Yesterday, Corp Fin issued Staff Legal Bulletin 14L, which outlines Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception. The new SLB also rescinds SLBs 14I, 14J and 14K, following a “review of staff experience applying the guidance in them.” Generally, new SLB 14L presents its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. SEC Chair Gary Gensler said that “[t]oday’s bulletin will provide greater clarity to companies and shareholders on these matters, so they can better understand when exclusions may or may not apply. The updated staff legal bulletin, which replaces three previously issued bulletins, is consistent with the Commission’s original intention.” The effect of the new SLB is to reverse some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under the rescinded SLBs, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. Needless to say, climate activists are pleased that their proposals will now likely find a more receptive audience at the SEC.
The new SLB also republishes, with some “primarily technical, conforming changes,” the guidance related to the use of graphics and images and proof of ownership letters that was in rescinded SLBs 14I and 14K and includes new guidance on the use of e-mail for submission of proposals, delivery of notices of defects and responses to those notices.
Rule 14a-8 addresses when a company must include a shareholder proposal in its proxy statement. Rule 14a-8(i)(7), the “ordinary business” exclusion, permits a company to omit a proposal that “deals with a matter relating to the company’s ordinary business operations.” Why? Because the resolution of these types of matters is considered to be more properly the province of management and the board of directors than of the shareholders. The ordinary business exclusion is based on “two central considerations”: one is the “subject matter” of the proposal, that is, whether it relates to running the company on a day-to-day basis or to a significant social policy, and the other is the extent to which the proposal “micromanages” the company.
Significant social policy. Generally, as described in a 1998 release, proposals may be excluded under Rule 14a-8(i)(7) if the proposals 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 would preclude exclusion of the proposal if the proposal “would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” Historically, proponents and companies have often focused on “the overall significance of the policy issue raised by the proposal.” In SLB 14K, however, the staff took a different approach and advised that the significance discussion should be company-specific—“whether the proposal raises a policy issue that transcends the particular company’s ordinary business operations”—rather than discussing whether the particular issue is of general significance. That is, under SLB 14K, the staff took “a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally ‘significant.’” (See this PubCo post.)
In the new SLB, the staff indicates that, based on
“a review of the rescinded SLBs and staff experience applying the guidance in them, we recognize that an undue emphasis was placed on evaluating the significance of a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy, complicating the application of Commission policy to proposals. In particular, we have found that focusing on the significance of a policy issue to a particular company has drawn the staff into factual considerations that do not advance the policy objectives behind the ordinary business exception. We have also concluded that such analysis did not yield consistent, predictable results.”
Under new SLB 14L, Corp Fin advises that the staff will “realign its approach” with the standard originally expressed in 1976, and reaffirmed in 1998, which looked at whether the proposal raised significant social policy issues. According to the new SLB, the
“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.” [Emphasis added.]
For example, under its revised approach, the new SLB states that “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.” The SLB also notes that “[m]atters related to employment discrimination are but one example of the workforce management proposals that may rise to the level of transcending the company’s ordinary business operations.” It wouldn’t be much of a stretch to see major implications for other environmental and social proposals, such as climate and diversity, the types of proposals that have increasingly been submitted in recent years.
The elimination of the need to discuss the company-specific significance of policy issues means that the staff “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.” Interestingly, the staff found that providing a board analysis “may distract the company and the staff from the proper application of the exclusion. Additionally, the ‘delta’ component of board analysis – demonstrating that the difference between the company’s existing actions addressing the policy issue and the proposal’s request is insignificant – sometimes confounded the application of Rule 14a-8(i)(10)’s substantial implementation standard.”
Micromanagement. The second consideration that forms the basis of the “ordinary business” exclusion is, as described in the 1998 release, whether 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 aspect of the exclusion, the staff does not look at the subject matter, but rather only at the manner in which a proposal seeks to address the subject matter, i.e., how prescriptive is the proposal? In now-rescinded SLB 14K, the staff illustrated the type of proposal that it viewed as micromanagement—and thus excludable: a proposal that sought “annual reporting on ‘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.” Why was that proposal consider micromanaging? Because, according to the staff at the time, it “prescribed the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.”
In new SLB 14L, the staff indicates that, after further consideration, it has now determined that the staff’s recent application of the micromanagement concept in SLB 14J and SLB 14K “expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, we believe that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.” In support of the staff’s position, the new SLB highlights the clarification in the 1998 release that “specific methods, timelines, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.” And again, as explained in the 1998 release, some commenters had apparently read examples given of micromanagement to “imply that all proposals seeking detail, or seeking to promote time-frames or methods, necessarily amount to ‘ordinary business.’ We did not intend such an implication. Timing questions, for instance, could involve significant policy where large differences are at stake, and proposals may seek a reasonable level of detail without running afoul of these considerations.”
Under new SLB 14L, the staff
“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, we 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. We 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.”
The new SLB offers some contrasting examples of its new approach to micromanagement as compared with the approach applied under the rescinded SLBs. Its new approach is exemplified by a no-action letter issued earlier this year that denied relief for a proposal requesting that the company set targets for GHG emissions, but not specifying a “specific method for doing so. The staff concluded this proposal did not micromanage to such a degree to justify exclusion under Rule 14a-8(i)(7).” In contrast, the notes identify two climate-related proposals—the new SLB observes that there were many proposals related to climate that were excluded under the rescinded SLBs—that were permitted to be excluded under the prior approach: one proposal that asked the company to prepare a report on the feasibility of achieving net-zero emissions by 2030 and one that requested that the board in annual reporting include disclosure of short-, medium- and long-term greenhouse gas targets aligned with the Paris Climate Agreement. “Going forward,” the staff indicates, “we would not concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.” [Emphasis added.]
Under new SLB 14L, the staff may examine other factors to “assess whether a proposal probes matters ‘too complex’ for shareholders, as a group, to make an informed judgment.” These factors might include “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.”
Finally, the staff expresses its belief that its new “approach to micromanagement will help to avoid the dilemma many proponents faced when seeking to craft proposals with sufficient specificity and direction to avoid being excluded under Rule 14a-8(i)(10), substantial implementation, while being general enough to avoid exclusion for ‘micromanagement.’”
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.” Rescinded SLB 14I, issued in 2017 (see this PubCo post), addressed the second prong of the rule, the proposal’s significance to the company’s business, indicating that the staff’s analysis would be focused on a proposal’s significance to the company’s business when it otherwise related to operations that accounted for less than 5% of total assets, net earnings and gross sales. The rescinded SLB noted that the burden was on the proponent to show that a proposal was “otherwise significantly related to the company’s business.” That is, if the “proposal’s significance to a company’s business is not apparent on its face,” it “may be excludable unless the proponent demonstrates that it is ‘otherwise significantly related to the company’s business.’” As with the “ordinary business” exception in Rule 14a-8(i)(7), Corp Fin had advised that it would expect a company’s Rule 14a-8(i)(5) no-action request to include a discussion that reflects the board’s analysis of the proposal’s significance to the company, again detailing “the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”
In new SLB 14L, the staff advises that it is “returning to our longstanding approach, prior to SLB No. 14I, of analyzing Rule 14a-8(i)(5) in a manner we believe is consistent with Lovenheim v. Iroquois Brands, Ltd. [(D.D.C. 1985)].” As a result, the new SLB continues, “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).”
Rule 14a-8(d) provides a basis for exclusion of a shareholder proposal if it, including any accompanying supporting statement, exceeds 500 words. The discussion of this rule, which relates to the use of images in shareholder proposals, originally appeared in the now rescinded SLB 14I. To retain the guidance, the staff is republishing the discussion in new SLB 14L with only minor, conforming changes. (For a summary, see this PubCo post).
The staff’s guidance on proof-of-ownership letters previously appeared in now rescinded SLB 14K. The guidance addressed companies’ application of an “overly technical” approach in trying to exclude proposals on the basis of proof-of-ownership letters for purposes of Rule 14a-8(b). The guidance is republished in new SLB 14L with minor, conforming changes. However, the staff notes that it is providing some additional guidance indicating that the staff does “not interpret the recent amendments to Rule 14a-8(b) to contemplate a change in how brokers or banks fulfill their role. In our view, they may continue to provide confirmation as to how many shares the proponent held continuously and need not separately calculate the share valuation, which may instead be done by the proponent and presented to the receiving issuer consistent with the Commission’s 2020 rulemaking. Finally, we believe that companies should identify any specific defects in the proof of ownership letter, even if the company previously sent a deficiency notice prior to receiving the proponent’s proof of ownership if such deficiency notice did not identify the specific defect(s).”
Use of E-mail
The use of email has increased, especially during the pandemic, both to submit proposals and make other communications. However, unlike snail mail, there is no standard proof of delivery, and methods for confirmation of email may differ. Accordingly, the staff advises that parties should keep in mind that
“[e]mail delivery confirmations and company server logs may not be sufficient to prove receipt of emails as they only serve to prove that emails were sent. In addition, spam filters or incorrect email addresses can prevent an email from being delivered to the appropriate recipient. The staff therefore suggests that to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply e-mail from the recipient in which the recipient acknowledges receipt of the e-mail. The staff also encourages both companies and shareholder proponents to acknowledge receipt of emails when requested. Email read receipts, if received by the sender, may also help to establish that emails were received.”
Submission of proposals. Under Rule 14a-8(e)(1) “shareholders should submit their proposals by means, including electronic means, that permit them to prove the date of delivery.” Proponents “risk exclusion of their proposals if they do not receive a confirmation of receipt from the company in order to prove timely delivery with email submissions.” The staff advises that, in the absence of an email address in the proxy statement for proposal submission, proponents should contact the company to obtain the correct email address, and companies should provide it on request.
Delivery of notices of defects and responses. The same applies with regard to a company’s delivery by email of deficiency notices to proponents and proponents’ response: companies and proponents should seek a confirmation of receipt to prove timely delivery. Under Rule 14a-8(f)(1), companies must notify the shareholder of any defects within 14 calendar days of receipt of the proposal, and the company has the burden to prove timely delivery of the notice. Under Rule 14a-8(f)(1), the shareholder’s response must be postmarked, or transmitted electronically, within 14 days of the date of receipt of the company’s notification of a deficiency. If a shareholder uses email to respond, the burden is on the shareholder or representative to use an appropriate email address (e.g., an email address provided by the company, or the email address of the counsel who sent the deficiency notice).