Securities Regulation Daily SEC applies new 14a-8(i)(9) reasoning to Chevedden majority voting proposal
Wednesday, March 23, 2016

SEC applies new 14a-8(i)(9) reasoning to Chevedden majority voting proposal

By John Filar Atwood

The SEC’s Division of Corporation Finance has applied its recently articulated reasoning under Rule 14a-8(i)(9) to allow Illumina Inc. to omit a shareholder proposal from its 2016 annual meeting proxy materials. The staff stated that the proposal, which seeks to replace Illumina’s supermajority voting provisions with a majority vote standard, directly conflicts with a management proposal because a reasonable shareholder could not logically vote for both proposals.

The “could not logically vote for both” reasoning was established by the SEC in Staff Legal Bulletin No. 14H, which was released in October. The bulletin addressed the controversy that arose in the 2015 proxy season surrounding the application of the (i)(9) exclusion, which allows a company to omit a proposal if it directly conflicts with a company proposal that will be submitted to shareholders at the same meeting. SEC Chair Mary Jo White asked the staff to review the application of paragraph (i)(9) to shareholder proposals and the staff issued the bulletin in response.

In the Staff Legal Bulletin, the staff said that it believes that any assessment of whether a proposal is excludable under (i)(9) should focus on whether there is a direct conflict between the management and shareholder proposals. It explained that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, meaning that a vote for one proposal is tantamount to a vote against the other.

Shareholder proposal. In the instant case, Illumina received a proposal from John Chevedden in early December. He requested that the board of directors eliminate voting requirements in the company’s charter and by-laws that calls for a greater than simple majority vote and replace them with a requirement for a majority of the votes cast for and against applicable proposals.

Counsel for Illumina responded in its no-action request that the proposal directly conflicts with a proposal that the company is planning to include in its proxy materials that seeks shareholder ratification the company’s existing supermajority voting requirement for the approval of certain corporate actions. A proposal seeking elimination of supermajority provision directly conflicts with one seeking approval of such provisions, counsel noted, and an affirmative vote on both proposals would result in exactly the kind of conflict that Rule 14a-8(i)(9) was designed to prevent.

Shareholder warning. Chevedden warned that implicit in Illumina’s argument is the idea that hereafter any Rule 14a-8 governance proposal might be kept off the ballot by simply asking shareholders to ratify a contradictory proposal. He questioned the timing of Illumina’s counter proposal, which came well after the company had received his majority voting proposal. He also complained that if his proposal is omitted, shareholders will not know that the company is seeking ratification of the supermajority provisions simply to block his proposal on the same topic.

Opposite proposals. Illumina’s counsel pointed out that the conflicting proposals standard includes instances where the company proposal seeks to do the exact opposite as the shareholder proposal. Counsel cited a 2006 letter to Alliance World Dollar Government Fund Inc. in which a proposal was allowed to be excluded under Rule 14a-8(i)(9) where it sought to have the fund merge with another specified fund, while the company proposed to solicit approval of a merger agreement with a different fund. Counsel also cited a 1989 letter to Pacific First Financial Corp. in which a shareholder proposed to cancel a merger agreement at the same meeting at which the company was seeking approval of that agreement.

Counsel also noted that the Commission, in amending Rule 14a-8(i)(9), did not intend to imply that proposals must be identical for the exclusion to be available. Rather, a proposal may be excluded if presenting the two proposals at the same shareholder meeting would present alternative decisions for the company’s shareholders and would create the potential for inconsistent or conflicting results were both proposals to be approved.

Companies: Illumina Inc.; Alliance World Dollar Government Fund Inc.; Pacific First Financial Corp.

Attorneys: Kier Gumbs (Covington & Burling LLP) for Illumina Inc. Evan S. Jacobson for the Securities and Exchange Commission.

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