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The Division of Corporation Finance of the SEC Issues Further Guidance Concerning Shareholder Proposals

On November 1, 2017, the Division of Corporation Finance (“Division”) of the U.S. Securities and Exchange Commission (“SEC”) issued Staff Legal Bulletin No. 14I (CF) (“SLB No. 14I”) in an effort to provide guidance on several issues arising under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (“Rule 14a-8”). Rule 14a-8 requires that publicly-traded companies include in their proxy materials all shareholder proposals that comply with the Rule’s eligibility and procedural requirements, unless a proposal falls into one of the substantive bases for exclusion provided by the rule. A company seeking to exclude a proposal submitted pursuant to Rule 14a-8 must submit a “no-action” request to the SEC seeking assurance that the staff will not recommend enforcement action if the proposal is omitted.

In SLB No. 14I, the Division provides guidance on the scope and applicability of two of the substantive bases for exclusion under Rule 14a-8, the ordinary business exclusion and the economic relevance exclusion, and seems to indicate a greater willingness of the Division to consider arguments that certain proposals may be omitted on these grounds. Additionally, the Division provides guidance on the specific information that must be provided with shareholder proposals submitted by proxy under Rule 14a-8(b), as well as the use of graphs and images in proposals and their impact on the 500-word limit.

Ordinary Business Exclusion – Rule 14a-8(i)(7)

Rule 14a-8(i)(7) allows a company to exclude a shareholder proposal that relates to the ordinary business operations of the company.

As part of its analysis, the Division permits the exclusion of proposals that relate to matters which 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,” unless the proposal “focuses on policy issues that are sufficiently significant because they transcend ordinary business and would be appropriate for a shareholder vote (emphasis added).” Whether a policy issue is sufficiently significant relies partially on the nexus between the significant policy issue and the company’s business operations.

Accordingly, many no-action requests and decisions under Rule 14a-8(i)(7) address whether a proposal that relates to ordinary business operations focuses on a sufficiently significant policy issue. In SLB No. 14I, the Division states that these determinations often require difficult judgment calls, and that the Division believes a company’s board of directors is generally in a better position to make these determinations in the first instance. Therefore, the Division instructed companies submitting no-action requests under the ordinary business exclusion to include a discussion detailing the board’s analysis of the policy issue raised by the shareholder proposal and its significance. The discussion should detail the “specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.” While it has always been the company’s burden to demonstrate to the SEC that a proposal may be omitted, the language of SLB No. 14I indicates that the Division may be more open to a well-documented and well-reasoned conclusion by a company’s board of directors that a proposal may be omitted on these grounds.

Economic Relevance Exclusion – Rule 14a-8(i)(5)

Rule 14a-8(i)(5) allows a company to exclude a shareholder proposal that “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 (emphasis added).”

Historically, the Division has not granted no-action relief under Rule 14a-8(i)(5), even where a proposal has met the quantitative thresholds, if the company conducted business, no matter how small, related to an issue of broad social or ethical concern raised in the proposal. However, that analysis failed to account for a proposal’s significance to the company’s business and therefore unduly limited the availability of this substantive exclusion. Under the new guidance, proponents would need to tie social or ethical issues raised by the proposal to a significant effect on the company’s business – “The mere possibility of reputational or economic harm will not preclude no-action relief.” The Division noted, however, that it would generally view substantive governance matters to be significantly related to almost all companies’ businesses.

As with its guidance relating to the ordinary business exclusion, the Division states that the analysis under the economic relevance exclusion typically involves difficult judgment calls that it believes are in the first instance matters that the company’s board of directors is generally in a better position to determine. Accordingly, a company seeking no-action relief under the economic relevance exclusion should include with its no-action request a discussion reflecting the board’s analysis of the proposal’s significance to the company, as well as the “specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”

Furthermore, the Division’s analysis of whether a proposal was “otherwise significantly related” has historically been informed by its analysis under the ordinary business exclusion. Going forward, however, the separate analytical frameworks for the ordinary business and economic relevance exclusions will be treated by the Division as such.

Shareholder Proposals Submitted by Proxy – Rule 14a-8(b)

In SLB No. 14I, the Division retained its position that shareholder proposals may be submitted through a representative, often referred to as “proposal by proxy.” However, to facilitate the evaluation of whether a proposal by proxy meets the eligibility requirements of the rules, the staff of the SEC will now look to whether the shareholder who submits a proposal by proxy provides adequate documentation describing the shareholder’s delegation of authority to the representative. The Division states that this documentation should:

  • identify the shareholder-proponent and the person or entity selected as proxy;

  • identify the company to which the proposal is directed;

  • identify the shareholder meeting for which the proposal is submitted;

  • identify the specific proposal to be submitted; and

  • be signed and dated by the shareholder.

The failure to provide the above-listed information may be a basis for exclusion of the proposal by a company under Rule 14a-8(b).

Graphs, Images, and the 500-Word Limit on Shareholder Proposals

The Division reiterated its position that shareholders may include graphs and images in shareholder proposals, noting that companies should not minimize or diminish the appearance of shareholder graphics, and should give “similar prominence” to a shareholder’s graphics if the company includes its own graphics in a proxy statement. The Division further noted that existing provisions within Rules 14a-8 and 14a-9 address potential abuses related to the use of graphs and images, the violation of which could result in exclusion of the shareholder proposal.

Lastly, the Division stated that the 500-word limit on shareholder proposals applies to words in graphs and images.

© 2022 Jones Walker LLPNational Law Review, Volume VII, Number 312

About this Author

Dionne M. Rousseau, Jones Walker, acquisitions transactions lawyer, public private companies attorney

Dionne Rousseau has served as the lead outside corporate and securities counsel for 12 public companies, and as boardroom lawyer for three of those companies. She has more than 25 years of experience handling corporate finance and mergers and acquisitions transactions for public and private companies. Representative transactions handled as lead counsel include two $1-billion at-the-market common stock offerings for a Fortune 500® Company; a $1-billion debt refinancing, including $300 million in senior subordinated notes and a $200-million debt tender offer...

Joan S. Guilfoyle, Banking and Finance Lawyer, Jones Walker Special Counsel
Special Counsel

Joan S. Guilfoyle is special counsel in the firm's Banking & Financial Services Practice Group in the Washington, D.C. office. Ms. Guilfoyle's practice concentrates on corporate and securities matters for financial institutions. She has extensive experience representing clients in connection with mergers and acquisitions, securities offerings, stock conversions, and securities compliance matters. Ms. Guilfoyle also represents companies involved in proxy contests, and has assisted clients with fidelity bond claims and internal investigations. Prior to practicing law,...

Thomas Kimball, Jones Walker Law Firm, New Orleans, Corporate Law Attorney

Thomas D. Kimball is an associate in the firm’s Corporate & Securities Practice Group and practices from the firm’s New Orleans office. He is a 2016 graduate of the Loyola University New Orleans College of Law, where he received a juris doctor degree, summa cum laude, a Certificate in Law, Technology, and Entrepreneurship, and earned the William L. Crowe, Sr. Scholar distinction. In addition, Mr. Kimball was an Articles Editor on the Loyola Law Review Editorial Board and served in Loyola’s Entrepreneurship Project, a partnership with Propeller which...