McDermott Will & Emery

In Depth

On October 23, 2018, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued interpretive guidance, in the form of Staff Legal Bulletin No. 14J (SLB 14J), addressing the staff’s review of no-action requests from public companies that seek to exclude shareholder proposals from their proxy materials pursuant to Exchange Act Rule 14a-8.

The most noteworthy guidance conducted by SLB 14J is its commentary on the scope and substance of analysis provided by a company’s board of directors where the company seeks to exclude the proposal under either the “ordinary business” (Rule 14a-8(i)(7)) or “economic relevance” (Rule 14a-8(i)(5)) exclusion principles. SLB 14J also clarifies the scope of what is considered to be “micromanagement” under the “ordinary business” exclusion principle and addresses the circumstances under which proposals touching upon executive compensation may be excluded.


The “ordinary business” and “economic relevance” exclusion principles are two of the thirteen substantive bases for exclusion of a shareholder proposal provided in Rule 14a-8. When determining whether to permit the exclusion of a shareholder proposal under either of these principles, the SEC staff will determine whether the proposal is (or is not) significantly related to the company’s business or if it raises a significant policy issue that transcends the company’s ordinary business matters.

Last year, the SEC staff issued Staff Legal Bulletin No. 14I (SLB 14I), which first suggested that a company may include a summary of the discussions and analysis of its board of directors regarding the significance of a shareholder proposal. Through SLB 14I, the SEC staff acknowledged that a determination of whether a proposal is sufficiently significant to a company’s business such that it may not be excluded under these two exclusion principles often raises difficult judgment calls. In SLB 14I, the SEC staff signaled that, although not required and not dispositive of the issue, the staff’s review of a request could benefit from the analysis and findings of a board of directors in this regard.

Best Practices for Board Analysis

SLB 14J expands upon Staff Legal Bulletin No. 14I (SLB 14I) by reflecting on best practices from no-action letters submitted since the release of SLB 14I. The SEC staff stated that no-action requests benefit from the inclusion of board analysis when the request includes specific substantive factors the board considered in arriving at its conclusion.

The SEC staff also provided the following non-exclusive and non-exhaustive list of factors that have been helpful in their determination of whether a shareholder proposal should be excluded:

  • The extent to which the proposal relates to the company’s core business activities;
  • Quantitative data, including financial statement impact, related to the matter that illustrates whether or not a matter is significant to the company;
  • Whether the company has already addressed the issue in some manner, including the differences—or the delta—between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company;
  • The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement;
  • Whether anyone other than the proponent has requested the type of action or information sought by the proposal; and
  • Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.

In addition, although SLB 14I noted that a no-action request may include a detailed discussion of the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned, SLB 14J clarifies that it would be less helpful if a request detailing the board’s process does not also include a discussion of the specific factors considered.

SLB 14J confirms that companies may still receive no-action relief under these exclusion principles without including in their request a determination of their board of directors. In public statements made after the release of SLB 14I, SEC staff indicated that companies may still look to precedent for examples of proposals and policy issues that clearly are excludable under the “ordinary business” and “economic relevance” standards.

SLB 14J reiterates these points, stating that the inclusion of board analysis is most useful in cases in which, depending on the facts of the company, a proposal may be excludable for one company but not excludable for another, or “where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident.” The SEC staff signaled that, in these instances, it may be difficult for the staff to concur that a proposal may be properly excluded without having the benefit of the board’s perspective on the matter.

What is “Micromangement”?

Through SLB 14J, the SEC staff also provided guidance regarding a second prong of the “ordinary business” exclusion principle. In addition to considering the significance of a proposal’s subject matter, the “ordinary business” exclusion principle looks at the degree to which a proposal seeks to transgress the limitations of shareholder judgment by probing into detailed business matters that are generally implemented and supervised by management. Thus, shareholder proposals may be successfully challenged for their attempt to “micromanage” company affairs.

SLB 14J cites to instances where the SEC staff has permitted the exclusion of shareholder proposals on this basis. Specifically, such proposals may be excluded where they include intricate detail, or seek to impose specific time frames or methods for implementing complex policies.

In recent proxy seasons, the SEC staff has found that a number of shareholder proposals do not constitute micromanagement where the proposal is phrased as a request to the company board to conduct a study or publish a report analyzing the company’s role in a larger social or environmental issue. SLB 14J clarifies that such proposals may be excludable where they require that the board include certain details or if the substance of the report imposes specific timeframes or methods for implementing complex policies.

Proposals Regarding Compensation of Senior Executives and/or Directors

SLB 14J also provides guidance regarding the application of the “ordinary business” exclusion principle to proposals that relate to the compensation of a company’s senior executives and/or directors. As a general matter, the SEC has held that proposals involving “the management of the workforce, such as the hiring, promotion, and termination of employees,” generally relate to ordinary business matters and thus they are excludable. In contrast, a proposal that is limited in scope and tailored a company’s compensation practices for senior executives and/or directors is generally not excludable.

SLB 14J clarifies that a proposal may be excluded, even if it touches upon senior executive and/or director compensation, if the underlying concern of the proposal relates to ordinary business matters. SLB 14J further clarifies that a proposal may be excluded if a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce and is not sufficiently related to senior executive and/or director compensation. If such form of compensation is broadly available to the workforce, the eligibility of senior management to receive the compensation does not implicate a significant compensation matter. Finally, SLB 14J confirms that, consistent with the SEC staff’s treatment of shareholder proposals on other topics, executive compensation proposals may be excluded based on the micromanagement prong of the “ordinary business” exclusion principle, in particular where the proposal calls for intricate details, or seeks to impose specific time frames or methods for implementing complex policies.