Yesterday, the Corp Fin Staff published Staff Legal Bulletin 14M. SLB 14M addresses various aspects of the Rule 14-8 shareholder proposal process, but most significantly it rescinds SLB 14L – which was published in 2021 and had made it easier for proponents to put environmental & social proposals to a vote. Now, we hopefully are returning to more of a middle ground. Here’s an excerpt from the new SLB:
[I]t is the staff’s view that a “case-by-case” consideration of a particular company’s facts and circumstances is a key factor in the analysis of shareholder proposals that raise significant policy issues. In addition, the text of Rule 14a-8(i)(5) references the relationship of the proposal to the individual company, requiring analysis of whether the proposal is “significantly related to the company’s business.”
Accordingly, where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7). Our views on the application of both rules are described below.
As usual, the SLB contains the disclaimer that the bulletin is not a rule, regulation, or statement of the Commission, it has not been approved or disapproved by the Commission, and it does not alter or amend applicable law or create new or additional obligations for any person. (That’s important because the Government Accountability Office said a couple of years ago that Bulletins are rules that must be submitted to Congress.) But “rule” or “no rule,” these SLBs tend to inform the (informal, non-binding) no-action process that applies to a company’s decision to exclude a Rule 14a-8 shareholder proposal from its proxy statement. We all pay attention when a new one arrives – and when an old one is put out to pasture.
As a reminder, here’s the text of Rule 14a-8(i)(5) and (i)(7):
– Rule 14a-8(i)(5) – the “economic relevance” exclusion – which permits exclusion of a proposal if it 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, and
– Rule 14a-8(i)(7) – the “ordinary business” exclusion – which permits exclusion if the proposal deals with a matter relating to the company’s ordinary business operations
Here’s the now-current approach to the “economic relevance” exclusion under SLB 14M :
The Division’s analysis will focus on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than 5% of total assets, net earnings and gross sales. Under this framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.[8]
Because the rule allows exclusion only when the matter is not “otherwise significantly related to the company,” we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted. That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.
Where a proposal’s significance to a company’s business is not apparent on its face, the Commission has stated that a proposal may be excludable unless the proponent demonstrates that it is “otherwise significantly related to the company’s business.”[9] For example, as the Commission has stated, the proponent can provide information demonstrating that the proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.”[10] The proponent could continue to raise social or ethical issues in its arguments, but in accordance with these Commission statements it would need to tie those matters to a significant effect on the company’s business. The mere possibility of reputational or economic harm alone will not demonstrate that a proposal is “otherwise significantly related to the company’s business.” In evaluating whether a proposal is “otherwise significantly related to the company’s business,” the staff will consider the proposal in light of the “total mix” of information about the issuer.
In addition, the Division’s analysis of whether a proposal is “otherwise significantly related” under Rule 14a-8(i)(5) has at times been informed by its analysis under the “ordinary business” exception, Rule 14a-8(i)(7). As a result, the availability or unavailability of Rule 14a-8(i)(7) has at times been largely determinative of the availability or unavailability of Rule 14a-8(i)(5). For clarity, the Division will not look to its analysis under Rule 14a-8(i)(7) when evaluating arguments under Rule 14a-8(i)(5). In our view, applying separate analytical frameworks will ensure that each basis for exclusion serves its intended purpose.
On the “ordinary business” exclusion, SLB 14M calls out that this exclusion rests on the central considerations of the proposal’s subject matter and the degree to which the proposal “micromanages” the company. On the first prong, the Bulletin says (in part):
[T]he staff will take a company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally “significant.” Accordingly, a policy issue that is significant to one company may not be significant to another. The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.
On micromanagement, Corp Fin has reinstated Sections C.2 and C.3 of SLB 14J and Section B.4 of SLB 14K – these subsections are reprinted at the bottom of SLB 14M for convenience. However, SLB 14M does not reinstate the expectation for a no-action request to include a board analysis of the policy issue raised by the proposal. Hallelujah! You can still submit one voluntarily if you’d like to do that.
But wait, there’s more good news! FAQs included at the end of the Bulletin say that the Staff will consider the guidance in place at the time it issues a response to a no-action request. The burden remains on the company to demonstrate that it’s entitled to an exclusion, but if you think this SLB will help your cause, you also can raise new legal arguments as supplemental correspondence via the online portal. You should do that in as timely a manner as possible – and don’t forget to forward copies to the proponent. Keep in mind that the Staff’s response time will be affected if they receive a huge influx of supplemental letters.
In addition to rescinding Staff Legal Bulletin 14L, SLB 14M addresses various other aspects of Rule 14a-8. SLB 14L had addressed several of these items as well – the new Bulletin is carrying some things forward and also refining & clarifying the guidance. Here are key takeaways:
1. 2022 Proposal: Confirms the 2022 proposal to amend Rule 14a-8 has not been adopted and is not operative
2. Graphics: States that proponents can use graphics in their proposals, but noting that exclusion may be appropriate under 14a-8(i)(3) where they make the proposal materially false or misleading, render the proposal inherently vague, etc. Also, words in the graphics count towards the proposal’s 500-word limit.
3. Proof of Ownership: Discourages an overly technical reading of proof of ownership letters as a means to exclude a proposal. Also, stating that brokers and banks can continue to provide confirmation of how many shares the proponent held continuously and need not separately calculate the share valuation, and stating that the Staff does not view Rule 14a-8 as requiring a company to send a second deficiency notice to a proponent if the company previously sent an adequate deficiency notice prior to receiving the proponent’s proof of ownership and the company believes that the proponent’s proof of ownership letter contains a defect.
4. Email Communications: To prove delivery of email under Rule 14a-8, the Staff suggests that senders should seek a reply email from the recipient in which the recipient acknowledges receipt and encourages both companies and proponents to do acknowledge receipt when requested. The staff doesn’t consider screenshots of emails on the sender’s device to be proof of delivery. The Staff shares views on submission of proposals, delivery of notices of defects, and responses to notices of defects.
We’ve been living with Staff Legal Bulletin 14L since November 2021. I always respect the Staff and know they are doing their best to further the agency’s mission, so I imagine there was a positive intention in trying to make the no-action process more efficient. But this one landed like a lead balloon. John blogged at the time that the Bulletin:
rescinds Staff Legal Bulletins 14I, 14J and 14K, and effectively takes a sledgehammer to four years of interpretive guidance on the exclusion of ESG-related shareholder proposals from proxy statements. In doing so, the new SLB may open the door for the inclusion of a wide range of previously excludable ESG proposals.
There was even a dissenting statement from Commissioners Peirce and Roisman – pretty rare at the time, given the fact that these SLBs expressly aren’t approved or disapproved by the Commission. Commissioner Crenshaw has now also issued a statement on SLB 14M – but it’s (mostly) focused on the mid-season timing.
As predicted, things got wild during the 2022 proxy season, which was the first full season when SLB 14L was in effect. A record number of shareholder proposals went to a vote after being included in company proxy statements, and we experienced twists, turns, and “U-turns.” Obviously no-action responses are fact-specific, but companies were not finding many “good facts” when it came to no-action arguments.
Things stabilized a bit in the following years, after proponents experienced low support for prescriptive proposals. But peoples’ strong feelings about now-rescinded SLB 14L remained. SLB 14L prompted compromises & conversations that may not have happened otherwise – and some of those may have been worthwhile. But today, more than a few corporate folks are dancing on its grave.
The SEC litigation team has asked the 8th Circuit Court of Appeals to hold off on scheduling oral argument on the Commission’s climate-related disclosure rules, pursuant to a 7-paragraph directive issued yesterday by Acting SEC Chair Mark Uyeda. His statement recaps the opposition that he and Commissioner Hester Peirce registered against the rules when they were adopted – as well as ongoing concerns about costs vs. benefits and the Commission’s statutory authority and procedural compliance. It concludes:
These views, the recent change in the composition of the Commission, and the recent Presidential Memorandum regarding a Regulatory Freeze, bear on the conduct of this litigation. I believe that the Court and the parties should be notified of these changes.
Therefore, I have directed the Commission staff to notify the Court of the changed circumstances and request that the Court not schedule the case for argument to provide time for the Commission to deliberate and determine the appropriate next steps in these cases. The Commission will promptly notify the Court of its determination about its positions in the litigation.
The Commission has committed to submitting a status report to the court within 45 days. Although Commissioner Caroline Crenshaw issued this response statement saying that she still supports the rule and believes the agency acted within its authority, given the current makeup of the Commission and broader developments, I’d be shocked if the “next steps” involve continued defense of mandated climate disclosure. (But don’t forget about the possibility of disclosure in other regimes, like California!)
Yesterday, the Corp Fin Staff released updated CDIs on the filing of Schedules 13D and 13G. First, Question 103.11 was revised to state that a shareholder’s ability to file on Schedule 13G in lieu of the Schedule 13D otherwise required will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2. As you can see from the redline (thanks again, Corp Fin!), language about the shareholder’s discussions with management has been deleted.
New CDI 103.12 now separately describes that “discussion” factor – with significant changes from the previous language. Here it is in full:
Question: Shareholders filing a Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) must certify that the subject securities were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer.” Under what circumstances would a shareholder’s engagement with an issuer’s management on a particular topic cause the shareholder to hold the subject securities with a disqualifying “purpose or effect of changing or influencing control of the issuer” and, pursuant to Rule 13d-1(e), lose its eligibility to report on Schedule 13G?
Answer: The determination of whether a shareholder acquired or is holding the subject securities with a purpose or effect of “changing or influencing” control of the issuer is based on all the relevant facts and circumstances and will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2.
The subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in making this determination. For example, Schedule 13G would be unavailable if a shareholder engages with the issuer’s management to specifically call for the sale of the issuer or a significant amount of the issuer’s assets, the restructuring of the issuer, or the election of director nominees other than the issuer’s nominees.
In addition to the subject matter of the engagement, the context in which the engagement occurs is also highly relevant in determining whether the shareholder is holding the subject securities with a disqualifying purpose or effect of “influencing” control of the issuer. Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:
– recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
– discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations. [Feb. 11, 2025]
Pay attention to those bullet points. They may force institutional investors and asset managers to choose between engaging on voting policy topics & consequences vs. maintaining Schedule 13G eligibility. Acting SEC Chair Mark Uyeda has remarked in the past that asset managers’ engagement endeavors – when they include the implicit threat of voting against a director standing for re-election – may have the purpose or effect of changing or influencing control.
This is a biggie. Yesterday, ISS announced that it would halt consideration of gender and racial and/or ethnic diversity of a company’s board when making vote recommendations on director elections. The change applies to the proxy advisor’s Benchmark policies – as well as all of its Specialty policies – for U.S. companies. Here’s an excerpt from the press release:
ISS will indefinitely halt consideration of certain diversity factors in making vote recommendations with respect to directors at U.S. companies under its proprietary Benchmark and Specialty policies. Specifically and for shareholder meeting reports published on or after February 25th, ISS will no longer consider the gender and racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies under its Benchmark and Specialty policies.
Assessments and vote recommendations on directors of U.S. companies will continue to be evaluated under the other considerations outlined in the Benchmark and Specialty voting guidelines (accessible here) including independence, accountability and responsiveness.
It’s rare for ISS to update its voting policies after the annual updates have been released. As I noted earlier this week and as Dave shared last week, companies have been caught between a rock and a hard place on diversity-related disclosures in their Form 10-K and proxy statement. The pendulum is swinging quickly away from “box checking” after last month’s Executive Orders and last week’s AG memo. Two big asset managers had already shifted their policy language, and now ISS is following suit.
Reuters reported last week that SEC Enforcement Staff was told that they need Commission approval before formally launching investigations. As noted in this Paul Hastings memo, a formal order of investigation is needed before the Enforcement Staff can subpoena testimony or documents.
Currently, there are three SEC Commissioners, and two of them have publicly dissented from a number of enforcement actions over the past few years. Unlike the Consumer Financial Protection Bureau, it doesn’t look like the SEC is halting all of its efforts and facing annihilation. The SEC’s Enforcement Division will still conduct investigations. But those endeavors likely will have more guardrails. The Paul Hastings team gives more color:
This action could be a precursor to the SEC rescinding a 2009 SEC rule that delegated authority to issue a formal order of investigation to the SEC’s director of Enforcement and other senior officers of the Division of Enforcement.
Before 2009, the Commission approved formal orders of investigation after the Enforcement staff prepared a memorandum for the Commission summarizing the facts and the possible securities law violations.
The scope of delegation authority has fluctuated since the 2009 rule. Most recently, as of 2021, senior Staff including regional directors and associate regional directors have had the authority to open formal investigations.
The memo goes on to summarize the attributes of pre-2009 practices that could apply if this authority has been rescinded. In those days, Enforcement Staff would seek information on a voluntary basis – which was less costly & intrusive for companies. The Commission’s involvement at the early stage of the formal investigation helped guide the direction of the case.
Despite grappling with manyuncertainties right now, corporate teams may be breathing a little easier when it comes to the SEC Enforcement environment. That’s partly because people are predicting that the new leadership team will be focused more on individual accountability than on corporate penalties. This Reuters article details enforcement actions that presumptive SEC Chair Paul Atkins dissented from when he served as a Commissioner, which give some insight into what his priorities and approaches might be.
A shift in the enforcement environment doesn’t mean that compliance teams can fall asleep at the wheel, though. This Statement of the Commission Concerning Financial Penalties – which was unanimously approved back in 2006, when Paul Atkins was a Commissioner – lays out factors that, at that time, the Commission believed would warrant corporate penalties. Here’s Broc’s blog from way back when that happened. The two principal considerations were:
The presence or absence of a direct benefit to the corporation as a result of the violation. The fact that a corporation itself has received a direct and material benefit from the offense, for example through reduced expenses or increased revenues, weighs in support of the imposition of a corporate penalty. If the corporation is in any other way unjustly enriched, this similarly weighs in support of the imposition of a corporate penalty. Within this parameter, the strongest case for the imposition of a corporate penalty is one in which the shareholders of the corporation have received an improper benefit as a result of the violation; the weakest case is one in which the current shareholders of the corporation are the principal victims of the securities law violation.
The degree to which the penalty will recompense or further harm the injured shareholders. Because the protection of innocent investors is a principal objective of the securities laws, the imposition of a penalty on the corporation itself carries with it the risk that shareholders who are innocent of the violation will nonetheless bear the burden of the penalty. In some cases, however, the penalty itself may be used as a source of funds to recompense the injury suffered by victims of the securities law violations. The presence of an opportunity to use the penalty as a meaningful source of compensation to injured shareholders is a factor in support of its imposition. The likelihood a corporate penalty will unfairly injure investors, the corporation, or third parties weighs against its use as a sanction.
Additional factors included:
1. The need to deter the particular type of offense.
2. The extent of the injury to innocent parties.
3. Whether complicity in the violation is widespread throughout the corporation.
4. The level of intent on the part of the perpetrators.
5. The degree of difficulty in detecting the particular type of offense.
6. Presence or lack of remedial steps by the corporation.
7. Extent of cooperation with Commission and other law enforcement.
In a speech later that year, then-Commissioner Atkins noted:
It is worth noting that articulating the Commission’s approach to corporate penalties is one area where, thanks to Chairman Cox, we have made significant progress. Our January principles turn primarily on the existence or absence of a direct benefit to the corporation resulting from the violation and the degree to which the penalty will compensate or further harm shareholders. But, despite this guidance, do not think that large corporate penalties are a thing of the past. As I have said for quite a while, corporate penalties are appropriate in many circumstances, particularly where the company and its shareholders have broken the law and accrued a benefit from it. Consider, for example, the $700 million in disgorgement and penalty of $100 million that AIG agreed last month to pay.
He went on to discuss the undesired incentive-effect that large corporate penalties can have on the Enforcement Staff – along with ideas for rewarding Staff who pursue micro-cap cases and other less glamorous issues.
On Friday, the SEC announced that a new filing fee Fedwire format will take effect on March 10th. The old format will be retired on March 9th. Clients often appreciate help with the Fedwire process – especially smaller or newly public companies – so stay tuned for the SEC to share the new format on its instruction page.
While we’re on the topic of filing fees, don’t forget that all filers will be required to tag filing fee exhibits in iXBRL beginning July 31st of this year, as part of the modernization rules adopted a few years ago. Large accelerated filers were subject to the requirement beginning last summer, and others were permitted to voluntarily comply. The SEC has posted compliance resources to help with this transition.
The NYSE has sent its “annual compliance guide” to listed companies to remind them of their obligations on a variety of topics and summarize developments since last year. The letter gives a front-page reminder about the need to submit supplemental listing applications at least two weeks in advance of any issuances of a listed security, listing a new security, and certain other corporate events. Here’s more detail:
A listed company is required to file a SLAP to seek authorization from the Exchange for a variety of corporate events, including:
• Issuance (or reserve for issuance) of additional shares of a listed security;
• Issuance (or reserve for issuance) of additional shares of a listed security that are issuable upon conversion of another security, whether or not the convertible security is listed on the Exchange;
• Change in corporate name, state of incorporation, or par value; and/or
• Listing a new security (e.g., new preferred stock, second class of stock, or bond). No additional shares of a listed security, or any security convertible into the listed security, may be issued until the Exchange has authorized a SLAP.
Such authorization is required prior to issuance, regardless of whether the security is to be registered with the SEC, including if conversion is not possible until a future date. The Exchange requests at least two weeks to review and authorize all SLAPs. It is recommended that a SLAP be submitted electronically through Listing Manager as soon as a listed company’s board approves a transaction.
Section 703 of the Listed Company Manual provides additional information on the timing and content of SLAPs. Domestic companies should also give particular attention to Sections 303A.08, 312.03 and 313 of the Listed Company Manual (see Shareholder Approval and Voting Rights Requirements below). Generally, FPIs may follow home country practice in lieu of these requirements. Please consult the Exchange if you have any questions.
The letter also gives reminders to NYSE-listed companies on the new “compliance by reverse split” rules, timely alert policies, notification requirements, annual & interim affirmations, related party transactions, voting requirements for proposals at shareholder meetings, and more.
