On November 3, 2021, the staff of the Division of Corporation Finance (the Staff) of the US Securities and Exchange Commission (the SEC) issued Staff Legal Bulletin No. 14L (CF) (SLB 14L) relating to shareholder proposals submitted under Rule 14a-8 of the Securities Exchange Act of 1934 (Rule 14a-8). Rescinding three prior Staff Legal Bulletins (the Rescinded SLBs),1 SLB 14L heightens the standards that the Staff will employ when assessing companies’ requests to exclude shareholder proposals under Rule 14a-8 from their proxy statements. In particular, the Staff notes that companies will not be allowed to exclude certain shareholder proposals that have broad societal impact, which would have been excludable under the Rescinded SLBs. As a result, SLB 14L is expected to increase the number of Environmental, Social, and Governance (ESG) shareholder proposals included in 2022 proxy statements.
Rule 14a-8 provides a process through which, in accordance with the Rule’s requirements, shareholders may submit a proposal for inclusion in a company’s proxy statement. Rule 14-8(i) provides thirteen substantive bases for a company to exclude a shareholder’s proposal. Companies aiming to exclude a proposal under Rule 14a-8 typically request a “no-action letter” from the Staff requesting the Staff’s agreement with the company’s conclusion that it may exclude the shareholder proposal under Rule 14a-8.
The “ordinary business” exception
Rule 14a-8(i)(7), the “ordinary business” exception, allows a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The exception is designed to keep ordinary business decision-making in the hands of management and the board of directors because it would be “impracticable” for shareholders to opine on such decisions at an annual shareholder meeting, but it does not prevent shareholders from “providing high-level direction on large strategic corporate matters.”
Based on the new guidance in SLB 14L, in assessing no-action requests for exclusion under the “ordinary business” exception, the Staff will no longer focus on determining the link between a policy issue and the company. Instead, the Staff will focus on the social policy significance of the issue presented by the shareholder proposal. The Staff explained that in making this assessment it will consider whether the proposal “raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”
Notably, the Staff acknowledged that certain proposals previously viewed as excludable under the Rescinded SLBs because they did not raise a policy issue of significant to the company may no longer be excludable under the “ordinary business exception.” To illustrate this point, the Staff explained that proposals directly raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not establish that the human capital management issue was significant to the company.
The Staff will also employ a measured approach to assessing companies’ arguments that a proposal involves an inappropriate level of micromanaging. Proposals that seek detail or promote timeframes or methods do not per se demonstrate micromanagement. The Staff explained that its consideration of micromanagement arguments will focus on “the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.”
The “economic relevance” exception
Rule 14a-8(i)(5), the “economic relevance” exception, 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.”
The Staff states in SLB 14L that proposals raising “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 5 percent economic and relevance thresholds outlined in the exception. This approach reverses Staff guidance provided in 2017.2
Procedural requirements: Graphics, technical defects and use of email
In addition to outlining the changes in the Staff’s approach to considering requests for exclusion of shareholder proposals, SLB 14L also clarifies certain technical issues under Rule 14a-8, including the following:
- Use of graphics – Graphics may be used in shareholder proposals, although the words included in such graphics count towards the 500-word limit under Rule 14a-8(d). The Staff reiterates that any graphics used must comply with the SEC’s proxy rules. For example, a graphic that makes a shareholder proposal materially false or misleading could be excluded under Rule 14a-8(i)(3).
- Proof of ownership letters – Companies should not apply an overly technical reading of proof of ownership letters in order to attempt to exclude a shareholder proposal based on Rule 14a-8(b). The Staff has provided sample language to aid shareholders in submitting proof of ownership, but that exact language is not required.
- Use of email – Citing the increased use of email for shareholder proposal communications in recent years, the Staff recommends that to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply email from the recipient in which the reception provides confirmation receipt. The Staff further encourages companies and shareholder proponents to confirm receipt of emails when requested.
SEC Commissioners’ commentary
SLB 14L marks a significant reversal in Staff policy and is consistent with Chairman Gensler’s published regulatory agenda and recent public statements.3 Commenting on SLB 14L, Chairman Gensler said, “The right to put proposals in front of other shareholders for a vote is an important part of the securities laws.”4 In contrast, the SEC’s two Republican commissioners, Hester Peirce and Elad Roisman, issued a statement challenging SLB 14L, arguing that it erases previous work by the SEC, replacing it with the current administration’s “flavor-of-the day regulatory approach” and does not provide criteria to support a finding that a topic is socially significant.5
In advance of the 2022 proxy season, companies should review their corporate governance policies and procedures to consider any actions that may be taken to address expected shareholder concerns. Although it will be more difficult to exclude shareholder proposals under the “ordinary business” and “economic relevance” exceptions, companies should continue to assess whether shareholder proposals, even those raising a significant social policy issue, may be excluded on other substantive or procedural grounds under Rule 14a-8.
1 The Staff rescinded the following: Staff Legal Bulletin No. 14I (“Rescinded SLB 14I”); Staff Legal Bulletin No. 14J; and Staff Legal Bulletin No. 14K.
2 See Rescinded SLB 14I.
3 See SEC Announces Annual Regulatory Agenda, June 22, 2021.
4 SEC Chair Gary Gensler, Statement Regarding Shareholder Proposals: Staff Legal Bulletin No. 14L.
5 SEC Commissioner Hester Peirce and SEC Commissioner Elad L. Roisman, Statement Regarding Shareholder Proposals: Staff Legal Bulletin No. 14L.