SEC Division of Corporation Finance Director Higgins Discusses the "Directly Conflicts" Exclusion Under the Exchange Act

SEC Division of Corporation Finance (the "Division") Director Keith Higgins discussed his views on the controversy over conflicting proposals between shareholders and management, and how the SEC should respond with regard to the "directly conflicts" exclusion under Exchange Act Rule 14a-8. His remarks were delivered at the Practising Law Institute Program on Corporate Governance.

Although Rule 14a-8 generally requires a company to include a qualified shareholder proposal in its proxy materials, a company may exclude it for one of the 13 reasons described in the rule. According to Mr. Higgins, the most significant recent development in the Division's shareholder program is the decision on January 16, 2015 that the Division will not express its informal views on any requests for exclusions made by an issuer under Rule 14a-8(i)(9): the so-called "directly conflicts" exclusion. (For an example of an instance in which the Division refused to give comfort on an issuer request, see, e.g., the Whole Foods letter.)

The exclusion itself, which allows a company to exclude a shareholder proposal that "directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting," has been the source of recent conflicting views.

Mr. Higgins explained various concerns with the motives of management proposals; for example, the possibility that the only reason for a proposal by management in response to a shareholders' proposal might be to prevent the shareholders from expressing their views; or, if management came up with slightly different proposals year after year, the probability that the purpose would be to keep a shareholders' proposal from making it into the proxy materials. According to Mr. Higgins, it is difficult for the Division to assess "good faith" motives.

Mr. Higgins added that, as the Division continues to review Rule 14a-8(i)(9), it may consider whether there is a structural limitation in the SEC's overall current proxy rules that makes side-by-side comparisons difficult.

Mr. Higgins requested that interested parties send comments on this topic to [email protected].

See: Mr. Higgins' Speech.Related news: SEC Chair White Directs Staff to Review Rule for Excluding Conflicting Proxy Proposals (January 20, 2015).