On November 1, 2017, the SEC’s Division of Corporation Finance issued Staff Legal Bulletin 14I reflecting guidance ostensibly easing its prior views on the availability of no-action relief for certain shareholder proposals submitted under Rule 14a-8. The guidance affects four topics under the rule:
- the ordinary business exclusion (Rule 14a-8(i)(7));
- the economic relevance exclusion (Rule 14a-8(i)(5));
- proposals by proxy; and
- the use of images and graphs in supporting statements.
The Staff has indicated that, when an issuer proposes to exclude a proposal under Rule 14a-8(i)(7) because it deals with a matter relating to the issuer’s ordinary business operations, the Staff will give weight to the analysis of the board of the issuer in the Staff’s consideration of “no-action” relief. Previously, the Staff had generally denied no-action relief if the proposal focused on “policy issues that are sufficiently significant” because “they transcend ordinary business and would be appropriate [in the view of the Staff] for a shareholder vote.” In the new guidance, the Staff recognizes that the board, with fiduciary duties of loyalty and due care, may be in a better position to judge the significance of a policy issue and indicates that the issuer should submit the board’s analysis of significance with its request for no-action relief.
Over the past 35 years, the Staff has conflated its analysis of the economic irrelevance exclusion of Rule 14a-8(i)(5), i.e., the proposal relates to operations accounting for less than 5% of total assets, net earnings and gross revenues in the last fiscal year and is “not otherwise significantly related to the company’s business,” with its analysis of whether no-action relief should be denied under Rule 14a-8(i)(7) because the proposal focuses on a policy issue that is “sufficiently significant.” This conflation has effectively nullified the exclusion for economic irrelevance. The Staff now advises that, in order to recognize the intended purpose and language of the economic irrelevance test under Rule 14a-8(i)(5), it will give weight to the board’s analysis of whether a proposal is “not otherwise significantly related to the company’s business.” The Staff indicates that the board’s analysis should be included in the no-action request.
Proposals by Proxy
The Staff reaffirmed its view that the submission of a proposal by a representative of a shareholder is proper (despite a pending bill in the House prohibiting the practice). However, to conclude that a valid agency has been established, the Staff will now require supporting documentation which:
- identifies the shareholder and the agent;
- identifies the issuer;
- identifies the meeting for which the proposal is submitted;
- identifies the specific proposal to be submitted; and
- is signed and dated by the stockholder.
Use of Graphs/Images
The Staff confirmed that the use of graphs and images is proper but noted that any words used on a graph or image will be included in the 500-word limit of any proposal and supporting statement. In addition, any graph or image may subject the proposal to exclusion under Rule 14a-8(i)(3) if the graph or image makes the proposal materially misleading, renders the proposal inherently vague or indefinite, impugns character, integrity or personal reputation, or is irrelevant to the proposal.