SEC Issues New Guidance on Shareholder Proposals

by Foley & Lardner LLP

On November 1, 2017, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14I (SLB 14I), which provides important guidance to public companies reviewing whether to include shareholder proposals in their proxy statements. Specifically, SLB 14I addresses the following topics:

  • The scope and application of the ordinary business exception
  • The scope and application of the economic relevance exception
  • Documentation that proposals submitted on behalf of shareholders need to include
  • The treatment of images with respect to the 500-word limit in shareholder proposals

Ordinary Business Exception

Rule 14a-8(i)(7) of the Securities Exchange Act of 1934, as amended (the Exchange Act), is a popular provision companies rely on to exclude a shareholder proposal and allows a company to exclude a shareholder proposal when it “deals with a matter relating to the company’s ordinary business operations.” In interpreting how to apply this exception, the SEC previously noted that shareholder proposals that deal with matters that are fundamental to management’s ability to run the company on a day-to-day basis may be excluded from the proxy statement unless such proposals focus on policy issues that are significantly sufficient to transcend ordinary business and therefore are appropriate for a shareholder vote. According to SLB 14I, the determination of whether a matter is sufficiently significant often raises judgment calls about which the board of directors, as opposed to the SEC, is best suited to make. SLB 14I went on to note that the division’s staff believes that the board’s knowledge of the company’s business and its fiduciary duties of loyalty and care in its oversight of management make it particularly well situated to analyze, determine and explain whether a matter is sufficiently significant and falls within the ordinary business exception.

Accordingly, if a company wants to rely on the ordinary business exception to exclude a shareholder proposal, it should include in its no-action request a thorough discussion of the board’s analysis of the significance of the policy issue and the company’s business operations. To assist the division’s staff in its review of a request to exclude a shareholder proposal, the no-action request letter should also explain how the board came to its conclusions and the processes employed to ensure the board’s decision was well-informed and well-reasoned.

Economic Relevance Exception

Rule 14a-8(i)(5) of the Exchange Act allows a company to exclude a shareholder proposal that relates to operations which account for less than five percent of a company’s assets, earnings and gross sales as long as it is not otherwise significantly related to the company’s business.

Historically, this was an infrequently used exception as the SEC would not agree with the exclusion of a proposal addressing broad social or ethical issues and the company conducted any business related to the issue in the proposal, regardless of the amount. SLB 14I acknowledges that this type of analysis did not always focus on the significance of the proposal to the company’s business and resulted in the limited availability of this exclusion. Like with the ordinary business exception, SLB 14I noted that the staff will give greater deference to the determinations of a board and, therefore, a company should include a thorough discussion of the board’s analysis in any no-action request relying on this exception.

Proposals Submitted on Behalf of Shareholders

SLB 14I provides guidance on what additional documentation is required if a shareholder submits a proposal through a representative (proposal by proxy). The newly required documentation is designed to aid companies in determining whether a proposal by proxy complies with the eligibility requirements of Rule 14a-8(b) of the Exchange Act and better ensure a shareholder is aware that such a proposal is being submitted on its behalf. Specifically, the new documentation should be dated and signed by the shareholder and identify the:

  • Shareholder-proponent and the person or entity selected as proxy
  • Company to which the proposal is directed
  • Annual or special meeting for which the proposal is submitted
  • Special proposal to be submitted

Graphs and Images

Rule 14a-8(d) of the Exchange Act permits the exclusion of shareholder proposals which exceed 500 words. Consistent with recent no-action letters, SLB 14I confirms that graphs or images in a shareholder proposal will not be prohibited by Rule 14a-8(d) of the Exchange Act; however, any words in graphs or images will count towards the 500-word limit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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