Last week, the SEC helped activist investors in a small but important way. Staff Legal Bulletin (SLB) 14H cleared up how companies will handle some shareholder proposals for annual meetings. It should help along not only proxy access proposals, but others that interest portfolio managers (PMs).

What’s an SLB?

The staff handles most of the tough work at the SEC. They mediate almost all disputes between shareholders and companies, such as how companies should deal with shareholder participation at annual meetings. In this case, “participation” refers to how a company includes shareholder items on the meeting agenda, and how it must include those items in proxy materials.

SLBs express staff policy on various subjects. These are not legally enforceable, but set forth how the staff thinks about a subject. Since the commissioners defer to staff in many areas, and the staff seek commissioner input to SLBs, practically these become rules for issuers and investors.

Shareholder Proposal Basics, for PMs

For our purposes, shareholders can propose two types of business for shareholder meetings: non-binding resolutions and bylaw amendments. Companies publicize this business in the proxy materials, which we all study thoroughly before we vote (right?).

The SEC regulates proxy materials. Low standards apply to how shareholders qualify to have a company include a proposal in those materials (basically own $2,000 of shares for a year). At the same time, the SEC allows companies to exclude a proposal on one or more of thirteen grounds. These include routine business (a proposal pertains to day-to-day operations), substantially implemented (company did what the proposal demands), or personal grievance, among others.

SLB 14H pertains to one of those grounds for excluding shareholder proposals from proxy materials, conflict with a company’s proposal (14a-8(i)(9)).

SLB 14H Cleverly Solves the Problem

The “conflicting” exclusion provides:

1. ... the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting
   

Recently, companies use this to exclude proxy access proposals. At many companies, shareholders propose detailed proxy access structures, say proxy access for a 3% shareholder. Companies then propose proxy access, but with a much more restrictive structure, say for a 9% shareholder. (Whole Foods in 2014, which prompted SLB 14H.) For many years, SEC staff interpreted the exclusion to allow the company’s proposal in proxy materials, but not the shareholder’s.

SLB 14H now interprets that exclusion more narrowly and sensibly:

1. In considering no-action requests ... going forward, we will focus on whether a reasonable shareholder could logically vote for both proposals.
   

Now, SEC staff will allow companies to exclude only a shareholder proposal for which a shareholder could not logically vote at the same time that the shareholder votes for a management proposal.

So, a shareholder could logically vote for both a 3% and a 9% proxy access proposal, if they didn’t care which one prevailed. A shareholder could not logically vote to both support and reject a merger, if a company and a shareholder each proposed one or the other.

This works. It allows management and shareholder proposals to compete for votes. It also allows management to exclude proposals that would confuse shareholders by presenting mutually exclusive choices.

More Than Proxy Access

SLB 14H applies to all shareholder proposals, not just proxy access. Lately, many companies have used the conflicting proposal exclusion with proxy access. But, they have also used it with many others, it’s a well-known tactic. If a company doesn’t like an investor proposal, put a similar but worse one on the agenda.

It also applies to bylaw amendments, which causes some problems. Bylaw terms should not conflict. SLB 14H seeks to preclude a shareholder from voting on opposite sides of the same question. We would thus expect companies to continue to exclude binding shareholder bylaw amendments, by proposing the company’s own similar amendment.

Of course, in the event of a legitimate conflict, SLB 14H and the conflicting proposal exclusion still gives the advantage to the company. If proposals truly conflict, management’s proposal remains in the proxy materials.

PMs should have an interest in non-binding resolutions. SLB 14H doesn’t grant a new or different right to shareholders. It does make it harder for companies to prevent shareholders from exercising the current right to publicize a proposal in the proxy materials. For this reason alone it represents progress.