With proxy season now upon us, we at Westlaw Business see it as our job keep you informed of the top issues raised in recent disclosures, SEC correspondence, and other related documents. After a year of changing economic conditions and heightened shareholder activism, this year’s proxy statements require a degree of foresight and strategy not seen for some time. To help you with that, we have launched our 2010 proxy disclosure series, covering issues that are sure to arise throughout the 2010 season.
Succession planning proposals are in this proxy season – quite literally. After the succession fiasco at Bank of America and the less-than-smooth transition at Lazard, CEO succession is on many shareholders’ minds. The Laborers' International Union of America (LiUNA), a union with a penchant for activist investing, is embarking on another of its annual succession plan proposal binges. In the 2010 proxy season, however, shareholders will actually vote on the proposals, which call for adoption and disclosure of written and detailed CEO succession planning policies. The stakes are higher than ever for succession planning proposals, because the Securities and Exchange Commission recently slammed the door on corporate America’s preferred succession planning no action argument.
With the omission permission door previously shut by the SEC, several companies are now facing votes on proposals requesting CEO succession plans. LiUNA, the font of many proposals calling for adoption and disclosure of CEO succession plans, has recently submitted shareholder proposals to Bank of America, Verizon Communications, and Whole Foods, just to name a few. Despite the proposals’ progress, it remains to be seen if succession initiatives will garner enough support to transform into actual policies.
LiUNA submitted a raft of shareholder proposals calling for written and disclosed corporate succession planning policies during the 2008 and 2009 proxy seasons. During previous proxy seasons, many companies excluded succession proposals via the No Action process. The SEC, however, has recently had a change of heart and, so far, has refused to grant no action relief for the 2010 round of CEO succession proposals. For additional information on previous CEO succession planning proposals, please see the previous Westlaw Business Currents article Succession Planning: Is Anyone in Charge?.
The boards at Verizon, Bank of America, National Instruments and Whole Foods, for example, previously excluded CEO succession plan proposals under Rule 14a-8(i)(7). The Rule provides that a company may omit a shareholder proposal from its proxy materials, “if the proposal deals with a matter relating to the company's ordinary business operations.”
In the past, the SEC took a different approach to succession planning-related no act requests: When asked about 2008 and 2009 rounds of the CEO succession plan proposals, the SEC’s Division of Corporation Finance relied on Commission’s statement in the Exchange Act Release No. 40018. The Release states in part that proposals involving “the management of the workforce, such as the hiring, promotion, and termination of employees” relate to ordinary business matters. According to the same Release, proposals can also be omitted under Rule 14a-8(i)(7) if they seek to “micro-manage” the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.
On October 27, 2009, the Division had a change of heart and issued Staff Legal Bulletin (SLB) No. 14E (CF), which included a whole sale reevaluation of Rule 14a-8(i)(7) applicability to CEO succession proposals. SLB 14E, citing “recent events” that underscored the importance succession planning, states:
“We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such… a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.”
By comparison, Whole Foods successfully argued for no action relief from one of LiUNA’s succession planning proposals under Rule 14a-8(i)(7), during the 2009 proxy season. The Central Laborers' Pension Welfare & Annuity Funds petitioned the Division to reconsider the ruling and argued that Whole Foods failed to satisfy its burden of persuasion. LiUNA’s investment arm argued that proposal shouldn’t be excluded under Rule 14a-8(i)(7), because the proposal actually dealt with a board duty, as opposed to a management duty, and it didn’t seek to “micro-manage” Whole Foods. The Division was unimpressed and stated that it found “no basis to reconsider [it’s] position.”
On September 28, 2009, prior to SLB 14E, LiUNA submitted a succession planning proposal for Whole Foods’ 2010 proxy. The upscale grocer filed for no action relief with the SEC under Rule 14a-8(i)(7) on October 5, 2009. The Central Laborers' Pension Welfare & Annuity Funds protested the no action request with a new argument dated October 27, 2009, the same day SLB 14E was released. Citing Apple, Bank of America, and Citigroup, the fund argued that succession planning rises to the level of a significant policy issue. The fund noted the SEC has consistently held that companies cannot exclude proposals relating to significant policy issues under Rule 14a-8(i)(7), and pointed to several no action letters and Release No. 12999. According to the Release:
“[P]roposals of that nature [significant policy, economic or other implication], as well as others that have major implications, will in the future be considered beyond the realm of an issuers ordinary business operations.”
Using this precedent as a sword, the fund argued Whole Foods had failed to met its burden of persuasion under Rule 14a-8(i)(7). The Division notified Whole Foods on November 10, 2009 that it was unable to concur with the no action request.
Bank of America and Verizon also received CEO succession planning proposals in advance of the 2010 proxy season. The two companies started their no action campaigns after SLB 14E and Whole Foods’ spoiled No Action Letter. Bank of America attempted to exclude a succession planning proposal under Rule 14a-8(i)(10), claiming the Rule permits a company to exclude a shareholder proposal if it has already substantially implemented the proposal. Bank of America’s substantial implementation of a “written and detailed succession plan” is a rather interesting defense in light of the Ken Lewis succession debacle. Perhaps not surprisingly, the Division was unable to concur with the bank.
Verizon also attempted just a few months ago to exclude a succession proposal under Rule 14a-8(i)(10). The phone giant pursued a two pronged strategy and also argued that the proposal could be omitted under Rule 14a-8(f), because LiUNA allegedly failed to supply documentary support evidencing satisfaction of the continuous ownership requirements of rule 14a-8(b)(1). Neither tract of Verizon’s request was successful. For additional information on ownership requirements and verification, please see the previous Westlaw Business Currents article Proxy Disclosures: Activist’s Last Act in Court?.
Succession planning proposals are clearly on the minds of shareholders – and thus on the agenda for the 2010 proxy season. The outcomes of questions remain to be seen: first, is there any no action defense to a CEO succession proposal that will be accepted by the SEC, and second, will shareholders actually vote for the proposals?
SLB 14E isn’t as black and white as it seems. The Bulletin specifically carves-out the “micro-manage” leg of Rule 14a-8(i)(7), which means a CEO succession planning policy could potentially be omitted under the rule if it veers into the territory of “micro-management”. As for the proposals, so far only Whole Foods’ proposal has actually gone to a vote. After the battle with the SEC, on March 8, 2010, Whole Foods shareholders actually rejected the succession planning proposal. The shareholder movement for detailed, written information about the company’s CEO succession planning is over at Whole Foods, at least for 2010, but it remains to be seen how the shareholders at Bank of America, Verizon, and other companies will vote.