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Shareholders May Get a Bigger Say in Proxy Votes

The SEC made the unusual step of reversing a previous decision that granted permission to the upscale supermarket chain Whole Foods Market Inc. to 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 rules. Until the agency completes its review of the rules, it will refrain from granting new exemptions when a management resolution is in conflict with a shareholder resolution.

The SEC made the unusual step on January 16, 2015, of reversing a previous decision that granted permission to the upscale supermarket chain Whole Foods Market Inc. to exclude a shareholder-backed resolution from its proxy statement.

SEC Chair Mary Jo White issued a brief statement late on a Friday afternoon before a holiday weekend that said the decision was based on questions that have come to the agency about the application of Rule 14a-8(i)(9) of the Securities Exchange Act of 1934. As a result, the Corporation Finance Division said it will review the rule and refrain from issuing formal opinions on its proper application until the review is finished.

Investors had complained to White that Whole Foods unfairly blocked them from inserting independent resolutions to its proxy statement by countering with a management proposal designed to allow it to use an SEC rule to block shareholder proposals. After the original exemption was granted through what the agency calls a “no-action” letter on December 1, 2014, more than 20 other companies rushed similar requests and were granted them.

Rule 14a-8(i)(9) says a company can leave a shareholder proposal out of its proxy if it conflicts with a management proposal.

A spokesperson for Whole Foods said the company doesn’t comment on proxy-related matters.

“This is a victory for all shareholders and should stem the avalanche of copycats filings,” said James McRitchie, a shareholder and publisher of Corporate Governance website. McRitchie in September 2014 proposed that shareholders that have a 3 percent stake for three years should be allowed to submit director nominees for the upcoming 2015 shareholder meeting. Whole Foods countered by proposing a 9 percent threshold for five years. However, no investors own more than 6 percent of Whole Foods’ stock.

Investors have been pushing for proxy access using the 3 percent stake 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.

Rule 14a-8 outlines the conditions for submitting shareholder resolutions in a proxy filing.

The Whole Foods decision has no immediate practical effect, given that the company’s proxy filing had been sent to shareholders by the time of the announcement. But until the review is complete, other companies won’t have the same flexibility to exclude shareholder proposals because they conflict with a similar proposal from management. The SEC statements won’t affect its actions on other requests for regulatory exemptions.

In the meantime, investor advocates praised Chair’s White decision.

“I have seen and am pleased by the SEC’s decision in response to the cynical attempt by Whole Foods to ‘game’ the process,” said Joseph Carcello, executive director of the Corporate Governance Center at the University of Tennessee and member of the SEC’s Investor Advisory Committee.

McRitchie said the SEC staff is “likely to revisit how they have reinterpreted the rule since promulgating it and will decide if they need to go back to the original, more narrow interpretation.”

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