On February 12, 2016, the SEC Staff provided long-awaited guidance on the 2016 proxy access debate when it issued 18 No Action Letters to companies seeking to exclude shareholder proxy access proposals from their annual meeting proxy statements. All of the letters involved Rule 14a-8(i)(10), which allows companies to exclude shareholder proposals that have already been “substantially implemented” by the company. Fifteen (15) of these No Action Letters permitted a company to exclude the proxy access proposal at issue, while the remaining three (3) denied relief under the rule.
The 15 companies who were granted No Action relief under 14a-8(i)(10) generally each (1) received similar proposals, (2) adopted similar proxy access provisions and (3) made similar arguments to the SEC in support of their exclusion request:
- Shareholder Proposals. The shareholder proposals typically sought to allow an unlimited number of shareholders who, in the aggregate, have held at least 3% of the company’s outstanding shares for at least 3 years to nominate the greater of 25% of the board seats at issue or 2 directors to the company’s board of directors on the company’s proxy statement (“3/3/25/Unlimited”).
- Proxy Access Bylaws Adopted. Companies whose No Action requests were granted typically adopted bylaws substantially similar to those requested by the shareholder proposal (3%, 3 years, 20-25% or 2 directors). However, most of these companies also limited the number of shareholders who may aggregate their shares to form the nominating group to 20 to 25 shareholders (“3/3/20/20” or “3/3/20/25”), as well as customary procedural and technical requirements for both the nominating shareholder or group and the shareholder nominee.
- Reliance on 14a-8(i)(10) and GE No Action Letter. Most of the companies who were granted No Action relief relied on the SEC’s prior guidance in its 2015 GE No Action Letter based on substantial implementation of proxy access. A number of the letters also noted that the inclusion of a limit on the size of the nominating group was consistent with the vast majority of proxy access provisions adopted by public companies and some letters also noted that many institutional shareholders and proxy advisory firms support reasonable limitations on the number of shareholders who may combine to form the nominating group. For example, ISS will support proxy access policies that limit the number of shareholders to not fewer than 20 (see ISS’s guidance here).
In each of the three (3) instances (available here, here and here) where the SEC did not grant No Action relief under the substantial implementation exclusion, the company making the request sought to implement proxy access with a 5% ownership threshold.
On the basis of these recent No Action Letters, public company directors can conclude that, for the time being, the SEC is willing to allow companies to exclude shareholder proxy access proposals on the basis of Rule 14a-8(i)(10) at least when a company receives a shareholder proposal requesting proxy access for an “unlimited” group of shareholders and implements proxy access with a limit of no fewer than 20 shareholders who may form a group. However, it should be noted that the SEC’s current approach and precedent does not guarantee that it will grant relief on the same basis in the future.