December 20, 2016

New SEC No-Action Guidance on Proxy Access Bylaw Amendment Proposals

The SEC’s Division of Corporation Finance recently granted no-action relief to a company seeking to exclude shareholder-proposed amendments to the company’s proxy access bylaw provisions on the basis of substantial implementation under Rule 14a-8(i)(10) after the company adopted some but not all of the shareholder’s proposed amendments. Although the SEC staff’s response does not make the basis for its decision clear and there remains some lack of clarity about the circumstances in which the staff is likely to agree that a company may exclude a shareholder proposal to amend existing proxy access bylaws, this no-action letter provides some useful data on how companies may respond to shareholder proposals to amend specific provisions of a company’s proxy access bylaws.

In the most recent of a series of no-action letters involving shareholder-proposed amendments to companies’ existing proxy access bylaw provisions, the SEC staff has granted no-action relief where the company adopted amendments that partially but not completely implemented the shareholder’s proposal. Previous no-action requests by companies seeking to exclude shareholder proxy access proposals fell into one of two categories:

  • initial adoption proposals would be treated as substantially implemented under Rule 14a-8(i)(10) and therefore excluded from the company’s proxy materials if the company adopted, or proposed to adopt, a proxy access bylaw with an ownership threshold and ownership period that was at least as favorable as the shareholder proposal (typically, ownership of at least 3% of the company’s shares for a period of three years), as summarized in our client alert SEC Releases Additional No-Action Letters on “Substantial Implementation” of Shareholder Proxy Access Proposals; or
  • proposed amendments to existing proxy access bylaw provisions would not be treated as substantially implemented and would not receive a favorable no-action response from the SEC staff, at least in cases where the company took no action in response to the shareholder-proposed amendments, as summarized in our client alert SEC Staff Reiterates No-Action Position on Proxy Access Amendment Proposals.

These no-action responses did not provide any new guidance on how the SEC staff would apply its “substantial implementation” doctrine if a company adopted some but not all of a shareholder’s proposed amendments to a proxy access bylaw. The response of the SEC staff in Oshkosh Corporation (November 4, 2016) – the first no-action response on this issue since the staff’s response in H&R Block, Inc. (July 21, 2016) – indicates that the staff may be willing to take a no-action permission that supports a company’s exclusion of the shareholder-proposed amendments on the basis of substantial implementation if the company adopts some portion of the proposed amendments.

Unfortunately, the facts presented in Oshkosh involve a mix of the fundamental proxy access provisions that have emerged as the principal criteria (3% ownership/ownership for three years) in no-action letters involving initial adoption cases and the secondary proxy access provisions dealt with in existing letters involving proposed amendments (most often, maximum number of directors subject to nomination, cap on number of shareholders whose shares can be aggregated to satisfy the ownership threshold, and minimum shareholder vote required for renomination at future meetings), which makes it hard to extract clear guidance from Oshkosh. Specifically, although Oshkosh involved adoption of two of the five amendments to secondary provisions of Oshkosh’s proxy access bylaw, Oshkosh also reduced the existing 5% ownership threshold to the market-standard 3% ownership threshold, which we see as an important factor in most in most SEC no-action responses involving substantial implementation under Rule 14a-8(i)(10).

For this reason, it remains unclear what sort of company response to shareholder-proposed amendments to a company’s proxy access bylaw will lead to a no-action response from the SEC staff that will support excluding the amendments from the company’s proxy materials. The Oshkosh letter leaves uncertainty about the relative importance of the change to a 3% ownership threshold, the adoption of three of the six proposed amendments, and the SEC staff’s judgment about the importance of the proposed amendments that Oshkosh did adopt compared to those that Oshkosh did not adopt. Future SEC staff no-action responses will presumably provide more detailed guidance on how the staff will view requests to exclude shareholder-proposed amendments that involve only secondary elements of a proxy access bylaw under the substantial implementation doctrine and Rule 14a-8.

The amendments proposed in the Oshkosh no-action letter are summarized in the table below. The company’s response to the shareholder-proposed amendments was to adopt amendments that (1) reduced the ownership threshold from 5% to 3%, (2) eliminated the 25% shareholder vote threshold for renomination and (3) eliminated the requirement that the nominating shareholder represent that it intended to continue to own the shares for one year after the annual meeting. Oshkosh did not adopt three other proposed amendments that would have (1) increased the cap on the number of directors nominated by shareholders to the greater of 25% of the board or two (from 20% or two), (2) eliminated the 20-person cap on shareholders whose shares could be aggregated to satisfy ownership requirements or (3) eliminated the requirement that a shareholder must have the right to recall loaned shares that are counted toward satisfaction of the ownership threshold on five business days’ notice. The shareholder proposal had identified all six of the proposed amendments as “essential elements” of its proposal, and this characterization does not appear to have influenced SEC analysis in earlier no-action requests.

In response to the shareholder proposal to amend its existing proxy access bylaw, Oshkosh adopted the three amendments described above and argued that these amendments substantially implemented the proposed amendments because the amendments satisfied the essential goal of the proposed amendments, which the company characterized as expanding the ability of shareholders to use proxy access. Citing an earlier SEC no-action response to NVR, Inc. (granted on reconsideration, March 25, 2016), Oshkosh stressed that it had reduced the minimum ownership threshold from 5% to 3%, and pointed to existing SEC staff no-action responses that favored exclusion of shareholder proxy access proposals involving both initial adoption and subsequent amendments on the basis of substantial implementation. Oshkosh also pointed out that it had taken action to amend several (although not all) of the provisions targeted by the shareholder proposal, unlike H&R Block, which had unsuccessfully sought no-action relief without taking any action on the shareholder-proposed amendments.

  Oshkosh Proxy Access Bylaw (Original)  Oshkosh Amendment  Shareholder Proposal for Amendment 
Share Ownership Threshold  5%  3%  3%
 Minimum Shareholder Vote % for Renomination  25%+ votes cast  No minimum  No minimum
 Shareholder Continuing Ownership Representation  Required  Not required  Not required
 Maximum Number of Nominees  20%/not less than 2  No change  25%/not less than 2
 Cap on Shareholder Aggregation  20 shareholders  No change  No cap
 Loaned Shares  Shareholder must be able to recall loaned shares on 5 business days’ notice  No change  Counted as “owned” shares for share ownership threshold/ representations required