Pushback From SEC Staff – Shareholder Appraisal Rights

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“Stun­ning”, “ar­bi­trary”, “un­jus­ti­fi­ied” … “ques­tion­able”: these are some of the words in­di­vid­ual share­own­ers are using to de­scribe the SEC han­dling of six cor­po­ra­tions’ re­quests to be al­lowed to ex­clude the USPX model proxy ac­cess pro­posal from their 2012 proxy ma­te­ri­als. This week, the Com­mis­sion’s staff ap­proved every one of those re­quests.

Cor­po­rate ex­ec­u­tives rou­tinely so­licit SEC staff no-ac­tion let­ters in­di­cat­ing staff will rec­om­mend no en­force­ment ac­tion should a com­pany ex­clude a pro­posal from its proxy ma­te­ri­als. Grounds for ex­clud­ing pro­pos­als are spelled out in Rule 14a-8(i)(9) and in­clude cases where pro­pos­als might vi­o­late state law, ad­dress per­sonal griev­ances, re­late to rou­tine busi­ness de­ci­sions, etc. Cor­po­ra­tions’ in-house coun­sel often draft no-ac­tion re­quests. If ex­ec­u­tives re­ally want to block a pro­posal, they spend share­owner money on out­side law firms to write the re­quests. In re­sponse to the USPX model proxy ac­cess pro­posal, ex­ec­u­tives went all-out, hir­ing out­side law firms to draft lengthy no-ac­tion re­quests float­ing nu­mer­ous pos­si­ble rea­sons for ex­clu­sion.

The high-priced law firm Gib­son Dunn wrote an Oc­to­ber 23, 2011 no-ac­tion re­quest for Tex­tron (TXT) propos­ing that the USPX model pro­posal, which share­owner Ken­neth Steiner had sub­mit­ted to the com­pany, might be ex­cluded be­cause it dealt “with mat­ters re­lat­ing to the Com­pany’s or­di­nary busi­ness”; was ac­tu­ally mul­ti­ple pro­pos­als pos­ing as one; was “im­per­mis­si­bly vague and in­def­i­nite so as to be in­her­ently mis­lead­ing”; and was “be­yond the Com­pany’s power to im­ple­ment.” The let­ter goes on for 19 pages, not in­clud­ing 18 pages of ex­hibits. Gib­son Dunn re­cy­cled es­sen­tially the same let­ter for an­other client, Bank of Amer­ica (BAC). The law firm Stin­son Mor­ri­son Hecker wrote a stag­ger­ing 27 page let­ter for their client, Sprint (S), ar­gu­ing that the USPX model pro­posal would vi­o­late Kansas law, was “im­per­mis­si­bly vague and in­def­i­nite so as to be in­her­ently mis­lead­ing”; was be­yond the Com­pany’s power to im­ple­ment; and dealt “with mat­ters re­lat­ing to the Com­pany’s or­di­nary busi­ness.”

Law firms take a “throw things at the wall and see what sticks” ap­proach to the no-ac­tion process. No ar­gu­ment seems too far fetched. The cor­po­ra­tions are foot­ing the legal bills, and, who knows, Com­mis­sion staff only have to ac­cept one con­trived ar­gu­ment for a pro­posal to be ex­cluded—might as well offer them plenty to choose from. With cor­po­ra­tions re­cy­cling each oth­ers’ ar­gu­ments, it turns out that Com­mis­sion staff only had to ac­cept two ar­gu­ments in order to allow ex­clu­sion of every sin­gle con­tested sub­mis­sion of the USPX model proxy ac­cess pro­posal.

The first of those ar­gu­ments—among those raised by Tex­tron, Bank of Amer­ica and Gold­man Sachs (GS)—was that the USPX model proxy ac­cess pro­posal was ac­tu­ally two pro­pos­als dis­guised as one! The pro­posal’s item 6 pro­vided a com­mon-sense safe­guard against ex­ec­u­tives ex­ploit­ing proxy ac­cess as a means of en­rich­ing them­selves:

Any elec­tion re­sult­ing in a ma­jor­ity of board seats being filled by in­di­vid­u­als nom­i­nated by the board and/or by par­ties nom­i­nat­ing under these pro­vi­sions shall be con­sid­ered to not be a change in con­trol by the Com­pany, its board and of­fi­cers.

In the past, the Com­mis­sion al­lowed share­own­ers to sub­mit as many pro­pos­als to a cor­po­ra­tion as they liked. In 1976, they lim­ited share­own­ers to two pro­pos­als a year, which they fur­ther re­duced to one a year in 1983. Com­mon sense would sug­gest that a sin­gle pro­posal would be what­ever a share­owner sub­mit­ted for a sin­gle up or down vote, but it has been many decades since any­one ac­cused the SEC of hav­ing com­mon sense. No. The Com­mis­sion’s lawyer-bu­reau­crats set them­selves the task of de­ci­pher­ing share­owner pro­pos­als to see if, in their opin­ion, they ad­dress mul­ti­ple is­sues. Rarely is this clear, so de­ci­sions tend to be … nu­anced. Com­mis­sion staff didn’t have to de­cide against share­own­ers on this one, but they did. It doesn’t mean any­thing—just lawyers men­tally mas­tur­bat­ing—but the con­se­quences are real. Share­own­ers of Tex­tron, Bank of Amer­ica and Gold­man Sachs al­most had a chance to vote on proxy ac­cess this year, but Com­mis­sion staff de­cided oth­er­wise.

The sec­ond ar­gu­ment Com­mis­sion staff ac­cepted—among those ad­vanced by Sprint, MEMC Elec­tronic Ma­te­ri­als (WFR) and Chiq­uita (CQB)—was that, be­cause the pro­posal cited the Com­mis­sion’s own Rule 14a-8, it was im­per­mis­si­bly vague or mis­lead­ing. Specif­i­cally, Com­mis­sion staff noted that the USPX model proxy ac­cess pro­posal asked that com­pa­nies’ proxy ma­te­ri­als

… in­clude the di­rec­tor nom­i­nees of share­hold­ers who sat­isfy the “SEC Rule 14a-8(b) el­i­gi­bil­ity re­quire­ments.” The pro­posal, how­ever, does not de­scribe the spe­cific el­i­gi­bil­ity re­quire­ments. In our view, the spe­cific el­i­gi­bil­ity re­quire­ments rep­re­sent a cen­tral as­pect of the pro­posal. While we rec­og­nize that some share­hold­ers vot­ing on the pro­posal may be fa­mil­iar with the el­i­gi­bil­ity re­quire­ments of rule 14a-8(b), many other share­hold­ers may not be fa­mil­iar with the re­quire­ments and would not be able to de­ter­mine the re­quire­ments based on the lan­guage of the pro­posal. As such, nei­ther share­hold­ers nor [the Com­pany] would be able to de­ter­mine with any rea­son­able cer­tainty ex­actly what ac­tions or mea­sures the pro­posal re­quires.

The SEC’s own Rule 14a-8(b) is eas­ily ac­ces­si­ble with a web search. It ex­plains in a half page of plain Eng­lish what the el­i­gi­bil­ity re­quire­ments are, so how does Com­mis­sion staff con­clude that “nei­ther share­hold­ers nor [the Com­pany] would be able to de­ter­mine with any rea­son­able cer­tainty ex­actly what ac­tions or mea­sures the pro­posal re­quires”???

The SEC is a giant re­volv­ing door for lawyers. Al­most the en­tire se­nior staff is lawyers who work at the Com­mis­sion for a few years and can then look around for high-pay­ing jobs at law firms. Re­cently, one such de­par­ture was Greg Bel­lis­ton, who left the Com­mis­sion for—where else!—Gib­son Dunn.

In com­ment­ing on Com­mis­sion staff’s treat­ment of the USPX model pro­posal, the CorporateCounsel. net Blog of­fers share­own­ers some com­fort:

As is usu­ally the case with the type of ex­clu­sions that we see here … the pro­po­nents will no doubt get smarter next year and try to cor­rect the lan­guage which led to ex­clu­sion this year, so the land­scape might be quite dif­fer­ent in 2013.

Ac­tu­ally, share­own­ers won’t be wait­ing for 2013. USPX mem­bers are al­ready re­draft­ing the USPX model proxy ac­cess pro­posal. Ex­pect new sub­mis­sions in the next few weeks.

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