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SEC Provides Guidance on Ordinary Business Exclusion for Shareholder Proposals and on Proof of Ownership Letters

On October 16, 2019, the Division of Corporation Finance issued Staff Legal Bulletin 14K (SLB 14K), the latest in a line of legal bulletins discussing Rule 14a-8 under the Securities Exchange Act of 1934, which governs when shareholder proposals must be included in a public company’s proxy statement. The legal bulletin provides new insight into application of the rule’s provision that permits a company to exclude a shareholder proposal if it “deals with a matter relating to the company’s ordinary business operations" (referred to as the “ordinary business” exception and found in Rule 14a-8(i)(7)). It also provides guidance on proof of ownership letters that shareholders who are not registered holders deliver to companies to demonstrate their eligibility to submit a proposal. SLB 14K may be found here.

The Ordinary Business Exception

The purpose of the ordinary business exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” SLB 14K provides guidance on two aspects of the ordinary business exception analysis: (1) the significance of the policy issue underlying the proposal and (2) the degree to which the proposal “micromanages” the company.

Significance of the Policy Issue to the Company

The Securities and Exchange Commission (SEC) has recognized that some shareholder proposals raise policy issues so significant to a company that, even if they touch on ordinary business matters, they would be appropriate for a shareholder vote and therefore would not be excludable. SLB 14K states that although proponents and companies have often focused in the past on the overall significance of the policy issue raised by a proposal, this is not the proper analysis. Instead, the staff will determine the significance of the policy in a “company-specific approach,” analyzing the connection between the policy and the particular company’s business operations. SLB 14K gives the example of a climate change proposal, which may raise significant policy issues if submitted to an energy company but would not have similar significance if submitted to a software development company.

Micromanagement

A proposal is excludable under the ordinary business exception if it micromanages the company. SLB 14K notes that certain proposals are overly prescriptive, such as proposals that require a specific strategy, method, action, outcome, or time line for addressing an issue. These types of proposals may be excludable because they limit the discretion of management and the board. Even precatory proposals that attempt to govern the method by which a company’s board may address particular policy issues, thereby preventing the board from exercising its judgment, may be considered to micromanage the company. In contrast, a proposal that defers to management’s discretion and allows the board flexibility in its implementation of the proposal is not likely to be excludable. If a company attempts to exclude a proposal that micromanages the board, the staff expects the no-action request to include an analysis of “how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.”

Board Analysis

Referring to prior Staff Legal Bulletins 14I and 14J, the SEC in SLB 14K again stresses that a discussion of the board’s analysis of whether the particular policy issue raised by the proposal is sufficiently significant in relation to the company can assist the staff in evaluating a company’s no-action request and, in turn, assist the company in demonstrating that it may exclude the proposal. The staff further notes that in the last proxy season, the staff was on a number of occasions unable to agree with a board’s argument for exclusion where the no-action request did not include a board analysis, especially where the significance of a particular issue to a particular company and its shareholders potentially depended on factors that were not self-evident.

Delta Analysis

As previously discussed in SLB 14J, the staff in SLB 14K explains that a board analysis of a proposal could include whether the company has already addressed in some manner the policy issue raised by the proposal, including the differences — or the delta — between the proposal’s specific request and the actions the company has already taken, along with an analysis of whether the specific manner in which the proposal addresses the issue presents a significant policy issue for the company. The staff stated that a delta analysis is most helpful where it clearly identifies the differences between the manner in which the company has addressed an issue and the manner in which a proposal seeks to address the issue, and explains in detail why those differences do not represent a significant policy issue to the company.

Prior Voting Results

Prior voting results on a proposal is another substantive factor that the staff expects a no-action request to include as part of its discussion of the board’s analysis. However, the staff notes that certain arguments based on this analysis were not persuasive during the last proxy season, including that:

  • Voting results were not significant given that a majority of shareholders voted against the proposal.

  • The significance of the prior voting results was mitigated by the impact of proxy advisory firms’ recommendations.

  • When considering the voting results based on shares outstanding, instead of votes cast, the voting results were not significant.

In SLB 14K, the staff endorses including a “robust discussion” that explains how the company’s actions following the prior shareholder vote, intervening events, or other objective indicia of shareholder engagement on the issue bear on the significance of the underlying issue to the company.

Proof of Ownership

A shareholder who submits a proposal must prove continuous ownership of at least $2,000 in market value or 1% of the company’s voting securities for at least one year before the proposal is submitted. Staff Legal Bulletin 14F previously suggested a format that shareholders who are not registered holders should use to provide proof of ownership. SLB 14K emphasizes that this suggested format is not mandatory. SLB 14K also states that companies should not seek to exclude a shareholder proposal based on an “overly technical” reading of proof of ownership letters, explaining that the staff generally does not find such arguments persuasive; instead, SLB 14K takes a “plain meaning” approach to interpreting proof of ownership letters.

Conclusion

The SEC recently issued guidance that could lead to less staff engagement with companies during the upcoming proxy season, including the possibility of oral responses instead of written responses in some instances, and the possibility of no determination from the staff at all. For additional information, see our September 2019 Corporate Client Alert here. SLB 14K provides helpful guidance ahead of the proxy season for companies that may be in a position to seek to exclude a shareholder proposal under the “ordinary business” exception.

© 2022 Jones Walker LLPNational Law Review, Volume IX, Number 303
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About this Author

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

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...

225-248-2026
Katherine Herbert Corporate Attorney Jones Walker Baton Rouge
Associate

Katherine Herbert is an associate in the Corporate Practice Group. She focuses on economic development and public finance.

Katie assists in public finance transactions. Her practice also includes working with the firm’s economic development consulting arm, Jones Walker Consulting, LLC, and assisting public and private entities in economic development projects.

While in law school, Katie clerked at Jones Walker for two summers. 

225-248-2194
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