The SEC’s Division of Corporation Finance recently provided helpful clarity regarding the exclusion of certain shareholder proposals under Rule 14a-8. The guidance, Staff Legal Bulletin No. 14K, relates to the “ordinary business” exception and the proof of ownership requirement of the rule.
By way of background, Rule 14a-8 permits shareholders of a public company to submit proposals for a stockholder vote, and the company is generally required to include those proposals unless a specific exception applies.
Significance May Vary by Company. The new guidance clarifies the “ordinary business” exception under Rule 14a-8(i)(7). Under that exception, the company can exclude a proposal if it “deals with a matter relating to the company’s ordinary business operations.” The staff has advised, however, that proposals should not be excluded if they address a “significant policy issue” that transcends day-to-day business matters, such as greenhouse gas emissions. In the new guidance, the staff clarifies that “significance” is determined on a company-by-company basis, such that an issue that is significant to one company may not be significant to another. The staff noted, for example, that a climate change proposal that would be significant to an energy company might not be significant to a software development company. This position may enable companies to succeed in excluding proposals where other companies failed, based on their own circumstances.
Board Analyses Matter. The staff reiterated that a company can meaningfully improve its chances of excluding a proposal under the ordinary business exception by explaining in detail the “specific substantive factors” that its board of directors considered in concluding that a policy issue raised by a shareholder proposal is not significant. Reading between the lines, the staff legal bulletin seems to imply that, if a company chooses not to provide a robust board analysis, its chances of obtaining no-action relief for excluding the proposal will diminish considerably.
The staff guidance also expressed receptivity to an argument from a board that a policy issue is not significant on the basis of prior actions taken by the company. In that case, the company should provide a “delta analysis,” meaning a description of the specific differences between the shareholder’s policy proposal and the actions already taken. In the right circumstances, the company’s actions may be sufficient to render the policy issue insignificant.
On the other hand, the staff warned that certain arguments based on prior voting results are likely to be unsuccessful. The staff was not persuaded by arguments that a policy issue was not significant merely because (a) a majority of votes had been cast against a previous, similar proposal, (b) prior voting results had been impacted by proxy advisory firms’ recommendations or (c) votes in favor of the previous proposal, when measured against total shares outstanding (rather than against votes cast), had not been significant. Instead, a company should provide a robust discussion of the actions it took to address the issue after the prior vote, any relevant intervening events and other objective evidence of shareholder engagement that would diminish the significance of the issue.
Micromanagement. Under existing staff guidance, a company can exclude a shareholder proposal under the “ordinary business” exception if the proposal seeks to “micromanage” the company. On this topic, the staff clarified that micromanagement should be analyzed not on the basis of the complexity of the proposal’s subject matter but rather on whether the proposal is excessively prescriptive. The staff cautioned that shareholders are free to make proposals addressing complex topics like climate change, but that proposals seeking to dictate too precisely the manner in which a company should respond to a complex problem are likely to be excludable as micromanagement. By way of example, the staff contrasted an acceptable proposal asking for a report describing “if and how” the company plans to respond to climate change against an objectionable proposal requiring management to report annually on the company’s progress toward achieving short-, medium- and long-term greenhouse gas targets aligned with the Paris Climate Agreement. The staff regarded the latter proposal as micromanagement in part because it included time-bound targets and thereby impermissibly imposed a specific method for implementing a complex policy.
Proof of ownership letters. Lastly, the staff clarified that shareholders’ proof of ownership letters, which seek to demonstrate compliance with the minimum ownership requirements of Rule 14a-8(b), need not follow the staff’s recommended form. Instead of requiring any special language, the staff said it would follow a “plain meaning” approach and will not permit companies to reject proof of ownership letters merely on the basis of non-substantive variations from the recommended form. Any letter satisfactorily demonstrating compliance with the minimum ownership requirements should suffice.
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Overall, the staff legal bulletin adds welcome clarity that should help companies more easily determine whether or not some of the shareholder proposals they may receive can be excluded from their proxy statements.