The staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission on November 1, 2017, issued a new Staff Legal Bulletin regarding shareholder proposals under Rule 14a-8. Staff Legal Bulletin 14I is the ninth update on this contentious topic since the release of SLB 14 in 2001. This new bulletin is most notable for encouraging board of director involvement when companies seek to exclude proposals under either the “ordinary business operations” or the “economic relevance” exceptions.
Rule 14a-8 under the Securities Exchange Act of 1934 provides a procedure by which a shareholder can require a company to submit a discrete matter to a shareholder vote at a shareholders’ meeting and to include that matter, and the shareholder’s supporting statement, in the company’s proxy statement. The rule includes specific procedural requirements for a proposal to be properly submitted. It also contains 13 different bases for a company to exclude a properly submitted proposal. The staff has the unenviable—and time consuming—task of evaluating company and proponent arguments over the applicability of these grounds for exclusion.
SLB 14I deals with two of the grounds for exclusion:
SLB 14I notes that applying the ordinary business operations exclusion involves difficult judgment calls for the staff because of the “sufficiently significant” aspect of the analysis. It asserts that a company’s board of directors is well situated to analyze, determine and explain whether an issue is “sufficiently significant” because the matter transcends ordinary business and would be appropriate for a shareholder vote. This being the case, the staff expresses its expectation that a no-action letter seeking to exclude a proposal on the basis of the ordinary business operations exception would discuss the board’s analysis of the particular policy issue and its significance. The staff goes on to say that such a discussion would be helpful if it “detailed the specific process” that the board employed to “ensure that its conclusions are well-informed and well-reasoned.”
While the staff does not comment on the appropriateness of its current application of the ordinary business operations exclusion, it does comment on the application of the economic relevance exception. SLB 14I expresses the staff’s belief that it has unduly limited the application of Rule 14a-8(i)(5) because it has failed to consider whether a proposal “deals with a matter that is not significantly related to the issuer’s business.” The staff indicates that in the future it will, as the rule clearly directs, focus on a proposal’s significance to the company’s business. This being the case, the economic relevance exclusion will depend on each company’s particular circumstances and may result in a matter being regarded as significant to one company and not significant to another. The staff further notes that where a proposal’s significance to a company is not apparent on its face, it will be incumbent on the proponent to demonstrate significance. While the staff’s new approach to applying the economic relevance exclusion will not be dependent on input from the company’s board, SLB 14I states that the staff will expect to see the board’s analysis of whether the subject matter is significantly related to the company’s business in the company’s no-action letter seeking to exclude a proposal on that basis. The staff notes, once again, that it will also be helpful if the no-action letter describes the board’s analytical process.
SLB 14I explains that in the past the staff has, essentially, applied the economic relevance exclusion of Rule 14a-8(i)(5) in lock-step with the ordinary business operations exclusion of Rule 14a-8(i)(7). Accordingly, if a proponent appropriately asserted that the subject matter of the proposal related to a significant social policy for the purposes of the latter, then that proposal would also avoid exclusion under the narrowly-applied economic relevance test. Going forward, the staff will no longer look to its analysis of a proposal under the ordinary business operations basis when determining the availability of the economic relevance basis.
In addition to the new guidance regarding the bases for exclusion as discussed above, SLB 14I provides specific guidance for proponents submitting a “proposal by proxy.” It also states that the proponents may include in their supporting statements graphics to convey information about their proposal. The staff notes that such use will continue to be subject to existing rules allowing exclusion of such images if they make a proposal false or misleading or inherently vague, or if they impugn someone’s character without factual foundation.
While the full impact of SLB 14I will only be known after it has been implemented in actual factual situations, we believe there are at least two repercussions that can be expected:
We look forward to seeing whether companies will routinely seek to include their boards of directors in the process of seeking exclusions under the economic relevance and ordinary business operations tests of Rule 14a-8(i). Anticipating this response, one might observe that SLB 14I is somewhat presumptuous in its expectation of director involvement in the 14a-8 process, essentially affording a holder of as little as $2,000 of the company’s common stock to force a topic into the board of director’s agenda. We also look forward to the staff’s application of the guidelines of SLB 14I to specific no-action requests and observing whether SLB 14I provides meaningful relief under the two bases for the exclusion.
2 By way of example, this condition arose out of the staff’s reversal of its no-action position where it had allowed the exclusion of a proposal calling for a company to implement non-discrimination policies with respect to sexual orientation and to specifically amend its written employment policies accordingly. See 1998 Release.