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SEC Reverses Course on Shareholder Proposals

By | November 10, 2021

The SEC Division of Corporation Finance announced it has rescinded Staff Legal Bulletin (“SLBs”) Nos. 14I, 14J and 14K after a review of staff experience applying the guidance in them.  Public companies relied on the guidance in the SLBs to determine whether to seek a no-action letter to exclude shareholder proposals under Rule 14a-8, to engage with the shareholder proponent or to include the shareholder proposal in the company’s proxy statement.

Ordinary Business Operations

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.”

Going forward, the staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the SEC initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the SEC subsequently reaffirmed. According to the SEC, this exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters. For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

Under this realigned approach, proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.

Because the staff is no longer taking a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7), it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion.

Micromanagement

Upon further consideration, the staff has determined that its recent application of the micromanagement concept expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, the staff believes that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.

The staff stated it will take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement. Instead, the staff will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. The staff stated it would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.

Additionally, in order to assess whether a proposal probes matters “too complex” for shareholders, as a group, to make an informed judgment, the staff may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. The staff may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.

Going forward the staff will not concur in the exclusion of proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.

Economic Relevance

Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

Based on a review of the rescinded SLBs and staff experience applying the guidance in them, the staff is returning to its approach, prior to SLB No. 14I, of analyzing Rule 14a-8(i)(5) in a manner it believes is consistent with case law.  As a result proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds of Rule 14a-8(i)(5). In light of this approach, the staff will no longer expect a board analysis for its consideration of a no-action request under Rule 14a-8(i)(5).

Other

The staff also republished, with what it describes as primarily technical, conforming changes, the guidance contained in SLB Nos. 14I and 14K relating to the use of graphics and images, and proof of ownership letters. In addition, the staff provided new guidance on the use of e-mail for submission of proposals, delivery of notice of defects, and responses to those notices.

Contact Steve Quinlivan for more information.