Rule 14a-8(i)(6) — former Rule 14a-8(c)(6)

Question 9(6): Absence of power/authority: If the company would lack the power or authority to implement the proposal.

§ 19.01 Background of the Exclusion

This exclusion applies to proposals that a company lacks the legal authority or practical ability to carry out.

§ 19.01[A] History of the Exclusion

In 1972, the SEC first addressed the concern that companies should not have to include proposals in their proxy materials that related to matters over which they had no control. The SEC did this by creating a Note to an existing provision that permitted exclusion of proposals that were not significantly related to a company's business. In this Note, the SEC indicated that "proposals not within an issuer's control are those which are beyond its power to effectuate."[fn1] In 1976, the SEC created a separate exclusion using the concept from the Note. The SEC indicated that "the Note did nothing more than define the term used in the subparagraph. . . ."[fn2] With the new exclusion, it was clearer that the SEC could allow companies to exclude proposals that they could not implement.

In 1998, this exclusion was renumbered as 14a-8(i)(6) and the wording was revised to clarify its meaning, although there was no change in how the SEC applied the exclusion.[fn3]

[fn1] Exchange Act Release No. 9784, 1972 SEC LEXIS 155 (Sept. 22, 1972).

[fn2] Exchange Act Release No. 12,999, 10 SEC Dock. 1006, 1011 (1976).

[fn3] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 19.01[B] Purpose of the Exclusion

The exclusion is designed to ensure that a company can exclude proposals that would require it to undertake acts that it could not carry out, because it lacks the legal authority or practical ability.

§ 19.01[C] Overlap with Other Exclusions

This exclusion is sometimes viewed as a secondary exclusion since it overlaps with several other exclusions. In many cases, companies will make a primary argument under another exclusion and then add a brief argument that this exclusion is also available to them for the same reasons.

Most often, this exclusion overlaps with Rule 14a-8(i)(2), which permits exclusion of proposals that would cause the company to violate federal or state law, because companies are required to argue under (i)(2) that they would be legally constrained from implementing a proposal. It logically follows that if a company is prevented by law from implementing a proposal, it also lacks the power or authority to implement it. If a state corporate law is implicated, there also may be an overlap with Rule 14a-8(i)(1), regarding improper subjects for shareholder action under state law.[fn4]

It is not uncommon for this exclusion to intersect with the relevance exclusion set forth in Rule 14a-8(i)(5). This is not surprising since these two exclusions were combined as one exclusion before 1976. Companies argue that the lack of any connection between the subject of the proposal and the company's business makes the proposal irrelevant and precludes the company from implementing it.

In the case of proposals establishing director eligibility criteria, a company may argue that applicable state law does not vest its board or management with the power to ensure the election of directors who satisfy the criteria. As a result, companies urge that the proposal is excludable as beyond the company's power to implement and as relating to an election of directors, which is dealt with in Rule 14a-8(i)(8).

[fn4] See supra Chapter 14.

§ 19.02 Application of the Exclusion

§ 19.02[A] Identifying the Key Issues

While the SEC staff has taken a fairly narrow view of this exclusion, proposals that do any of the following may be good candidates for exclusion on this basis:

require the company to violate an existing legal obligation;
impose vague or general objectives without providing a specific means of implementation; or
require action by third parties over which the company has no control.

In each of these circumstances, the SEC staff has allowed exclusion under this provision. However, the staff often permits proponents to cure the defects in their proposals by making them operate prospectively.

§ 19.02[B] Importance of Framing Arguments

The scope of the actions sought in a proposal is a critical factor in how the staff applies this provision. Because one of the key issues under this exclusion is whether the proposal truly is impossible to effectuate or merely difficult, the parties normally focus on this issue.

Proponents tend to focus on "micro" issues, by illustrating that the requested action is just one manageable small step toward a larger goal. Proponents emphasize that the company is being asked to do something that is reasonable, not to solve the entire problem underlying the proposal. Such a focus may give the SEC staff the opportunity to allow the inclusion of a seemingly impossible proposal. In many cases, the ability of a proponent to provide a reasonable rebuttal can make a difference in the staff's decision.

On the other hand, companies focus on the "macro" issues, arguing that the underlying objective of the proposal is impossible to achieve. They try to persuade the staff that despite the small steps that a proponent seeks, the proponent will never be capable of achieving its larger goal through the company's efforts.

EXAMPLES:

Proponents focusing on "micro" issues

In Coca-Cola Company,[fn5] the SEC staff denied no-action relief on a proposal that required the company to promote the retention and development of bottle deposit systems and laws and to cease any efforts to replace existing deposit and return systems with one-way containers in developing countries with per capita income of less than $5,000 or others that do not have an effective and comprehensive municipal trash collection and disposal system. The proposal required the company to accomplish this itself as well as through companies in which it had an ownership interest. The company argued that, except for controlled bottlers, it did not have the ability to control bottler decisions and that many existing contracts with the bottlers allowed them to use one-way containers. As a result, to implement the container choice portion of the proposal, the company would have to breach numerous bottling contracts. Regarding bottlers that were controlled, but not wholly owned, the company argued that the company would breach its fiduciary responsibility to those bottlers' shareholders to force changes to its bottling contracts that reasonable persons might find imprudent or uneconomic. The company also noted that contracts between bottlers and suppliers could be breached under the proposal. The proponent responded that the company certainly could influence the decisions of bottlers in which it owned a partial interest, not only the controlled ones, and that the company's efforts to turn the bottlers away from traditional deposit-refund systems caused the problem in the first place.
In Lincoln National Corporation,[fn6] the company was required to include a proposal requesting that the board initiate a policy mandating no further purchases of tobacco equities and that the company divest itself of all tobacco stocks by a specified date. The company argued that it had assets under management in excess of $120 billion and that these assets included portfolios managed by the company's subsidiaries engaged in investment management services and assets in entities that are not controlled by the company or its subsidiaries, such as registered investment companies and separately managed accounts for individual institutional clients. The company noted that these accounts and entities are governed by their own organizational documents which typically specify investment policies, restrictions and practices and that in the case of registered investment companies, those entities have separate boards of directors. The company argued that, even if the proposal was limited to apply only to portfolios beneficially owned by the company and its subsidiaries, it could not limit its investment operations in the manner requested in the proposal because the portfolio securities were maintained in separate accounts and that those portfolios were created to support particular products and were held for the benefit of the holders of those products, not the company's shareholders. The proponent replied that the proposal only applied to the portfolios of the company's insurance subsidiaries.
In Raytheon Company,[fn7] the proponent successfully defended against a no-action challenge to a proposal asking that the board ensure that all directors are elected annually, and that 70% of the directors be independent. In its response, the SEC staff noted that the proposal requested the board to take the steps necessary to implement the action called for and that the Spin-Off Separation Agreement permits the board to request a determination from the acquiror that the action would not jeopardize the tax-free status of the spin-off. The company claimed that the proposal was not within its power to effectuate because it would cause the company to violate Delaware law as well as breach a separation agreement with its former parent. The proponent disputed that implementation of the proposal would violate the separation agreement.
In UST Inc.,[fn8] the SEC staff denied a no-action request on a proposal urging the board to implement a policy of submitting advertising campaigns to independent testing to ensure that they are not more appealing to children than to adults. The company argued that the proposal would cause the company to violate contractual commitments while awaiting subjective approval of its marketing programs. The proponent argued that the company "sorely underestimated its creativity and ability to respond to new conditions" and noted that the company merely would have to find a business experienced in running focus groups which have no tie to the tobacco industry to conduct the tests. The proponent also pointed out that the company had claimed that it would be impractical, rather than impossible, to implement the proposal.
In Illini Corporation,[fn9] the SEC staff denied no-action relief with respect to a proposal requesting that the board redeem the rights issued pursuant to, or otherwise terminate or rescind, its rights plan and refrain from adopting any similar plan in the future without shareholder approval. The company argued that, because a court in which legal action was pending might decide that the shareholder rights agreement had already been triggered (as one of the parties to the litigation contended), the company did not have the power to rescind existing contractual rights. The proponent observed that the company was taking two contradictory positions: that it could redeem the rights but that this would violate state law, and that it does not have the power or authority to redeem the rights because the rights were no longer redeemable.

[fn5] 2000 SEC No-Act. LEXIS 122 (Feb. 2, 2000).

[fn6] 1999 SEC No-Act. LEXIS 351 (Mar. 24, 1999).

[fn7] 1999 SEC No-Act. LEXIS 276 (Mar. 9, 1999).

[fn8] 1999 SEC No-Act. LEXIS 203 (Feb. 22, 1999).

[fn9] 1999 SEC No-Act. LEXIS 167 (Feb. 12, 1999).

§ 19.03 Possibility of Implementation

§ 19.03[A] Impossible Proposals

There are some proposals whose requests are so outrageous that it is indisputable that the company cannot effectuate them. Since these proposals clearly are outside the boundaries of what a company should reasonably consider, the SEC staff is able to allow their exclusion without controversy.

EXAMPLE:

In Bell Atlantic Corporation,[fn10] the company successfully excluded a proposal that mandated that the board request a ruling from the Board of Governors of the Federal Reserve System on the scheduling of the company's shareholder meetings. The company argued that it did not believe that the Federal Reserve had the power to issue the requested ruling. The proponent did not submit a rebuttal.

[fn10] 1997 SEC No-Act. LEXIS 54 (Jan. 15, 1997).

§ 19.03[B] Action Cannot Be Taken Immediately

Even if the action contemplated in the proposal cannot be effectuated immediately, the proponent normally can convince the SEC staff to require inclusion of the proposal, as long as the company can take the proposed steps at some reasonable time in the future. The determination of what constitutes a reasonable time is a facts and circumstances test that has not been addressed often by the staff, in no-action letters or otherwise.

§ 19.03[C] Action Cannot Be Taken in its Entirety

The SEC staff may require the inclusion of a proposal if some element, but not all of the proposal, is possible to implement. If a proponent is able to show that there is a theoretical possibility of implementation, the staff likely will allow the proposal to be included. For example, a proposal may ask for a report about a matter that could not be implemented. Since the preparation of the report itself is possible, the staff likely would allow its inclusion. This is an example of the staff focusing on "micro" issues.

EXAMPLES:

In UST Inc.,[fn11] the proposal asked the board to create a committee of outside directors to investigate policies and procedures regarding the placement of the company's tobacco products in retail outlets and to prepare a report to shareholders with recommendations aimed at ensuring that the company's tobacco products are placed out of reach of consumers. The company unsuccessfully argued that only the retail outlets were in a position to review and change their internal policies and procedures. The proponent did not submit a rebuttal.
In Hartford Financial Group, Inc.,[fn12] the SEC staff denied no action relief with respect to a proposal requesting that the board initiate a policy mandating that no further purchases of equities be made for insurance portfolios and that the company divest itself of all tobacco stocks by a specified date. The company argued that it did not have the power to change the investment policies of the investment companies whose portfolios were available to holders of separate account products because those policies are determined by their independent boards of directors and are implemented by their independent investment advisers. In addition, the company argued that index funds are by definition designed to track precisely the performance of an index and it was beyond the power of the company to change the industries that are represented in the index. The company also argued that it could not offer true broad-market index products if a major industry like tobacco is excluded from separate accounts. The proponent replied that the proposal was aimed exclusively at the portfolios of the company's insurance subsidiaries so that the company's arguments were irrelevant.

[fn11] 2000 SEC No-Act. LEXIS 436 (Mar. 13, 2000).

[fn12] 2000 SEC No-Act. LEXIS 455 (Mar. 18, 2000).

§ 19.03[D] Lack of Control Over Third Parties

Some proposals request that a third party, a shareholder, supplier, affiliate or employee, take action. In these cases, companies argue that they do not control the third parties. Sometimes, a proponent is able to argue successfully that the company can exert pressure on the third party through the company's relationship or other means, making lack of direct control irrelevant.

EXAMPLES:

In General Motors Corporation,[fn13] the SEC staff required the company to include a proposal recommending that the company's spun-off companies retain the corporate governance standards of their former parent. The company had spun off three units recently but stated that it did not have any current plans to spin off any more. The company noted that the proposal, as worded, could only be applied to companies that had been spun off, particularly one that was the sole subject of the supporting statement. Since that spun-off company was now a separate entity and not controlled by the company (because the company did not own any of its stock), the company argued that it did not have the ability to require it to maintain any particular policies. As a result, the company argued that the proposal should only apply to future spin-offs. The proponent argued that the proposal did apply to future spin-offs.
In CCBT Bancorp, Inc.,[fn14] the SEC staff declined to grant no-action relief on a proposal that mandated the dissolution of a recently created holding company. The company argued that it would need the affirmative votes of at least two-thirds of its stockholders, as well as various regulatory approvals, to dissolve the holding company. It noted that the results of this lengthy and costly process would be out of its control. The proponent did not submit a rebuttal.
In Student Loan Corporation,[fn15] the company was allowed to exclude a proposal asking the board to amend the bylaws to grant minority shareholders the right to elect two independent directors, which would require the abstention of the company's 80% shareholder. The company argued that it did not have the right or ability to cause any shareholder to abstain from voting on any matter. The proponent did not submit a rebuttal. In its response, the staff noted that it appeared that the proposal would eliminate the right of all shareholders to vote for all of the members of the board of directors.

[fn13] 2000 SEC No-Act. LEXIS 533 (Apr. 10, 2000).

[fn14] 1999 SEC No-Act. LEXIS 449 (Apr. 20, 1999).

[fn15] 1999 SEC No-Act. LEXIS 361 (Mar. 8, 1999).

§ 19.03[E] Violation of Law

Companies normally make arguments under both Rule 14a-8(i)(6) and (i)(2) when they believe that a proposal would force them to violate a law. In fact, it is not uncommon for these bases to be addressed together in the company's letter and for the SEC staff to rely on both exclusions if it allows a company to exclude a proposal.[fn16]

If the company argues that a proposal would breach an existing contract, the staff normally allows proposals to be recast so that it would apply when the contract expires.

Other than breach of contract, if a proposal would cause the company to violate a law, the proponent normally cannot adequately modify its proposal to avoid exclusion, so the staff does not provide an opportunity to cure.

EXAMPLE:

In Kroger Co.,[fn17] the company successfully excluded a proposal that required the company to limit officers' and directors' compensation to no more than 2% above the lowest paid hourly employee or 2% above the C.P.I. In its response, the SEC staff noted that the proposal could be excluded because it would cause the company to breach an existing employment agreement but allowed the proponent to revise the proposal so that it applied only to future employment contracts.

[fn16] See supra Chapter 15.

[fn17] 2000 SEC No-Act. LEXIS 583 (Apr. 21, 2000).

§ 19.03[E][1] Illegal Activity

The SEC staff consistently allows companies to exclude proposals that would require them to engage in illegal activity that would violate federal, state or other laws. For example, a proposal that asked a company to allow employees to smoke marijuana during working hours clearly could be excluded.

§ 19.03[E][2] Violation of Existing Legal Obligations

Companies normally are successful in convincing the staff to require that a proposal apply only prospectively when they can argue that a contract will be breached if a proposal is implemented. They point out that the breach of contract would result in a violation of law, typically state law.

EXAMPLES:

In UST Inc.,[fn17.1] the company was required to include a proposal recommending that the company put specific information in the packaging of its tobacco products. The company argued that the Federal Trade Commission (FTC) already prescribed certain health warnings on tobacco packages and that modifications of the warnings would violate the FTC regulations.
In Whitman Corporation,[fn18] the SEC staff permitted the company to exclude a proposal that required the board to rescind an existing agreement with another company and to demand damages from that company resulting from implementation of an agreement. The company argued that the proposal would cause the company to rescind unilaterally a pending merger and that this would result in a breach of a merger agreement, thereby violating state law. The proponent's rebuttal did not address this exclusion.
In Captec Net Lease Realty, Inc.,[fn19] no-action relief was denied with respect to a proposal seeking an amendment of the company's bylaws to prohibit the direct or indirect use of funds to purchase or maintain directors' and officers' insurance and to eliminate all clauses from the bylaws providing for indemnification of the company's officers, directors or employees. The company noted that its directors and officers had relied upon this liability insurance in deciding to work for the company, and that implementation of the proposal would require the company to unilaterally repudiate its obligation to purchase such insurance. The company also noted that it had entered into Indemnification Agreements which required it to maintain directors' and officers' liability insurance for a certain period of time. The proponent's rebuttal did not address this exclusion.

[fn17.1] 2002 SEC No-Act. LEXIS 256 (Feb. 27, 2002).

[fn18] 2000 SEC No-Act. LEXIS 203 (Feb. 15, 2000).

[fn19] 2000 SEC No-Act. LEXIS 687 (June 15, 2000).

§ 19.03[E][2][a] Executive Compensation

The SEC staff normally requires companies to include proposals that relate to executive compensation. However, if a company raises a valid argument that implementation of the proposal would cause a breach of an existing contract, the staff normally allows the proponent to recast the proposal to apply to future obligations so that it does not affect the existing contract.

EXAMPLE:

In OGE Energy Corp.,[fn20] the proposal mandated that all bonuses be voted on by shareholders and be limited to 10% of the salaries of executive officers. To avoid exclusion, the SEC staff required the proponent to recast the proposal as a recommendation to the board, rather than a mandate, and to make it apply prospectively after the existing contracts expired. The company argued that it was bound by its obligations under various employment agreements and incentive plans.

Proponents have succeeded in convincing the SEC staff to include proposals that link executive compensation to social issues. For several years, a number of proposals that linked tobacco issues to executive compensation were excluded because the standards set were too vague. However, proponents learned from their mistakes and submitted proposals that allowed companies to set their own atandards. The staff agreed that these standards were not too vague and allowed the proposals to be included.

EXAMPLE:

In Loews Corporation,[fn21] the proposal requested that the board create a formula linking future executive compensation packages with reduction in teen consumption of the company's brands, using the terms of the now-defunct national tobacco settlement as a guide. The company unsuccessfully argued that the proposal improperly linked executive compensation and the achievement of goals in the settlement and noted that the settlement was for the whole smokeless tobacco industry, not individual companies, making it impossible for the company to implement the proposal. The proponent argued that the proposal called on the company to establish reduction goals for its own brands and only referred to the defunct settlement as a guide. The proponent noted that the company was asked only to penalize failure to meet its own standards, and to reward management if it meets them.

[fn20] 1999 SEC No-Act. LEXIS 298 (Mar. 4, 1999).

[fn21] 1999 SEC No-Act. LEXIS 266 (Feb. 22, 1999).

§ 19.03[E][2][b] Sale or Merger

The SEC staff normally denies no-action relief with respect to proposals that ask companies to enter into — or consider — a business combination. By contrast, the staff generally allows companies to exclude proposals that interfere with a pending business combination. The staff's reasoning is that the company would violate state law if it breached a merger agreement or other contract related to the transaction.

EXAMPLES:

In NCH Corporation,[fn22] the company was required to include a proposal urging the board to arrange for the sale of the company to the highest bidder. The Delaware company noted that one shareholder, who owned a controlling interest in the company, strongly opposed a sale. The company argued that the proposal would be futile and would confuse shareholders because, under both the company's bylaws and Delaware law, the consent of the controlling shareholder was required to sell the company. The company also noted that the company's board opposed the sale and was in the process of implementing managerial and operational changes that were inconsistent with the proposal. The proponent did not submit a rebuttal.
In Staten Island Bancorp,[fn23] the company was permitted to exclude a proposal recommending the removal of "anti-takeover defenses" from the company's certificate of incorporation and bylaws, but the SEC staff permitted the proponent to cure the defect if the proposal were recast as a recommendation that the board take the steps necessary to implement the proposal. The company argued that even the proponent acknowledged the company's inability to implement the changes required by the proposal, due to its wording.
In Whitman Corporation,[fn24] the SEC staff granted no-action relief on a proposal that required the board to rescind an agreement with another company and to demand damages resulting from misleading statements made in relation to that agreement. The company argued that the proposal would cause the company to unilaterally rescind a pending merger, in breach of a merger agreement and in violation of state law. The proponent's rebuttal did not address this exclusion.

[fn22] 2000 SEC No-Act. LEXIS 579 (Apr. 27, 2000).

[fn23] 2000 SEC No-Act. LEXIS 462 (Mar. 21, 2000).

[fn24] 2000 SEC No-Act. LEXIS 203 (Feb. 15, 2000).

§ 19.03[F] Violation of Laws Relating to Boards, Management and their Functions

A company may argue that it cannot unilaterally implement a proposal because state law does not vest its board or management with the power to do so. In some cases, framing the proposal as prospective can cure the deficiency.

§ 19.03[F][1] Qualification Criteria for Directors or Board Committees

Only shareholders have the ability under state law to elect directors, although boards and their nominating committees select nominees. As a result, the SEC staff generally allows companies to exclude proposals that require the board to consist of persons who satisfy certain criteria. However, proponents may be able to avoid exclusion on this basis if they focus the proposal on the nomination rather than election process, or if the proposal conditions requiring particular qualifications for committee membership on the board containing a sufficient number of persons meeting those qualifications.

In Staff Legal Bulletin No. 14C, the SEC allowed companies to exclude proposals calling for director independence under Rule 14a-8(i)(6) only if the proposals appeared to require continuous independence and did not contemplate the ability to cure defects. This approach is consistent with independence standards for audit committees of listed companies, which provide an opportunity to cure defects before listing can be challenged. The Staff agrees that companies lack the practical ability to ensure director independence at all times.[fn24.1]

EXAMPLES:

In Avon Products, Inc.,[fn25] the SEC staff denied a no-action request with respect to a proposal asking the company to adopt a policy to transition to an audit committee composed entirely of independent directors as openings occur. The company, a New York corporation, noted that Section 703 of the New York Business Corporation Law provided that directors are elected by shareholders at the company's annual meeting. As a result, the company argued that it was not within the power of the company to provide for the election of any particular type of person. The company also noted that the proponent's independence criteria were more stringent than that imposed by the New York Stock Exchange, on which the company's common shares were listed, so that the company could be faced with a situation in which it has a full board, but no "qualified" directors as determined by the proposal, to serve on the audit committee.
In Murphy Oil Corporation,[fn25.1] the proposal requested that the board adopt a policy that all members of the company's executive compensation and nominating committee be independent, unless insufficient independent directors were elected to the board. The company argued unsuccessfully that it did not have the power to ensure the election of independent directors. The proponent countered that the language in the proposal excusing compliance made the company's concern inapplicable.
In General Electric Company,[fn25.2] the company was allowed to exclude a proposal that requested that a majority of the board of directors be independent. In its response, the SEC staff noted that it did not appear to be within the board's power to ensure the election of individuals as directors who meet specified criteria.
In Bank of America Corporation,[fn26] the proposal requested that the company take steps to ensure that the board's audit committee is composed entirely of "independent" directors, as that term was defined in the proposal. The company, a Delaware corporation, successfully contended that it could not guarantee or enforce the election of any particular person or type of person as a director under Delaware law. The proponent attempted to distinguish no-action precedent by focusing on the fact that it merely asked the company to "take steps" and that 12 of the current 18 directors satisfied the proposal's definition of "independence." In other words, the proponent argued that the company indeed had the power to implement the proposal because a sufficient number of directors already sat on the board who could comprise an audit committee under the proposal's criteria.
In Boeing Company,[fn29] the company successfully excluded a proposal recommending that its audit, nominating and compensation committees be composed solely of independent directors. The company argued that it lacked the power to implement the proposal because, under applicable state law, shareholders elect the directors. As a result, the company argued, neither the company nor the board could guarantee the election of independent directors to the board and consequently could not ensure that there would be sufficient independent directors to fill the committees. The proponent argued that the company effectively determined membership on the board through the nomination process, so it could ensure a sufficient number of independent directors.
In Boeing Company,[fn30] the company was allowed to exclude a proposal that permitted only "independent committed directors," as defined in the proposal, to serve on key board committees. The company argued that it was not within the board's power to ensure the election of individuals as director who met the specified criteria and that the board did not contain enough members who met the proposal's qualifications. The proponent argued that the proposal was precatory and that the board would determine how the policy was implemented.

[fn24.1] See Division of Corporation Finance, Staff Legal Bulletin No. 14C (June 28, 2005) (available at http://www.sec.gov/interps/legal/cfslb14c.htm).

[fn25] 2002 SEC No-Act. LEXIS 288 (Mar. 6, 2002).

[fn25.1] 2002 SEC No-Act. LEXIS 361 (Mar. 10, 2002).

[fn25.2] 2002 SEC No-Act. LEXIS 153 (Feb. 4, 2002).

[fn26] 2001 SEC No-Act. LEXIS 256 (Feb. 20, 2001).

[27] [Reserved.]

[28] [Reserved.]

[fn29] 2000 SEC No-Act. LEXIS 342 (Mar. 6, 2000).

[fn30] 1999 SEC No-Act. LEXIS 214 (Feb. 22, 1999).

§ 19.03[F][2] Procedure for Nomination and Election of Directors

Proposals restricting the rights of shareholders to elect directors are usually found by the SEC staff to be excludable, most likely because they would require the company to disenfranchise shareholders in violation of state law or by breaching a contract. On the other hand, the SEC staff normally rejects companies' objections to proposals asking a company to nominate two candidates for each open directorship, including arguments that companies will be unable to secure qualified candidates willing to take part in a contested election and that boards will be forced to recommend against the less qualified of the two nominees.

EXAMPLES:

In Student Loan Corporation,[fn31] the SEC staff granted no-action relief on two proposals asking the board to amend the bylaws to grant minority shareholders the right to elect two independent directors; the proposal would have required the company's 80% shareholder to abstain from voting in order to give the minority shareholders the ability to elect two directors. The company argued that the company's 80% shareholder could not be required — nor could the company force the shareholder — to abstain when it otherwise had the right to vote on a matter. The proponent did not submit a rebuttal. In its response, the SEC staff noted that that the proposal would eliminate the right of all shareholders to vote for each member of the board.
In US West, Inc.,[fn32] the company was required to include a proposal requesting that the board require its board affairs committee to nominate two candidates for each directorship to be filled by the voting of stockholders at annual meetings, and include in the proxy statement a statement from each candidate as to why the nominee should be elected. The company pointed out that its board has an obligation to use its own best judgment to choose those persons it reasonably believes to be the best candidates and that a two-nominee contest would require the board to recommend against the nominees it did not believe were the best candidates. The company noted that as a practical matter, it may be impossible to obtain qualified alternative candidates. The proponent did not submit a rebuttal.

[fn31] 1999 SEC No-Act. LEXIS 361 and 446 (Mar. 8, 1999).

[fn32] 1999 SEC No-Act. LEXIS 122 (Jan. 29, 1999).

§ 19.03[F][3] Board and Management Activity

Generally, proposals requesting that directors, officers or employees engage or refrain from an activity are not excludable under this exclusion unless the proposal would cause a company to breach a contractual obligation. The staff requires inclusion of such proposals over company objections that it lacks the power to impose such requirements or limitations.

EXAMPLES:

In Duke Energy Corporation,[fn32.1] the company was required to include a proposal asking the board to conduct a study relating to the company's participation in nuclear energy programs. The company argued that it could not conduct a meaningful study by utilizing solely "independent public resources" because a substantial amount of information that the company uses to develop probabilistic risk assessments for its nuclear plants is not publicly available or, in some cases, does not exist. The company also noted that publication of the type of information necessary to conduct the study would raise homeland security concerns and be contrary to national security interests.
In The Goldfield Corporation,[fn33] the SEC staff granted no-action relief with respect to a proposal urging the board of directors to seek shareholder approval for all current and future executive officer severance pay agreements, including a shareholder referendum on current severance agreements. The company argued that implementation of the proposal could cause a breach of the contract with its chairman, president and CEO. The proponent argued that the proposal was non-binding and was for informational purposes only.
In Storage Technology Corporation,[fn34] the proponent successfully defended against a no-action challenge to a proposal requesting that the board restrict each officer and director from selling any of the company's shares acquired upon exercise of options for a period of five years from the date of purchase or exercise. The company argued that without the optionee's consent, the company could implement the proposal only by retroactively and unilaterally amending the option agreements with the optionees, which was prohibited under state law. The proponent claimed that the company had admitted that it might not need to amend any existing agreements to implement the proposal.
In Bangor Hydro-Electric Company,[fn35] the company unsuccessfully sought to exclude a proposal seeking the preparation of a report discussing political contributions by the company, its directors, and certain of its employees. The company argued that it lacked the power and authority to compel its directors and employees to disclose their political contributions. The proponent did not submit a rebuttal.
In CVS Corporation,[fn36] the company was required to include a proposal that recommended that the entire board of directors be elected at every third annual meeting of shareholders. The company, a Delaware corporation, explained that Section 141(d) of the Delaware General Corporation Law sets forth the only two circumstances in which directors may have a term of longer than the period between annual meetings: in the case of (i) directors serving on a classified board or (ii) one or more directors elected by a class of stock in addition to the common stock. Since it did not have a charter or bylaw provision that established a classified board of directors, the company argued that its directors could not have terms longer than the period between mandated annual meetings. The proponent did not submit a rebuttal.
In PG&E Corporation,[fn38] the SEC staff granted no-action relief on a proposal requiring the company not to count abstentions as votes cast on a proposal (recognizing that abstentions may be counted as present for quorum purposes), but the staff allowed the proponent to recast the proposal as a recommendation or a request. The company, a California corporation, noted that California law specified that a matter was "approved by the outstanding shares" if the matter was approved by the affirmative vote of a majority of the outstanding shares entitled to vote. As a result, the company argued that because abstentions and "no" votes both are required to be included in the pool of outstanding shares entitled to vote, abstentions must have the same effect as a "no" vote by operation of law. The proponent did not address the exclusion in its rebuttal.

[fn32.1] 2002 SEC No-Act. LEXIS 295 (Mar. 1, 2002).

[fn33] 2001 SEC No-Act. LEXIS 452 (Mar. 28, 2001).

[fn34] 2000 SEC No-Act. LEXIS 519 (Apr. 3, 2000).

[fn35] 2000 SEC No-Act. LEXIS 418 (Mar. 13, 2000).

[fn36] 2000 SEC No-Act. LEXIS 136 (Jan. 31, 2000).

[37] [Reserved.]

[fn38] 2000 SEC No-Act. LEXIS 173 (Feb. 22, 2000).

§ 19.04 Vague and General Objectives

An often unsuccessful argument by companies is that a proposal's request is so vague that a company could not implement the proposal even if shareholders approved it and the company wanted to implement it. A company has to make a very strong argument that a proposal is vague for the staff to allow its exclusion. The proposal has to be so vague that it is not capable of being cured. The argument under this provision typically is made in tandem with a vagueness argument under Rule 14a-8(i)(3).

EXAMPLES:

In Microsoft Corporation,[fn39] the company was required to include a proposal requesting the board to implement and/ or increase activity on 11 principles relating to human and labor rights. The company argued that the proposal was too vague to implement since it was merely a broad statement of values with no discussion of concrete implementation methods. The proponent argued that while the company attacked his proposal for being vague, the company's own worker's Code of Conduct or ethical guidelines was equally vague.
In Kroger Co.,[fn40] the proposal asked the board to adopt a policy of removing genetically engineered crops or organisms from all products sold under the company's brand names or private labels, until long-term testing has shown that they are not harmful to humans, animals and the environment, and to provide a report to shareholders. The company argued that the proposal was vague because it provided no guidance as to how the company would determine what constituted "genetically engineered crops or organisms" and that the proposal's labeling requirement provided vague and general objectives. The company also argued if it attempted to label its products as required by the proposal, state law would require that the label not be untrue, deceptive or misleading; because the company did not have the basic information that might be required on the label, it could be subject to potential liability. The proponent argued that the labeling issue could be quite simply overcome by placing a label stating that a product did — or did not — contain any genetically engineered material.
In Masco Corporation,[fn41] the SEC staff required the company to include a proposal that requested the board to require outside directors to have no business relationships of any kind with the company, its present or former affiliates, its management or its directors. The company argued that the proposal was too vague regarding the definition of a "business relationship" to allow the company to implement the proposal. The proponent did not submit a rebuttal.
In State Street Corporation,[fn42] the SEC staff declined to grant no-action relief on a proposal asking the board to adopt a policy that the Revised Model Business Corporations Act govern the company's conduct to the extent that the model statute does not directly conflict with the company's bylaws or applicable laws. The company argued that it could not realistically implement the proposal since it contained overly vague language. The proponent responded that many companies have bylaws that contain a provision in which some other body of rules shall govern when the bylaws themselves are silent and that the principle of adopting a final arbiter of fair play was important.
In Bristol-Myers Squibb Company,[fn43] exclusion was not permitted of a proposal recommending that the board implement a policy of price restraint on pharmaceutical products for individual customers and institutional purchasers to keep drug prices at reasonable levels and prepare a report to shareholders on any changes in its current pricing policy. The company argued that it could not implement the proposal because the proposal did not define "reasonable levels" of drug prices and that even if the company were to implement the proposal, it would have no means of knowing when the goal of "reasonableness" had been attained. The proponent responded by stating that the proposal merely mandated a policy of price restraint, and that any reasonable individual can understand such a concept.

[fn39] 2000 SEC No-Act. LEXIS 854 (Sept. 14, 2000).

[fn40] 2000 SEC No-Act. LEXIS 547 (Apr. 12, 2000).

[fn41] 2000 SEC No-Act. LEXIS 480 (Apr. 3, 2000).

[fn42] 2000 SEC No-Act. LEXIS 312 (Mar. 2, 2000).

[fn43] 2000 SEC No-Act. LEXIS 214 (Feb. 21, 2000).

§ 19.05 Practice Pointers

Company Practice Pointers

Focus on the big picture. Companies should focus on the "macro" issues; that is, that the underlying objective of the proposal is impossible to achieve. A company must persuade the SEC staff that although the proponent ostensibly seeks to achieve small steps, the company is incapable of effectuating the proposal's larger goal.

Overcome burden with substantive arguments. To convince the SEC staff that a proposal is excludable, a company must show that the proposal would require the company to violate existing legal obligations, set vague and general objectives without suggesting specific means for achieving them, or attempt to regulate third-party decisions that clearly are beyond the company's power to implement. In most cases, the SEC staff imposes a high standard of proof for the company to overcome. Merely arguing that this exclusion applies for the same reasons made under another basis often is not enough.

Proponent Practice Pointers

Take baby steps. Proponents can increase the likelihood that their proposals will be included if they can show that implementation of the proposal would merely be difficult, not impossible. Proponents may be able to convince the staff to deny a no-action request by focusing on "micro" issues — by illustrating that its proposal is just one small step towards a larger goal. This approach may give the staff an opening to allow the inclusion of an otherwise seemingly impossible proposal.

Rebut arguments specific to this exclusion. The SEC staff sets a high standard for companies trying to rely on this exclusion. A proposal may be deemed includable even if a proponent does not rebut the company's arguments. However, proponents are more likely to be successful if they do submit a rebuttal specifically addressing this exclusion, even if the company only makes a brief argument specific to this exclusion.

Make an independent investigation of the company's assertions. Companies sometimes claim that implementation of a proposal would require violation of a contract or law. Proponents should conduct an independent investigation of such assertions; for example, if a company argues that a proposal would result in a breach of a contract, the proponent should review the contract to determine the extent of any conflict.

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