Risk & Compliance

SEC About-Face in Whole Foods Case May Empower Investors

The change could prevent other companies from excluding shareholder proposals that they say "directly conflict" with management proposals.
Matthew HellerJanuary 20, 2015
SEC About-Face in Whole Foods Case May Empower Investors

In a reversal of an earlier decision, the U.S. Securities and Exchange Commission has announced that Whole Foods cannot avoid a vote on a shareholder proposal at its next annual meeting, possibly giving a boost to activist investors in other corporate governance battles.

SEC Chair Mary Jo White said in a statement that questions had “arisen about the proper scope and application” of a rule that allows a company to exclude a shareholder proposal that “directly conflicts” with a management proposal. She had directed staff to review the rule, the statement said.

In December, SEC staff applied that rule in deciding that Whole Foods could exclude a proposal by a small shareholder, James McRitchie, from a vote at its annual meeting in March. McRitchie proposed that individuals or groups who collectively owned 3% of the company for three years be allowed to nominate up to two directors on the company’s proxy.

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Under Whole Foods’ competing proposal, only single shareholders owning 9% or more of the company for five years would be able to put directors on the proxy.

SEC staff notified McRitchie on Friday that in light of White’s directive, the Division of Corporate Finance “would not express any views under rule 14a-8(i)(9) for the current proxy season. Accordingly, we express no view concerning whether Whole Foods may exclude the proposal under rule 14a-8(i)(9).”

McRitchie told Reuters that the decision was “a great victory for shareholders.” In a letter to the SEC, he had said its earlier ruling was “an unnecessary limitation on the shareholder franchise.”

The New York Times said the SEC had “potentially cleared the way for [governance] challenges to spread at annual shareholder meetings.”

“Few companies allow investors to nominate corporate directors, a practice known as proxy access,” the Times noted. “This stand has helped to keep boardrooms insular and pro-management, investors say, resulting in a lack of accountability to shareholders.”

After the SEC disclosed its original Whole Foods ruling, 18 companies asked the regulator for permission to exclude similar shareholder proposals under the same rule.