Apple pounces on new SEC Staff Legal Bulletin bandwagon to exclude shareholder proposal

A shareholder proposal calling on Apple to establish a human rights committee is the first to be challenged by a company under new guidance from the Securities and Exchange Commission.

The SEC’s Staff Legal Bulletin No. 14I requires boards, not just management, to “analyze, determine and explain whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote” in any request to exclude a proposal.

The time line of the ‘No-Action’ challenge from Apple is odd, and the company was unwilling, or unable, to clarify it when asked.

“Gadfly” Chinese human rights activist Jing Zhao submitted the proposal in August this year.

The SEC’s bulletin was issued on 1 November – and the No-Action letter was sent to the SEC on 20 November.

Apple did not provide any reason for the almost three-week delay. Apple’s proxy is typically filed at the beginning of January, for an annual meeting at the end of February.

There is an 80-day deadline prior to the date a proxy is filed for No-Action letters to be submitted. Apple is asking for this deadline to be waived because it “believes that it has good cause for its failure to meet the 80-day deadline” since its request for the proposal to be excluded rests on the “new staff policy regarding the application of Rule 14a-8(i)(7)”.

Now, the cynic in me immediately jumps to the conclusion that the Apple board had not bothered to “analyze, determine and explain” whether the shareholder proposal was ordinary business or not in August, when it was filed.

But it rather seems that management hurriedly got them together – which could take about three weeks to organise with busy board members – when it saw this potential loophole, so that it could do some analysing, determining and explaining. Then it filed its No-Action letter. But that’s just the cynic in me.

Zhao has filed similar proposals at Google, Yahoo!, Verizon, Cisco, Chevron, News Corp and Altaba over the years since 2005. None have been excluded, though none have received majority support.The Apple proposal expresses concern about whether Apple’s operations in China sufficiently promote human rights by offering products designed to “help internet users evade censorship” by the Chinese government. It asks for a new committee to: adopt Apple Human Rights Principles, add outside independent human rights experts as advisors, adopt a charter, solicit public input and to issue reports.

Apple is the object of an unusual number of gadflies – Zhao, Ken Steiner and Jim McRitchie in 2017 alone – with proposals on: charitable giving, proxy access and stock retention. The Zhao proposal at the 2017 annual meeting was on executive compensation reform, calling for the company to hire more diverse pay consultants.

It’s a proposal that actually failed to get on to Goldman Sachs’ 2016 proxy because it would have caused the company to violate state law, but Apple was unable to exclude it. Interestingly, many of these gadflies would not be allowed to file resolutions at Apple if proposed reforms to raise the share ownership threshold go through. Zhao, for example, owns 20 shares of Apple which, while worth a lot, would not qualify him to submit any proposals.

The company’s statement of opposition to the proposal is fulsome: “We have a great responsibility to protect the rights of all the people in our supply chain, and to do everything we can to preserve our planet’s fragile environment. That’s why we obsess over every detail of how we build our products.” ‘Obsess’ is not a word you often read in an SEC filing. It goes on to highlight its ‘Supplier Code of Conduct’ which sets standards for working conditions, fair treatment and sustainability in its supply chain, which all suppliers are required to sign.

The letter also notes actions as well as codes, saying that, last year, it conducted “705 supply chain assessments on labor and human rights, health and safety, and environment, covering over 1.3 million workers in 30 countries”. The bar is raised every year, the letter says, and all codes go well beyond compliance with legal and regulatory requirements.

Then comes the newly required board analysis, starting with the bland: “The Board is regularly updated on… the Company’s efforts to make substantial progress on its human rights goals.”

And moving to the specific: “In reviewing the Proposal, the Board was presented with information prepared by management about the Proposal and its policy implications.” Presentations about the proposal were made by Apple’s Vice President of Environment, Policy and Social Initiatives, who is not named in the letter but who is Lisa Jackson, who reports directly to CEO Tim Cook. But all this review, of progress reports, implications of the proposal, written materials on human rights efforts, simply confirmed the board in its view that the proposal covered ordinary business.If I were the SEC, I would say that the problem is that the specific issues that inspire the proposal are not addressed in Apple’s defence at all. Yes, there is detailed analysis of the company’s human rights efforts and work in education and access to technology for people with disabilities, but none of this addresses the proposal’s core concerns: what Apple is doing in order to be able to sell iPhones to the Chinese people. That would seem to me to transcend the company’s ordinary business and therefore necessarily subject to a shareholder vote. Link