The Activist Investor Blog
The Activist Investor Blog
What Did Whole Foods (and the SEC) Just Do to Proxy Access?
We love it when the New York Times features prominently one of our priorities, proxy access. They got some critical details wrong, but their hearts and minds are in the right place.
This weekend Gretchen Morgenson reported on the clever way Whole Foods dodged a shareholder’s proxy access proposal. She highlights how the SEC staff allowed them to do it, too, either through carelessness or complicity.
What should PMs take away from this seemingly arcane debate over BoD election procedure? We think it reveals how hard portfolio companies will fight against shareholders, and how investors should consider warily the SEC as well as company management.
Alas, shareholders probably lost this one. The uproar probably helps the overall proxy access effort in 2015.
The Proposal
These days, shareholders can push for proxy access at specific companies. A group of pension funds organized as the Boardroom Accountability Project (BAP) will do just that at 75 US companies in 2015. An individual investor and corp gov maven, Jim McRitchie, also did so at Whole Foods and several other companies for 2015. All good stuff for investors.
McRitchie submitted a non-binding resolution on proxy access to Whole Foods for shareholders to consider at the 2015 annual meeting. He proposes a structure in which:
❖one or a group of shareholders
❖owning 3% of outstanding shares
❖for at least three years
❖can account for 20% of directors through proxy access.
We prefer a bylaw amendment, and more lenient ownership thresholds. Otherwise, we like McRitchie’s plan and efforts.
The No-Action Letter
Whole Foods responded with its own proxy access structure. It told the SEC it intends to propose a structure in which:
❖one shareholder
❖owning 9% of outstanding shares
❖for at least five years
❖can account for 10% of directors through proxy access.
Note: no current Whole Foods shareholder qualifies.
Now, a company can’t prevent a shareholder from moving a proposal at an annual meeting. It may exclude a proposal from the proxy materials, which effectively prevents other shareholders from voting on it. The SEC has extensive rules about how companies can and cannot do this.
One rule allows a company to exclude a shareholder proposal if it “directly conflicts” with a company proposal. Whole Foods cleverly argues McRitchie’s proposal conflicts with its own. The SEC agreed, and allowed the company to exclude it. In SEC-speak, the SEC staff wrote a letter to Whole Foods indicating it would not recommend an enforcement action against the company, hence a “no-action letter.”
Whole Foods has since filed preliminary proxy materials with a proxy access resolution that provides for a 5% ownership floor. It also does not include McRitchie’s proposal, pursuant to the no-action letter.
The Appeal
This tactic pissed off McRitchie. He thinks that the proposals do not conflict, other than they both concern proxy access. He also asserts that Whole Foods proposed its own resolution only to preclude a vote on his resolution, which the SEC does not allow.
He has appealed to the full Commission for relief. His options are limited, though. It could end up in court, an expensive path with a low likelihood of success. We don’t expect anything to change before the March 10 annual meeting.
McRitchie makes a superb point about Whole Foods’ deceit in proposing its own resolution. He proposed a non-binding resolution asking the BoD to amend the bylaws. At Whole Foods, the BoD can amend the bylaws at any time, for any reason. Why not just do that, and allow proxy access at a 9% or 5% ownership level? Because with a resolution, and a clueless or complicit SEC staff, the company can head off a vote on an important shareholder proposal. Instead, shareholders will vote on the company proposal.
No telling how well the resolution will do, either. Shareholders confront a dilemma: should they vote for what amounts to an empty proposal? Vote yes, and supports management against our own interest. Vote no, and we vote against a key priority.
The Uproar
The investor community doesn’t like this one bit. Numerous shareholder advocates weighed in against the SEC staff. At the same time, corporate attorneys pen memos to clients suggesting how they can follow Whole Foods’ lead. Several of the BAP companies have already adopted the strategy.
Investors evidently alerted the New York Times, too, including the CII and the pension funds behind the BAP. Morgenson quotes both nicely in her story.
We take exception with how she repeatedly labels the effort as one to “nominate” directors, or “name” or “propose” directors. It is neither. Shareholders (and only shareholders) could always nominate directors. And, proxy access does not guarantee shareholders one or more BoD positions, so we can’t name, propose, designate, or appoint anyone. We can only nominate them, and proxy access then allows us to include them with the company’s nominees in proxy materials.
We await eagerly the outcome of several other no-action requests, from companies that have received proxy access proposals from the BAP. We expect that the recent publicity will cause the SEC staff to rethink how it handles these next few.
Tuesday, January 6, 2015