In Case You Missed It - Interesting Items for Corporate Counsel - February 2015

by Stoel Rives LLP


  1. It’s still the case that commentators have said nothing revelationary about “proxy access ,” the recent private-ordering push, and the SEC’s flip-floppery on its Whole Foods no-action letter. “Proxy access” is short hand for “when can a shareholder force a company to put its preferred director on the ballot?” Historically, the answer was “never”; for a few days the answer was “when the SEC’s rules say so”; and now the answer is “after you amend the company’s articles or bylaws to tell you when.” The proxy access saga goes back even earlier than 2003, but that’s when we started paying attention. Historical commentary on earlier proposals (search “proxy access”) is here. An abbreviated history follows.
    • 2003: SEC proposes shareholder director nomination rules, here. These are controversial. Ultimately, they die.
    • 2007: SEC proposes competing “status quo” proxy access rules (i.e., no proxy access), here, and expanded proxy access rules, here. This is weird.
    • 2007: SEC abandons expanded access and adopts “status quo” rules, here and here, rejecting the Second Circuit’s AFSCM v. AIG decision and re-establishing a company’s ability to reject a shareholder proposal that would result in a director election contest. Shareholder activists are miffed.
    • 2009: SEC proposes proxy access rules, here, and subsequently extends the public comment period, here.
    • 2010: SEC adopts 3%, 3-year, 25% of the board rules, here.
    • 2010: SEC stays the rules pending a legal challenge, here.
    • 2011: D.C. Circuit Court says “nuh uh,” here, to much of the SEC rules.
    • 2011: SEC says that although direct proxy access is dead, “private ordering” shows promise, here.
    • 2014: NY Comptroller submits shareholder access proposals to 75 public companies, here, asking for 3%, 3-year, 25% of the board proxy access.
    • 2014: SEC issues no-action letter to Whole Foods, here, saying Whole Foods may exclude a shareholder access proposal if a more restrictive company counterproposal is made. Many similar no-action requests are filed.
    • 2014: SEC says, here, “whoops, Whole Foods, we didn’t mean that . . . or, at least we’re not sure if we did.” It refuses to act on similar no-action letters. Again, weird.
    Understandably, public companies are miffed that the SEC left them with no guidance on when a counterproposal trumps a shareholder proposal. See, e.g., the U.S. Chamber of Commerce Center for Capital Markets Competitiveness letter to the SEC here. The head of the SEC’s Division of Corporation Finance recently commented on the controversy, and the difficulty of the issue, here, perhaps foreshadowing further work on the topic by the SEC.

    The Business Roundtable asked ISS and Glass Lewis not to do anything rash if a company decides to exclude a shareholder proposal in favor of its own, here. Glass Lewis, and probably ISS soon, has said it will take a case-by-case approach on proxy access proposals, see here, which presumably means it won’t automatically recommend voting against all directors if the board suggests a reasonable counterproposal.

    Options for a company that gets a valid shareholder proxy access proposal are fairly limited: include the shareholder proposal, include a counterproposal, or include both and let shareholders know that whichever gets the most votes wins. If it includes only the counterproposal, a company might preemptively seek a declaratory judgment that excluding the shareholder proposal is OK or it may let the proponent decide whether to try to force the issue in court. Our best guess on how this will shake out follows. (But don’t quote us – you’re on your own.)

    • Some will engage shareholder activists, hoping to reach a compromise with the proponent.
    • Absent compromise, a company will suggest a reasonable counterproposal in its proxy statement. (Arguably, Whole Foods’ initial counterproposal was not very reasonable.) The proxy disclosure will justify the proposal to shareholders and recite the many considerations reviewed by the board. These will borrow heavily from SEC analyses when it considered proxy access rules. Companies will review the voting policies of their big shareholders, if known, when shaping counterproposals; many will engage proxy advisory firms to help them communicate with shareholders. We imagine proposals might generally circle around 5%, 5-year, one director or 20% of the board.
    • The company will notify the SEC of the exclusion under Rule 14a-8(j), leaving it up to the shareholder activist to decide whether to seek an injunction or sue after the meeting. The more reasonable the counterproposal, the less likely a lawsuit. (And it seems unrealistic that the SEC would pursue enforcement action after saying it wouldn’t against Whole Foods and then saying it isn’t saying it wouldn’t – I mean, how big a bunch of jerks would those guys have to be?)
    • One assumes that as long as the counterproposal is reasonable, courts would be less willing to require that a company include the shareholder proposal in its proxy statement, and it’s not clear whether many court dockets would even allow action before a planned meeting.
    • Companies will argue that subsequent shareholder proposals may be omitted because they were “substantially implemented” under 14a-8(i)(10), likely with limited success.
  2. More troubling than proxy access, perhaps, is the decision in Trinity Wall Street v. Wal-Mart, here. In Trinity, a shareholder activist proposed amending Wal-Mart’s corporate governance committee charter to require that it consider whether Wal-Mart was selling products that would make it look bad – specifically, large magazine firearms. The U.S. District Court in Delaware determined Wal-Mart could not exclude the proposal as a matter dealing with ordinary business operations, even though the SEC issued a no-action letter saying precisely that, because proposals “focusing on sufficiently significant social policy issues . . . transcend the day-to-day business matters.” And here, the proposal didn’t require Wal-Mart to stop selling specific products, just to determine whether to sell them and, if they decide to sell them, to report about what kind of monsters are running that place. Of course, almost proposals can be phrased in a “won’t somebody think about the children! ” kind of way, and nobody is fooling anyone: the goal is to affect ordinary business operations and prevent Wal-Mart from selling guns. The district court decision is on appeal.
  3. Activist shareholders were more active in 2014 than ever before according to Activist Investing, here, and there’s no reason to assume the tide will ebb.
  4. Glass Lewis proposed enhancements to its pay-for-performance and equity compensation models, here.
  5. ISS released FAQs on its “equity plan scorecard,” here, and FAQs on its independent chair policy, here. A criticism of ISS’s holistic review of independent chair proposals is here.
  6. Oregon joined the growing crowd of states that allow intrastate crowdfunding. Oregon’s new rules are here and its FAQs about the rules are here. The exemption allows a business based in Oregon to raise up to $250,000 from 100 Oregon investors, each of whom is limited to investing $2,500. To qualify for the exemption, a company must (a) first meet in person with a “business technical service provider” to review the company’s business plan, (b) file a notice with the State at least seven days before advertising or selling any security, (c) file advertising materials with the State, (d) obtain an affirmative declaration from the potential investor that she is an Oregonian before advertising or making an offer to her and confirm she is an Oregonian before actually selling her the securities (like by checking her driver license), and (e) disclose specified information to potential investors. After the sale, the company must report specified information to investors twice each year and file a report with the State. The offering can’t last more than 12 months, shares purchased can’t be resold for nine months, and the exemption isn’t available for development stage companies with no specific plan or for specified “bad actors.” Exempt offers and sales under these rules will not be integrated with other offers and sales made under the rules if they happen six months apart.
  7. The SEC proposed rules, here, requiring disclosure in a company’s proxy statement about whether employees or directors are allowed to hedge or offset decreases in the market value of company securities. Many companies already disclose information about hedging policies as part of their CD&A and to evidence they have abided by shareholder service group preferences that such policies be in place. Policies typically apply just to directors and executives, and, if the rule is adopted, we don’t expect a rush to prohibit hedging transactions for employees generally even if the disclosure ends up being “we don’t prohibit hedging transactions for employees generally.”
  8. The SEC proposed to amend its rules to follow the statutory mandates of the JOBS Act, which increase ownership thresholds that force you to go public, here.
  9. The SEC granted its second bad actor waiver, here, this time in connection with settling charges against Oppenheimer & Co. for securities violations. The waiver ties “good cause” for exempting Oppenheimer to its compliance with the conditions in its waiver request letter, including improvements in its oversight processes.
  10. The SEC released cybersecurity alerts that summarize its investigation of broker-dealers, here, and suggest to investors how to protect their online brokerage accounts from fraud, here.
  11. Finally, Valentine’s Day approaches and, as always, young security lawyers’ thoughts turn to the timely filing of annual Schedule 13Gs, due February 14 (actually, the 16th since the 14th is a Saturday). Remember: nothing says “I own more than 5% of a public company’s stock” like a Schedule 13G.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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