Observations from Recent 14a-8 No-Action Letters

In keeping with my earlier post on shareholder activism, I became curious about the sorts of 14a-8 proposals that companies have been receiving lately. Conveniently, the SEC keeps a chronological list of all of the no-action letters it issues in response to company inquiries on omitting 14a-8 proposals, available here: http://www.sec.gov/divisions/corpfin/cf-noaction/2011_14a-8.shtml#chrono. Although the list may not reflect all of the proposals that a company may receive (e.g., the proposals it includes without dispute or in some negotiated form), the SEC’s response letters suggest the involvement of a wide diversity of companies, shareholders, issues, and approaches to handling disputes.

The companies involved in the last month of no-action letters span across several industries: Disney, Hewlett Packard, Starbucks, Capital Bancorp, Deere & Company (of John Deere fame), and Hormel Foods, to name some of the more recognizable household names. The shareholders submitting the proposals, also, come in an assortment of shapes and sizes: a union (Unite Here), retirement funds (various New York City public employee retirement funds, the United Brotherhood pension fund), funds committed to socially responsible investing (Walden Asset Management, Tides Foundation), a nonprofit (the Humane Society), and even profit-minded individual investors who believe that tighter corporate governance will increase their returns.

But surprisingly, the subject matter of the proposals aren’t all that different from the sort of demands you might see scrawled on a handwritten sign in a populist street protest. For example, the individual stockholders, whose only apparent purpose in submitting the proposals was to increase profit, submitted several proposals aimed at increase corporate oversight and accountability measures. The proposals ranged from proposals seeking greater shareholder input, such as eliminating supermajority voting requirements and allowing larger shareholders to call their own shareholder meetings, to trying to implement checks against what the shareholder believed to be risky behavior (i.e., a proposal demanding that the company retain a threshold cash balance). And other proposals by the individual shareholders appeared to attack perceived cronyism and accountability problems: demanding that the company shorten director terms, appoint an independent director to serve as chairman of the board (instead of the CEO), and preventing employees of the company from being part of the board of directors of a peer group used to benchmark executive compensation, and audit a subsidiary to ensure that it conforms to law and the company’s corporate governance documents.

The institutional investors made similar demands, requesting auditor rotation, shareholder approval prior to golden-parachute agreements exceeding a certain percentage of the senior executive’s salary, and even regular reports disclosing company political contributions and expenditures and the names of the people involved in making such decisions on behalf of the company. The perceived problems targeted in these proposals strike me as rather reminiscent of the more vague public dissatisfaction against corporate greed, lack of decisionmaker accountability, high-risk strategy, and (a hot-button issue since Citizens United even among members of the non-stockholding public) corporate political speech. And curiously, it was the institutional investor, rather than the renegade individual shareholder with a personal agenda, that proposed the less ostensibly profit-oriented proposals. For example, the New York City retirement funds demanded that Hewlett Packard work toward encouraging the publication of an annual sustainability report and monitoring the protection of workers’ rights and human rights throughout its supply chain. The Humane Society, though not a traditional institutional investor, used its ownership in Hormel Foods stock to demand a report on Hormel’s use of sows in gestation crates. Each of these more social-reform-minded proposals were framed in profit-seeking terms, expressing concern about the company’s failure to keep up with industry standards or match peer companies’ commitments, or failure to realize the profits that may be captured from adopting a new way of business that also happens to coincide with efficiency, reputational gains, and profit-maximizing strategy. Perhaps shareholders and discontented non-shareowner members of the public have more in common than commonly assumed, such that there isn’t always such a clean-cut dichotomy between the interests of those who make up a corporation and those who do not.

A survey of the companies’ responses and the SEC’s no-action letters reveal that these proposals have enjoyed varying levels of success in accomplishing their objectives. The less remarkable no-action letters appear to concern outcomes that followed naturally from the SEC’s interpretation of the SEC’s rules (e.g., denials based on personal grievance, ordinary business operations, substantial similarity, and share ownership requirement grounds).

But three of the proposals, in particular, caught my interest as good illustrations of how parties seem to negotiate in reaction to the rules that define the landscape. For example, the parties seem to use the SEC review process to communicate with one another and to equalize informational gaps about the other’s preferences and concerns. Unite Here withdrew its proposal on executive compensation before the SEC could weigh in, once Disney submitted its belief that it could exclude on vagueness grounds (i.e., even if passed, the company would not be able to assess exactly what concrete policy would implement the shareholders’ consensus view). http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2011/unitehere120611-14a8.pdf. This seems to be an example where the proposer benefited from hearing the potential critiques to the proposal early on and getting an opportunity to revise the proposal and to anticipate concerns that may come up at the annual meeting itself. (After all, the cost of a failed proposal, whether because of poor drafting, poor campaigning, or lack of interest, is to be locked out of submitting proposals on roughly the same subject matter for a period of time. So, it is helpful to get things right the first time.)

When Hewlett Packard learned of the New York City retirement funds’ desire to require the publication of annual sustainability reports, it negotiated with the proposers and voluntarily agreed to implement published, independently verifiable reports, where previously they only reported internally on such benchmarks in response to internal requests. The NYC retirements funds withdrew their proposal, seeing this concession as achieving the same effect as what they requested. http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2011/unitedbrotherhoodofcarpentershewlett111811-14a8.pdf. HP, in turn, appeared to benefit from these informal negotiations; they are not formally required by shareholder resolution to take a particular course of action, and the informal understanding between the parties allowed greater flexibility on the company’s part to decide on their own terms how they would address the parties’ concerns. And they gained another possible side benefit: avoiding company-wide discussion on an idea that hasn’t reached its time or doesn’t interest all shareholders, and possibly gaining a “substantially implemented” defense against future proposals that take a more aggressive stance on sustainability and human rights issues.

And then there are company challenges that take a less cooperative stance. When an individual shareholder submitted a proposal to Piedmont Natural Gas on changing an 80% supermajority vote to a simple majority, the company submitted its own counterproposal reducing the supermajority requirement to a two-thirds majority. The company then challenged the proposal contending that they should not be required to distribute the shareholder’s proposal because it contradicted their own. What is especially interesting is the history behind the proposal: apparently, an earlier vote to reduce three-year director terms to one-year terms failed because only 79% voted in favor, just shy of the 80% requirement. http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2011/geraldarmstrong111711-14a8.pdf. This seems to be another example of where a company undercuts a proposal by submitting what is essentially a compromise position. This may not immediately appear as a win for the shareholder that wanted to campaign for the more aggressive stance, but in essence, he was successful in pushing the company itself to espouse a position that may permit the director term vote to prevail the next time it is proposed. A company-backed proposal can be viewed as a win in itself, given the number of passive shareholders that may simply vote as recommended by the company.

*****

And finally… The last series of proposals of note might not be particularly instructive on any useful aspect of the proposal review process, but is interesting nonetheless. They all involve Deere, and its strategy of denying proposals on the basis of discrepancies between the postmarked date and the date of the letter asserting proof of share ownership. In essence, the company takes the shareholder’s statement of one-year continuous ownership of $2,000 worth of stock, which is a prerequisite to submitting proposals under Rule 14a-8, and challenges, and decides to exclude the proposal when the postmark on the letter is later than the end date of the one-year period for which the statement vouches for the proposer’s share ownership. See, for example, http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2011/waldenasset111611-14a8.pdf. For example, Deere successfully procured a no-action letter where Walden Asset Management encloses a proof of ownership letter dated September 12, and the FedEx stamp reveals a mailing date of September 15. The idea, ostensibly, is that the proposer might have fallen under the requirement between September 12 and 15, even though it is required to vouch for its intent to maintain its ownership in the company until the annual meeting. But while these technicalities appear to be successful in fending off proposal distribution requests, for now, I wonder whether cutting off this valuable informational pipeline between shareholders and management will prove a pyrrhic strategy in the long run. And, aside from the informational advantages, perhaps there are some loyalty incentives to negotiating with certain shareholders (e.g., those not of the day-trading variety) and giving them a greater sense of participation and personal attachment to the company to encourage increased investment and confidence in the company.

But for now, I guess the lesson-of-the-moment to be learned, if you happen to be a Deere shareholder, is to make sure you mail your proposals on the same day as the date of your proof of ownership letter.

HC