Recent Trends in Shareholder Proposals

47 Pages·2015·0.34 MB·English

Recent Trends and Legal Developments You
Should Consider in 2015: Part II – Securities
& Corporate Governance

February 24, 2015
© 2015 Winston & Strawn LLP
Today’s Speakers

Christina Roupas Karen A. Weber
Associate, Securities/ Partner, Securities/
Corporate Governance Corporate Governance
Chicago Chicago
[phone] [phone]
[email protected] [email protected]

© 2015 Winston & Strawn LLP
Agenda

• Recent Trends in Shareholder Proposals
• Recent Changes in Debt Tender Offer Rules
• Litigation-Related Bylaws
• Public Companies and Social Media
• Investors Activism Update

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Recent Trends in Shareholder Proposals

© 2015 Winston & Strawn LLP
Recent Trends in Shareholder Proposals -
Background
• Rule 14a-8 under the Securities and Exchange Act of 1934, as amended, allows
shareholders to include proposals in a company’s proxy statement
• Adopted in 1942 to allow shareholders to have a voice in the major policy decisions
of companies in which they have made an equity investment
• Process
• Proposal received not less than 120 calendar days before the date on which the company
released its definitive proxy statement in the prior year
• Proposal and supporting statement must be less than 500 words
• Eligibility:
• At least 1% or $2,000 in the company’s securities for at least one year
• Intent to hold such securities through the date of the shareholders’ meeting
• Only one proposal per meeting per shareholder
• Defect Notice
• Company must provide written notice of defect within 14 calendar days of receipt and provide 14 calendar
days to cure

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Recent Trends in Shareholder Proposals -
Background
No-action letter must be submitted no later than 80 calendar days before a company files
its definitive proxy statement and form of proxy

Bases for Exclusions • Absence of Power or Authority – 14a-
8(i)(6)
• Improper under State Law - 14a-8)(i)(1)
• Ordinary Business – 14a-8(i)(7)
• Requires legal opinion
• Election to Office – 14a-8(i)(8)
• Violation of Law - 14a-8(i)(2)
• No exclusion for proxy access
• Requires legal opinion
• Counterproposal – 14a-8(i)(9)
• Violation of the Proxy Rules - 14a-8(i)(3)
• Conflicts with company’s proposal
• False and misleading statements under Rule
14a-9 • Substantially Implemented – 14a-8(i)(10)
• Personal Claim or Grievance – 14a-8(i)(4) • Substantially Duplicative – 14a-8(i)(11)
• Relevance – 14a-8(i)(5) • Duplicates another shareholder proposal
• Less than 5% of total assets and less than 5% • Resubmissions – 14a-8(i)(12)
of net earnings and gross sales and not
• 5-year cooling off
otherwise significantly related to business
• Dividends – 14a-8(i)(13)

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© 2015 Winston & Strawn LLP
Recent Trends in Shareholder Proposals
Trend #1: Litigation
Appealing a No-Action Decision (Company or Proponent)
• Ask the Staff to reconsider
• Staff rarely overturns its own decision
• More likely to reverse if there is a material change in factors or legal issues
• Ask the full Commission to review the Staff’s decision
• Commission review when there is a “matter of substantial importance and where the issues
are novel or unique”
• Commission rarely overturns Staff
• Sue in court to obtain a judicial determination on the question
• Proponent who believes that a company has wrongfully excluded a proposal has an implied
private right of action under Rule 14a-8 to challenge
• Companies may sue rather than rely on the Staff to exclude a proposal through the no-action
process
• Increase in SEC “no view” responses
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Recent Trends in Shareholder Proposals
Trend #1: Litigation
False and Misleading Statements - Rule 14a-8(i)(3)
• Express Scripts Holding Co. v. Chevedden (2014)
• Company sought declaratory judgment to exclude proposal in its proxy statement in the U.S.
District Court for the Eastern District of Missouri
• Proposal: Policy requiring the chairman to be an independent director
• Company argued exclusion based on demonstrably false and misleading statement sin
supporting statement
• Gross misstatement of CEO compensation
• Stated no clawback policy when such policy was adopted and publicly disclosed
• Stated plurality voting when majority voting was adopted and publicly disclosed
• Decision: supporting statement contained “inaccuracies [that] are more than mere
‘minor defects’ that could be corrected easily with minimal editing”
• Criteria for exclusion under Rule 14a-8 and 14a-9 have been met

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Recent Trends in Shareholder Proposals
Trend #1: Litigation
Ordinary Business Matters - Rule 14a-8(i)(7)
• Trinity Wall Street v. Wal-Mart Stores, Inc. (2014)
• Proposal: Amend NCGC Charter so that NCGC would oversee the “formulation and
implementation of, and the public reporting of the formulation and implementation of, policies
and standards that determine whether or not [Wal-Mart] should sell a product that 1)
endangers public safety and well-being; 2) has the substantial potential to impair the
reputation of [Wal-Mart] and/or 3) would reasonably be considered by many offensive to the
family and community values integral to [Wal-Mart]’s promotion of its brand”
• SEC granted no-action relief to Wal-Mart under the ordinary business exception
• Staff did not find that proposal addressed a “significant social policy issue”
• Proponent filed suit in the District of Delaware seeking injunctive relief
• Proposal was not excludable under the ordinary business exception
• Proposal raised a significant policy issue
• Court granted proponent injunctive relief and enjoined Wal-Mart from relying on the
ordinary business exception to exclude the same proposal from its 2015 annual meeting
• Court afforded SEC’s no-action letter less deference than in prior decisions – “undisputed
that the final determination as to the applicability of the ordinary business exception is for
the [c]ourt alone to make”
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Recent Trends in Shareholder Proposals
Trend #1: Litigation
2014 Victories for Shareholder Proponents
• EMC Corp. v. Chevedden (U.S. District Court for the District of Massachusetts);
Omnicom Group, Inc. v. Chevedden (U.S. District Court for the Southern District of
New York); and Chipotle Mexican Grill, Inc. v. Chevedden (U.S. District Court for the
District of Colorado)
• In each case, Company sought declaratory judgment to leave off its proxy statement
a proposal from John Chevedden
• Mr. Chevedden agreed not to sue if company excluded his proposal
• Courts determined that they lacked subject matter jurisdiction
• No adjudicable “case or controversy”
• No actual or imminent legal consequences because company would not face
lawsuit from proponent if excluded and possibility of SEC action or investigate is
remote

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