Monday, November 07, 2016

Apple may not exclude proxy access proposal, SEC says

By John M. Jascob, J.D., LL.M.

Apple’s proxy materials may not exclude a shareholder proposal aimed at seeking meaningful proxy access for more shareholders, according to staff from the SEC’s Division of Corporation Finance. In declining Apple’s request for no-action relief, staff was unable to conclude that the company’s proxy access bylaw compares favorably with the guidelines of a proposal submitted by well-known shareholder activist James McRitchie. Accordingly, Apple may not omit the proposal from its proxy materials in reliance on the “substantially implemented” standard of Exchange Act Rule 14a-8(i)(10).

Proxy access proposal. McRitchie, who publishes the corporate governance portal CorpGov.Net, claims to have drafted the template used in a flurry of proxy access proposals submitted to companies since the beginning of the 2016 proxy season. Under the terms of McRitchie’s proposal to the Apple board: (1) the number of eligible shareholder nominees for the board would either be 25 percent of the then-serving directors or two, whichever is greater; (2) no limitation would be placed on the number of shareholders that can aggregate their shares to achieve the three percent ownership threshold required for creating a nominating group; and (3) no limitation could be imposed on the re-nomination of shareholder nominees based on a failure to receive a certain percentage of votes in a previous election.

Request for no-action relief. In arguing that the company had already substantially implemented the proposal, Apple claimed that its existing bylaws already provide a meaningful right of proxy access. In Apple’s view, McRitchie’s proposal would merely refine the bylaw at the margins, addressing issues that are secondary to the essential elements of proxy access. Allowing shareholders to continually revisit the details of the company's proxy access bylaw would run counter to the "substantial implementation" standard of Rule 14a-8(i)(10), which permits a proposal to be excluded if it differs from existing company policy in only minor respects.

McRitchie, however, responded that Apple’s counsel cited no prior no-action letters for the position that once a company has adopted proxy access it should be free to exclude any proposal on the same topic in the future, provided the initial proposal was substantially implemented. Rather, McRitchie countered, Apple’s arguments were very similar to those made earlier in the year by H&R Block and Microsoft, both of which were denied no-action relief in attempts to exclude proposals seeking revisions to existing proxy access bylaws.

Illusory access? In McRitchie’s view, Apple’s bylaws provide the illusion of proxy access, similar to how certain foods labeled as “natural” provide the illusion of being healthy. With regard to the proposed changes to the maximum number of shareholder nominees, McRitchie dismissed Apple’s contention that the proposal would not represent a meaningful change because it would result in an increase of just one additional potential director under the current bylaws. McRitchie noted that just one additional director would double the number of potential proxy access candidates nominated by shareholders, thus possibly preventing a sole shareholder-nominated director from being frozen out of discussions.

With regard to the size of the nominating group, McRitchie contended that there is a huge difference between Apple’s current limit of 20 shareholders, which the Council of Institutional Investors concludes cannot even be met by its own members at most companies, and the unlimited group size that he proposes. Finally, McRitchie argued that Apple provided no evidence that its current bylaw standard limiting the re-nomination of shareholder nominees would meet an essential purpose of his proposal, which was to facilitate the re-nomination of shareholder nominees without requiring them to meet specific voting thresholds.

Staff conclusion. Based on the information presented, the staff advised that Apple’s proxy access bylaw did not compare favorably with the guidelines in McRitchie's proposal and, accordingly, the proposal could not be omitted as having been substantially implemented.

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