On November 1, 2017, the Division of Corporation Finance (Division) of the Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14I (SLB No. 14I) to offer guidance on the scope and application of Rules 14a-8(i)(7) and 14a-8(i)(5), each of which provide a substantive basis for excluding shareholder proposals from a company’s proxy materials for shareholder meetings. SLB No. 14I also discusses a new policy requiring documentation when shareholders submit “proposals by proxy,” along with the Division’s views on the use of graphs and images in the supporting statements for shareholder proposals.
Rule 14a-8(i)(7)—the “Ordinary Business” Exception
Rule 14a-8(i)(7) permits a company to exclude any shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” Nonetheless, the SEC has stated that proposals focusing on sufficiently significant policy issues should be included in a company’s proxy materials even when dealing with such ordinary business matters. A policy is sufficiently significant when it (i) transcends these day-to-day business matters and (ii) raises policy issues that would be appropriate for a shareholder vote. In SLB No. 14I, the Division acknowledges that such a determination raises difficult judgment calls, which the company’s board—in the exercise of its fiduciary duties to its shareholders—is generally in the best position to make.
Going forward, when a company submits a no-action request to exclude a shareholder proposal under the “ordinary business” exception, the Division expects the company to also include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance. In particular, the Division will expect the no-action request to detail the specific processes employed by the board to ensure that its conclusions regarding the policy issue are well-informed and well-reasoned.
Rule 14a-8(i)(5)—the “Economic Relevance” Exception
Rule 14a-8(i)(5) permits a company to exclude any shareholder 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.” SLB No. 14I points out that, as a result of a federal court decision following the promulgation of the current rule, the Division’s analysis has simply considered whether a company conducted any amount of business related to the issue in the proposal and whether that issue was of broad social or ethical concern. This, according to the Division, unduly limits the exclusion’s availability because it does not fully consider the question of whether the proposal “deals with a matter that is not significantly related to the issuer’s business.”
Going forward, when a company submits a no-action request to exclude a shareholder proposal under the “economic relevance” exception, the Division’s analysis will focus on the proposal’s significance to the company’s business when it otherwise relates to operations accounting for less than 5 percent of total assets, net earnings and gross sales. Whether to exclude or include a proposal that raises issues of social or ethical significance will be based on the relevance of such issues to the company’s business—regardless of the importance of these social or ethical issues in the abstract. While a matter’s significance may vary from company to company, the Division will generally consider substantive governance matters to be significantly related to almost all companies.
For any proposal that lacks significance on its face, the burden will be on the proponent to demonstrate that it is “otherwise significantly related to the company’s business.” This can be done by providing information regarding the proposal’s significant impact on the company’s other business segments as well as its potential to subject the company to significant contingent liabilities. While the proponent can make social or ethical arguments, the Division expects the proponent to tie these to a significant effect on the company’s business. Additionally, the mere possibility of reputational or economic harm, according to the Division, will not preclude no-action relief. Ultimately, the Division will look at the “total mix” of information about the company when evaluating a matter’s significance.
As with the “ordinary business” exception, the Division acknowledges that the company’s board is better situated to determine whether a proposal is “otherwise significantly related to the company’s business.” Accordingly, the Division expects a company to include a discussion in its Rule 14a-8(i)(5) no-action request that reflects the board’s analysis of the proposal’s significance to the company, as well as the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.
Finally, the Division acknowledges the historic interplay between Rule 14a-8(i)(5) and Rule 14a-8(i)(7) whereby its analysis under the “ordinary business exception” largely determined whether a proposal was “otherwise significantly related” under Rule 14a-8(i)(5). Because the Division will rely on separate analytical frameworks, its evaluation of arguments under Rule 14a-8(i)(5) will no longer depend on the outcome of its Rule 14a-8(i)(7) analysis.
New Documentation Requirement for “Proposals by Proxy”
In SLB No. 14I, the Division reiterates its view that a shareholder’s ability to submit proposals through a representative (“proposal by proxy”) is consistent with Rule 14a-8. However, the Division acknowledges the challenges and concerns that proposals by proxy may present. These relate, for instance, to the satisfaction of Rule 14a-8(b) eligibility requirements and the fact that some shareholders may not even be aware that proposals are being submitted on their behalf.
To address these concerns, shareholders who submit a proposal by proxy will now be expected to provide documentation describing the shareholder’s delegation of authority to the proxy. According to SLB No. 14I, such documentation should:
- identify the shareholder-proponent and the person or entity selected as proxy
- identify the company to which the proposal is directed
- identify the annual or special meeting for which the proposal is submitted
- identify the specific proposal to be submitted
- be signed and dated by the shareholder.
When the above information is not provided, there may be a basis to exclude the proposal under Rule 14a-8(b).
Use of Graphics and/or Images in Shareholder Proposals
Rule 14a-8(d), which limits a proposal to 500 words, provides a procedural basis for excluding shareholder proposals that fail to comply with this requirement. According to SLB No. 14I, the Division is of the view that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals. At the same time, the Division recognizes the potential for abuse, but contends that these potential abuses can be addressed through other provisions of Rule 14a-8. As an example, the Division points out that Rule 14a-8(i)(3) would be an appropriate basis for excluding graphs and/or images if they:
- made the proposal materially false or misleading
- rendered the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires
- directly or indirectly impugn the character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation
- are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.
Finally, if the total number of words in a proposal, including words in the graphics, exceeds 500, then this, according to SLB No. 14I, would be an appropriate basis for excluding the proposal under Rule 14a-8(d).
In addition to SLB No. 14I, the Division’s guidance on Rule 14a-8 can be found in the following bulletins that are available on the SEC’s website: SLB No. 14, SLB No. 14A, SLB No. 14B, SLB No. 14C, SLB No. 14D, SLB No. 14E, SLB No. 14F, SLB No. 14G and SLB No. 14H.