SEC Staff Publishes New Guidance on Shareholder Proposals
On November 1, the Division of Corporation Finance of the Securities and Exchange Commission (Division) published Staff Legal Bulletin No. 14I (SLB 14I), which provides new, issuer-friendly guidance on shareholder proposals in advance of the 2018 proxy season. Specifically, SLB 14I provides guidance on (1) exclusion of shareholder proposals under the “ordinary business” and “economic relevance” exceptions under Rule 14a-8 of the Securities Exchange Act of 1934; (2) proposals submitted on behalf of shareholders through a representative; and (3) the use of images in proposals.
The following is a brief summary of SLB 14I:
- “Ordinary Business” Exception
The “ordinary business” exception under Rule 14a-8(i)(7) allows a company to exclude a shareholder proposal that deals with matters “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.” The Division has traditionally accepted an exception to this exclusion for proposals that “focus on policy issues that are sufficiently significant because they transcend ordinary business.” SLB 14I has clarified that a board of directors is well situated to analyze whether an issue is significant and the Division will expect a board analysis regarding the particular policy issue raised in a company’s no-action request with respect to exclusion of a proposal. The Division noted that an explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.
- “Economic Relevance” Exception
The “economic relevance” exception under Rule 14a-8(i)(5) allows a company to exclude a shareholder proposal that “relates to operations which account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” Traditionally, however, the Division has not issued a no-action letter with respect to the exclusion of the proposal “where the proposal has reflected social or economic issues, rather than economic concerns” and the company conducted any business that related to the proposal, no matter how insignificant. In SLB 14I, the Division clarified that it will now focus on how the proposal is “significantly related to the company’s business,” regardless of broader social or ethical issues the proposal may present. The Division noted that a board of directors acting with knowledge of the company’s business is better suited than the Division to determine if a proposal is “significantly related” to that business and accordingly would expect a no-action request to include a detailed board analysis. Additionally, the Division noted that it will no longer look to its analysis under Rule 14a-8(i)(7) (ordinary business exception), when evaluating arguments under Rule 14a-8(i)(5) (economic relevance exception).
- Proposals by Proxy
Although Rule 14a-8 does not explicitly address the ability of shareholders to submit proposals through a representative, shareholders frequently do so (commonly referred to as “proposals by proxy”). The Division clarified that, to help the Division and company evaluate whether the eligibility requirements of 14a-8(b) have been satisfied by a shareholder submitting a proposal by proxy, a proponent submitting a shareholder proposal must provide documentation that is executed by the shareholder and describe the shareholder’s delegation of authority to the proxy, including:
- the identity of the shareholder-proponent and the person or entity selected as proxy;
- the identity of 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 (e.g., proposal to lower the threshold for calling a special meeting from 25% to 10%).
- The Use of Images
Rule 14a-8(d) provides that a “proposal, including any accompanying supporting statement, may not exceed 500 words.” SLB 14I has clarified that the use of graphs and images is not prohibited in proposals; however, exclusion of graphs and/or images is appropriate under Rule 14a-8(i)(3) where they:
- make the proposal materially false or misleading;
- render the proposal inherently vague or indefinite;
- directly or indirectly impugn character or make charges of improper, illegal or immoral conduct, without factual foundation; or
- are irrelevant to a consideration of the subject matter of the proposal.
SLB 14I also noted that exclusion of graphs and/or images is appropriate if the total number of words in the shareholder proposal, including the words and/or graphics, exceeds 500.
SLB 14I is available here.