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Companies Complain About Reversal of Staff Decision on Conflicting Proxy Proposals

The SEC made the unusual step of reversing a previous decision that let the upscale supermarket chain Whole Foods Market Inc. exclude a shareholder-backed resolution from its proxy statement. The decision was based on questions that have come to the agency about its application of the proxy access rules. Some public companies feel the move, coming just before the start of the annual shareholder meeting season, put them in an untenable position and overlooked the efforts many directors undertake to carry out their responsibilities to investors.

With the SEC staff reversing an established practice and now refraining from issuing opinions on the proper application of a key proxy access rule, some public companies say the move has put them in a difficult situation just as they’re preparing for annual shareholder meetings.

The suspension of Rule 14a-8(i)(9) of the Securities Exchange Act of 1934 guidance “in the middle of the season has been problematic,” said Darla Stuckey, president and CEO of the Society of Corporate Secretaries and Governance Professionals Inc. during a presentation to the SEC’s Investor Advisory Committee (IAC) meeting in Washington on February 12, 2015. “Companies do feel like they are in no win situation… They also feel like they’re being cautioned, is the nice word, to not put in a management proposal because they are going to be voted against.”

She was referring to SEC Chair Mary Jo White’s January 16 statement reversing a staff decision that granted permission to the supermarket chain Whole Foods Market Inc. to exclude a shareholder-backed resolution from its proxy statement. Chair White asked the staff to review the rule. (See Shareholders May Get a Bigger Say in Proxy Votes in the January 21, 2015, edition of Accounting & Compliance Alert .)

The SEC’s Corporation Finance Division won’t issue no-action letters to companies seeking to exclude conflicting shareholder proposals until the review is finished.

Investors had complained to the SEC that Whole Foods unfairly blocked them from inserting independent resolutions in its proxy statement by countering with a management proposal designed to allow it to refer to Rule 14a-8(i)(9) when excluding shareholder proposals.

Rule 14a-8(i)(9) says a company can leave a shareholder proposal out of its proxy if it conflicts with a management proposal. In the Whole Foods case, shareholders said investors with a 3 percent stake for three years should be allowed to submit nominees for board seats. The company countered by proposing a 9 percent threshold for five years. No outside investor owns more than 6 percent of the company’s stock.

Stuckey said in the vast majority of cases, companies act in good faith, and the SEC’s abrupt decision poses unnecessary problems. In her view, boards have been elected to exercise judgment on shareholders’ interests based on the facts of a specific issue.

“Now they are being cautioned that they are going to be subject to a vote no campaign,” she said. It amounts to “punishment for the vast majority of companies that did nothing wrong.”

Investors have been pushing for proxy access using the 3 percent threshold with individual companies after a federal appeals court overturned the SEC’s proxy access rule in Release No. 33-9136, Facilitating Shareholder Director Nominations, in July 2011. The court ruled that the SEC didn’t adequately assess the rule’s costs.

Zach Oleksiuk, head of BlackRock Inc.’s corporate governance and responsible investment team for the Americas, said proxy access is a shareholder right, ensuring director accountability to long-term shareholders.

Oleksiuk isn’t a member of the IAC, but he gave a presentation during the meeting. He said shareholders should be given “reasonable opportunity to use this right without overly restrictive or onerous parameters.”

Michael Garland, assistant comptroller for environmental, social and governance at the New York City Office of the Comptroller, said he saw companies becoming very aggressive in excluding shareholder proposals.

Some boards “will endlessly ignore proposals,” Garland said.

Both Oleksiuk and Garland encouraged the SEC to write a universal proxy access rule to better address the situation.

David Fredrickson, the chief counsel in the SEC’s Division of Corporation Finance, said the staff will keep an open mind during its review of Rule 14a-8(i)(9), will consider every available option, and may advise the five commissioners to amend the proxy access rules.

White told reporters that the agency’s immediate goal is to have some guidance in place by the 2016 proxy season.

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