions “(a) that the shareholder-nominated candidate be independent according to applicable listing standards, (b) that election of a shareholder-nominated candidate shall not cause the Company to violate its Bylaws, Certificate of Incorporation, listing rules of the New York Stock Market or other applicable rule or regulation, (c) that the shareholder-nominated candidate not be an officer or director of a competitor, (d) that the shareholder-nominated candidate not be the named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or have been convicted of a criminal proceeding, or (e) that the shareholder-nominated candidate not be the subject of any order of the type specified in Rule 506(d) of Regulation D promulgated under the Securities Act of 1933.” Similarly, in Northrup Grumman, the bylaws included restrictions such as that “proxy access nominees must complete director questionnaires and otherwise meet the Company’s eligibility and other requirements applicable to director nominees, must be independent, must not have a criminal background and must not be a ‘bad actor’ under the SEC’s rules.” In granting relief, the SEC noted the companies’ representations that the proxy access bylaws that had been adopted addressed the proposals’ essential objective. Notably, the staff concurred that the proposals had been substantially implemented even where the proposals explicitly prohibited caps on aggregation and other restrictions not applicable to other nominees.
In three instances, the SEC did not concur that the companies’ policies, practices and procedures compared favorably with the guidelines of the proposals and, therefore, did not grant relief. In each case, the key difference in the proxy access bylaws that these companies had adopted (relative to the bylaws discussed in the letters that received favorable responses) was that these companies’ bylaws included a 5% threshold in lieu of a 3% threshold. Interestingly, two of these proposals were second efforts from the proponent, the NYC Comptrollers’ office: in one case, in the prior year, shareholders had defeated the Comptrollers’ proxy access proposal and in another case, the company’s shareholders had approved the company’s competing proposal for a 5%/3-year/20% bylaw with an aggregation cap of 10.
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