On October 22, the Securities and Exchange Commission’s Division of Corporation Finance (Division) issued Staff Legal Bulletin No. 14H (SLB 14H), which (1) sets forth a new standard for determining when a shareholder proposal conflicts with a company proposal and therefore may be excluded from the company’s proxy statement under Rule 14a-8(i)(9), and (2) reaffirms the Division’s views on the application of the “ordinary business” standard in Rule 14a-8(i)(7).

Rule 14a-(8)(i)(9)

In SLB 14H, the Division stated that, for purposes of Rule 14a-8(i)(9) (which permits a company to exclude a shareholder proposal if the proposal “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting”), a “direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal.” The Division went on to note that, when considering future no-action requests the staff of the Division will focus on whether “a reasonable shareholder could logically vote for both proposals.” Under SLB 14H, the Division further noted that a direct conflict would not exist if a shareholder proposal and a company proposal contain different terms but “generally seek a similar objective” (e.g., proposals for proxy access at different ownership thresholds). The Division acknowledged that the new standard under SLB 14H “may be a higher burden for some companies” to adhere to, resulting in the reduced availability of Rule 14a-(8)(i)(9) as a basis for excluding shareholder proposals.

Rule 14a-(8)(i)(7)

The Division reaffirmed its position as to the exclusion of shareholder proposals under Rule 14a-8(i)(7), which allows a company to exclude from its proxy materials shareholder proposals that relate to the company’s ordinary business operations. The US Court of Appeals for the Third Circuit in Trinity Wall Street v. Wal-Mart Stores, Inc. (792 F.3d 323 (3d Cir. 2015)), issued an opinion overturning the November 2014 ruling of the US District Court for the District of Delaware that Wal-Mart Stores, Inc. had improperly excluded a shareholder’s request to include a proposal in Wal-Mart’s 2014 proxy statement that would have required Wal-Mart’s Compensation, Nominating and Governance Committee to evaluate, among other things, whether Wal-Mart should sell products that endanger public safety (even though Wal-Mart had previously been granted no-action relief with respect to such exclusion by the Office of Chief Counsel of the Division). The appellate court concluded that “a potential change in the way Wal-Mart decides which products to sell” related to Wal-Mart’s ordinary business operations. Such position was consistent with the views the SEC had previously articulated on the method to analyze proposals under the ordinary business exclusion when the SEC responded to Wal-Mart’s request for a no-action letter.

However, the majority opinion employed a new two-part test, “concluding that ‘a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.’” The majority opinion further noted “that to transcend a company’s ordinary business, the significant policy issue must be ‘divorced from how a company approaches the nitty-gritty of its core business.’” In SLB 14H, the Division expressed concern that this analytical approach used by the Third Circuit goes beyond the SEC’s prior statements. The Division stated that it “intends to continue to apply Rule 14a-8(i)(7) as articulated by the SEC and consistent with the Division’s prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion,” rather than the two-part test applied in the majority opinion.

See the complete text of SLB 14H here.