Shareholder Will Challenge SEC No-Action Decisions Allowing Public Companies to Omit Auditor Rotation Proposals From Proxy Statements

14 December 2011 Publication
Authors: Jason M. Hille Mark T. Plichta

Legal News Alert: Transactional & Securities

The United Brotherhood of Carpenters Pension Fund has announced plans to request that the full SEC reconsider a series of recent no-action letters issued by the staff of the SEC’s Division of Corporation Finance (Staff) allowing companies to omit the Carpenters’ proposals regarding mandatory audit firm rotation.

Since the beginning of the 2012 proxy season, the Carpenters, as well as the Sheet Metal Workers’ Pension Fund, have submitted a series of proposals to companies such as Hewlett-Packard, Walt Disney, Alcoa, U.S. Bancorp, and Deere & Co., recommending a shareholder advisory vote asking each to establish a policy requiring the company’s audit firm to rotate off of its engagement every seven years and remain off of such engagement for a minimum of three years. These companies filed requests with the SEC seeking to omit the proposals pursuant to Rule 14a-8.

Mandatory audit firm rotation is proving to be a hot topic in 2012, both with respect to shareholder access and auditor independence. On August 16, 2011, the Public Company Accounting Oversight Board (PCAOB) issued a concept release seeking input on auditor independence and auditor rotation. Although the PCAOB’s goal is to increase auditor objectivity, independence, and professional skepticism, the release raises a number of concerns for public companies and their management and audit committees. For example, the increased costs associated with the loss of audit firm and individual auditor knowledge and increased auditor fees that would be caused by mandatory rotation may outweigh any benefits from such rotation. Further, as the pool of large, sophisticated international firms is small, and existing independence rules already preclude retaining firms that provide certain non-audit services, many companies are concerned that they would have few or even just one audit firm option reasonably acceptable to their audit committee when forced to rotate firms. Although the future of mandatory audit firm rotation as imposed by the PCAOB remains uncertain, the Carpenters’ planned actions may be a step toward imposing this requirement by shareholder vote.

To date, however, the Staff has sided with companies. The Staff has issued no-action letters to each of the aforementioned companies, stating it would not recommend enforcement action to the SEC if the companies omitted the Carpenters’ audit rotation proposal from its proxy materials. In supporting the companies’ requests for exclusion, the Staff found that omitting such proposals was permissible under Rule 14a-8(i)(7), which permits the omission of a shareholder proposal concerning a matter relating to the “ordinary business” of the company. According to the Staff, the “selection of independent auditors or, more generally, management of the independent auditor’s engagement, are generally excludable” under the rules governing proxy solicitation.

Despite this trend, the debate over the issue (highlighted by the PCAOB release) may prove beneficial to the Carpenters and other shareholders seeking to submit an auditor rotation proposal during the proxy season. In its request for reconsideration, the Carpenters intend to argue that the topics of mandatory audit firm rotation and auditor independence have become “significant policy issues” subject to widespread debate and therefore no longer qualify as “ordinary business” as previously designated by the Division. This argument has had success in the past. In 2009, the Staff initially supported Tyson Foods’ omission of a shareholder proposal requiring a report on the use of antibiotics in raising livestock. After finding that the subject was a “significant policy issue,” however, and noting the international attention received from other agencies, the SEC reversed the original position. Accordingly, it remains to be seen what effect the Carpenters’ challenge, when coupled with the PCAOB release and related commentary, will have on the efficacy of mandatory audit firm rotation proposals in the coming year.


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this Alert or would like to discuss the topic further, please contact your Foley attorney or:

Mark T. Plichta
Milwaukee, Wisconsin
414.297.5670
mplichta@foley.com

Kathryn M. (Kate) Agostinelli
Los Angeles, California
213.972.4727
kagostinelli@foley.com

Jason M. Hille
Milwaukee, Wisconsin
414.319.7336
jhille@foley.com

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