On a webcast today, “Shareholder Proposals: Corp Fin Speaks,” presented by TheCorporateCounsel.net, Matt McNair, Senior Special Counsel in Corp Fin’s Office of Chief Counsel, provided some “soft” guidance regarding the implications of the recent SLB 14I on shareholder proposals, particularly the exclusions for “ordinary business” and “economic relevance.” (See this PubCo post.)
(Based on my notes, so standard caveats apply.)
Rule 14a-8(i)(7) permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations,” except where the proposal focuses on policy issues that are so significant that “they transcend ordinary business and would be appropriate for a shareholder vote. Whether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company’s business operations.” In the SLB, the staff introduced a new element into the no-action request; in light of the difficult judgment calls involved, the staff “would expect a company’s no-action request to include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance.” McNair remarked that the staff was optimistic that this new approach would foster shareholder engagement by the putting the proposal in front of board at an earlier stage.
Rule 14a-8(i)(5) 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.” Under the new SLB, Corp Fin’s “analysis will focus, as the rule directs, on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than 5% of total assets, net earnings and gross sales.” As with the “ordinary business” exception, the no-action request could include a discussion that reflects the board’s analysis of the second prong of the rule, the proposal’s significance to the company.
In response to questions, McNair advised:
- Board analysis optional. McNair confirmed that a board analysis is optional. For example, where, based on a long trail of prior no-action letters, the proposal falls clearly within the exclusion, a board analysis would likely be unnecessary. Note that this position is consistent with the positions previously articulated by Corp Fin director William Hinman and Corp Fin Associate Director Michele Anderson at the PLI Securities Regulation Institute. (See this PubCo post.)
- Proposal already submitted. Even if a no-action request has already been submitted, companies can still supplement their requests with board analyses; however, proponents will be given time to review and respond to the supplementary information, so the ultimate time involved will necessarily be extended.
- Delegation to board committee. Since the board analysis is not mandatory, delegation to a board committee is within the board’s discretion; however, a well-developed record prepared by a committee and approved by the full board will likely carry more weight.
- Formality. It is not necessary to submit board resolutions or board materials so long as the process and findings are well described and sufficiently detailed. Although it’s possible that documentation could be helpful, companies should keep in mind that any materials submitted become part of the public record.
- Board analysis. In McNair’s view, for the “ordinary business” exclusion, the board analysis would not necessarily need to cover the issue of general societal impact for purposes of the transcendence test of the significant policy exception (although that issue should probably be covered by the company in its no-action request). Rather, McNair suggested, the staff is asking for the board’s insight with regard to the sufficiency of the connection to the company’s business. That is, when the proposal raises a significant policy issue, there still must be a sufficient nexus between the policy issue and the company’s business operations, and the board’s analysis should focus on that nexus. Similarly, as with “ordinary business,” under the “economic relevance” exclusion, the question for the board analysis is the sufficiency of the “nexus” to the company’s business. He noted, in addition, that showing the mere possibility or chance of reputational harm to the business would not be enough. McNair was not sure at this point that information about prior shareholder votes on the proposal would carry much weight, although it was possible that very high or very low votes might impact the decision. Although the staff had, at this point, no preconceived ideas about what the analysis should look like, he thought that the board analysis might also cover the meetings held, the board vote and any discussions with shareholders or other third parties.
- Deference to board. The board analysis is expected to be useful to the staff’s resolution of the issues, but it won’t be determinative. However, the better the record and analysis, the more weight the staff would likely accord to it.
With regard to the SLB’s discussion of proposals by proxy and the new requirements for a proponent’s delegation of authority, the purpose of the new requirement is to provide the company with assurances about the shareholder and the authority of the proxyholder. McNair emphasized that the purpose was not to create a new foot fault. If something is technically missing, but the company can still reasonably determine from the information provided that the shareholder has authorized the proxyholder, the company probably would not be allowed to exclude on that basis. For example, if, after notice of a deficiency, the corrected authorization failed to refer back to the date of the original proposal, McNair would view that as a hypertechnical defect and would not likely allow exclusion on that basis.
Finally, McNair asked for patience this year because, as a result of the new SLB, the staff will probably want to be more “deliberate” in its review, which will take more time than usual. Also, he observed, one way to expedite review is to forego insisting on “having the last word” or repeating arguments already made. It would be best, he advised, to try to limit the correspondence to the critical arguments.