On November 3, 2021, the staff of the Corporate Finance Division (Staff) of the United States Securities and Exchange Commission (the SEC) issued Staff Legal Bulletin No. 14L (CF) (SLB 14L) relating shareholder proposals submitted under Rule 14a-8 of the Securities Exchange Act of 1934 (Rule 14a-8). Canceling three previous staff legal bulletins (the canceled SLBs),1 SLB 14L reinforces the standards that Staff will use when evaluating corporate requests to exclude shareholder proposals under Rule 14a-8 from their proxy statements. In particular, staff note that companies will not be permitted to exclude certain shareholder proposals that have broad societal impact, which could have been excluded under the canceled SLBs. As a result, SLB 14L is expected to increase the number of environmental, social and governance (ESG) shareholder proposals included in 2022 proxy statements.
Rule 14a-8 provides a process by which, in accordance with the requirements of the Rule, shareholders may submit a proposal for inclusion in a company’s proxy statement. Rule 14-8(i) provides thirteen substantive grounds upon which a corporation may exclude a shareholder proposal. Companies wishing to exclude a proposal under Rule 14a-8 typically request a “no action letter” from staff requesting staff agreement with the company’s conclusion that it may exclude the shareholder proposal by under rule 14a-8.
The “ordinary business” exception
Rule 14a-8(i)(7), the “ordinary business” exception, allows a business to exclude a proposal that “deals with a matter relating to the ordinary business operations of the business.” The exception is designed to keep ordinary business decision-making in the hands of management and the board of directors because it would be “impractical” for shareholders to vote on such decisions at an annual meeting of shareholders. shareholders, but it does not preclude shareholders from “providing high-level direction on major corporate strategic issues.
Based on new SLB 14L guidance, when assessing requests for exclusion without action under the “routine business” exception, staff will no longer focus on determining whether a policy issue is and the business. Instead, staff will focus on the social policy significance of the issue presented by the shareholder proposal. Staff explained that in carrying out this assessment, they will consider whether the proposal “raises issues of broad societal impact, such that they transcend ordinary business activities”.
In particular, staff acknowledged that certain proposals previously deemed eligible for exclusion under the canceled SLBs because they did not raise a material policy issue for the company may no longer be excluded under the “ordinary business exception”. “. To illustrate this point, staff explained that proposals directly raising human capital management issues with broad societal impact would not be subject to exclusion solely because the proponent has not established that the human capital management issue was important to the business.
Staff will also use a measured approach to assess business arguments that a proposal involves an inappropriate level of micromanagement. Proposals that seek detail or promote timelines or methods do not in themselves demonstrate micromanagement. Staff explained that their review of the micromanagement arguments will focus on “the level of granularity sought in the proposal and whether and to what extent it inappropriately limits board or management discretion.”
The “economic relevance” exception
Rule 14a-8(i)(5), the “economic relevance” exception, allows a company to exclude a proposal that “relates to transactions that represent less than 5% of the total assets of the company at the end of its last fiscal year. year, and for less than 5% of its net profits and gross sales for its most recent financial year, and is not otherwise materially connected with the activities of the company. »
Staff state in SLB 14L that proposals raising “issues of general social or ethical concern relating to the business of the business” cannot be excluded, even if the relevant business falls below economic and 5% relevance defined in the exception. This approach reverses the staff guidance provided in 2017.2
Procedural Requirements: Graphics, Technical Faults and Use of Email
In addition to outlining changes in Staff’s approach to considering requests to exclude shareholder proposals, SLB 14L also clarifies certain technical matters under Rule 14a-8, including the following:
- Use of graphics – Graphics may be used in shareholder proposals, although words included in such graphics count towards the 500 word limit under Rule 14a-8(d). Staff remind that any graphics used must comply with SEC proxy rules. For example, a chart that renders a shareholder proposal materially false or misleading could be excluded under Rule 14a-8(i)(3).
- Proof of ownership letters – Companies should not apply an overly technical reading of proof of ownership letters in an attempt to exclude a shareholder proposal based on Rule 14a-8(b). Staff have provided sample language to help shareholders submit proof of ownership, but this exact language is not required.
- Use of email – Citing the increased use of email for shareholder proposal communications in recent years, Staff recommends that to prove delivery of an email for purposes of Rule 14a-8, the sender should request an email response to the recipient in which the receipt provides confirmation of receipt. Staff further encourage companies and sponsoring shareholders to confirm receipt of emails upon request.
SEC Commissioners’ Commentary
SLB 14L marks a significant reversal in personnel policy and is consistent with the regulatory agenda released by Chairman Gensler and recent public statements.3 Commenting on SLB 14L, Chairman Gensler said, “The right to submit proposals to other shareholders for a vote is an important part of securities laws.”4 In contrast, the two Republican SEC commissioners, Hester Peirce and Elad Roisman, issued a statement challenging SLB 14L, arguing that it erases previous SEC work, replacing it with “the up-to-date regulatory approach of the current administration and do not provide criteria to support the conclusion that a topic is socially significant.5
Ahead of the 2022 proxy season, companies should review their corporate governance policies and procedures to consider any steps that can be taken to address expected shareholder concerns. While it will be more difficult to exclude shareholder proposals under the “ordinary business” and “economic relevance” exceptions, companies should continue to assess whether shareholder proposals, even those that raise a policy issue social importance, may be excluded on other substantive or procedural grounds. under Rule 14a-8.
1 Staff rescinded the following: Staff Legal Bulletin No. 14I (“SLB 14I Rescinded”); Staff Legal Bulletin No. 14J; and Staff Legal Bulletin No. 14K.
2 See SLB 14I cancelled.
3 See SEC Announces Annual Regulatory Agenda, June 22, 2021.
4 SEC Chairman Gary Gensler, Statement Regarding Shareholder Proposals: Staff Law Bulletin No. 14L.
5 Hester Peirce, SEC Commissioner, and Elad L. Roisman, SEC Commissioner, Statement Regarding Shareholder Proposals: Staff Law Bulletin No. 14L.