New SEC Staff Guidance on Shareholder Proposal Exclusions | Baker

Key points to remember
  • The Division of Corporation Finance (staff) of the Securities and Exchange Commission has issued Staff Legal Bulletin No. 14L, which provides new guidance on the basis allowed for excluding shareholder proposals from the proxy circular of ” a company public under Rule 14a-8 (i) (7) exclusion of ordinary business and exclusion of relevance of rule 14a-8 (i) (5) and cancel Staff Legal Bulletins no ° 14I, 14J and 14K.
  • Proposals that previously could have been excluded from a company’s proxy statement under these rules may now need to be included if they touch on issues of broad social or ethical impact.
  • Although staff legal bulletins do not have the force of law, this new directive will make it more difficult to obtain a no-action measure in the face of issues that the Division of Corporation Finance deems important to society as a whole. , even when the connection to the problem with the business of the company is weak.

On November 3, 2021, the Division of Corporation Finance (the staff) of the Securities and Exchange Commission (the Commission) released its Staff Legal Bulletin (SLB) No. 14L. This release contains new guidance regarding shareholder proposals submitted for inclusion in public company proxy statements under Rule 14a-8 of the Securities Exchange Act of 1934. Specifically, the bulletin sets out the latest views staff on qualifying bases for the exclusion of proposals under the ordinary business exclusion of rule 14a-8 (i) (7) and the exclusion of relevance of rule 14a-8 (i) (5). The bulletin also rescinds staff directives dating from 2017 (SLB Nos. 14I, 14J and 14K), claiming to be a return to the standards set out by the Commission in 1998 when it amended rule 14a-8 in its current form.

Exclusion of ordinary businesses

Under canceled SLBs, no-action requests from issuers to exclude proposals that rely on the “transcendent policy” exception to the ordinary business exclusion were assessed based on materiality to the business. itself from the issue of politics, beyond day-to-day operations. , covered by the proposal. To facilitate the staff investigation, the board of directors of the company was required to provide an analysis demonstrating the propriety of the proposal. Under SLB No. 14L, however, staff will no longer focus on the link between the policy issue and the business of the company. Instead, the assessment will simply focus on whether the shareholder’s proposal addresses issues with “great societal impact”.

Also in SLB # 14L, staff adjusted their guidance to the concept of ‘micromanagement’, which arises when a ‘problematic’ proposition is[es] too deeply into issues of a complex nature on which shareholders, as a group, would not be able to make an informed judgment. Staff indicated that the repealed PESs may have allowed this concept to be read too broadly, in which any limitation on the discretion of the company or the board of directors could be interpreted as micromanagement. Staff further explained that in the future, proposals that ask for reasonable detail and promote timelines and procedures will not automatically be considered micromanaging. Instead, in applying this concept, staff will seek to determine whether the proposal inappropriately intrudes on the discretion of the board of directors or management of the company.

Staff explained that in determining whether the issues raised by a proposal are ‘too complex’, the sophistication of investors on the issue in general, the availability of data, and the robustness of the public debate on the topic will all be factors that staff should take into consideration and that references to “national or international frameworks” contained in the disclosure, goal setting and timeframe proposals will be “indicative of matters that shareholders are well equipped to assess”. Staff did not indicate how they would assess or apply the factors listed.

Staff have explicitly stated that proposals for setting climate change deadlines and targets – which under the repealed SLBs had been found to be easily ruled out for micromanagement reasons – will now be subject to a more measured approach. . As an example, Staff referred to their recent letter to ConocoPhillips Company, in which they declined to grant no-action relief for ruling out a proposal that the company was setting gas emissions targets. greenhouse effect of its operations and products.

Exclusion of relevance

In addition to updating their guidance on the ordinary business exception, staff have added their interpretation of the rule 14a-8 (i) (5) relevance exception. This rule states that companies can exclude proposals that relate “to transactions which represent less than 5% of the total assets of the company.” . . and for less than 5% of its net profit and gross sales. . . and is [sic] otherwise not significantly related to the activities of the company. Staff indicated that even proposals that might otherwise be excluded under this rule for failing to meet economic thresholds cannot be excluded if they raise issues of “significant social or ethical concern related to the activities of the company.” and that staff do not “expect a board analysis to be considered” in making their no-action decision.

Other details

Staff provided several other clarifications and re-posted certain items contained in the canceled SLBs. On the one hand, staff indicated that the use of graphics in proposals is permitted as long as the proposal remains within the 500 word limit contained in Rule 14a-8 (d) (including words contained in graphics ) and the graph is not working. violates any other provision of Rule 14a-8. The newsletter also encourages companies to allow more flexibility in writing proof of ownership letters. Finally, staff encouraged issuers and shareholders to request (and send upon request) acknowledgments when using emails to send proposals, notices of defaults and responses to notices of defaults, and indicated that it will be up to the issuing party to prove receipt in the event of a problem.

Our remarks

In SLB # 14L, staff openly severed the link between a shareholder proposal and the company for which the proposal is believed to be important when staff deem the issue important from a general ‘societal’ perspective, to purposes of the application of the transcendent policy exception. excluding Rule 14a-8 (i) (7) for ordinary business proposals. It is interesting to note that for the purposes of the exclusion of relevance of Article 14a-8 (i) (5), the staff’s reference to “economically unimportant matters of general social or ethical interest” retains the The idea that they must be “related to the activities of the company” to avoid exclusion, perhaps because the rule itself refers to matters “significantly related” to the company. But staff’s statement that they “will no longer expect a board analysis for their consideration of a no-action request” signals the diminishing importance of a business perspective.

Although the newsletter contains the obligatory introductory recitation that the SLB “has no legal force or effect. . . and . . . does not create any new or additional obligations on anyone ”, this visibly narrows and darkens the path to action-free redress for a company that believes a proposal does not adequately link to its investment thesis for its investors. While litigation, or living under the threat thereof, carries costs and raises substantial investor relationships and other risks, seeking a declaratory judgment or risking shareholder action may be the only one. viable remedy remaining for a company injured by a proposal that highlights the fragility of this link.

Author Credit: Connor A. Gibbons and Robert A. Weible

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