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The 2010 proxy season is over for most calendar year‑end companies.  As promised by the SEC Staff, the current batch of 2010 no‑action letters provides a brief glimpse into the SEC Staff’s reasoning behind its conclusions. 

In this article, we explore some of the trends we have observed in our review of the SEC Staff’s no‑action letters.  Understanding these trends, we believe, can be helpful for companies with upcoming fall 2010 meetings and for calendar year‑end companies who are starting to plan for their 2011 proxy season.

Ordinary Business Proposals

Most shareholder proposals that are excluded continue to be excluded on the basis that they deal with a matter relating to the company’s “ordinary business operations.”  We highlight a few trends regarding “ordinary business” challenges below:

Environmental proposals that require a risk assessment or otherwise relate to risk may not be excluded if they “focus primarily” on the environmental impacts of business operations and do “not seek to micromanage the company to such a degree” that the SEC Staff believes exclusion of the proposal would be appropriate. 

Proposals calling for reports on charitable contributions have not been excludable, since the SEC Staff believes that they “involve a matter of corporate policy which is extraordinary in nature and beyond a company’s ordinary business operations.” 

Proposals regarding “internet neutrality” have been excludable, since the SEC Staff does not believe that they involve “a significant social policy issue.”

Proposals requiring a company to prepare a report comparing the total compensation of executives to that of non‑executive employees have not been excluded, since the SEC Staff believes that such proposals relate to “significant policy issue of senior executive compensation.”

Proposals that conflict with a company proposal

2010 saw a somewhat new tactic employed by companies asserting that they intended to propose a responsive charter or bylaw amendment at the upcoming annual meeting that was on the same topic as the proposal submitted by the stockholder.  A company is permitted to exclude a shareholder proposal if the proposal conflicts with one of the company’s own proposals to be submitted to stockholders at the same meeting.  (Rule 14a‑8(i)(9)) 

The rationale for this exclusion is that the policy issue is raised for stockholders even if the management proposal takes a different position than that advocated by the shareholder, the stockholder could solicit votes against the company proposal if it disagrees with the company proposal, and there would be confusion if there were two substantially similar proposals submitted on the same topic.  The SEC Staff tends to grant no‑action relief if a company can demonstrate that the company-sponsored proposal directly conflicts with the stockholder proposal and would present alternative and conflicting decisions for the stockholders.  For example, more than 25 companies used this approach to exclude proposals seeking to allow stockholders to call a special meeting.  The SEC Staff granted no‑action relief even though in each case the proposal submitted by the company included a higher required ownership threshold than the one submitted by the proponent.  Several companies also relied upon this approach in successfully asserting that proposals related to say on pay and the elimination of supermajority provisions could be excluded.

Proposals containing misleading statements

Company challenges to proposals as vague or misleading were largely unsuccessful in 2010.  A few proposals calling for reports on political contributions were excluded since they failed to “sufficiently explain” the meaning of the term “grassroots lobbying communications” such that stockholders and the company would not “be able to determine with any reasonable certainty exactly what actions or measures the proposal requires."

The trends

Looking forward to the 2011 proxy season, we expect the number of shareholder proposals to continue increasing and to focus on familiar governance topics related to board declassification, eliminating or rescinding supermajority vote requirements, majority voting in uncontested board elections and the right of stockholders to call a special meeting.  Some interesting governance topics that may garner stockholder interest include proposals allowing stockholders to act by written consent in lieu of a meeting, enabling a company to recoup unearned management bonuses and granting stockholders the ability to remove directors.

On proposals dealing with social issues, we expect the primary focus will continue to be proposals related to charitable and political contributions, human rights, health and safety, sustainability and labor related issues.  We expect additional emphasis on environmental proposals, particularly those calling for reports on climate change, Gulf Coast wetlands restoration and Internet privacy.  It is too early to predict the impact of the Dodd‑Frank Act on say on pay proposals.  We expect to have some additional guidance once the SEC provides clarity on this issue via some form of rulemaking.

For more information about these trends, please contact:

Diane Holt Frankle

Andrew Ledbetter

Sanjay Shirodkar