On November 1, 2017, the staff of the SEC’s division of corporation finance issued Staff Legal Bulletin No. 14I (CF), which provides new guidance on the excludability of shareholder proposals under Securities Exchange Act Rule 14a-8. The bulletin and its interpretation will have practical implications for corporate secretaries and general counsel during the 2018 proxy season and beyond.
‘Ordinary business’ exception (Rule 14a-8(i)(7))
A company may exclude a proposal under Rule 14a-8(i)(7) if it ‘deals with a matter relating to the company’s ordinary business operations.’ However, the division staff will not permit a company to exclude a proposal if it transcends the company’s day-to-day business matters by raising a policy issue so significant that it would be appropriate for a shareholder vote. The division staff is of the view that the company’s board is generally in a better position than the staff to make this determination given the board’s fiduciary duties and knowledge of the company’s business.
The division staff now expects a no-action request under Rule 14a-8(i)(7) making the argument that the proposal does not raise a significant policy issue for the company to include a discussion: (i) reflecting the board’s analysis of the particular policy issue raised and its significance; and (ii) explaining the specific processes the board employed to ensure that its conclusions are well-informed and well-reasoned. The new guidance does not provide examples or otherwise elaborate on what these ‘specific processes’ may be.
‘Economic relevance’ exception (Rule 14a-8(i)(5))
Going forward, the division staff will focus on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than 5 percent of total assets, net earnings and gross sales (regardless of whether the proposal raises issues of social or ethical importance in the abstract).
In evaluating a proposal’s significance, the division staff will consider it in light of the ‘total mix’ of information about the company. The determination will depend on a company’s particular circumstances, but the division staff would generally view substantive governance matters to be significantly related to almost all companies. The staff now expects no-action requests on the basis of economic relevance to include a discussion that reflects the board’s analysis of the proposal’s significance to the company.
‘Proposals by proxy’
The new bulletin describes the information the division staff expects to see in documentation describing a shareholder’s delegation of authority to the proxy. Such documentation should be signed and dated by the shareholder and identify the proponent, the proxy, the company to which the proposal is directed, the meeting for which the proposal is submitted and the specific proposal to be submitted.
Graphs and images
The bulletin states that Rule 14a-8(d) does not preclude proponents from using graphics to convey information about proposals and provides examples of when graphs or images may render a proposal excludable.
The division staff’s new approach to applying the ordinary business and economic relevance exclusions as described in the bulletin, as well as its guidance relating to proposals by proxy, may result in the exclusion of more proposals this proxy season – particularly as many companies received shareholder proposals before the guidance was issued. Practical steps for the corporate secretary and general counsel to consider in light of the bulletin include:
- Giving the board and governance committee an early warning that in future the board will be expected to weigh in on certain kinds of shareholder proposals, and that no-action requests may need to describe the board’s analysis and processes followed in determining a proposal’s significance to the company
- Reviewing the company’s procedure that applies when the company receives a shareholder proposal to ensure that the right people are informed on a timely basis
- After receiving a shareholder proposal that could potentially be excludable on the basis of the ordinary business and/or economic relevance exclusions:
- Reviewing whether the board has previously considered, or engaged with shareholders regarding, the subject matter of the proposal and its significance to the company’s business
- Ensuring that the board’s agenda includes time for discussion of the proposal and its relevance to the business
- Scheduling the board’s discussion while taking into account the deadline for seeking no-action relief on substantive grounds under Rule 14a-8 – which is 80 days before the proxy statement is filed with the SEC - and the time required to gather the necessary information to inform the board’s discussion and decision making
- Considering whether and to what extent to delegate certain actions related to the board’s analysis to the governance committee rather than the full board
- Engaging constructively with proponents about what they are looking to achieve by bringing a proposal - such as particular disclosure or a new or revised policy - bearing in mind that proponents may be more inclined to negotiate a withdrawal of a proposal that may potentially be excludable as ordinary business and/or on economic relevance grounds in light of the new bulletin
- Keeping apprised of the shareholder proposal landscape generally, including new proposal topics, proposals received at peer companies, shareholder support for proposals that go to a vote, arguments for exclusion in incoming letters (including the ‘specific processes’ that other boards have employed in analyzing a proposal) and division staff decisions in no-action letters.
Holly Gregory is a partner and the co-chair of the global corporate governance and executive compensation practice with Sidley Austin. Rebecca Grapsas is counsel and Claire Holland is special counsel, both practicing in the firm’s corporate governance and executive compensation practice.