SEC Provides Greater Deference to Public Company Boards

by Manatt, Phelps & Phillips, LLP
Contact

Manatt, Phelps & Phillips, LLP

On Nov. 1, 2017, the Securities and Exchange Commission (SEC) issued Staff Legal Bulletin No. 14I(CF), which articulates important interpretive guidance relating to shareholder proposals submitted to public companies for inclusion in proxy statements. The bulletin, which addresses exclusions of shareholder proposals under the “economic relevance exception” and the “ordinary business exception,” appears to provide public companies and their boards with additional deference when attempting to exclude shareholder proposals from their proxy statements for this upcoming 2018 proxy season.

“Economic Relevance Exception”

Rule 14a-8(i)(5) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) allows a company to exclude a shareholder proposal if “the proposal 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.”

Historically, the SEC has rarely allowed companies to exclude shareholder proposals under the “economic relevance exception.” Under their prior rationale, as long as a company conducted any amount of business related to the issue and the issue was of broad ethical or social concern, the SEC would require a company to present the proposal in its proxy statement and deny requests for no-action relief to exclude such a proposal. Acknowledging that this manner of interpretation has been too limiting, the SEC has agreed, going forward, to more closely analyze whether or not a proposal is significant to a company’s business. In that regard, although a proposal may raise an issue of ethical or social significance in the abstract, the release indicates that a company could exclude that proposal if it is not actually significantly related to a company’s business.1

Further to the release, a shareholder proponent now bears the burden of clearly demonstrating that a shareholder proposal is significant as relates to a company’s business. According to the SEC, the “mere possibility of reputational or economic harm will not preclude no-action relief.” Instead, the staff will focus on such a proposal in light of the “total mix” of information that is available about an issuer.

In evaluating whether or not to exclude a proposal, the SEC acknowledged that making this decision is a judgment call, and that the board of directors of a subject company is in a better position to analyze whether or not a proposal is significantly related to its business. Accordingly, a company’s board of directors will now be charged with analyzing a proposal’s significance and detailing the specific processes which the board employed to demonstrate that its conclusions are well-reasoned and well-informed. The release implies that the SEC may be willing to provide substantial deference to boards of directors that clearly articulate why a proposal should be excluded under the “economic relevance exception.”

“Ordinary Business Exception”

The SEC also addressed the application of Rule 14a-8(i)(7) under the Exchange Act which allows a company to exclude a shareholder proposal under the “ordinary business exception.” Under Rule 14a-8(i)(7), a shareholder proposal may be excluded if the proposal deals with a matter relating to a company’s ordinary business operations. Historically, the SEC has focused its analysis in part on whether a proposal raises an issue that is significant enough that it would be appropriate for a stockholder vote—in such a case, the proposal would be one that “transcends ordinary business.” Similar to the analysis applied for the “economic relevance exception,” the SEC acknowledges in the release that it must apply a significant amount of judgment in acting on no-action requests to exclude such proposals. Again, the staff implies that a company’s board of directors is in a better position to make a determination about the significance of such a proposal and, therefore, is well-situated to explain and analyze whether the matter raised in the proposal is significant and therefore appropriate to put in front of shareholders. We believe that such thoughtful analysis should assist the SEC staff in its review of no-action requests.

As with Rule 14a-8(i)(5), the SEC appears to be setting a framework for providing greater deference to public companies in excluding shareholder proposals so long as a company’s rationale for exclusion is well-reasoned and thoughtful. The SEC also confirmed in SLB 14I that it will separately analyze whether or not a proposal should be excluded under the “economic relevance exception” or the “ordinary business exception” rather than allowing its determination under the “ordinary business exception” to inform its determination under the “economic relevance exception.”

Conclusion

In preparation for this upcoming proxy season, public companies and their boards of directors should assess the likelihood of being presented with a shareholder proposal and, to the extent they have any advance insight into what the substance of a proposal may be, should discuss in advance their approach to preparing a no-action letter. This advance preparation will assist the company with being able to rapidly respond to a shareholder proposal within the short time frames allotted by the SEC and may increase the likelihood of successfully excluding such a proposal under either the “economic relevance exception” or the “ordinary business exception.”

1. The SEC notes that substantive corporate governance matters will generally be viewed as significant to almost all companies.

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.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.