In remarks earlier this month to the Council of Institutional Investors, Corp Fin director Renee Jones discussed Corp Fin’s reevaluation of the no-action process for shareholder proposals under Rule 14a-8. In particular, she provided some insight into the staff’s issuance, in November 2021, of new Staff Legal Bulletin No. 14L, which outlined 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of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception, and rescinded three earlier SLBs—SLBs 14I, 14J and 14K—following a “review of staff experience applying the guidance in them.” Generally, new SLB 14L presented its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. (See this PubCo post.) The effect of SLB 14L was to make exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, smoothing the glide path for inclusion of proposals submitted by climate and other activists. Jones explains why Corp Fin believed that SLB 14L was advisable. She also shares some statistics about the current proxy season.
Guidance under the shareholder proposal rules
Jones begins with a retelling of the history and purpose of Rule 14a-8, the shareholder proposal rule. That rule is designed—as are other federal proxy rules—to make the proxy process “replicate as nearly as possible the opportunity that shareholders would have to exercise their voting rights at a meeting of shareholders, if they were personally present.” By permitting shareholders to include proposals in a company’s proxy statement, “the shareholder proposal rule ‘facilitates shareholders’ traditional ability under state law to present their own proposals for consideration at a company’s annual or special meeting, and it facilitates the ability of all shareholders to consider and vote on such proposals.’” But proponents’ access to the proxy statement is not unlimited—the company may seek to exclude a proposal that does not satisfy specified procedural and substantive requirements.
For example, Rule 14a-8(i)(7), the ordinary business exception, allows exclusion of a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is to prevent “undue interference by shareholders in matters that, according to corporate governance principles, lie within the purview of the directors and management.” The policy underlying the exception “rests on two central considerations. The first relates to the proposal’s subject matter and goes to the notion that certain matters should not be subject to direct shareholder oversight because they are so fundamental to management’s ability to run the day-to-day affairs of a company. The second relates to the degree to which the proposal ‘micromanages’ 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.’” Still, some social policy issues are so significant “that it would not be appropriate to characterize them as ‘ordinary business.’ However, what is ordinary or extraordinary often lies in the eye of the beholder.” As an example of a significant policy issue, she cites a proposal submitted to Dow Chemical during the Vietnam war that sought a charter amendment to prohibit the sale of napalm. The SEC had allowed Dow to exclude the proposal, but the D.C. Circuit remanded the case back to the SEC for reconsideration, questioning whether it was appropriate to preclude a shareholder from submitting for a vote the issue of whether other shareholders wanted “to have their assets used in a manner which they believe to be more socially responsible.” (The case was later vacated by SCOTUS as moot.)
After a period of inconsistent application and policy shifts, in 1998, the SEC amended Rule 14a-8 to make clear that “proposals relating to ordinary business matters, but focusing on sufficiently significant social policy issues, generally would not be excludable 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.” Jones characterizes the 1998 adopting release as “the most recent statement from the Commission on the ordinary business exception and the social policy exception, and as such, it continues to guide Division action.”
Since then, the staff, in applying the policy, has been required to use its judgment, which, Jones recognizes, has sometimes been controversial. (She cites as an example Trinity Wall Street v. Wal-Mart Stores, Inc. See this PubCo post and this PubCo post.) However, Jones said, explaining the reason for issuance of SLB 14L, in recent years, these controversies had increased
“as further staff guidance and no-action letters took the view that additional conditions and hurdles must be met for proponents to avoid exclusion under Rules 14a-8(i)(7) and under Rule 14a-8 (i)(5), which allows proposals to be excluded if they are not relevant to the company’s business. More specifically, under 14a-8(i)(5) a proposal may be excluded if it relates to operations that account for less than 5 percent of the company’s total assets, net earnings and gross sales, and is not otherwise significantly related to the company’s business. This latter part of the ‘(i)(5)’ test—whether a proposal is ‘otherwise significantly related to the company’s business’—involves considerations similar to those at play when addressing the social policy exception under (i)(7). Staff legal bulletins extended a trend of staff no-action positions that had arguably strayed from the guidance the Commission has provided. Feedback from market participants and staff experience indicated, among other things, that such guidance led to increasingly inconsistent decisions and unpredictable results. Our assessment of recent staff guidance and no-action letters suggested a need to reset and restate the staff’s approach to evaluating no-action requests under Rule 14a-8.”
In November 2021, after reviewing SLBs 14I (see this PubCo post), 14J (see this PubCo post) and 14K (see this PubCo post) and “assessing the staff’s experience in applying the guidance in them,” Corp Fin rescinded those SLBs and issued SLB 14L (see this PubCo post) to provide greater clarity and consistency in applying Rules 14a-8(i)(7) and Rule 14a-8(i)(5). In the rescinded SLBs, Jones explained, the staff said that it would take a company-specific approach when evaluating the significance of a policy issue, and, in that regard, would benefit from understanding the board’s analysis of the issue. But, she said, upon review, Corp Fin found that “focusing the staff’s analysis on the significance of a policy issue to a particular company drew the staff into factual considerations that did not advance the policy objectives behind the ordinary business exception, and we found that it failed to yield consistent, predictable results.” As a result, in SLB 14L, the staff realigned its approach with the SEC’s standards affirmed in 1998, that is, that the review would focus on the broader social policy significance of the issue in the proposal, not on its significance to a particular company and without the need for a board analysis.
With regard to micromanagement, Jones observed that the guidance in SLBs 14J and 14K could be interpreted “to mean that any limit on company or board discretion constitutes micromanagement, which seemed inconsistent with the Commission’s articulation of the rule.” In SLB 14L, the staff again returned to the staff’s position in 1998, which did not necessarily deem details or timeframes to be micromanagement. Instead, the staff’s “analysis will focus now on the level of granularity sought and whether the proposal inappropriately limits discretion of the board or management. Put differently, we expect the level of detail included in a proposal to accord with what investors need to assess an issuer’s impacts, progress towards goals, risks or other strategic matters that are appropriate for shareholder input.”
Finally, with regard to “economic relevance” under Rule 14a-8(i)(5), Jones observed, SLB 14L returned to the prior policy that precludes exclusion of proposals “that raise issues of broad social or ethical concern that are related to the company’s business…, even if the relevant business falls below the numeric thresholds in the rule.” Jones emphasized, however, that ‘there still must be a nexus between the policy issue and the company. In other words, the social policy issue must be “otherwise related” to the company’s business, even if it is below the 5% threshold.”
Current proxy season
Jones announced some data regarding the current proxy season to that point. The staff had so far received 231 no-action requests (compared to 253 last year), with the most common topics being corporate governance (64), environmental (31), discrimination (19), human rights (11), lobbying (9), executive comp (8) and political spending (5). In the addition, the most frequent bases for exclusion asserted “ordinary business” (100) under Rule 14a-8(i)(7), “ownership and other eligibility provisions” (88) under Rule 14a-8(b), “substantially implemented” (86) under Rule 14a-8(i)(10) and “contrary to the proxy rules” (42) under Rule 14a-8(i)(3). So far, about 20% of no-action requests have been withdrawn, the majority of which, the staff believes, reflect engagement and compromise between the company and the proponent. She advocates more cooperation and engagement regarding disputes over a proponent’s eligibility to submit a shareholder proposal.
Note that there may be additional proposals from the SEC on this issue. The topic of shareholder proposals appears on the Fall 2021 regulatory agenda with a target date for a proposal of April 2022 (see this PubCo post), and Jones reports that they are “considering ways to add clarity and reduce ambiguities and uncertainties surrounding the application of certain provisions in the rule.”