On November 3, Chairman Gary Gensler announced that the Staff (Staff) of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance released SLB 14L (“new guidance”) regarding shareholder proposals.
The new guidance significantly changes the Staff’s approach when determining whether a shareholder proposal may be properly excluded from a company’s proxy statement. The new guidance rescinds SLBs 14I, 14J, and 14K (Rescinded SLBs), as well as any provisions of other prior Staff guidance that could be considered as inconsistent with the new guidance. A few of these changes are highlighted below.
Significant Social Policy Exception
The new guidance significantly impacts Rule 14a-8(i)(7), commonly referred to as the “ordinary business exception.” This substantive basis for exclusion permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” Under the new guidance, the Staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the SEC initially set forth in 1976, which provided an exception for certain proposals that raise significant social policy issues.
According to the new guidance, the Staff believes that an “undue emphasis was placed on evaluating the significance of a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy.”
Going forward, the Staff will no longer focus on determining the connection between a policy issue and the particular company. It will instead focus on the social policy significance that is the subject of the shareholder proposal. In making this determination, the Staff will consider whether the proposal, “raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” As an example, the Staff stated “proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.” As a result of the Staff no longer considering company-specific context in this scenario, companies no longer need to consider including a board analysis in their no-action letter requests when asserting this exception.
The Micromanagement Prong
Under the new guidance, the Staff indicated that its recent application of the micromanagement concept, as outlined in certain of the Rescinded SLBs, expanded the concept of micromanagement “beyond the Commission’s policy directives,” to potentially mean that any limit on company or board discretion constituted micromanagement. Going forward, the Staff will assess the micromanagement prong of the ordinary business exception by focusing (among other matters) on the “level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.”
The Staff provided its expectation that the level of detail in shareholder proposals would be commensurate with “that needed to enable investors to assess an issuer’s impacts, progress towards goals, risk or other strategic matters appropriate for shareholder input.” In addition, the Staff noted it might consider factors such as “the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic,” as well as other resources available to shareholders, including references to well established national or international frameworks, in evaluating whether the proposal is indeed micromanaging.
The new guidance on micromanagement will likely result in more detailed shareholder proposals, such as those suggesting targets or timelines but providing management with discretion on how to achieve such goals, being included in proxy statements.
Economic Relevance Exception
Under Rule 14a-8(i)(5), or the “economic relevance” exception, a company can exclude a 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.”
Under the new guidance, going forward, the Staff will revert to an approach taken before certain of the Rescinded SLBs, so that proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds of Rule 14a-8(i)(5). With this new approach, the Staff will no longer expect a board analysis to consider a no-action request under Rule 14a-8(i)(5).
The new guidance also urges certain practices when emailing proposal submissions and subsequent correspondence between the company and shareholders. One specific area of encouragement expressed by the Staff is for companies that do not provide an email address for submitting proposals in their proxy statements to provide proponents with such information upon request. To that end, companies may want to consider including the appropriate email address for proposal submission in their next proxy statement.
The Staff also essentially restated the guidance in SLB Nos. 14I and 14K relating to the use of graphics and images and proof of ownership letters.
Companies, as a result of the revised guidance, may find it more difficult to exclude shareholder proposals under the bases described herein. Certain SEC Commissioners also expressed concern in response to the new guidance.
If you have any questions regarding any of the topics covered in this blog post, please feel free to email the author directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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