The staff’s release of Staff Legal Bulletin No. 14I (“SLB 14I”) ahead of the upcoming proxy season, appears to reflect several issuer-friendly modifications to the staff’s processing of no-action letters seeking exclusion of shareholder proposals under Rule 14a-8 of the Exchange Act. In particular, SLB 14I addresses the following aspects of the shareholder proposal submission process under Rule 14a-8 that could be viewed as favorable to issuers considering submission of no-action letters for exclusion of shareholder proposals :
- Deference to issuers’ analyses of significant policy issues under the Rule 14a-8(i)(7)’s “ordinary business” exception;
- Expansion of the “economic relevance” exception under Rule 14a-8(i)(5);
- Additional eligibility requirements for proposals “by proxy” under Rule 14a-8(b); and
- Application of Rule 14a-8(d) to the use of images in shareholder proposals and supporting statements and encouraged reliance on Rule 14a-8(i)(3)’s “false and misleading” standard for exclusion.
Ordinary Business Exception – Rule 14a-8(i)(7)
The ordinary business exception provides a basis for exclusion under Rule 14a-8(i)(7) if a shareholder proposal deals with matters “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” An exception to this exclusion, however, applies to proposals that “focus on policy issues that are sufficiently significant because they transcend ordinary business” that they may not be excluded. The staff has traditionally conducted a painstaking, multi-faceted analysis to determine whether an issue may rise to the level of significant policy issue warranting a no-action letter denial.
The staff’s guidance expresses the view that the board of directors is generally in a better position to determine the significance of a shareholder proposal. As such, SLB 14I indicates that the staff will now be looking to an issuer’s boards of directors to provide a discussion that reflects the board’s analysis of the particular policy issue raised and its significance including “the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.” In this respect, SLB 14I appears to the lay the groundwork for the staff to defer to the board’s analysis on the “the difficult judgment call” of determining the significance of a shareholder proposal under Rule 14a-8(i)(7).
Economic Relevance Exception – Rule 14a-8(i)(5)
The infrequently relied upon “economic relevance” exception under Rule 14a-8(i)(5 permits a company to 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.” The staff has historically narrowly applied the Rule 14a-8(i)(5) and, as such, has infrequently granted no-action relief under this basis over the years.
SLB14I notes the Division of Corporation Finance’s belief that the existing application of Rule 14a-8(i)(5) has unduly limited the exclusion’s availability because it has not fully considered whether the proposal “deals with a matter that is not significantly related to the issuer’s business.” and is therefore excludable. Under the staff’s guidance, the Division’s analysis of Rule 14a-8(i)(5) requests going forward will focus on a proposal’s significance to the company’s business irrespective of whether it raises broad issues of social or ethical significance. SLB 14I provides that the analysis will now be dependent on the particular circumstances of the company to which the proposal is submitted. For example, SLB14I highlights that a proposal may be excludable under Rule 14a-8(i)(5) where a proponent fails to demonstrate that a proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.” Furthermore, similar to its guidance on Rule 14a-8(i)(7), SLB 14I suggests that the staff will defer to an issuer’s board as to whether a particular proposal is “otherwise significantly related to the company’s business.”
“Proposals by proxy” – Rule 14a-8(b)
SLB14I discusses the common practice of shareholder submission of proposals through a representative, or “proposal by proxy” – a tactic frequently relied upon by serial shareholder proponents such as John Chevedden. Although the staff’s guidance confirms the propriety of such submissions under the spirit of Rule 14a-8, SLB14I appears to raise the bar for proposal submissions by proxy by increasing the type of documentation that must be provided to prove eligibility under Rule 14a-8.
Specifically, in order to meet the eligibility requirements under Rule 14a-8(b), a proponent seeking to submit a proposal by proxy must now provide documentation describing the shareholder’s delegation of authority to the proxy including the following:
- the identity of shareholder-proponent and the person or entity selected as proxy;
- the identity of the company to which the proposal is directed;
- the annual or special meeting for which the proposal is submitted;
- the specific proposal to be submitted (e.g., proposal to lower the threshold for calling a special meeting from 25% to 10%); and
- a copy executed by the shareholder.
Although a failure to provide such documentation upon initial submission may not be fatal to a proposal by proxy (since an issuer is required to provide a notice of deficiency to the proponent with an additional 14-calendar day period to provide required information), it is clear that SLB 14I reflects the staff’s intent to place an additional procedural obstacle in front of shareholder proponents who are viewed by some as unfairly monopolizing the Rule 14a-8 shareholder submission process.
Use of Images – Rule 14a-8(d)
Rule 14a-8(d) is a procedural bases for exclusion that provides that a “proposal, including any accompanying supporting statement, may not exceed 500 words.”
SLB14I provides the Division of Corporation Finance’s view that, consistent with recent no-action letter precedent, the use of images or graphs in shareholder proposals is appropriate. However, SLB14I simultaneously invites issuers to seek exclusion of graphs and/or images under Rule 14a-8(i)(3) where they:
- make the proposal materially false or misleading;
- render the proposal inherently vague or indefinite;
- directly or indirectly impugn character or make charges of improper, illegal, or immoral conduct, without factual foundation; or
- are irrelevant to a consideration of the subject matter of the proposal.
SLB14I also notes that exclusion would also be appropriate under Rule 14a-8(d) if the total number of words in a proposal, including words in the graphics, exceeds 500.