SEC Adopts Guidance Likely to Lead to More Policy-Related Shareholder Proposals

By: David A. Bell , Ron C. Llewellyn , Ran Ben-Tzur , Julia Forbess

On November 3, 2021, the Staff of the Securities and Exchange Commission’s Division of Corporation Finance issued Staff Legal Bulletin No. 14L (the New SLB), which will make it more difficult for companies to exclude social and environmental shareholder proposals from their proxy statement. The primary action of the New SLB is that it rescinded three prior staff legal bulletins (SLBs): Staff Legal Bulletin No. 14I, dated November 1, 2017, Staff Legal Bulletin No. 14J, dated October 23, 2018 and Staff Legal Bulletin 14K, dated October 16, 2019 (collectively, the Rescinded SLBs). All of these SLBs deal with Rule 14a-8 under the Securities Exchange Act of 1934, which provides the framework for shareholders to submit proposals for inclusion in a reporting company’s proxy statement, and, among other things, grounds for companies to exclude certain types of proposals.

The Rescinded SLBs contained interpretations of Rule 14a-8 that provided something of a roadmap for companies to exclude certain types of proposals on the grounds that the matters related to the ordinary business of the company or were not relevant to the company. The New SLB retracts these interpretations and the relief they may have provided to companies.

As a result of the New SLB (and the recent relative success of such proposals), we anticipate an increased likelihood of social and environmental shareholder proposals, including proposals raising human capital management issues, and more of them reaching a shareholder vote.


The Rescinded SLBs expounded upon the grounds for exclusion contained in Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the relevance exception.

Rule 14a-8(i)(7). The ordinary business exception provides that a proposal may be excluded if it “deals with a matter relating to the company's ordinary business operations.” Rescinded SLB 14I had noted that there were two effective considerations under this rule, either of which could be the basis for exclusion. The first was whether the proposal related to matters so fundamental to management’s ability to run the company that it could not be subject to direct shareholder oversight. Proposals that were so fundamental to operations could be excluded unless focusing on policy issues that are significant because they “transcend the ordinary business.”

Rescinded SLB 14I noted that the determination of whether a proposal sufficiently transcends ordinary business is a difficult judgement call. It contained a provision that the case for exclusion under Rule 14a-8(i)(7) could be enhanced if the company showed that the Board of Directors had carefully analyzed the policy issue involved in the proposal and its significance to the business. Rescinded SLB 14J addressed the type, and description, of the Board’s analysis that the Staff might find persuasive.

Rescinded SLB 14J also discussed the level of micromanagement involved in a proposal that would render it excludable under Rule 14a-8(i)(7). It stated that even though stockholder proposals are precatory and therefore do not require any specific action, a proposal may be excludable if it “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”

Rule 14a-8(i)(5). The relevance exception provides that a proposal may be excluded if it “relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business.”

In 1985, a U.S. District Court for the District of Columbia ruled that a proposal involving an extremely small percentage of the company’s assets could not be excluded because of the “ethical and social significance” of the issue that was the subject of the proposal. Rescinded SLB 14I noted that as a result of this broad application of the “significantly related to the company’s business” component of Rule 14a-8(i)(5), the Staff rarely granted relief under this section. Rescinded SLB 14I sought to address this by providing that where a proposal relates to matters that fall below the 5% threshold, the Staff will evaluate the circumstances of the proposal to see if it has a significant effect on the company’s business. If it did not, the proposal could be excluded, even if it related to matters of broad social or ethical concern. As with the application of Rule14a-8(i)(7) under Rescinded SLB 14I, a company could provide grounds for exclusion if it showed that the topic had been carefully analyzed by its Board of Directors.

Rescinded SLB 14I further noted that in the past, a proposal that could not be excluded under Rule 14a-8(i)(7) because the topic “transcends the ordinary business” of the company, also was effectively immune from exclusion under Rule 14a-8(i)(5). It provided that in the future, the Rule 14a-8(i)(5) analysis would be decoupled from the Rule 14a-8(i)(7) analysis.

Looking Ahead

The most significant impact of the New SLB would appear to be that it will be very difficult for companies to exclude proposals raising significant policy issues, such as social and environmental issues, even if the effects of that particular policy concern are not material to the company itself.

This will be the case under either the ordinary business or the relevance bases for exclusion. As was the case before the adoption of the Rescinded SLBs, a proposal is unlikely to be excludable under 14a-8(i)(5) regardless of the immateriality of the subject matter of the proposal to the company, if the proposal involves matters of broad social or ethical concern. In furtherance of this emphasis on subject-matter materiality rather than company-specific materiality, the New SLB provides that future no-action letters seeking exclusion need not include any Board analysis of the impact of the policy issue. Perhaps not surprisingly, the New SLB provides, as an example, that proposals raising human capital management issues with a broad social impact will not be excludable under either basis for exclusion.

Commentary in the New SLB further addresses the micromanagement component of the ordinary business test. It states the concern that guidance in the now-rescinded SLBs may have been taken to mean that any limit on company or board discretion constitutes micromanagement. Going forward, proposals “seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement.”

The New SLB further states that in assessing whether matters are too complex for shareholders and thus should be excludable under the micromanagement theory, the Staff will consider, among other things, the “robustness of public discussion and analysis of the topic,” as well as references to well-established national or international frameworks. It specifically highlights proposals relating to climate change as not subject to exclusion on micromanagement grounds where they suggest targets or timelines.

Other Provisions

The New SLB contains other commentary on the shareholder proposal process, including:

  • Noting that the template provided in SLB 14F, and updated in the New SLB, for verifying prescribed ownership should not be applied in an overly technical manner by companies, which should be flexible in analyzing whether the submission documents clearly and sufficiently evidence the ownership requirements.
  • A statement that the September 2020 amendments to Rule 14a-8 ownership thresholds do not change how banks and brokers verify proponents’ ownership, and further that the broker need not separately calculate the share valuation test, which can be done by the proponent.
  • Further to the technical compliance of ownership verification, expressing the Staff’s belief that “companies should identify any specific defects in the proof of ownership letter, even if the company previously sent a deficiency notice prior to receiving the proponent’s proof of ownership if such deficiency notice did not identify the specific defect(s).”
  • A discussion of the potential verification hazards in the use of email for submitting proposals and communications, and encouragement for both companies and proponents to acknowledge receipt of emails when requested to do so.

Key Takeaways

With the historic level of success of many social and environmental proposals during the 2021 proxy season and the anticipated continued support for such proposals, companies should plan for how they may respond if faced with these proposals in the 2022 proxy season. The New SLB will make it more difficult for companies to use the ordinary business or economic relevance exceptions to exclude them.

Accordingly, companies that have historically relied on these bases for exclusion should be prepared to consider other grounds for exclusion under Rule 14a-8 or plan for engagement on the applicable policy issues either in their proxy statements or directly with proponents. Companies that are likely recipients of proposals in these areas should consider addressing these topics as part of their annual stockholder engagement processes.