By Andrew Ackerman And Joann S. Lublin
WASHINGTON--U.S. securities regulators declared a temporary
cease-fire in a continuing battle over whether companies can
exclude shareholder ballots that conflict with management's own
proposals.
The Securities and Exchange Commission on Friday disclosed it
was reversing a controversial December decision in which agency
staff agreed Whole Foods Market Inc. could exclude a nonbinding
shareholder proposal that would make it easier for investors to
nominate directors at the high-end grocer. Whole Foods said it
should be allowed to exclude the proposal because it was offering a
similar corporate governance change.
The SEC said going forward it would take "no view" on whether
companies could leave such proposals out of their proxy materials.
Instead, it plans to review a rule that has allowed firms to
exclude measures if management plans to offer similar changes to
its governing documents. The reversal will affect all companies,
not just Whole Foods.
The SEC's December decision allowing Whole Foods to ignore the
shareholder proposal prompted more than 20 companies to seek
permission to exclude similar corporate governance proposals.
In a statement, SEC Chairman Mary Jo White said she directed
staff to review the issue "due to questions that have arisen about
the proper scope and application of" the rule.
Under current SEC rules, a qualifying shareholder can seek to
require a company to publish certain proposals in the company's
proxy statements. Companies can ignore shareholder proposals if
they fit a set of roughly a dozen exclusions, including if they
"conflict" with a proposal the firm is including in its proxy at
the same time.
Companies also can ask SEC staff for a green light to exclude
specific proposals, or go to court to block proposals they don't
like. Some attorneys said the SEC's move could lead more companies
to litigate rather than risk a possible SEC enforcement case for
excluding proposals.
In December, the SEC said Whole Foods could exclude a proposal
filed by James McRitchie, an activist investor who runs corporate
governance website CorpGov.net, that would have allowed
shareholders owning at least 3% of the company's stock for three
years to nominate their own directors.
Initially the company countered with a proposal of its own that
would have allowed investors who owned at least 9% of the company
for five years to nominate directors. It subsequently lowered that
threshold to 5%, though activists warned that bar was still too
high.
A spokeswoman for Whole Foods said the company is "reviewing"
the SEC's move but offered no further comment. Mr. McRitchie said
the SEC's move was "a victory for shareholders."
Friday's reversal was extremely rare, according to several legal
specialists with no role in the Whole Foods case. "It's pretty
unusual for the Commission to get involved in a decision of this
kind," said John F. Olson, a senior partner at Gibson, Dunn &
Crutcher who advises boards on governance issues.
Speaking more broadly, the SEC's action "could be significant"
by giving companies' greater latitude this year "to decide in their
own favor" about conflicting resolutions, suggested Simon Lorne, a
former SEC general counsel who now is vice chairman and chief legal
officer of Millennium Partners LP.
Friday's decision comes amid a growing frustration by some
public companies that the SEC has abdicated its traditional role as
referee separating frivolous shareholder proposals from legitimate
ones. Many companies are gearing up for annual meetings this
spring, a period when most companies hold meetings and vote on
proxy resolutions.
Daniel Gallagher, a Republican member of the SEC, has said
activist investors have "hijacked" the shareholder-proposal system
and called on the SEC to review the entire process. An aide to Mr.
Gallagher declined to comment.
New York City Comptroller Scott Stringer, who this fall began an
initiative to ease the ability of shareholders to nominate
directors at 75 companies, welcomed the review. He said it was
necessary because companies have begun to "game" the proxy
process.
Write to Andrew Ackerman at andrew.ackerman@wsj.com and Joann S.
Lublin at joann.lublin@wsj.com
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