Monday, March 02, 2015

Whole Foods Position Creates Whole Host of Problems, Coalition Says

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

The SEC’s decision to review the Rule 14a-8(i)(9) basis for omission of shareholder proposals has drawn the ire of a coalition of 17 professional organizations, which has written to the SEC to request that it take corrective action without delay. The coalition, which includes the American Bankers Association, the Securities Industry and Financial Markets Association, and the U.S. Chamber of Commerce, said that it is alarmed at the Commission’s abrupt change to a longstanding practice under the rule.

Whole Foods letters. Paragraph (i)(9) allows a company to exclude from its proxy materials a shareholder proposal that conflicts with a management proposal. In a pair of letters to Whole Foods Market in December and January, the staff initially allowed the company’s request to exclude a proxy access proposal under (i)(9), then later withdrew that position. The SEC staff, at the direction of Chair Mary Jo White, is not ruling on (i)(9) letters in the 2015 proxy season while it reviews the issue.

The review was prompted by the controversial nature of Whole Foods’ counter proposal on proxy access. The company sought to allow access only for shareholders that held at least nine percent of the outstanding shares for five years. These requirements varied widely from the industry norm of three percent for three years, and when other companies began to put forth similarly restrictive proposals the SEC decided to pull back on (i)(9) requests until it has more thoroughly considered the matter.

Coalition’s concerns. In its letter to Chair White, the coalition said the Commission’s new stance on (i)(9) is a departure from precedent that benefits neither issuers nor investors. The group urged the agency to pursue policies that provide predictability and do not advance the goals of a small minority of special-interest activists.

The coalition decried the timing of the announcement, which it said came at the height of the proxy season after the deadline for submission of no-action requests for many companies had passed, and after the boards of some companies had already taken action. The group expressed particular concern that the policy applies to all shareholder proposals that may conflict with a management proposal, and not just those on proxy access. This will adversely impact companies with no stake in the proxy access debate, but who want staff guidance on unrelated questions, the coalition warned.

Also of concern to the group is that the Commission made the policy decision apparently without the input of the four other SEC commissioners. The coalition believes that changes of this magnitude should be made in a formal action by the full Commission. The Commission should be careful not to damage the trust of issuers and investors by making significant changes without providing the opportunity for public comment, the group said.

The coalition said that when an agency such as the SEC has announced its interpretation of a regulation, and private parties have relied on that interpretation, the Administrative Procedure Act requires the agency to give notice before changing course. This procedure protects the interests of the regulated community and gives agencies the feedback they need to regulate in a factually sound and publicly accountable manner, the coalition stated.

Poor alternatives. The coalition’s final concern is that the SEC’s position leaves companies and shareholders with no acceptable options under (i)(9). Companies that want to present their own proposals for consideration, but which cannot get no-action assurance, are left to decide whether to exclude the shareholder proposal in favor of their own, risk confusion by including them both, or seek declaratory relief in federal district court since the staff will not to take a position on (i)(9). These are some of the unintended consequences the SEC’s January announcement may cause, the coalition concluded.