On Wednesday, SEC Commissioner Mark Uyeda spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under rule 14a-8, a topic on which, historically, the commissioners’ energetic back-and-forth has been reflected in Corp Fin interpretations that have literally shifted back and forth. You might think these reversals are a new thing, but Uyeda reminds us about the goings-on in 2015, when Whole Foods was first permitted to exclude, as a conflicting proposal under Rule 14a-8(i)(9), a proxy access proposal, only to have the staff reverse course shortly thereafter. (See this PubCo post, this PubCo post and this PubCo post.) “Relying on the Commission’s rules, or its staff’s positions,” he later observes, “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.” However, Uyeda finds the reversals over the course of the last few years particularly problematic. In his view, the recent interpretative changes in SLB 14L have led to a surfeit of proposals the aggregate effect of which he finds to be “value-eroding.” He suggests some approaches to address the problem. Are we looking at a fundamental—some might say radical— reimagining of the shareholder proposal process?
This proxy season, companies saw more shareholder proposals than in the past, a change that has been widely attributed to actions by the SEC and its Division of Corporation Finance that had the effect of making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. As discussed in this article in the WSJ, investors are taking the opportunity to press for more changes at companies. Nevertheless, the prescriptive nature of many of the proposals, especially climate-related proposals, has prompted many shareholders, including major asset managers, to vote against these proposals. Will next season reflect lessons learned by shareholder proponents from this proxy season?
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.
In new SLB 14L, Corp Fin takes new (old) approach to “ordinary business” and “economic relevance” exceptions
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 relax 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.