In Part IV of their letter challenging the USPX model proxy access proposal, as submitted at Textron (TXT), the Gibson Dunn lawyers argue that the proposal is excludable under Rule 14a-8(i)(7) “because it deals with matters relating to the company’s ordinary business operations.” That provision of Rule 14a-8 tends to be contentious because it is often unclear what should be considered “ordinary business.” However, in this particular case, there is no ambiguity: The USPX model access proposal addresses a significant policy issue. Let’s start with the lawyers’ position. They explain:
… the Proposal seeks to amend the Company’s organizational documents to prevent the Company from agreeing that a “change in control” includes an election of directors that results in a majority of the Company’s board consisting of directors nominated by shareholders and elected through the Proposal’s proxy access mechanism. This broad prohibition would restrict the Company’s ability to agree to routine change in control definitions in a wide variety of ordinary business dealings, including in the terms of financing agreements, publicly-issued notes, equity incentives plans and various other compensation arrangements that are applicable to non-executive officers. Thus, the Proposal implicates matters that are so fundamental to management’s ability to run the Company on a day-to-day basis that they cannot effectively be subject to shareholder oversight.
The lawyers go on to claim that certain of the company’s debt securities
… contain terms under which an election of directors that results in a majority of the Company’s board ceasing to consist of directors who were directors at the time the debt was issued or who were nominated by a majority of such directors constitutes a change in control. Such an event triggers a repurchase right under the terms of certain of the Company’s debt securities.
The lawyers provide no documents or direct quotes from documents to support this claim, so there is no basis to assess how creatively they are interpreting the indicated terms, but this is unimportant.
The lawyers also cite the company’s 2007 Long-Term Incentive Plan for employees, which they claim also defines “change of control” in a manner different from that prescribed in the USPX model proposal.
Rule 14a-8(i)(7) states that a proposal may be excluded if:
…the proposal deals with a matter relating to the company’s ordinary business operations
In 1998, the Commission explained (Exchange Act Release No. 34-40018) the two considerations staff apply in interpreting the rule:
The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. Certain tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight. Examples include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers …
The second consideration relates to the degree to which the proposal seeks 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. This consideration may come into play in a number of circumstances, such as where the proposal involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.
The subject matter of the USPX model proposal is not a day-to-day matter such as “the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers.” It does not involve “intricate detail,” or seek “to impose specific time-frames or methods for implementing complex policies” The proposal addresses a significant policy issue: allowing shareowners to nominate a few directors without the costs and risks of attempting a change in control via a proxy solicitation. This is the same purpose for which the Commission adopted vacated Rule 14a-11, so it can hardly be a routine matter suitable solely for the board’s discretion, and it can hardly be considered micro-managing.
The Gibson Dunn lawyers appear to think that, if a proposal relates to a significant policy issue, but in doing so requires actions that might otherwise be considered ordinary business, then that is sufficient grounds for exclusion. This is nonsense. Suppose a proposal requested the board to conduct a study on some important governance issue, the corporation should not be allowed to exclude that proposal under Rule 14a-8(i)(7) on the grounds that preparing the study might require staffers to work some overtime, a routine employment matter.
The lawyers provide no support for their position. Indeed, the precedents they cite where staff allowed exclusion relate to proposals whose primary purpose was ordinary business. For example, in the 2008 Vishay Intertechnology decision they cite, the purpose of the proposal was for the company to make three specific financial transactions culminating in the retirement of $500 million of a convertible subordinated note. As funding decisions are considered ordinary business, the very purpose of that proposal was ordinary business. In the 2011 Southern Company decision they also cite, the proposal’s purpose was to address specific provisions of an employee prescription drug benefit. Again, the very purpose of the proposal related to ordinary business.
Even if we accept the lawyers’ position that a proposal addressing a significant policy issue may be excluded so long as it happens to require actions that might be considered ordinary business (we should not) they fail to identify a single matter of ordinary business that would be impacted by the proposal. The closest they come is when they claim that the proposal:
… would restrict the Company’s ability to agree to routine change in control definitions in a wide variety of ordinary business dealings, including in the terms of financing agreements, publicly-issued notes, equity incentives plans and various other compensation arrangements that are applicable to non-executive officers.
This is nonsense. The proposal in no way limits management’s ability to include routine change-in-control provisions in any ordinary business dealings. Nothing in the proposal precludes the inclusion of such provisions in financing agreements, publicly-issued notes, equity incentive plans or any other documents. All the proposal asks is that those routine provisions, when inserted, treat any election resulting in a majority of board seats being filled by individuals nominated by the board and/or by parties nominating under proxy access as not a change in control. Since routine change-in-control provisions do not anticipate proxy access, this does not change the nature of routine change-in-control provisions. It merely clarifies what should constitute a “routine change-in-control” provision moving forward.
The definition of change in control, as it relates to proxy-access-nominated directors is a significant policy issue. The purpose of the USPX model proxy access proposal is to allow shareowners to nominate a few directors without the costs and risks of attempting a change in control via a proxy solicitation. If shareowners had to worry that by nominating under proxy access, or by voting for proxy access nominees, they might inadvertently trigger a poison pill or other expensive change-in-control provision, that might sow confusion and uncertainty detracting from the very purpose of proxy access. By addressing this concern, the proposal touches upon a significant policy issue and not a matter of ordinary business.
January 24, 2012
Corporate Gov., Law & Regulation, USPX