Key Takeaways

• The Division of Corporation Finance (the Staff) of the Securities and Exchange Commission has issued Staff Legal Bulletin No. 14L, which provides new guidance on permissible bases for excluding shareholder proposals from a public company’s proxy statement under the Rule 14a-8(i)(7) ordinary business exclusion and the Rule 14a-8(i)(5) relevance exclusion and rescinds Staff Legal Bulletin Nos. 14I, 14J and 14K.
• Proposals that previously would have been excludable from a company’s proxy statement under these rules may now need to be included if they touch on issues of broad social or ethical impact.
• Though staff legal bulletins do not carry the weight of law, this new guidance will make obtaining no-action relief more difficult in the face of issues that the Division of Corporation Finance deems to be of importance to society at large, even when the issue’s nexus with the company’s business is tenuous.

Overview

On Nov. 3, 2021, the Division of Corporation Finance (the Staff) of the Securities and Exchange Commission (the Commission) released its Staff Legal Bulletin (SLB) No. 14L. This release contains new guidance regarding shareholder proposals submitted for inclusion in public companies’ proxy statements under Rule 14a-8 of the Securities Exchange Act of 1934. More specifically, the bulletin sets forth the Staff’s latest views on the permissible bases for the exclusion of proposals under the ordinary business exclusion of Rule 14a-8(i)(7) and the relevance exclusion of Rule 14a-8(i)(5). The bulletin also rescinds Staff guidance dating back to 2017 (SLB Nos. 14I, 14J and 14K), purporting to be a return to the standards set forth by the Commission in 1998 when it amended Rule 14a-8 to its current form.

Ordinary Business Exclusion

Under the rescinded SLBs, issuers’ no-action requests for excluding proposals that rely on the “transcending policy” exception to the ordinary business exclusion were evaluated based on the significance to the company itself of the policy issue, beyond day-to-day operations, addressed by the proposal. To facilitate the Staff’s inquiry, the board of the company was required to provide an analysis that demonstrated the excludability of the proposal. Under SLB No. 14L, however, the Staff will no longer focus on any nexus between the policy issue and the company’s business. Instead, the focus of the evaluation will simply be on whether the shareholder’s proposal touches on issues with “broad societal impact.”

Also in SLB No. 14L, the Staff adjusted its guidance on the concept of “micromanagement,” which arises when a proposal “prob[es] 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.” The Staff indicated that the rescinded SLBs may have allowed for an overly broad reading of this concept, in which any limit on company or board discretion could be interpreted as micromanagement. The Staff further explained that going forward, proposals that request reasonable detail and promote time frames and procedures will not automatically be considered micromanagement. Instead, in applying this concept, the Staff will seek to determine whether the proposal intrudes inappropriately on the discretion of the company’s board of directors or management.

The Staff explained that in determining whether the issues raised by a proposal are “too complex,” the sophistication of investors on the matter in general, the availability of data and the robustness of public discussion on the topic all will be factors that the Staff will consider and that references to “national or international frameworks” contained in proposals related to disclosure, target setting and time frames will be “indicative of topics that shareholders are well-equipped to evaluate.” The Staff did not indicate how it will assess or apply the enumerated factors.

The Staff asserted explicitly that proposals concerning setting time frames and targets related to climate change – which, under the rescinded SLBs, had been adjudged readily excludable on micromanagement grounds – will now be subject to a more measured approach. As an example, the Staff referred to its recent letter to ConocoPhillips Company, in which it declined to give no-action relief for excluding a proposal that the company set targets for greenhouse gas emissions of its operations and products.

Relevance Exclusion

In addition to updating its guidance on the ordinary business exception, the Staff added to its interpretation of the Rule 14a-8(i)(5) relevance exception. This rule states that companies may exclude proposals that relate “to operations which account for less than 5 percent of the company’s total assets . . . and for less than 5 percent of its net earnings and gross sales . . . and is [sic] not otherwise significantly related to the company’s business.” The Staff indicated that even proposals that otherwise may be excluded under this rule for failure to meet the economic thresholds may not be excluded if they raise issues of “broad social or ethical concern related to the company’s business” and that the Staff would no longer “expect a board analysis for its consideration” in making its no-action determination.

Other Clarifications

The Staff made several other clarifications and republished certain points that were contained in the rescinded SLBs. For one, the Staff advised that the use of graphics in proposals is permitted so long as the proposal stays within the 500-word limit contained in Rule 14a-8(d) (including words contained in the graphics) and the graphic does not run afoul of any other provision of Rule 14a-8. The bulletin also encourages companies to allow for more flexibility in the wording of proof-of-ownership letters. Finally, the Staff encouraged both issuers and shareholders to request (and send when requested) acknowledgments of receipt when using emails to send proposals, notices of defects and responses to notices of defects, and instructed that the onus will be on the sending party to prove receipt if an issue arises.

Our Observations

In SLB No. 14L, the Staff has openly severed the link between a shareholder proposal and the business to which the proposal purportedly is important when the Staff deems the issue important in a general “societal” way, for purposes of applying the transcending policy exception to the Rule 14a-8(i)(7) exclusion for ordinary business proposals. Interestingly, for purposes of the Rule 14a-8(i)(5) relevance exclusion, the Staff’s reference to economically immaterial “issues of broad social or ethical concern” retains the notion that they must be “related to the company’s business” to avoid exclusion, perhaps because the rule itself refers to issues “significantly related” to the business. But the Staff’s statement that it “will no longer expect a board analysis for its consideration of a no-action request” signals the diminished importance of a company’s perspective.

While the bulletin contains the obligatory introductory recitation that the SLB “has no legal force or effect . . . and . . . creates no new or additional obligations for any person,” it visibly narrows and darkens the path to no-action relief for a company that believes a proposal lacks an adequate nexus to its investment thesis for its investors. While litigation, or living under the threat of it, carries costs and raises substantial investor relations and other risks, seeking declaratory relief or risking a shareholder’s action may be the only viable remaining recourse for a company aggrieved by a proposal that highlights the tenuousness of that nexus.

Authorship credit: Connor A. Gibbons and Robert A. Weible