Excluding Shareholder Proposals: When Ratification Creates a Direct Conflict

The annual scrum between companies and shareholders seeking to have their proposals included in the company’s annual proxy statement is well underway.  One of the bases upon which a company may exclude a shareholder proposal from its proxy statement is if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”  After some controversy in 2015 over the scope of what it means to “directly conflict,” the SEC staff issued Staff Legal Bulletin (SLB) 14H, which said that proposals conflict only “if a reasonable shareholder could not logically vote in favor of both proposals.”  So, for example, if a company’s charter does not give shareholders the right to call a special meeting, a shareholder proposal to allow 10 percent of the shares to call a meeting will not conflict with a company proposal to set the threshold at 25 percent, because a shareholder preferring 10 percent could still want the threshold at 25 percent rather than not having the right at all.

When a shareholder seeks to include a proposal asking for a change to a provision of the company’s bylaws, the company can create a direct conflict by asking shareholders to ratify the existing bylaw.  In a recent no-action letter to The AES Corporation (December 19, 2017), the SEC staff confirmed that a proposal to reduce the threshold to call a shareholder meeting from 25 percent to 10 percent directly conflicted with a company proposal to ratify the existing bylaw.  In the staff’s view, a reasonable shareholder could not logically vote for both proposals.  This position is consistent with a 2016 no-action letter the staff issued concluding that a proposal to replace all supermajority provisions in a company’s governing documents with a simple majority standard directly conflicted with a company proposal asking shareholders to ratify its existing supermajority voting provisions (Illumina, Inc. (March 18, 2016)).  Presumably, this same strategy could work with a so-called “fix-it” proposal to an existing proxy access bylaw.

Companies considering this strategy for excluding a shareholder proposal will want to think about the following issues:

  • Proxy Disclosure. In presenting the ratification proposal, consider the need to discuss the shareholder proposal to give proper context to the company’s decision to seek ratification.  Seeking an advisory ratification vote is sufficiently unusual that it might require some additional explanation.
  • Preliminary Proxy Filing. Unlike a shareholder proposal, a company ratification proposal would trigger the requirement to file a preliminary proxy statement.  So at the very least, the company will need to build a potential 10 calendar-day wait into its schedule.  The preliminary filing gives the SEC staff the ability to review the proxy statement and, although it is rare for the staff to do so in “plain vanilla” situations, this situation could be something that might pique their interest.
  • Proxy Advisory Firms.  It may not be clear how the proxy advisory firms will recommend on a ratification vote.  If the shareholder proposal the company proposal is displacing is one on which the proxy advisory firm would generally recommend a favorable vote, it would not be hard to imagine the firm recommending against ratification of the company proposal.  In addition, if the ratification received a majority negative vote, how would management respond?  Would the proxy advisory firms consider a majority vote against ratification the equivalent of a majority vote in favor of the excluded proposal for purposes of applying their policies on voting for directors in future elections?  If ratification became a popular alternative, the proxy advisory firms would no doubt sharpen their views on the consequences.
  • Shareholder Optics. Proposing ratification of an existing company provision may allow the company to set the terms of the debate, but it could also be seen as a form of gamesmanship.  As with Inspector Renault in the film Casablanca, observers will no doubt be “shocked, shocked” to find that there is gamesmanship going on with shareholder proposals.  Still, a company may engender ill will with its shareholders by taking this course, rather than the more conventional course of stating its case in opposition to the shareholder proposal.  The resulting vote may be the same, but how the company gets there could have an independent effect.

Thus, it appears that ratification can in some cases allow a company to exclude a shareholder proposal.  Whether to adopt that course will not always be a straightforward decision, and companies will need to consider the broader implications of such a strategy.

This post comes to us from Keith F. Higgins, chair of the securities and governance practice at Ropes & Gray LLP, and, from June 2013 to January 2017, director of corporation finance at the U.S. Securities and Exchange Commission.