Wednesday, March 08, 2017

Banks may not omit shareholder proposals on divestiture of non-bank business segments

By Jacquelyn Lumb

Bank of America Corporation and Wells Fargo & Company may not omit shareholder proposals asking their boards to consider whether divestiture of all non-core banking business segments would enhance shareholder value and whether they should divide into a number of independent firms. Bank of America sought to omit the proposal in reliance on Rules 14a-8(c) on the basis that it constituted more than one proposal, 14a-8(i)(3) on the basis that it was vague and indefinite, and 14a-8(i)(10) on the basis that it had substantially implemented the proposal. Wells Fargo also sought to omit the proposal under Rule 14a-8(i)(3) and under Rule 14a-8(i)(7) as constituting ordinary business operations. Both proposals were submitted by Bartlett Naylor.

Study on bank divestitures. The proposals ask the boards to conduct a series of study sessions, ideally led by an independent director, and to report their findings about a potential divestiture of non-core banking business segments. The boards should consider retaining independent legal, investment banking, and third party advisers as appropriate to assist in the valuation, under the proposals. In each proposal, Bartlett Naylor defines non-core banking operations to mean those that are conducted by affiliates other than Bank of America, N.A. and Wells Fargo Bank N.A., respectively.

Bartlett Naylor cited the financial crisis of 2008 in support of its proposal, which it said highlighted the significant weaknesses in the practices of large inter-connected financial institutions. The crisis revealed that some banks were too big to fail, too big to jail, and too big to manage, according to the proponent. The proposal is not intended to be prescriptive, Bartlett Naylor added. The study is meant to determine whether a trimmer organizational structure would be more beneficial.

Arguments for omission. Bank of America argued that the submission included two different proposals—whether to divest of non-core banking business segments and whether it should divide into a number of independent firms. Each would require a separate and distinct analysis, according to the firm. The firm also argued that the proposal was vague because it would not enable shareholders to determine which operations constituted non-core banking business segments.

Bank of America also noted that it has divested non-core operations and simplified its operations since the financial crisis, and it is not too big to manage today, as asserted by the proponent. Throughout this decade, Bank of America said it has engaged annually in a review of its operations and business strategy, which includes consideration of whether to divest non-core business lines with a focus on enhancing shareholder value. For example, in 2010 the firm divested a total of more than $74 billion in non-core operations and assets.

Wells Fargo also argued that the proposal was vague and indefinite with respect to what constituted non-core banking operations and said it is subject to multiple interpretations, each of which would require different actions. In addition, the firm said the proposal relates to non-extraordinary transactions involving ordinary business operations. The non-core banking operations are relatively small business segments, the firm explained, and shareholder approval would not be required to divest them under Delaware law or under the firm’s governing documents. Given that the divestiture would constitute non-extraordinary transactions, Wells Fargo said the proposal could be omitted under the ordinary business exclusion.

Staff response. In its response to Bank of America’s no-action request, the staff did not concur with the view that the proponent had submitted more than one proposal or that the proposal was vague and indefinite. The staff added that, based on the information provided, the firm’s policies, practices, and procedures did not appear to compare favorably with the guidelines in the proposal and the proposal could not be omitted in reliance on Rule 14a-8(i)(10).

In its response to Wells Fargo, in addition to its finding that the proposal was not vague or indefinite, the staff concluded that the proposal focused on an extraordinary business transaction and could not be omitted in reliance on Rule 14a-8(i)(7).