SEC Staff Legal Bulletin Makes Exclusion Of Certain Shareholder Proposals More Challenging

• Published date: 19 November 2021
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Securities, Shareholders
• Law Firm: Cooley LLP
• Author: Cooley LLP

On November 3, 2021, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued Staff Legal Bulletin 14L, which outlines new guidance on shareholder proposals submitted to public companies pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. SLB 14L rescinds three recent staff legal bulletins - SLB 14I, SLB 14J and SLB 14K - and:

• Reverses the earlier SLBs' company-specific approach to evaluating the significance of a policy issue that is the subject of a shareholder proposal for purposes of the ordinary business exclusion in Rule 14a-8(i)(7).
• Reverses the earlier SLBs' approach on micromanagement arguments for purposes of the "ordinary business" exclusion in Rule 14a-8(i)(7).
• Outlines the staff's view regarding application of the "economic relevance" exclusion in Rule 14a-8(i)(5).

This new guidance reverses four years of staff precedent and raises the burden for public companies seeking to exclude shareholder proposals, particularly those related to environmental and social issues.

Generally, SLB 14L presents its approach as a return to the standards that, as described below, historically prevailed before the issuance of the rescinded SLBs. SEC Chairman Gary Gensler said that the "bulletin will provide greater clarity to companies and shareholders on these matters, so they can better understand when exclusions may or may not apply. The updated staff legal bulletin, which replaces three previously issued bulletins, is consistent with the Commission's original intention." The replacement of the rescinded SLBs may well be part of a larger trend at the SEC under Gensler to reverse course on some of the work done under the previous administration and former Chairman Jay Clayton.

The new SLB also republishes previous guidance related to the use of graphics and images and to proof-of-ownership letters that was originally contained in rescinded SLBs 14I and 14K, with some minor technical changes. In addition, SLB 14L includes new guidance on the use of email for submission of proposals, delivery of notices of defects and responses to those notices.

Background

Rule 14a-8 provides a means by which shareholders can submit proposals for inclusion in a company's proxy statement to be presented for a shareholder vote, saving the shareholder the effort and expense of doing a separate proxy solicitation. In addition to setting forth the procedural and eligibility requirements for submitting shareholder proposals to a company, Rule 14a-8 identifies several substantive bases a company can rely on to exclude a shareholder proposal from its proxy statement. Typically, before excluding a shareholder proposal, a company will request assurance from the staff that it will not recommend an enforcement action if the company omits the proposal on the basis of one of the exclusions described in the no-action letter requesting relief.

Issued between 2017 and 2019 under Clayton, the rescinded SLBs provided guidance on the ordinary business exclusion under Rule 14a-8(i)(7) and the scope and application of the economic relevance exclusion under Rule 14a-8(i)(5).

'Ordinary business' exclusion

The "ordinary business" exclusion permits a company to omit a shareholder proposal that "deals with a matter relating to the company's ordinary business operations." The policy underlying the ordinary business exclusion is based on two considerations. The first is the "subject matter" of the proposal - that is, whether, as described in a 1998 SEC release, it refers to matters that are "so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight," with the rationale being that the resolution of these types of matters is considered to be more properly the province of management and the board of directors than of the shareholders. However, as noted in the 1998 release, proposals relating to these matters but focusing on significant social policy issues generally would not be excludable "because such issues typically fall outside the scope of management's prerogative." The second consideration is whether a proposal seeks to "micromanage" a company by probing too deeply into matters upon which shareholders would not be in a position to make an informed judgment.

Based on these considerations, the determination of whether a proposal may be excluded under the ordinary business exclusion turns on the answers to the following questions:

• Does the proposal relate to tasks so fundamental to management's ability to run a company on a day-to-day basis they could not be subject to shareholder oversight?
• Does the proposal focus on a sufficiently significant social policy issue that transcends these day-to-day business matters?
• Does the proposal involve intricate detail or seek to impose specific time frames or methods for implementing complex...