What seems to be the Rule 14a-8 exclusion du jour? My vote goes to Rule 14a-8(i)(7), the “ordinary business” exclusion—sort of a perpetual home renovation project for the staff. As you may recall, in Staff Legal Bulletins 14H, 14I and 14J issued over the last few years, the staff has addressed the scope and application of the exclusion—specifically the “significant policy exception,” the need for a board analysis, “micromanagement” as a basis for exclusion and the availability of the exclusion in the context of executive comp. (See this PubCo post, this PubCo post and this PubCo post. Some recent no-action letters related to use of the exclusion in connection with executive comp are discussed in this PubCo post.) Some of the staff’s most recent guidance has been viewed to expand the potential for companies to rely on the exclusion, and a slew of letters addressing requests for no-action relief under Rule14a-8(i)(7) has recently been posted. Not surprisingly, many of the proposals address current topics in the news: climate change, sexual harassment and mandatory employee arbitration, allocation of corporate tax savings, and even immigrant detention. As BlackRock CEO Laurence Fink has previously observed, in the face of political dysfunction “and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” (See this PubCo post.) To provide a flavor of current trends, this post discusses several of these letters below.
Rule 14a-8(i)(7). As discussed in the SLBs, the ordinary business exception is based on “two central considerations”: one is the “subject matter” of the proposal and the other is “micromanagement.” Generally, with regard to “subject matter,” proposals may be excluded under Rule 14a-8(i)(7) if they “raise matters that are ‘so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,’” unless, that is, the “significant policy exception” applies. That exception precludes exclusion of the proposal if 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 SLB 14H, the staff explained that “proposals focusing on a significant policy issue are not excludable under the ordinary business exception ‘because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.’ Thus, a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’”
The other central consideration of the “ordinary business” exception is the extent to which the proposal seeks to “micromanage” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Under this prong of the exclusion, the staff does not look at the subject matter, but rather “only to the degree to which a proposal seeks to micromanage.” Excessive micromanagement could arise, the staff explained in SLB 14J, “where the proposal involves intricate detail, or seeks to impose specific timeframes or methods for implementing complex policies.” For example, the SLB states, the staff has agreed to the exclusion of a proposal to “generate a plan to reach net-zero greenhouse gas emissions by the year 2030, which sought to impose specific timeframes or methods for implementing complex policies.” Similarly, the staff has also granted no-action relief for the exclusion of a proposal seeking an intricately detailed study or report, including where the “substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies.”
Climate. A couple of recent climate change proposals illustrate the staff’s most recent take on micromanagement. In Devon Energy, the staff permitted exclusion, under Rule 14a-8(i)(7), of a climate change proposal that requested “that the board, in annual reporting from 2020, include disclosure of short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius.” The company claimed the proposal related to ordinary business operations and sought to micromanage the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, are not in a position to make an informed judgment.” More specifically, the proposal would micromanage the company because it “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies,” requiring company management “to assess current operational strategies and business judgments regarding drilling and production levels, among other matters, given the Proposal’s request for company-wide, time-bound quantitative targets.” This proposal, the company maintained, requested “an intricately detailed and complex report on emissions targets” of the type that the staff had previously allowed to be excluded. (The filing does not include a response from the proponent.)
The staff agreed that the proposal could be excluded: it “would require the Company to adopt targets aligned with the goals established by the Paris Climate Agreement. By imposing this requirement, the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.”
By contrast, in a letter issued on the same date to Anadarko Petroleum, the proposal requested that the company “issue a report describing if, and how, it plans to reduce its total contribution to climate change and align its operations and investments with the Paris Agreement’s goal of maintaining global temperatures well below 2 degrees Celsius.” Here too, the company maintained that the proposal was excludable as ordinary business, even if it “touched upon” a significant policy issue. In particular, the company looked to the supporting statement, which identified a number of specific issues on which the shareholders were looking for information that would require the company “to conduct a comprehensive series of analyses.” In addition, the proposal sought to micromanage “by imposing specific methods for implementing complex policies” that were different from the company’s announced plans to reduce emissions. Implicitly if not expressly, the company argued, the proposal was seeking quantitative and time-bound targets and plans to achieve them.
Not the case, the proponent responded; the proposal did not involve intricate details or try to substitute the judgment of shareholders for that of management, nor did it impose time frames or methods, but instead just asked the company “to describe if, and how, it plans to align its total climate change contribution with the global Paris climate agreement,” a significant policy issue that transcended ordinary business on “which shareholders are well equipped to make an informed judgment.” In addition, the proponent argued that SLB 14H “has made it clear that if a proposal addresses in its entirety a significant policy issue like climate change, it can certainly request information about “nitty-gritty” business matters that are directly related, such as strategic financial and investment decisions, etc.”
Interestingly, the proponent also took the opportunity to raise a big red flag about recent trends with regard to expanded interpretations of Rule14a-8(i)(7), which, in the proponent’s view, “could fundamentally change the relationship between companies and share owners. Proposals directed toward guiding and even redirecting business strategy decisions on significant policy issues have long been at the core of the shareholder proposal process, and not a basis for exclusion.” More specifically, the proponent pushed back against some of the potential implications of SLB 14J, voicing concern that “recent Staff decisions and Staff Legal Bulletin 14J… appear to invite companies to make new arguments that long-standing types of shareholder proposals, including issues raising important public policy concerns, suddenly entail micromanagement when applied at a particular company. This has resulted in numerous no action requests for the 2019 season going to great lengths to assert that ‘complex issues’ like management of greenhouse gases, the use of antibiotics in the supply chain, promotion of gender equity, management of the firm’s pollution impacts, impacts on civil rights, etc.—essentially a broad range of long-standing and established areas of shareholder concern—have suddenly become prohibited areas, the consideration of which creates risk of undermining board and management’s well-considered decisions, priorities, and strategies.” However, the proponent emphasized, this new trend was inappropriate: SLB 14J did not represent an abandonment of past guidance, but instead plainly expressed the staff’s intent to maintain consistency with prior SEC guidance in this area. Citing a 1998 SEC release, the proponent argued that prior SEC guidance has “made it abundantly clear that it has not endorsed or proposed a prohibition against requests for timelines or specific methods.” In this case, the proponent urged, the proposal “does not dictate the company’s day-to-day decision-making, but rather provides a larger strategic redirection that is part and parcel of the shareholder proposal process,” offering the company flexibility as to how to fulfill that request.
The staff agreed that the proposal was not excludable and refused to grant relief: in the staff’s view, the proposal “transcends ordinary business matters and does not seek to micromanage the Company to such a degree that exclusion of the Proposal would be appropriate.”
Mandatory employee arbitration. Another group of letters (also dated the same date) seeking exclusion under Rule 14a-8(i)(7) related to mandatory employee arbitration provisions. In Yum! Brands and XPO Logistics, the proposal requested that the board adopt a policy that the company “will not engage in any ‘Inequitable Employment Practice,’” defined as “mandatory arbitration of employment-related claims; non-compete agreements with employees; and nondisclosure agreements (“NDAs”) entered into in connection with arbitration or settlement of claims that any Company employee engaged in unlawful discrimination or harassment, unless such an NDA is requested by the person who was harassed or the victim of discrimination.” Yum! argued that the proposal could be excluded because it related to the company’s management of its workforce, a “critical component of the Company’s day-to-day management.” In addition, Yum! argued, if “implemented, the Proposal would prevent management at various levels in the Company and in various jurisdictions around the world from making fact-specific employment-related decisions that are a fundamental part of day-to-day business, without any allowance for how the Company and specific employees in specific locations may be best served by certain of the practices the Proposal seeks to wholesale ban. The Proposal attempts to replace management’s fundamental tasks with shareholder votes.” XPO argued that the proposal sought “to override management’s core function of managing the Company’s workforce by requiring the adoption of a blanket prohibition on certain lawful employment practices related to employee hiring and firing, conditions of employment and labor-management relations.” As a proposal that would apply to a broad cross-section of employees, both companies argued, it was not the type of proposal that the staff has found to relate to significant policy issues. The Yum! request also included an Executive Committee analysis, as part of which the “Committee focused on the prevalence of the employment practices referred to in the Proposal as well as the Company’s existing policies and procedures in relation the stated objectives of the Proposal.” The Yum! Letter also contended that the proposal sought to micromanage the company.
In response, the proponent maintained that the proposal aimed to “counter efforts to strip employees of legal protections” and that the identified inequitable employment practices were a significant policy issue because they were “intertwined with monopsony power, whose deleterious effects on the economy are increasingly clear to economists and policy makers.” In particular, the proponent contended that “[e]liminating mandatory arbitration provisions has been a major focus of the fight against workplace sexual harassment, with proponents arguing that arbitration lacks transparency, shields harassers from accountability and allows misconduct to continue, damaging employee morale and productivity.” These practices and their impact, the proponent argued, citing a number of articles and studies, are a “consistent topic of widespread public debate.”
The staff agreed that the proposal could be excluded, noting “that the Proposal relates generally to the Company’s policies concerning its employees, and does not focus on an issue that transcends ordinary business matters.”
By contrast, in CBRE Group, the proposal was framed more narrowly to focus on sexual harassment, requesting that “the board prepare a report on the impact of mandatory arbitration policies on the Company’s employees. The report shall evaluate the risks that may result from the Company’s current mandatory arbitration policy on claims of sexual harassment.” Here, too, the company argued that the proposal was excludable because it related to the management of the company’s workforce, considered to be “at the core of day-to-day ordinary business operations.” In addition, the company maintained, “[d]ecisions concerning the content of employment agreements for this workforce and policies regarding the handling of disputes with and among employees, including possible sexual harassment claims, are multi-faceted, complex and based on a range of factors,” and the company’s policies are designed to comply with local law in many countries. In light of the complexity of the issues to be addressed in the report, the company “concluded that it would be impracticable to ask stockholders to make informed judgments on such nuanced contractual and policy matters for the Company’s large and diverse workforce.” Conceding that the proposal “references the significant policy issue of workplace sexual harassment,” the company maintained that those references did not “override the Proposal’s underlying ordinary business subject matter” because of the proposal’s focus “on provisions in the Company’s employment agreements and policies as they relate to employee dispute resolution.” Proposals “relating to both ordinary business matters and significant social policy issues may be excluded in their entirety,” and this proposal sought additional actions or addressed issues that went beyond the significant social policy issue in question.
The proponent contended that the mandatory arbitration aspect of the proposal could not be separated from the sexual harassment component because these policies are designed “to deter and keep secret sexual harassment claims by employees.” In addition, the fact that the company employed a large number of employees in different countries did not mean that the proposal was “beyond the knowledge and expertise of most stockholders.” The staff refused to grant relief because, in the staff’s view, “the Proposal transcends ordinary business matters.”
Allocation of tax savings. In this letter refusing to grant relief to Gilead Sciences, the proponent requested that the board issue a report describing how the company planned to allocate tax savings as a result of the Tax Cuts and Jobs Act, contending in its supporting statement that the disclosure would allow investors to understand how the tax law would affect the company’s long-term strategy. The company argued that the proposal was excludable under Rule 14-8(i)(7) because decisions as to “how a company plans to allocate its funds for various expenditures are ordinary business decisions that are fundamental to management’s ability to run the company on a day-to-day basis and could not, as a practical matter, be subject to direct shareholder oversight.” In addition, the requested report would implicate a variety of decisions that “management makes on a day-to-day basis, including various matters that the Staff has consistently concluded constitute ordinary business matters such as management of the company’s workforce, management of the company’s expenses, the manner in which the company develops its annual budget and operating plan, employee compensation and benefits and product research and development.”
In response, the proponent maintained that the proposal focused on a significant policy issue facing pharma companies (such as the company) that transcended day-to-day business “because how companies allocate tax savings as a result of the Tax Cuts and Jobs Act is subject to widespread public interest.” In support, the proponent cited numerous articles and other public statements to show that the topic was subject to extensive public debate. Moreover, the proponent argued, the proposal did not specify that the report should specifically address employees or otherwise seek to micromanage the company because the report would permit the company to address these allocations however it chose.
The company contended the staff had not determined that the issue of how companies allocate tax savings was a significant policy issue and that the proponent did not demonstrate that it was. However, as explained above, the staff has previously said that “[w]hether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company’s business operations,” and the staff concluded that the company had not met its burden of demonstrating that the proposal related to ordinary business operations: “Based on the information presented in your correspondence, it is not readily apparent whether or not the Proposal raises an issue that is significant to the Company. In particular, we note that your discussion does not include any analysis addressing the significance of the Proposal to the Company’s business operations.”
Immigrant detention. The staff reached opposite conclusions with regard to proposals related to detention of immigrants. In a proposal to two companies that operate detention and correctional facilities, CoreCivic and The GEO Group, the proponent sought a board policy that, among other things, the company would not accept child detainees who had been separated from their parents, or adult detainees who had been separated from their children, all to be implemented by the end of 2019. CoreCivic argued for exclusion under Rule 14a-8(i)(7) on the basis of micromanagement “because the Staff has repeatedly held that a proposal regarding a company’s decision to offer a particular service to its clients and the manner in which the company provides said services are the exact type of fundamental, day-to-day operational decisions meant to be covered by the ordinary business operations exception.” The proponent claimed that it did not involve micromanagement “because the Proposal only requests that a policy be established by year end, and it does not compel the Board to adopt a policy or dictate the specifics or language of the policy.” The staff found that the proposal micromanaged the company “by seeking to impose specific methods for implementing complex policies. Specifically, the Proposal would dictate the terms of services to be provided by the Company and specify the manner in which the Company shall implement certain aspects of the policy requested by the Proposal.” The staff also allowed exclusion of the same proposal submitted to the GEO Group.
However, in another letter submitted to The GEO Group, the staff refused to grant relief. The proposal requested that the company report annually, beginning in September 2019, on how it implemented the portion of its Global Human Rights Policy that addressed “Respect for Our Inmates and Detainees,” identifying a number of specific disclosures to be provided. The supporting statement referred to reports of the Department of Homeland Security identifying “serious issues” at one of the company’s immigration detention centers. The company argued for exclusion on the basis of “ordinary business,” contending that the proposal was “an attempt to inject the Company’s shareholders into the management and direct oversight of the Company’s operations because it not only seeks to tell the Company what to do, but how to do it.” The company also maintained that, by imposing a specific timeframe for the report and by requesting details about how the company implemented its complex policy on human rights, the proposal sought to micromanage the company. In response, the proponent argued that human rights, the subject of the proposal, was a significant policy issue and that “the Proposal does not urge GEO to report on the substantive details of its human rights performance or to change its practices,” but rather to discuss how it is implementing its commitment. The staff did not agree that the company could omit the proposal because, in the staff’s view, it “transcends ordinary business matters and does not seek to micromanage the Company to such a degree that exclusion of the Proposal would be appropriate.”
