New SEC Staff Guidance Will Make It More Difficult for Companies to Exclude Certain Shareholder Proposals Under Exchange Act Rule 14a-8

“Ordinary Business” Exception Unavailable if Proposal Raises an Issue With a Broad Societal Impact

Background 

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. 

Since SLB No. 14K was issued in 2019, when evaluating whether a policy issue raised by a proposal is significant, the Division Staff has taken a “company-specific approach” rather than characterizing certain issues as universally significant. Therefore, a company’s no-action request seeking to exclude a proposal that potentially raises a significant policy issue was expected to discuss the significance of the issue to that particular company’s business.   

Believing that the company’s board is generally in a better position than the Division Staff to make determinations about the significance of a policy issue to the company given the board’s fiduciary duties and knowledge of the company’s business, the Division Staff previously encouraged companies to include in no-action requests where significance is at issue a robust analysis supporting the board’s conclusion that the policy issue raised by the proposal is not significant to the company.

Rejection of Company-Specific Approach; Future Proposals Generally Not Excludable if Focused on Sufficiently Significant Social Policy Issues 

In SLB No. 14L, the Division Staff rejects the company-specific approach outlined in the prior guidance, which it observed has not yielded “consistent, predictable” no-action determinations in recent years. Instead, the Division Staff revived a standard first articulated in 1976 and reaffirmed in a 1998 rulemaking that makes an exception for certain proposals that raise significant social policy issues. In analyzing future no-action requests, the Division Staff will consider whether the shareholder proposal raises issues with a broad societal impact, such that they transcend the company’s ordinary business, even if the shareholder proponent has not established that the issue is significant to the company. Because it will no longer take a company-specific approach, the Division Staff will not expect companies to provide a board analysis in no-action requests seeking exclusion on the basis of Rule 14a-8(i)(7).
Sidley 

Excludability Based on Micromanagement Will Be Unavailable if Management Retains Discretion

Background

A shareholder proposal may be excludable under Rule 14a-8(i)(7) if it “micromanages” the company. Since SLB No. 14K was issued in 2019, the Division Staff has viewed a proposal as micromanaging the company if the plan for implementing the action requested by the proposal is overly prescriptive (e.g., it imposes a specific strategy, method, action, outcome or timeline for addressing an issue), thereby potentially limiting the judgment and discretion of the board and management. The Division Staff believes that its application of the guidance in SLB No. 14K and SLB No. 14J with respect to micromanagement has been overbroad in recent years. As applied, any limit on board or management discretion could be construed as micromanagement, rendering a proposal excludable.

New Approach Will Focus on the Prescriptiveness of the Proposal

Going forward, the Division Staff will assess whether, and to what extent, the level of detail sought in the shareholder proposal inappropriately limits board or management discretion. Under SLB No. 14L, the prescriptiveness of the proposal should align with what shareholders need to evaluate a company’s “impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.”  

When evaluating whether a proposal raises matters too complex for shareholders to make an informed judgment on as a group, the Division may consider “the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic” as well as well-established national or international frameworks that could serve as a resource to shareholders when evaluating the topic at issue.

The Division Staff acknowledged in SLB No. 14L that its new approach represents a shift from recent years, when it concurred that proposals asking companies to adopt climate change-related timeframes or targets were excludable on the basis of micromanagement. In the future, the Division Staff will not concur that a proposal seeking targets or timelines is excludable on micromanagement grounds if the proposal gives management flexibility to decide how to achieve the goals sought in the proposal.
Sidley

One goal of the new guidance is to assist shareholder proponents who have found it challenging to draft shareholder proposals when language that is too granular may put the proposal at risk of exclusion on the basis of micromanagement and language that is too generic may put it at risk of exclusion on the basis of substantial implementation under Rule 14a-8(i)(10). 

“Economic Relevance” Exception Unavailable if Proposal Raises Issues of Broad Social or Ethical Concern

Since SLB No. 14I was issued in 2017, the Division Staff has agreed with exclusion of a shareholder proposal under Rule 14a-8(i)(5) (the “economic relevance” exception) that relates to operations that accounted for less than 5% of the company’s total assets, net earnings and gross sales and “is not otherwise significantly related to the company’s business.” The Division Staff has since that time expected companies to discuss in Rule 14a-8(i)(5) no-action requests the board’s analysis of the proposal’s significance to the company.

The Division Staff declared in SLB No. 14L that it will revert to its pre-SLB No. 14I position when analyzing Rule 14a-8(i)(5) no-action requests. Specifically, even if the economic thresholds are not exceeded, the Division Staff will not allow companies to exclude proposals that raise “issues of broad social or ethical concern related to the company’s business.” Under this approach, companies will no longer be expected to provide a board analysis in no-action requests seeking exclusion on the basis of Rule 14a-8(i)(5).

Email Communications Between Companies and Shareholder Proponents

As email has become a prevalent way for companies and shareholder proponents to communicate, the Division Staff provided guidance on how to prove timely delivery for purposes of Rule 14a-8 when using email. In SLB No. 14L, the Division Staff:

• advises that the sender should seek a reply email from the recipient acknowledging receipt of the email (which could apply to a shareholder proponent submitting a proposal to a company, a company sending a deficiency notice to the proponent, or a proponent responding to a company’s deficiency notice);
• encourages companies and shareholder proponents to acknowledge receipt of emails upon request; and
• notes that email read receipts received by the sender may help establish timely delivery.

If a company does not disclose in its proxy statement the email address for submitting shareholder proposals, the Division Staff encourages a shareholder proponent to contact the company to request the correct email address in advance of submitting a proposal and urges companies to provide the address upon request.

Supplemental Guidance on Proof of Ownership

In SLB No. 14L, the Division Staff republished language from the rescinded staff legal bulletins relating to the use of images in shareholder proposals (from SLB No. 14I) and proof of ownership letters (from SLB No. 14K). The new section on proof of ownership includes an updated suggested format for shareholders and their brokers or banks to use to verify ownership, which reflects changes to the ownership thresholds made through SEC rule amendments in 2020.
Sidley

Under the SEC’s 2020 rulemaking on Rule 14a-8, a shareholder can satisfy the applicable ownership threshold if the shareholder’s investment is valued at or above the relevant threshold on any date within 60 days prior to the date the shareholder submits the proposal. The market value is calculated by multiplying the number of shares the shareholder continuously held for the relevant period by the highest selling price during the 60 days prior to the submission of the shareholder proposal. 

The Division Staff clarifies in SLB No. 14L that the 2020 rulemaking did not change its view of how brokers or banks fulfill their role in verifying ownership. They may continue to provide confirmation of how many shares the proponent continuously held but need not calculate the share valuation, which the proponent can calculate and provide to the company. Finally, the new guidance notes that the Division Staff expects a company to identify any specific defects in a proponent’s proof of ownership letter that have not already been identified in any previously-delivered deficiency notice.

¹SLB No. 14K (Oct. 16, 2019), SLB No. 14J (Oct. 23, 2018) and SLB No. 14I (Nov. 1, 2017) are summarized in the Sidley Updates available here and here. 

²ConocoPhillips Company (Mar. 19, 2021), available here.