On June 5, 2019, the Securities and Exchange Commission (SEC) declined to issue a no-action letter to CorVel Corporation with respect to CorVel’s intention to exclude from its proxy materials a shareholder proposal regarding the company’s omission of the words “sexual orientation” and “gender identity” from its written non-discrimination policy. The proposal had been submitted for inclusion in the proxy materials for CorVel’s 2019 annual shareholders’ meeting by CorVel shareholder Walden Asset Management, the socially responsive investment practice of Boston Trust & Investment Management Company. Walden incorporates environmental, social, and governance (ESG) analysis into its investment decision-making and strives to strengthen corporate ESG policies, performance, and accountability through shareholder engagement.
Walden’s proposal would have required CorVel to issue a public report detailing the potential risks associated with omitting the phrases “sexual orientation” and “gender identity” from the company’s written non-discrimination policy. Rather than include the proposal in the proxy materials as requested, however, CorVel submitted a request for a no-action letter (i.e., a request that the SEC staff confirm that it will not recommend enforcement action against CorVel for excluding the proposal) to the SEC’s Division of Corporation Finance on April 10, 2019. In its request, CorVel invoked three SEC rules as bases for its purported right to exclude the proposal from the proxy materials, namely: (i) Rule 14a-8(i)(10), which permits exclusion if “the company has already substantially implemented the proposal;” (ii) Rule 14a8-(i)(7), which permits exclusion if “the proposal deals with a matter relating to the company’s ordinary business operations;” and (iii) Rule 14a-8(i)(3), which permits exclusion if “the proposal or supporting statement is contrary to any of the Commission’s proxy rules, including [Rule] 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials.” Walden submitted a response on May 8, 2019, in which it argued that none of those bases for exclusion applied.
First, CorVel argued that it had satisfactorily addressed the proposal’s underlying concerns and its essential objective because the company’s non-discrimination policy already states that it prohibits discrimination on the basis of “sex.” Walden pointed out, however, that the company had not, as the proposal would require, issued a public report detailing the potential risks associated with omitting the words “sexual orientation” and “gender identity” from the policy. Thus, argued Walden, the company had not responded to the underlying concerns of the proposal, or shown how the company’s policies, practices, and procedures compared favorably with the guidelines of the proposal, and therefore the proposal could not be said to have been substantially implemented.
Second, CorVel argued that because the focus of the proposal and its supporting statement was primarily on day-to-day business matters such as economic and competitive issues and the management of the company’s workforce, the proposal did not transcend the day-to-day business matters of the company, and could therefore be excluded. Walden, in contrast, argued that the subject matter of the proposal was exclusively focused on discrimination against certain categories of employees, which is a significant social policy issue with a clear nexus to the company.
Third, CorVel argued that the proposal and its supporting statement were materially false and/or misleading because they were inextricably based on the materially misleading premise that the company’s non-discrimination policy does not prohibit discrimination on the basis of sexual orientation and gender identity for the sole reason that it does not explicitly include the words “sexual orientation” and “gender identity.” In support of this argument, CorVel noted that the Equal Employment Opportunity Commission (EEOC) and several federal courts have indicated that LGBTQ individuals may bring discrimination claims on the basis of “sex” under Title VII. Walden strongly disagreed, pointing out that the proposal was clearly worded in its focus on the risks associated with the lack of specific inclusion of the categories, and did not make a legal interpretation or assertion as to whether the current policy, as interpreted in the courts, would or would not permit sexual orientation or gender identity discrimination. Walden noted that the law is not settled on whether protections for sexual orientation and gender identity fall under protections for “sex” and, in fact, the United States Department of Justice is taking the position that the term “sex” does not apply to gender identity in a case entitled R.G. & G.R. Harris Funeral Homes, Inc. v. EEOC, which the Supreme Court has agreed to hear. Walden further observed that the EEOC’s interpretation of the word “sex” in Title VII as including protections for “sexual orientation” and “gender identity”: (i) is not legally binding; (ii) is not uniformly agreed upon within the courts; (iii) is being actively challenged by the Department of Justice in the Supreme Court; and (iv) may change as the Trump administration appoints more EEOC commissioners.
Ultimately, the SEC agreed with Walden on all three points, stating that: (i) it does not appear that the company’s public disclosures compare favorably with the guidelines of the proposal, which requests a report on the potential risks related to the company’s non-discrimination policy, and thus the proposal is not excludable under Rule 14a-8(i)(10); (ii) the proposal transcends ordinary business matters, and thus is not excludable under Rule 14a-8(i)(7); and (iii) the SEC was unable to conclude that CorVel had demonstrated objectively that the proposal is materially false or misleading, and thus it is not excludable under Rule 14a-8(i)(3).
The decision, which makes it highly likely that CorVel will include the proposal in its proxy materials, was a win not only for shareholders, but also for LGBTQ rights, as it provides another tool in the arsenal of ESG-minded investors who wish to pressure companies that do not provide adequate LGBTQ protections in their written non-discrimination policies into amending those policies to provide such protections.