In June 2023, then-Commissioner Mark Uyeda (currently, Acting Chair) spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under Rule 14a-8. Alluding to the frequent reversals in interpretations of Rule 14a-8, he said that “[r]elying on the Commission’s rules, or its staff’s positions in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” No matter that Uyeda is now at the helm, that “next wave” tradition is continuing with the issuance by Corp Fin last week of new Staff Legal Bulletin 14M, which rescinds the prior Administration’s interpretation in SLB 14L and does an about-face on interpretations of two Rule 14a-8 shareholder proposal exclusions. Turnabout is fair play? (See this Pubco post.) The new SLB revises Corp Fin’s views on the scope and application of Rule 14a-8(i)(5), the economic relevance exception, and Rule 14a-8(i)(7), the ordinary business exception. The effect of new SLB 14M is to reverse some of the interpretations of “economic relevance,” “micromanagement” and “significant social policy” imposed under now rescinded SLB 14L, which had reversed interpretations of those same issues by rescinding Clayton-era SLBs 14I, 14J and 14K. Got it? Grounding its revised approach in the historical antecedents of 1998 and earlier SEC releases—as did now rescinded SLB 14L—Corp Fin takes the position that, under new SLB 14M, “where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7).” Moreover, the new approach will involve, as a “key factor in the analysis of shareholder proposals that raise significant policy issues,” a “‘case-by-case’ consideration of a particular company’s facts and circumstances.” Where SLB 14L made exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, new SLB 14M is expected to provide a framework for exclusion of proposals that will likely be more accommodating for companies. Companies will certainly welcome the revamp.
The new SLB also takes up several other issues related to shareholder proposals and includes some procedural FAQs at the end. Below is a summary.
Also, be sure to check out the new Cooley Alert on this topic: SEC Staff Adopts Significant New Guidance Affecting Shareholder Proposals and Engagement
Rule 14a-8(i)(5)
Rule 14a-8(i)(5), the “economic relevance” exclusion, 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.” SLB 14M addresses the second prong of the rule. Under now rescinded SLB 14L, based on prior judicial interpretations of this rule focused on the “ethical and social significance” of the proposal, the staff had taken the position that “proposals that raise[d] 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).” By contrast, under new SLB 14M, the staff’s analysis will “focus 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. Under this framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.”
To be excluded, the proposal may not be “otherwise significantly related to the company,” and so the determination of whether the matter is significant to a company depends on the particular circumstances of that company. However, the Corp Fin said that, in its view, substantive governance matters were “significantly related to almost all companies.” When a proposal’s significance to the company’s business is not apparent on its face, consistent with prior SEC statements, to avoid exclusion of the proposal, the proponent has the burden to demonstrate that the proposal is “otherwise significantly related to the company’s business,” such as by “providing information demonstrating that the proposal ‘may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.’” If the proponent were to raise social or ethical issues, the proponent would “need to tie those matters to a significant effect on the company’s business.” Nor will the “mere possibility of reputational or economic harm,” by itself, demonstrate that a proposal is “otherwise significantly related to the company’s business.” In its analysis, the “staff will consider the proposal in light of the ‘total mix’ of information.
The staff indicates that, for purposes of clarity, it will no longer take into consideration its analysis under the “ordinary business” exception, Rule 14a-8(i)(7), in evaluating the availability of the Rule 14a-8(i)(5) exclusion. In Corp Fin’s view, “applying separate analytical frameworks will ensure that each basis for exclusion serves its intended purpose.”
Rule 14a-8(i)(7)
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.’” Which category the proposal falls into, SLB 14M highlights, is “‘made on a case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed.” As a result, the new SLB concludes, “it is the staff’s view that a ‘case-by-case’ consideration of a particular company’s facts and circumstances is a key factor in the analysis of shareholder proposals that raise significant policy issues.”
Under rescinded SLB 14L, the staff focused “on the social policy significance of the issue that is the subject of the shareholder proposal,” considering “whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” By comparison, under new SLB 14M, Corp Fin will take a different approach—a “company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally ‘significant.’” Shades of old SLB 14K? Corp Fin’s “analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.”
Micromanagement and other considerations. In this context, the new SLB 14M simply reinstates designated sections of prior SLB 14J and SLB 14K, summarized below, which are reprinted in an Annex to the new SLB.
Micromanagement is the second consideration that forms the basis of the “ordinary business” exclusion. SLB 14M reinstates sections of SLBs 14J and 14K that related to micromanagement. As discussed in a now reinstated section of SLB 14J, consistent with the 1998 release, the analysis here looks at 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? Does it impose timeframes or methods or seek intricate detail? In applying that framework, 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.” Corp Fin emphasized, however, that “the staff’s concurrence with a company’s micromanagement argument does not necessarily mean that the subject matter raised by the proposal is improper for shareholder consideration. Rather, in that case, it is the manner in which a proposal seeks to address an issue that results in exclusion on micromanagement grounds.”
In a now-reinstated section of SLB 14K, Corp Fin took a deeper dive to further explain its views on micromanagement. According to the staff, excessive micromanagement could arise where the proposal
“seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. Thus, a proposal framed as a request that the company consider, discuss the feasibility of, or evaluate the potential for a particular issue generally would not be viewed as micromanaging matters of a complex nature. However, a proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement….Notwithstanding the precatory nature of a proposal, if the method or strategy for implementing the action requested by the proposal is overly prescriptive, thereby potentially limiting the judgment and discretion of the board and management, the proposal may be viewed as micromanaging the company.”
As examples, the SLB attempted to explain the staff’s approach to various climate change proposals submitted during the previous proxy season. The staff 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, 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.”
But a proposal “seeking a report ‘describing if, and how, [a company] plans to reduce its total contribution to climate change and align its operations and investments with the Paris [Climate] Agreement’s goal of maintaining global temperatures well below 2 degrees Celsius’” was not excludable. It both transcended ordinary business matters and did not seek to micromanage the company “because it deferred to management’s discretion to consider if and how the company plans to reduce its carbon footprint and asked the company to consider the relative benefits and drawbacks of several actions.” (For a discussion of these two proposals, see this PubCo post.)
By comparison, under now rescinded SLB 14L, the staff had taken an approach that they viewed at the time as more “measured,” “recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement.” Instead, under SLB 14L, the staff had focused “on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.” Under now rescinded SLB 14L, the staff had expected “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.” For example, the staff had not found micromanagement where the proposal requested that the company set targets for GHG emissions, but did not specify “specific method for doing so.”
Application of Rule 14a-8(i)(7) to proposals that address senior executive and/or director compensation. As noted above, SLB 14M reinstates a section of SLB 14J related to compensation. Consistent with prior SEC guidance, proposals that relate to general employee compensation and benefits are excludable under Rule 14a-8(i)(7), while proposals that focus on significant aspects of senior executive and/or director compensation generally are not excludable under that rule. In analyzing the availability of the exclusion in this context, a now-reinstated section of SLB 14J indicated that the staff takes into account both the actual resolution and the supporting statement.
Proposals that address senior executive and/or director compensation and ordinary business matters. In some cases, the availability of the exclusion depends on whether, at the end of the day, the focus of the proposal is executive comp or ordinary business. For example, the staff has agreed to exclusion of proposals that were styled as executive comp proposals but were considered by the staff to be primarily concerned with ordinary business, such as “a proposal requesting that the board prohibit payment of incentive compensation to executive officers unless the company first adopted a process to fund the retirement accounts of certain retired employees.” In that case, the staff viewed the proposal to be focused not on executive comp but rather on “the ordinary business matter of employee benefits.” By looking at the underlying focus of the proposals, the staff sought to avoid elevating form over substance: the staff confirmed that “including an aspect of senior executive or director compensation in a proposal that otherwise focuses on an ordinary business matter will not insulate a proposal from exclusion under Rule 14a-8(i)(7).”
Proposals that address aspects of senior executive and/or director compensation that are also available or applicable to the general workforce. Proposals related to executive comp are typically not excludable under Rule 14a-8(i)(7), but may be excludable “if a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce and the company demonstrates that the executives’ or directors’ eligibility to receive the compensation does not implicate significant compensation matters. For example, a proposal that seeks to limit when senior executive officers will receive golden parachutes may be excludable under Rule 14a-8(i)(7) if the company’s golden parachute provision broadly applies to a significant portion of its general workforce.” The rationale for this position is that, even where the proposal is framed in terms of executive comp, if the form of comp is broadly available or applicable to a company’s general workforce, the proposal would “not generally raise significant compensation issues that transcend ordinary business matters.” In the now-reinstated section of SLB 14J, the staff advised that it would take the following approach:
- Companies will generally not be permitted to rely on Rule 14a-8(i)(7) to exclude proposals that focus on aspects of compensation that are available or apply only to senior executive officers and/or directors.
- Companies will generally be permitted to rely on Rule 14a-8(i)(7) to exclude proposals that focus on aspects of compensation that are available or apply to senior executive officers, directors and the general workforce.
Proposals that micromanage senior executive and/or director compensation practices. Although, historically, the staff had not concurred in exclusion of proposals addressing executive comp on the basis of micromanagement, in SLB 14J, the staff changed its position and did “not believe there is a basis for treating executive compensation proposals differently than other types of proposals.” Accordingly, the staff may now agree to exclusion, on the basis of micromanagement, of executive comp proposals “that seek intricate detail, or seek to impose specific timeframes or methods for implementing complex policies.” As an example of a potentially excludable proposal, Corp Fin described a proposal “detailing the eligible expenses covered under a company’s relocation expense policy such as the type and duration of temporary living assistance, as well as the scope of eligible participants and amounts covered.”
Board analyses
In SLB 14I, SLB 14J and SLB 14K, Corp Fin introduced the idea of requiring a board analysis of the particular policy issue raised and its significance to the company. That turned out to be a bust: most of the time, “the information needed for the staff’s analysis was not included in the board analysis and board analyses did not generally have a dispositive effect.” So board analyses are now strictly optional.
Proposed amendments to Rule 14a-8(i)(10), Rule 14a-8(i)(11), and Rule 14a-8(i)(12)
In 2022, the SEC proposed amendments to the rules referenced above (see this PubCo post). They have not been adopted and are not operative, and SLB 14M makes the point that “the staff considers no-action requests and supplemental correspondence in accordance with operative Commission rules and applicable staff guidance.” [Emphasis added.]
Rule 14a-8(d)
Under Rule 14a-8(d), a shareholder “proposal, including any accompanying supporting statement, may not exceed 500 words.” While the staff believes that shareholders are not precluded from using graphics in their proposals, in recognition of the potential for abuse, SLB 14M outlines when graphics or images can be excluded, for example, when they make the proposal materially false or misleading, so inherently vague that it’s hard to determine what the proposal requires, impugns character without factual foundation or are so irrelevant they create uncertainty as to the matter up for a vote. In addition, the 500-word maximum would include any words appearing in the graphic. The SLB also advises that companies should not minimize or otherwise diminish the appearance of a shareholder proponent’s graphic.
Proof of Ownership Letters
Rule 14a-8(b) requires a proponent to prove eligibility to submit a proposal by offering proof that it “continuously held” the required amount of securities for the required amount of time. The staff has previously provided a suggested format for that proof of ownership. SLB 14M observes that companies sometimes seek to exclude proposals on the basis of “overly technical” readings of proof letters that deviate from the suggested format, but the staff does not usually go for it. Rather, the SLB advises that “companies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.”
The SLB also clarifies that the staff does “not interpret the 2020 amendments to Rule 14a-8(b) to contemplate a change in how brokers or banks fulfill their role,” but instead believes that brokers can “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 2020 Release.” In addition, the SLB confirms that “the staff does not view Rule 14a-8 as requiring a company to send a second deficiency notice to a proponent if the company previously sent an adequate deficiency notice prior to receiving the proponent’s proof of ownership and the company believes that the proponent’s proof of ownership letter contains a defect.”
Use of Email
The staff explains that email delivery confirmations, company server logs, screenshots and photos of emails on the sender’s device show only that emails were sent, not that they penetrated spam filters or were otherwise received. To prove delivery of an email, the staff advises, the sender “should seek a reply email from the recipient in which the recipient acknowledges receipt of the email. 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. Finally, we encourage companies and proponents to reach out using another method of communication or emailing another contact, if available, if the requested confirmation of receipt is not provided.”
Confirmation of delivery is important for establishing that a proposal has been timely delivered to meet the submission deadline; if the company has not disclosed an email address for submitting proposals in its proxy statement, the staff recommends that shareholder proponents contact the company to obtain the correct email address. Similarly, the company has the burden to prove timely delivery of a notice of defects in a proposal, and should seek a confirmation of receipt from the proponent or the representative. The same is true for proof of delivery of a proponent’s email response to a company’s deficiency notice. In that case, 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), and the staff encourages the shareholder or representative to seek confirmation of receipt.
FAQs
The SLB also includes a number of FAQs (summarized below) related to procedural aspects of the process in light of the new bulletin:
- If a company submitted a no-action request prior to the issuance of the guidance in the new SLB, the staff will “consider the guidance in place at the time it issues a response.” The staff emphasizes that the SLB “does not in and of itself provide a company with a basis to exclude a proposal. The burden is on the company to demonstrate that it is entitled to exclude the proposal under operative rules.” The company may make its argument explaining the basis for the exclusion in either the initial no-action request or in supplemental correspondence.
- Companies do not need to resubmit previously submitted requests, but if they want to raise new legal arguments in light of the new SLB, they should submit those new arguments as supplemental correspondence via the online portal, on as timely a basis as possible, copying the other side.
- In light of the new SLB, companies may be able to submit new no-action requests —even if the deadline prescribed in Rule 14a-8(j) has passed—under Rule 14a-8(j)(1), if the company demonstrates good cause for missing the deadline. Notably, the staff will consider publication of the new SLB to be “good cause” if, but only if, the new SLB relates to legal arguments made by the new request. New requests should be submitted as soon as possible, taking into account the proxy print deadline and an opportunity for proponents to respond to the new request.
- The staff will try to meet proxy print deadlines, but may not be able to make them. The staff encourages companies and proponents to try to resolve the proposal issues prior to print deadlines, allowing the company to withdraw its request.
- Questions (other than “legal arguments or strategy”) can be submitted to shareholderproposals@sec.gov.
