Alert March 22, 2016

SEC Releases Additional No-Action Letters on “Substantial Implementation” of Shareholder Proxy Access Proposals

Summary

The SEC’s Division of Corporation Finance recently released a second series of no-action letters that further clarifies the circumstances in which a company may exclude shareholder proposals involving proxy access bylaws provisions from the company’s proxy statement. Taken together with an earlier series of no-action letters released in February 2016 and Staff Legal Bulletin No. 14H, published in October 2015, companies considering the adoption of a proxy access bylaws provision now have a clearer understanding of when the Staff of the Division of Corporation Finance is likely to conclude that a company may appropriately exclude a proxy access shareholder proposal in favor of a proxy access provision adopted or proposed by a company.

In the last year, the number of companies that have adopted proxy access bylaws provisions – and the number of proxy access proposals submitted by shareholders – has risen significantly. Competing proxy access provisions adopted or proposed by companies and proposed by shareholders have resulted in increased requests for no-action relief by companies seeking to exclude shareholder proxy access proposals from their proxy statements.

Staff Legal Bulletin 14H – “Directly Conflicts.” SEC proxy rules permit a company to exclude a shareholder proposal if the proposal does not satisfy the conditions of Rule 14a-8. In October 2015, the SEC published Staff Legal Bulletin 14H. As described in our client alert SEC Issues New Guidance on Excluding Shareholder Proposals under Rule 14a-8 (November 4, 2015), SLB 14H significantly narrowed the circumstances in which a company can exclude a shareholder proposal under the “directly conflicts” test, which is one of the bases upon which a company may exclude a shareholder proposal under Rule 14a-8.

In SLB 14H, the Staff stated that it would conclude that a direct conflict between a management proposal and a shareholder proposal exists under Rule 14a-8(i)(9) only if a reasonable shareholder could not logically vote in favor of both proposals. Under SLB 14H, the Staff will only treat proposals as directly conflicting if “a vote for one proposal is tantamount to a vote against the other proposal.” This significantly increased the burden on companies seeking to exclude a proxy access shareholder proposal under the “directly conflicts” test because competing management and shareholder proxy access proposals will almost never present such a conflict.

SLB 14H did not address the other principal basis upon which a company might seek to exclude a shareholder proxy access proposal under Rule 14a-8: Rule 14a-8(i)(10), which permits a company to exclude a shareholder proposal if the company has “substantially implemented” the shareholder proposal. In light of the range of potential differences in the terms of proxy access provisions, it remained unclear how similar the terms of a company-adopted proxy access provision must be to the terms of a shareholder proxy access proposal in order to permit the company to exclude the shareholder proposal on the basis that the company had substantially implemented the shareholder proposal.

“Substantially Implemented” No-Action Letters (February 2016). In February 2016, the Staff granted no-action relief to 16 companies that sought to exclude shareholder proxy access proposals from their 2016 proxy statements on the basis that the company had substantially implemented the proposals. In each of these 16 cases, both the proxy access provision adopted by the company and the provision proposed by the shareholder would require ownership of three percent of the company’s outstanding common stock for a period of three years. At the same time, the Staff denied no-action relief to three companies that had adopted proxy access provisions requiring ownership of at least five percent of the company’s outstanding common stock, in contrast to the three percent ownership threshold provided by the shareholder proposal. Significantly, there were a variety of other terms of the company-adopted and shareholder-proposed proxy access provisions that were different. These no-action letters implied that the Staff would grant no-action relief to companies seeking to exclude shareholder proxy access proposals under the “substantially implemented” standard if the ownership threshold and period were the same (that is, three percent for three years), even if other terms differed substantially.

New No-Action Letters – March 2016. In recent weeks, the Staff has issued 18 more no-action letters to companies seeking to exclude shareholder proxy access proposals. Of these, 16 of the Staff no-action letters dealt with the “substantially implemented” standard of Rule 14a-8(i)(10). The results, which are summarized in the table immediately below and presented in greater detail in the appendix to this alert, confirm the Staff’s willingness to grant no-action relief to companies seeking to exclude shareholder proxy access proposals if the ownership threshold and period are the same. In each of the 16 cases, both the company-adopted provision and the shareholder proposal provided for three percent ownership for a period of three years. As the tables below show, other terms differed in most cases. These letters confirm that, at least at the present time, companies can be relatively confident that the Staff will grant no-action relief under the “substantially implemented” standard if the company has adopted or proposed a proxy access provision with an ownership threshold and holding period that are the same as those proposed by a shareholder.

The following table summarizes the principal terms of the proxy access provisions dealt with in the most recent group of Staff no-action letters.

Summary of SEC Staff No-Action Letters
February 26 through March 17, 2016

Proxy Access Provision

Company
Provision

Shareholder Proposal

Ownership threshold

3%
(16 of 16 letters)

3%
(16 of 16 letters)

Holding period

3 years
(16 of 16 letters)

3 years
(16 of 16 letters)

Shareholder nominee cap – shareholder nominees shall not be more than the greater of:

20% or 2 directors
(14 of 16 letters*)

*Three provide a cap of 20% with no minimum number; one provides a cap of 25% if the board < 10)

25% or 2 directors
(16 of 16 letters)

Shareholder aggregation (group size) limit

20
(12 of 16 letters)

Unlimited
(16 of 16 letters)

The table above does not include Staff responses to two company requests that sought to exclude shareholder proxy access proposals on the basis that the proposals were “inherently vague or indefinite” under SEC Rule 14a-8(i)(3). The Staff declined to grant no-action relief on that basis in either case, even though one request was supported by an opinion of Delaware counsel stating that the shareholder proposal was subject to at least three possible interpretations (Amphenol Corporation, available March 8, 2016).

The Status of Proxy Access – Spring 2016. In brief, although the practical impact of proxy access upon corporate governance remains to be seen, the initial movement toward proxy access as a de facto corporate governance standard during 2014 and 2015 is likely to accelerate through the rest of 2016 and into 2017. Companies that wish to seize the initiative on proxy access and control the many detailed components of a proxy access provision now have significant insight about when the Staff believes that a company may appropriately exclude a shareholder proxy access proposal from the company’s proxy statement.

APPENDIX

Detailed Summary of SEC No-Action Letters under Rule 14a-8(i)(10)
February 26 through March 17, 2016
Company Company-Adopted
Proxy Access Terms 
 Proponent Shareholder-Proposed
Proxy Access Terms 
Amazon.com, Inc. 
(March 3, 2016)
Ownership: 3%/3 years
Board limit: 20%
Group limit: 20 
James McRitchie  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Anthem, Inc.
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Chemed Corporation
(March 9, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Eastman Chemical Co.
(March 9, 2016) 
Ownership: 3%/3 years
Board limit: 20%
Group limit: unlimited 
William Steiner  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Fluor Corporation
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
James McRitchie
Myra K. Young 
Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
International Paper Co.
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
Kenneth Steiner Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited
ITT Corporation
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
McGraw Hill Financial, Inc.
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
Kenneth Steiner  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Newell Rubbermaid Inc.
(March 9, 2016)
Ownership: 3%/3 years
Board limit: 20%
Group limit: unlimited
John Chevedden
Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited
PG&E Corporation
(March 3, 2016)
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
Public Service Enterprise, Inc.
(March 3, 2016) 
Ownership: 3%/3 years
Board limit: 25%
Group limit: unlimited 
William Steiner  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 

Quest Diagnostics Inc.
(March 17, 2016)

Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20
John Chevedden Ownership: 3%/3 years
Board limit: 25%/2
Group limit: limited
Reliance Steel & Aluminum Co.
(February 26, 2017) 
Ownership: 3%/3 years
Board limit: 25%/2
Group limit: 20 
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
United Continental Holdings, Inc.
(February 26, 2016 
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20
John Chevedden  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited 
The Wendy’s Company
(March 2, 2016) 
Ownership: 3%/3 years
Board limit: 20% or 25% if < 10
Group limit: 25 
Kenneth Steiner  Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited
Xylem Inc.
(March 3, 2016)
Ownership: 3%/3 years
Board limit: 20%/2
Group limit: 20 
John Chevedden Ownership: 3%/3 years
Board limit: 25%/2
Group limit: unlimited