SEC issues new guidance on shareholder proposals

November 06, 2017

Securities Law Alert

Author(s): David R. Brown

The SEC’s Division of Corporation Finance issued Staff Legal Bulletin No. 14I (CF) (“SLB 14I”) on November 1, 2017. This is the latest in a series of related bulletins that provide important guidance for public companies reviewing shareholder proposals for inclusion in proxy statements.

An issuer often objects to a shareholder proposal because it believes that the subject matter of the proposal is inappropriate for a shareholder vote. Under Securities Exchange Act Rule 14a-8, however, an issuer may exclude a shareholder proposal from its proxy statement only if it qualifies for exclusion under one of several alternative procedural or substantive grounds. In most cases, before excluding a proposal, the issuer seeks no-action letter relief from the Division’s staff (the “Staff”) confirming that the Staff will not recommend enforcement action against the issuer.

The Ordinary Business Exception

SLB 14I addresses one of the most commonly-cited grounds for exclusion, under Rule 14a-8(i)(7), namely that the proposal addresses “ordinary business matters” and seeks to micromanage topics better left to the discretion of the board and management (the “Ordinary Business Exception”).  The Staff has historically conducted a multi-pronged analysis of whether a proposal qualifies for this exception.  Importantly, the Ordinary Business Exception is unavailable where a proposal focuses on significant policy issues that “transcend ordinary business.”  Issuers and proponents frequently hold opposing views as to the existence of significant policy issues, and in recent years this has led to the Staff being unable to concur in the proposed exclusion of various proposals. SLB 14I provides that the Staff will expect issuers to include in their no-action requests under the Ordinary Business Exception a detailed discussion reflecting the board of directors’ well-informed analysis of the significance of any policy issues raised in a proposal. This means that the board must consider each proposal carefully, but it may also signal that the Staff will be more inclined than previously to defer to the board with respect to how to conduct such an analysis and what the Staff refers to as “the difficult judgment call” with respect to determinations of significance.

The Economic Relevance Exception

The bulletin also covers a second, far less often used, grounds for exclusion, under Rule 14a-8(i)(5), namely that the proposal lacks economic relevance (that is, it relates to operations that represent less than 5% of the issuer’s total assets and 5% of its net earnings, and are not otherwise significantly related to its business) (the “Economic Relevance Exception”).  The Staff has rarely agreed with an issuer seeking exclusion on this basis, generally considering whether the issuer conducted any business related to the issue in the proposal and whether the issue was of broad social or ethical concern, regardless of dollar value.  As noted in SLB 14I, the Staff now expects a board analysis similar to that described above with respect to the Ordinary Business Exception.  This may grant an issuer more flexibility to make arguments concerning the applicability of issues of broad social or ethical concern to its own business, with the Staff possibly granting the issuer additional deference concerning such determinations.  SLB 14I may therefore expand the circumstances in which an issuer will find this exception viable.  In any case, we expect that it will be used more frequently as a secondary, alternative ground for relief alongside the Ordinary Business Exception.

Other Updates

SLB 14I also clarifies the requirements for “proposals by proxy” and how and when the inclusion of graphs or images may render a shareholder proposal excludable.  This guidance will be helpful in connection with proposed exclusions based on certain procedural grounds.

The full text of SLB 14I can be found here.

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