Recent SEC No-Action Positions Provide Further Support for Market-Standard Proxy Access Terms: SEC Staff Rejects Proponent’s Attempt to Define Which Ancillary Provisions are “Essential” for Substantial Implementation

Sullivan & Cromwell LLP - October 4, 2016

Two new no-action letters by the staff of the Securities and Exchange Commission confirm that companies can exclude a typical Rule 14a-8 proxy access shareholder proposal as “substantially implemented” if the company subsequently adopts a proxy access bylaw with current market-standard terms for large-cap companies – specifically, allowing groups of up to 20 shareholders who have held 3% of the stock for 3 years to nominate up to 20% of the board. The new letters, issued to Cisco Systems, Inc. and WD-40 Company, are consistent with no-action letters issued earlier in 2016 and make clear that a proxy access proposal may be substantially implemented even if the adopted bylaw excludes various ancillary terms highlighted in the proposal as “essential elements for substantial implementation.”

On the same day, the staff issued a no-action response to Microsoft Corporation denying the exclusion of a proposal to amend ancillary terms of the company’s previously adopted bylaw. This conclusion is consistent with letters issued by the staff earlier in 2016 denying the exclusion of a proposal to amend a previously adopted proxy access bylaw, even on non-core terms, as substantially implemented in situations where the company did not take some new responsive action.

For companies contemplating whether or when to adopt proxy access, the SEC staff’s positions may strengthen the argument for waiting until a shareholder proposal is received. If a company receives a typical shareholder proposal to adopt proxy access and adopts a market-standard proxy access bylaw in response, the proposal should be excludable as substantially implemented. But if a company adopts a market-standard proxy access provision and then receives a shareholder proposal to amend certain aspects of the bylaw, it does not appear that the staff would permit exclusion of the proposal as substantially implemented by the existing bylaw. On the other hand, there is a chance that proactive adoption of a market-standard proxy access bylaw would reduce the likelihood of receiving an amendment proposal—to date, the small number of amendment proposals of which we are aware have been at companies that adopted proxy access following receipt of a shareholder proposal.