By John Filar Atwood
In a letter signed by Division of Corporation Finance Director William Hinman, the staff of the SEC declined to reconsider its position that Johnson & Johnson may omit from the proxy materials for its upcoming annual meeting a proposal asking the company to adopt a mandatory arbitration bylaw provision for disputes between the company and its shareholders. The staff opted not to present the request for reconsideration for full Commission review, finding that the matter did not present a novel or highly complex issue that needed to be resolved by the Commission.
The proposal was submitted to Johnson & Johnson by the Doris Behr 2012 Irrevocable Trust. The company sought to omit the proposal on the grounds that it would require Johnson & Johnson to violate the laws of New Jersey where the company is incorporated.
In a carefully-worded response on February 11, the staff agreed with Johnson & Johnson, noting that the New Jersey Attorney General’s ruling that implementation of the proposal would violate state law was a legally authoritative statement that the staff was not in a position to question (see our previous coverage). Chairman Jay Clayton issued a statement in support of the staff’s position on the proposal.
On February 18, the staff received a letter from the trustee of the proponent asking the staff to submit the matter to the Commission for review. In support of his request, the trustee argued that when validity under state law is at issue, a company should not be treated as having met its persuasion burden based on an opinion of counsel acknowledging the absence of settled law.
Rationale for reconsideration. The trustee claimed that the staff treated the New Jersey Attorney General’s letter as authoritative even though letter itself acknowledged the absence of any relevant case law in New Jersey. The trustee acknowledged that New Jersey would likely look to Delaware law in this circumstance, but pointed out the New Jersey Attorney General has no special expertise in interpreting Delaware law. Moreover, the trustee believes that the New Jersey Attorney General’s role as the state’s chief legal officer does not empower him or her to make authoritative interpretations of New Jersey law.
The trustee also reiterated the point it made in an earlier letter that there is substantial U.S. Supreme Court authority for the conclusion that any New Jersey law that prohibits arbitration in this context would be preempted by federal law. The trustee argued that the staff should have addressed that basis in federal law for rejecting the company’s no-action request. In the trustee’s view, the failure to address this is alone a sufficient basis for appeal since if New Jersey law actually did bar arbitration in these circumstances, it would be preempted by federal law.
J&J rebuttal. Counsel for Johnson & Johnson urged the staff not to reconsider its position on the matter because the trustee had presented no new information in its request. Counsel cited several prior instances where the staff declined to reconsider where the proponent did nothing more than reiterate arguments made in previous letters to the staff.
Hinman noted in his reply to the trustee that staff is allowed to present a request for Commission review of a no-action response relating to Rule 14a-8 if it determines that the request involves “matters of substantial importance and where the issues are novel or highly complex.” The staff applied this standard and concluded that in light of the New Jersey Attorney General’s opinion that implementing the proposal would cause the company to violate state law, the matter does not present a novel or highly complex issue.