Introduction In a closely watched development, the SEC’s Division of Corporation Finance Staff (Staff) granted no-action relief in early December to Whole Foods Market, Inc. (Whole Foods, or the Company) in response to the Company’s request to exclude a shareholder proposal for proxy access. Whole Foods argued that it could exclude the proposal because its management will include a different proxy access proposal with higher ownership thresholds and other differences.
James McRitchie, a proponent shareholder of Whole Foods, submitted his proposal pursuant to Rule 14a-8 in September. The proposal was a non-binding resolution requesting that the board of directors take such actions necessary to grant certain shareholders of the Company the right to nominate director candidates and have those candidates included in the Company’s proxy statement and annual meeting materials. McRitchie’s proposal would give shareholders (individuals or groups) holding 3 percent of the Company’s shares for a continuous period of three years, the right to nominate candidates for election to the Company’s board. The number of nominees that shareholders could propose in such fashion would be limited to 20 percent of the board seats or at least two seats. The right to nominate would not be available to directors or officers who were also shareholders, and the proposal included other limitations as well.
Background on Proxy Access The concept of proxy access has been part of the shareholder activism landscape for well more than 10 years. In 2010, the SEC passed final rules requiring proxy access at the same 3 percent and three-year ownership thresholds included in Mr. McRitchie’s proposal. The federal rules, applying to all public companies, were later stayed and ultimately vacated by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) in 2011, and the SEC withdrew them without issuing revised rules. The SEC has not pursued the topic of proxy access, so it has fallen to the individual companies to be worked through, in what is called “private ordering.”
The Whole Foods request was the first time that the Staff considered an argument to exclude a proxy access proposal because it was “in direct conflict” with a management proposal. The Staff has denied company requests to exclude based on the “substantially implemented” exception, when the subject company had a proxy access provision requiring a higher ownership threshold already in place. See KSW, Inc. (avail. March 7, 2012).
Request for No-Action Relief Whole Foods, in its no-action request, described a management proposal to be included in the 2015 proxy statement, seeking shareholder approval to amend the Company’s bylaws with a proxy access provision. The proxy access proposed by management will allow any individual shareholder owning 9 percent of Whole Foods’ common stock for a continuous five-year period to nominate candidates for director and require the Company to list those candidates in its proxy materials. The number of candidates a shareholder could nominate under the management proposal would be more restrictive than McRitchie’s two or 20 percent proposal – only 10 percent of the board seats or at least one candidate.
Rule 14a-8(i)(9) allows a company to exclude from its proxy statement and annual meeting materials a shareholder proposal that “directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting.” In its no-action request, the Company argued that the two proposals directly conflict because they address the same right of shareholders, and because of the distinctions in ownership threshold, number of shareholders (individual and/or group), and limitation on candidates, could cause alternative and conflicting decisions for the voting shareholders that would likely result in inconsistent and ambiguous results.
A similar approach has been used by companies in the past to exclude shareholder proposals on the right of holders of a certain percentage of outstanding shares to call a special meeting of the shareholders. While many of these special meeting shareholder proposals required an ownership threshold at 10 percent or 15 percent, the subject companies submitted management proposals to implement the right at 25 percent or 35 percent ownership. The Staff granted no-action relief in these instances, and the Whole Foods request for relief cites to these examples as analogous to its proxy access proposal.
Conclusion The Staff granted the no-action relief, agreeing there was basis to exclude because the two proposals could directly conflict. There is interest in this topic for the 2015 proxy season because at least 75 public companies have received similar proposals from the New York City Comptroller as part of its “Board Accountability” campaign. Based on the Staff response to Whole Foods, the target companies receiving proposals from the New York City Comptroller can respond with similar management proposals, as one potential response to the shareholder activists. If your company has received a proposal regarding proxy access, you can request to exclude by submitting your letter to the Division of Corporation Finance at least 80 days before filing or mailing the proxy statement.
A company contemplating this strategy should understand that if management’s competing proposal is approved by shareholders, then the shareholder proponent may re-submit its proposal the following year. In that case, the company will likely not have a basis for excluding a 3 percent / three-year proposal in the following year because the “substantially implemented” grounds for exclusion will not be available, based on prior Staff responses. Given public relations considerations, the company would be reluctant to propose another proxy access regime to replace the one implemented the year before at management’s behest, and therefore the company would not be able to rely a second time on the competing proposal exclusion. In fact, sophisticated shareholders may vote in favor of management’s proposal in the first year to create just this situation, so as to facilitate the inclusion of the shareholder’s proxy access proposal the following year. The approach used by Whole Foods may simply postpone for one year the shareholder activists’ 3 percent / three-year proposal and not avoid it altogether, but a company with some form of proxy access implemented may have a stronger position to defeat the shareholder’s proposal when put to a vote of the shareholders.
Client Alert 2014-332