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M&A Update: SEC Issues Guidance on Issuers’ Ability to Exclude Shareholder Proposals under Rule 14a-8


On November 1, 2017, the staff of the Division of Corporate Finance of the Securities and Exchange Commission published Staff Legal Bulletin No. 14I.  SLB 14I provides additional guidance to companies and shareholders regarding circumstances in which the Staff will consider granting no-action relief for a company to exclude a shareholder proposal from its proxy statement pursuant to Rule 14a-8.  Specifically, the bulletin provides helpful insight into the Staff’s decision-making process as it relates to the “ordinary business” and “economic relevance” exceptions under Rule 14a-8, and the type of information the Staff will consider persuasive.  SLB 14I also provides additional guidance regarding proposals submitted by third parties on behalf of shareholders and the use of graphs or images in shareholder proposals.

Ordinary Business Exception

Under the “ordinary business” exception to Rule 14a-8, a company may exclude a shareholder proposal from its proxy statement if the proposal is “so fundamental to management’s ability to run a company on a day-to-day basis that [it] could not, as a practical matter, be subject to direct shareholder oversight.”  However, companies may not exclude proposals that focus on “policy issues that are sufficiently significant [that] they transcend ordinary business and would be appropriate for a shareholder vote.”

In SLB 14I, the Staff states that the board of directors of the company, given its fiduciary duties to the company’s shareholders and its intimate knowledge of the company’s business, is best positioned to determine whether a particular proposal is sufficiently significant to transcend the company’s ordinary business.  In light of this view, the Staff expects that future no-action requests on these grounds will include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance to the company, as well as a detailed description of the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned. 

Shareholders submitting a shareholder proposal to a company under Rule 14a-8 should be mindful of the Staff’s deferential view toward the board’s judgment, and seek to present their proposal in a manner that highlights to the board the significance of the policy in question and the connection between the policy and the company’s business operations. 

Economic Relevance Exception

Under the “economic relevance” exception, a company may exclude a shareholder proposal that (i) relates to operations that account for less than 5% of its total assets, net earnings and gross sales and (ii) is not otherwise significantly related to the company’s business.  The Staff, however, acknowledged the lack of emphasis it has historically placed on the second prong of this test in considering no-action requests, noting that the Staff has historically rejected a company’s request for no-action relief regardless of a proposals significance to the business if “a company conducted any amount of business related to the issue in the proposal and…that issue was of broad social or ethical concern.” 

Going forward, the Staff’s analysis will focus on a proposal’s significance to the company’s business when the proposal does not meet one of the 5% tests described above.  In SLB 14I, the Staff provides certain practical guidance to shareholders and companies with respect to the “economic relevance” exception:

  • Shareholders Must Demonstrate Significance of the Proposal. A shareholder making a shareholder proposal should seek to emphasize the significance of the impact the proposal may have on the company’s business, particularly if the significance of such impact is not apparent on the face of the proposal.  By way of example, the Staff noted that a shareholder could seek to demonstrate that such a proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.”

  • The Implication of Social or Ethical Issues Alone is Not Enough to Withstand Exclusion. The Staff highlighted its intent to change its historical practice of disallowing exclusion of a shareholder proposal in the event any social or ethical issue is implicated, without any further evidence that the issue is significant to the company’s business.  To this end, the Staff noted that shareholders may continue to raise social or ethical issues in their arguments, but would need to tie those issues to a significant effect on the company’s business.  Furthermore, the Staff noted that the mere possibility of reputational or economic harm will not be dispositive in its decision as to whether to exclude a proposal.

  • The Staff Will Make a Fact-Specific Determination. The Staff’s analysis will be more fact-specific than it has historically been, and will depend on the particular circumstances of the company to which the proposal is submitted.  In this regard, a matter that is considered significant to one company may not be considered significant to another, and the Staff will make a determination in light of the total mix of information available.

  • Corporate Governance Proposals are Generally Considered Significant. The Staff will generally view substantive governance matters to be significantly related to almost all companies, and, as a result, generally not excludable under Rule 14a-8(i)(5).

  • Request for No-Action Relief Should Include Board’s Consideration. Similar to the “ordinary business” exclusion, the Staff acknowledges that the board of directors is typically in a better position than the Staff to determine whether a shareholder proposal is “otherwise significantly related to the company’s business.”  Thus, a company seeking no-action relief under the “Economic Relevance Exception” should include in its no-action request the board’s analysis of why the proposal will not have a significant effect on the company.

Proposal by Proxy

While Rule 14a-8 does not expressly address shareholders’ ability to submit proposals through a representative, shareholders frequently elect to do so, a practice commonly referred to as “proposal by proxy.”  The Staff continues to be of the view that a shareholder’s submission by proxy is consistent with Rule 14a-8.  However, SLB 14I provides that, going forward, a shareholder submitting a proposal by proxy must provide documentation that is signed and dated by the shareholder and identifies:

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

  • the company to which the proposal is directed;

  • the annual or special meeting for which the proposal is submitted; and

  • the specific proposal to be submitted.

Use of Graphics or Images

SLB 14I reaffirms the Staff’s position taken in no-action letters issued to General Electric that the 500-word limitation set forth in Rule 14a-8(d) does not prohibit the use of graphs or images in shareholder proposals to convey information about their proposals.  While the Staff recognizes the potential for abuse in this area, it believes that these potential abuses are appropriately addressed through other provisions of Rule 14a-8.  The Staff also confirmed that any words used in the graphics themselves, however, do count towards the 500-word limit.

The full text of SLB 14I can be found here.

© Copyright 2018 Cadwalader, Wickersham & Taft LLP


About this Author

Joshua Apfelroth  Cadwalader’s Corporate Group complex transactional matters, including public and private mergers, acquisitions

Joshua Apfelroth is a special counsel in Cadwalader’s Corporate Group.

His practice involves counseling clients in a broad range of complex transactional matters, including public and private mergers, acquisitions, divestitures, proxy contests, tender offers, exchange offers, spinoffs and joint ventures. He also represents issuers, underwriters and selling stockholders in connection with public and private securities offerings. Josh’s practice also includes the representation of investment banks in their capacity as financial advisors on M&A and other transactions.


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Richard Brand, Cadwalader Law Firm, Corporate Governance Attorney

Richard Brand is co-chairman of the Corporate Group at Cadwalader, Wickersham & Taft LLP. He is widely recognized as a leading advisor to public companies, hedge funds, private equity firms and investment banks. His experience includes mergers and acquisitions, takeover preparedness and defense, shareholder activism and defense, general corporate advisory work and securities offerings. Before joining Cadwalader, Brand was a partner at Kirkland & Ellis LLP and, previously, an associate at Cravath, Swaine & Moore LLP and a staff writer for The Miami Herald.

Described by The American Lawyer as "a takeover and defense specialist" who is "no stranger to billion-dollar deals," Brand was named a New York “Rising Star” by Super Lawyers magazine each year from 2011 to 2016 for his corporate practice.

Janet Hsuh, Cadwalader Law Firm, New York, Corporate Law Attorney
Law Clerk

Janet Hsueh is a Law Clerk in Cadwalader's New York's office.

William P. Mills, Partner, Cadwalader law firm

William Mills represents clients in a wide range of transactions, including mergers and acquisitions, divestitures, public and private securities offerings, shareholder activism, proxy contests, spin-offs, restructurings, leveraged buyouts, tender and exchange offers, and joint ventures. He regularly advises public companies and boards of directors on corporate governance, fiduciary duty and disclosure matters, as well as investment banks as financial advisers on M&A and other transactions.

Bill is co-chair of Cadwalader's Corporate Group and co-chair of the firm's Health Care...

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Matthew Sadofsky, Cadwalader Law Firm, New York, Corporate Law Attorney
Senior Attorney

Matthew Sadofsky’s primary emphasis is on assisting U.S. and international clients with corporate finance and mergers and acquisitions transactions.

Matthew has advised issuers, underwriters and placement agents, private equity and hedge funds in connection with U.S. debt and equity offerings, including initial public offerings and other U.S. registered offerings, the use of the U.S.-Canada Multijurisdictional Disclosure System and Section 4(a)(2), Regulation D, Regulation S and Rule 144A transactions and has also acted as counsel in M&A and...