This letter is submitted on behalf of Business Roundtable (the "Roundtable"), an association of the chief executive officers of leading U.S. companies. Our member companies produce $7.2 trillion in annual revenues and employ more than 16 million employees worldwide. Roundtable companies comprise more than a third of the total value of the U.S. stock market, and annually pay more than $230 billion in dividends to shareholders, generate more than $470 billion in sales for small and medium-sized businesses, and invest $190 billion in research and development-equal to 70 percent of U.S. private research and development spending. Our members also give more than $3 billion a year in combined charitable contributions.
We write with respect to recent developments related to Rule 14a-8(i)(9) of the Securities Exchange Act of 1934, which allows a company to exclude a shareholder proposal that "directly conflicts" with a company proposal. On January 16, 2015, the Division of Corporation Finance of the U.S. Securities and Exchange Commission suddenly announced that going forward it "will express no views on the application of Rule 14a-8(i)(9) during the current proxy season." The Division's announcement followed an also equally unexpected statement from Chair Mary Jo White directing the Division staff "to review the rule and report to the Commission on its review." The Division's announcement has already and will continue to significantly affect board deliberations at companies that intended to seek exclusion of stockholder proposals because the board had planned to submit a company proposal on the same topic.
We anticipate that Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) will consider how to apply your proxy voting guidelines to companies that are unexpectedly no longer able to obtain no-action letters with respect to conflicting shareholder proposals. The purpose of this letter is to share with ISS and Glass Lewis Business Roundtable's views as to the Division's announcement and its effects upon the obligations of public companies to include Rule 14a-8 shareholder proposals in their proxy statements. We hope that ISS and Glass Lewis will consider the effects of the Division's announcement and apply your proxy voting guidelines in a manner consistent with these effects.
First, the Division's announcement represents only a decision to not express a view on the application of Rule 14a-8(i)(9) until its review is completed and does not affect a company's ability to rely on that rule. The announcement was not a statement by Chair White or the SEC staff that companies may no longer exclude a proposal under that rule and in no way changes the legal effect of the rule or prior precedent concerning the rule. As you know, SEC rules do not require an issuer to obtain a no-action letter in order to exclude a shareholder proposal from its proxy materials. Rather, Rule 14a-8(j) provides, in relevant part, "[i]f the company intends to exclude a proposal from its proxy materials, it must file its reasons with the Commission" (emphasis added). In the context of this situation, the rule requires nothing more.
Even the Division's standard Informal Procedures that accompanying its response to a no-action request acknowledge the context of those responses: the Division "believes that its responsibility with respect to matters arising under Rule 14a-8 . . . is to aid those who must comply with the rule by offering informal advice and suggestions and to determine, initially, whether or not it may be appropriate in a particular matter to recommend enforcement action to the Commission." Thus, while the no-action letter process is useful for both companies and shareholders, the Division's determination not to express a view on Rule 14a-8(i)(9) until its review is completed does not mean companies are unable to rely on that rule as a basis to exclude a shareholder proposal from their proxy statements. Indeed, like any rule, it remains in full force and effect unless and until the Commission takes formal action to amend or suspend the rule. Clearly, that is not the case here.
Second, the Division's announcement does not affect a shareholder's or company's right to resort to court to adjudicate the exclusion of a shareholder proposal. The Division also notes in its Informal Procedures that the issuance of a no-action letter "does not preclude a proponent, or any shareholder of a company, from pursuing any rights he or she may have against the company in court, should the management omit the proposal from the company's proxy material." Companies similarly have the right to pursue their rights in court with respect to a shareholder proposal, and the fact that the vast majority of companies historically have not chosen to litigate shareholder proposals in no way mitigates their right to do so in the future. In the instant situation, companies still have available to them the extensive and favorable SEC no-action letter precedent under Rule 14a-8(i)(9).
As noted, the Division's announcement that it will not express a view on the application of Rule 14a-8(i)(9) this late in the proxy season has created significant disruption for boards and their companies. In many cases, boards have been engaging in dialogue with their shareholders and considering responses to various shareholder proposals for some time. Moreover, the Division's announcement has produced disparate results since, as recently as December 23, 2014, companies received no-action letters permitting exclusion of conflicting shareholder proposals based on Rule 14a-8(i)(9). In contrast, companies that submitted the approximately 53 pending no-action requests requesting exclusion under Rule 14a-8(i)(9) (along with others that intended to seek similar no-action relief this proxy season) are left without a response from the Division.
The boards of public companies have a responsibility to make sure that the matters presented for a shareholder vote comply with the federal proxy rules. However, the Division's announcement means that companies may have no choice but to consider litigation if they want to adjudicate their rights under Rule 14a-8. Moreover, due to the timing of Division's announcement, it may not be realistic for companies to litigate the matter in advance of the deadline for finalizing their proxy materials. The Business Roundtable, therefore, believes that it would be inappropriate for ISS and Glass Lewis to apply their voting policies in a way that substitutes their own judgment as to the appropriate course of action in place of the Board's judgment.
Accordingly, we believe that it would be inappropriate for ISS and Glass Lewis to make proxy voting recommendations based on a company's reliance on Rule 14a-8(i)(9) when the Commission has not taken formal regulatory action to change the rule. Just as Chair White has determined to study the issue and the Division has determined to express no views on the matter at this time, we urge ISS and Glass Lewis to proceed in a deliberate fashion and exercise restraint as it considers how it will assess the response of companies that exclude shareholder proposals from their company proxy materials based on solid SEC precedent governing "conflicting" company proposals.
President, Business Roundtable
C: The Honorable Mary Jo White, Chair
The Honorable Luis A. Aguilar, Commissioner
The Honorable Daniel M. Gallagher, Commissioner
The Honorable Kara M. Stein, Commissioner
The Honorable Michael S. Piwowar, Commissioner
Mr. Keith F. Higgins, Director, Division of Corporation Finance