The argument that a proposal has already been implemented is routinely used by companies, particularly in recent years as a growing number of issuers have adopted stricter governance policies. As a result, no-action correspondence between companies and the commission often centers on whether the firm's policy goes far enough.

In general, in 2006, it appears the staff of the SEC's Division of Corporation Finance, which rules on no-action requests, has been reluctant to accept that argument unless a matter has been, or will shortly be, put to a shareholder vote.

For example, pharmaceutical giant Pfizer was unsuccessful in its attempt to exclude an AFL-CIO proposal seeking shareholder approval of supplemental executive retirement plans, or "SERPs." Pfizer's board adopted a policy on Dec. 12, 2005, committing to "seek shareholder approval prior to the payment to any senior executive from the company's defined benefit pension plans if his or her benefit, computed as a single life annuity, will exceed 100 [percent] of the senior executive's final average salary, as calculated at the discretion of the Company's Compensation Committee."

Under the policy, the company defined "final average salary" to mean "the highest calendar years' earnings, where earnings include salary earned during the year and annual cash incentives (or bonus) earned for the year."

The AFL-CIO argued against the exclusion, noting the policy was adopted after the proposal was filed, and branded it "weak" and hastily created. "A commitment to seek shareholder approval for extraordinary senior executive pension benefits represents a serious, long-term corporate governance undertaking, requiring extensive preparation and planning which goes far beyond Pfizer's attempt at implementation," the labor federation said in a Jan. 9 letter to the SEC.

The AFL-CIO pointed to distinctions between its proposal and the company's policy, including the company's definition of salary. On Feb. 8, the Division of Corporation Finance issued a response, saying the company could not exclude the proposal on reliance of SEC Rule 14a-8(i)(10), which states a shareholder proposal can be omitted if it has been "substantially implemented" and thus made moot.

Bristol-Myers Squibb also failed to persuade the SEC that the policy it adopted in March 2005 seeking to recoup executive bonuses following a restatement meant that it had implemented a shareholder proposal calling on the company to do so. That proposal, submitted by the Rossi family, will appear on the company's 2006 proxy statement.

In a somewhat similar ruling, the Division of Corporation Finance rejected El Paso's "substantially implemented" argument to exclude Harvard University Professor Lucian Bebchuk's proposal seeking enhanced compensation disclosure. The Texas-based energy company argued it has provided "all of the compensation-related disclosures that the Proposal would require..."

And in what may be the landmark ruling of the 2006 proxy season, the SEC in January told Hewlett-Packard that its adoption of a director resignation policy could not be used as grounds to omit a shareholder proposal calling for director elections by majority vote.

Success of "Substantially Implemented" Argument
Despite these examples, the substantially implemented argument has been used as grounds for exclusion successfully in 13 cases thus far in 2006, generally where the company has taken action to change charter documents. ISS is tracking five companies in 2006 where shareholder proposals to declassify boards were omitted because management pledged to submit resolutions calling for such action. At MeadWestvaco, Praxair, Schering-Plough, Sempra Energy, and Staples, shareholders will be given an opportunity to vote on a management proposal to change company by-laws and articles of incorporation, so the shareholder proposal was deemed substantially implemented.

Five proposals to eliminate supermajority provisions were also omitted under the substantially implemented argument, including one at Citigroup. Similar rulings were issued at Entergy, Johnson & Johnson, and Pfizer in response to each submitting a management proposal to eliminate supermajority rules on their 2006 proxies.

Companies also have the option of submitting a resolution similar to--but not necessarily the same as--a shareholder proposal and then argue that the latter is redundant. Halliburton has thus far in 2006 been the only company able to omit a shareholder proposal using these grounds, known formally as Rule 14a-8(i)(9).

After Halliburton failed to persuade the Amalgamated Bank's LongView Fund to withdraw a binding proposal on golden parachutes at this year's annual meeting, the company announced it would put its own proposal addressing severance policies on the ballot and sought no-action relief from the SEC.

In response, LongView Counsel Cornish Hitchcock wrote to the SEC, "The company's proposal omits key provisions and adds loopholes that undercut the policy approved by shareholders, with the result that the resemblances between the Fund's 2005 proposal and the Company's proposal are largely linguistic." On March 10, however, the SEC ruled that Halliburton could exclude the proposal. The SEC response noted that the shareholder proposal "has terms and conditions that conflict with those set forth in Halliburton's proposal."

"Halliburton's proposal is a watered-down version of the one shareholders approved last year," Hitchcock told Governance Weekly. "It's disappointing that shareholders won't get to vote for the real thing instead of a pallid substitute."