Risk & Compliance

SEC Gives Boost to Investors in Proxy Battles

A regulator says new guidance will prevent companies from "gaming the rules to deny shareowners the right to vote on critical reforms."
Matthew HellerOctober 23, 2015

The U.S. Securities and Exchange Commission has narrowed the scope of a rule that allows companies to block shareholder proposals from coming to a vote, giving a boost to activist investors in corporate governance battles.

Rule 14a-8(i)(9) says a company may exclude a proposal from a proxy ballot if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” SEC Chair Mary Jo White directed staff in January to review the “proxy access” rule after the agency reversed a decision allowing Whole Foods to exclude a proposal from an activist investor.

In a bulletin issued Thursday, the SEC’s Division of Corporate Finance said prior interpretation of the rule had incorrectly “focused on the potential for shareholder confusion and inconsistent mandates, instead of more specifically on the nature of the conflict between a management and shareholder proposal.”

In future, the bulletin said, regulators will not “view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both.”

The Wall Street Journal said the new guidance “boosts power for shareholder activists and clears up confusion over the regulators’ stance that muddied the most recent proxy season.”

“This decision will help to ensure that companies will not be able to game the rules to deny shareowners the right to vote on critical reforms, whether it’s proxy access or changes to executive pay,” Scott Stringer, the New York City comptroller who led a major corporate campaign for proxy access this year, said in a statement.

In the Whole Foods case, the grocer sought to exclude a proposal 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.

The SEC initially issued a “no-action letter” in December, agreeing with Whole Foods that the investor’s proposal would directly conflict with the company’s own director nomination proposal. The ruling prompted 18 companies to ask the SEC for permission to exclude similar shareholder proposals.