TheCorporateCounsel.net

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.

Here are a few thoughts from Matthew Sekol about what this could mean for ESG – and anti-ESG – proposals. We’ll be posting memos in our “Shareholder Proposals” Practice Area.

– Liz Dunshee