843 F.Supp. 858 (S.D.N.Y. 1994), 93 Civ. 1233, New York City Employees' Retirement System v. S.E.C.
|Docket Nº:||93 Civ. 1233 (KMW).|
|Citation:||843 F.Supp. 858|
|Party Name:||The NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM; The United States Trust Company; and The Women's Division of the Board of Global Ministries of the United Methodist Church, Plaintiffs, v. SECURITIES AND EXCHANGE COMMISSION, Defendant.|
|Case Date:||January 19, 1994|
|Court:||United States District Courts, 2nd Circuit, Southern District of New York|
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
OPINION AND ORDER
KIMBA M. WOOD, District Judge.
On October 15, 1993, the court issued an Order enjoining defendant Securities and Exchange Commission ("SEC") from issuing any no-action letter in which the SEC takes a position at variance with the understanding of the "ordinary business operations" exception adopted by the SEC on November 22, 1976, until such time as the SEC adopts such a position in a rule-making proceeding pursuant to public notice and comment. The court's factual and legal findings are set forth below.
Plaintiffs challenge a change in the SEC's enforcement policy concerning whether shareholders can require companies to include in their proxy materials shareholder proposals regarding equal employment opportunity matters. Plaintiff New York City Employees' Retirement System ("NYCERS") asked Cracker Barrel Old Country Store, Inc. ("Cracker Barrel") to include in its 1992 proxy material a proposal that Cracker Barrel implement an employment policy prohibiting discrimination on the basis of sexual orientation. NYCERS submitted its proposal in response to an announcement by the company of a policy of discrimination in employment against gay men and lesbians. 1 Cracker Barrel sought the SEC's views on the company's intention to omit
NYCERS' proposal from its proxy material. The SEC advised Cracker Barrel that it would not bring an enforcement action against Cracker Barrel for excluding NYCERS' proposal, because the proposal dealt with matters relating to Cracker Barrel's "ordinary business operations" pursuant to SEC Rule 14a-8(c)(7). 2 The SEC stated that it had reconsidered its past position, which viewed employment policies and practices that were tied to a significant social issue as outside of the "ordinary business operations" exception. The SEC announced that, because it had become increasingly difficult to identify those employment-related proposals that were includable by virtue of their social policy implications, all employment-based shareholder proposals that did not involve senior executives or directors could thereafter be excluded as relating to a company's ordinary business operations. 3 See Cracker Barrel Old Country Stores, Inc., 1992 WL 289095, 1992 SEC No-Act. LEXIS 984 (Oct. 13, 1992) (" Cracker Barrel "). In announcing this new position, the SEC reversed the position that it had taken consistently as recently as two years earlier. For example, in 1990, the SEC advised AT & T that AT & T could not omit a proposal that the company eliminate its affirmative action programs. See AT & T, 1990 SEC No-Act. LEXIS 20 (Jan. 5, 1990).
Plaintiffs are institutional investors that routinely submit employment-related proposals to companies in which they own stock. Complaintpp 7-11. They challenge the validity of the SEC's position in Cracker Barrel, claiming that in issuing and affirming the no-action letter, the SEC announced a new rule without first complying with the notice and comment procedures of the Administrative Procedures Act ("APA"), 5 U.S.C. §§ 551-559, 701-706 (1977). Even if the SEC was not required to comply with the notice and comment provisions, plaintiffs allege, the position is arbitrary and capricious and may not be enforced. See 5 U.S.C. § 706(2)(A). For the reasons stated below, the court finds that the Cracker Barrel position is a legislative rule that can be adopted only in a rule-making proceeding pursuant to public notice and comment. The court does not reach the question of whether the SEC action was arbitrary and capricious.
Much of the historical and regulatory background of shareholders' right to submit proposals for inclusion in a corporation's proxy material is recounted in this court's opinion in Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc., 821 F.Supp. 877, 881-83 (S.D.N.Y.1993) (" ACTWU "), and will be noted here only briefly. The SEC, rather than Congress, has been primarily responsible for the development of the shareholder proposal right under the proxy rules. The SEC was the first to conclude that a shareholder proposal rule was necessary in order to prevent proxy material from being misleading if such materials failed to disclose that shareholders intended to raise certain proposals at the annual meeting. See id. at 882 (citing authorities); Securities and Exchange Commission Division of Corporate Finance, Staff Report on Corporate Accountability: A Re-examination of Rules Relating to Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, 96th Cong.2d Sess. (Comm. Print) (Comm. on Banking, Housing and Urban Affairs of the U.S. Senate), at 144-45 & n. 32 (1980).
SEC Rule 14a-8(a) requires a company to include a shareholder's proposal in the company's proxy statement. See 17 C.F.R. § 240.14a-8(a). 4 This rule, adopted in 1942, established the communication and franchise rights of shareholders to receive information about proposals submitted by fellow stockholders in advance of the annual meeting and to cast a vote on those proposals by proxy. In 1953, the SEC proposed adding to the rule several grounds for excluding proposals, including "[i]f the proposal consists of a recommendation or request that management take action with respect to a matter relating to the conduct of the ordinary business operations of the issuer." The Commission explained that this ground for exclusion "relieve[s] management of the necessity of including in its proxy material security holder proposals which relate to matters falling within the province of management...." Securities Exchange Act Release No. 4950 (Oct. 20, 1953); 18 Fed.Reg. 6646, 6647 (1953). After a notice and comment period, the SEC adopted the amendment in 1954. The "ordinary business operations" exception was codified as Rule X-14a-8(c)(5). See Securities Exchange Act Release No. 4979 (Jan. 14, 1954); 19 Fed.Reg. 246, 247 (1954).
In 1976, the SEC again proposed amendments to Rule 14a-8 and to the ordinary business operations exception. After more than twenty years of experience with the exception, the Commission concluded that the ordinary business operations exception "frequently has been relied upon by issuers to exclude proposals that involve matters of considerable importance to the issuer and its security holders." Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Securities Exchange Act Release No. 12,598 (July 7, 1976); 41 Fed.Reg. 29,982, 29,984 (1976) (" Proposed 1976 Amendments "). To remedy this perceived flaw, the SEC proposed deleting subparagraph (c)(5) and replacing it with a new subparagraph (c)(7) that would provide a basis for excluding a proposal "[i]f the proposal deals with a routine, day-to-day matter relating to the conduct of the ordinary business operations of the issuer." Id. The SEC also proposed an alternative formulation: "[i]f the proposal deals with a matter that the governing body of the issuer (such as the Board of Directors) is not required to act upon pursuant to the applicable State law or the issuer's governing instruments (such as the Charter or By-Laws)." Id. The Commission invited comment on which formulation, if any, the SEC should adopt. After studying the comments it received, the SEC concluded that although an "ordinary business operations" exception should be retained, both of the proposed formulations would be difficult to administer. See Adoption of Amendments Relating to Proposals by Security Holders, Securities Exchange Act Release No. 12,999 (Nov. 22, 1976); 41 Fed.Reg. 52,994, 52,997 (1976) (" Adoption of 1976 Amendments "). In lieu of these proposed formulations, the SEC chose a modified version of the 1954 language. The amendment that was adopted took the form of a facially insignificant change; the new language permits exclusion of a proposal if it "deals with a matter relating to the conduct of the ordinary business operations of the issuer." 5 Id. at 52,998. However, the SEC simultaneously explained that notwithstanding the similarity between the old and new rules, the amended rule was intended to signal an SEC shift in position and that it would henceforth prohibit exclusion of proposals involving substantial policy considerations, even if they otherwise could be said to deal with "ordinary business operations." The SEC explained its decision as follows:
... the provision adopted today can be effective in the future if it is interpreted somewhat more flexibly than in the past. Specifically, the term "ordinary business operations" has been deemed on occasion to include certain matters which have significant policy, economic or other implications inherent in them. For instance, a proposal that a utility company not construct a proposed nuclear power plant has in the past been considered excludable under former subparagraph (c)(5). 6 In retrospect, however, it seems apparent that the economic and safety considerations attendant to nuclear power plants are of such magnitude that a determination whether to construct one is not an "ordinary" business matter. Accordingly, proposals of that nature
as well as others having major implications, will in the future be considered beyond the realm of an issuer's ordinary business operations, and future interpretive letters of the...
To continue readingFREE SIGN UP