On October 16, 2019, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance (“Corp Fin”) issued Staff Legal Bulletin No. 14K (“SLB 14K”) addressing shareholder proposals.1 This guidance follows Corp Fin’s September 6, 2019 announcement regarding changes to the Corp Fin staff’s (the “Staff”) process for handling shareholder proposals (the “New Policy”), which may include the Staff’s decision to decline to state a view in connection with a particular no-action request.2
SLB 14K provides deeper insight into the Staff’s interpretation of the ordinary business exclusion under Rule 14a-8(i)(7), reflective of the Staff’s decisions from the last proxy season. Specifically, SLB 14K addresses: (i) board analyses provided in no-action requests to demonstrate that the policy issue raised by the proposal is not significant to the company; and (ii) the scope and application of micromanagement as a basis to exclude a proposal under Rule 14a-8(i)(7). The new guidance also addresses certain “overly technical” readings of proof of ownership letters and cautions that companies should not seek to exclude a shareholder proposal based on technicalities when a letter sufficiently evidences the requisite minimum ownership requirements.
Significance of the Proposal’s Subject Matter to the Particular Company
Rule 14a-8(i)(7), the “ordinary business” exception, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations” as it “is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” SLB 14K reminds companies that the policy underlying the “ordinary business” exception rests on two central considerations: (i) the significance of the proposal’s subject matter; and (ii) the degree to which the proposal “micromanages” the company.
Generally, proposals that raise matters that are “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” are excludable under Rule 14a-8(i)(7), unless such proposal “transcend[s] the day-to-day business matters and raise[s] [a] policy issue so significant that it would be appropriate for a shareholder vote.” SLB 14K makes clear that in evaluating significance, the Staff “takes a company-specific approach… rather than recognizing particular issues or categories of issues as inherently ‘significant’.” Accordingly, a policy issue that is significant to one company may not be significant to another. For example, SLB 14K notes that a climate change policy proposal may raise a significant policy issue for an energy company but not for a software development company.
SLB 14K emphasizes the importance of including a description of the board’s analysis, where appropriate, in no-action requests seeking exclusion based on the “ordinary business” exception. Most notably, SLB 14K states that the Staff often found such an analysis helpful even in instances where such analysis was not referenced in its response letter, and, conversely, where significance was at issue and a no-action request did not include a robust board analysis, the Staff notes that its ability to state a view regarding exclusion may have been impacted.
Specifically, SLB 14K focuses on two key considerations relating to board analysis submitted in support of a no-action request: (i) delta analysis; and (ii) prior voting results.
When a company has already taken steps to address in some manner the policy issue raised by a proposal, a delta analysis – looking at the differences between the proposal’s specific request and the actions the company has already taken – could be helpful in analyzing whether the specific manner in which the proposal addresses the issue still presents a significant policy issue for the company. This could be particularly useful for companies that have already addressed the policy issue but may not have substantially implemented the proposal’s specific request for purposes of exclusion under Rule 14a-8(i)(10).
The board analysis could also outline whether the company’s shareholders have previously voted on the matter and the board’s views on the voting results. In SLB 14K, the Staff provides examples of when a board analysis of prior voting results has been unsuccessful in demonstrating that the policy issue was no longer significant to the company including arguments that: (i) the voting results were not significant given that a majority of shareholders voted against the prior proposal; (ii) the significance of the prior voting results was mitigated by the impact of proxy advisory firms’ recommendations; and (iii) when considering the voting results based on shares outstanding, instead of votes cast, the voting results were not significant.
SLB 14K notes that the board’s analysis may be more helpful if it includes a thorough explanation of how the company’s “subsequent actions, intervening events or other objective indicia of shareholder engagement on the issue” affect the significance of the underlying issue to the company. For example, after a proposal receives significant support, if a company engages with its shareholders to better understand the level of support on a particular policy issue, the board’s analysis might be more helpful if it “describes how its view on significance is informed by those engagements as well as any actions the company may have taken to address concerns expressed in the proposal.”
A proposal may also be excludable under the “ordinary business” exception if it “micromanages” the company (such as when a proposal prescribes the manner in which a policy issue is implemented, rather than focusing on the policy issue itself). In considering whether a proposal should be properly excluded based on the “ordinary business” exception because it “micromanages” the company, the analysis is focused on whether the proposal “seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board.” SLB 14K clarifies that a proposal framed as a request that the company “consider, discuss the feasibility of, or evaluate the potential for” [emphasis added] a particular issue, generally would not be viewed as micromanaging, while one that prescribes how the issue should be implemented, such as by requesting specific timeframes or methods for implementing complex policies, likely would be considered micromanagement. SLB 14K notes that the precatory nature of a proposal does not bear on the degree to which a proposal may be viewed as micromanaging the company.
Through specific examples, the Staff provides helpful insight into how it interprets the language of the proposal in tackling the micromanagement argument, focusing on the Staff’s “assessment of the level of prescriptiveness of the proposal.” SLB 14 K draws a distinction between a proposal prescribing “specific actions” that management or the board must undertake, and a proposal giving deference to management to consider the actions suggested by the proposal. The Staff advises companies asserting micromanagement as a basis on which to exclude a proposal to include an analysis of “how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.”
In addition, SLB 14K notes that the Staff looks at the entire proposal, not just the resolution itself, when analyzing a proposal. Therefore, if a supporting statement “modifies or re-focuses the intent of the resolved clause, or effectively requires some action in order to achieve the proposal’s central purpose as set forth in the resolved clause,” the Staff will take that into account in determining whether the proposal seeks to micromanage the company.
Overly Technical Reading of Proof of Ownership Letters
Rule 14a-8(b) provides that a proponent must prove eligibility to submit a proposal by offering proof that it “continuously held” the required amount of securities “for at least one year by the date” the proposal is submitted. The Staff has previously suggested a format for “proof of ownership letters” that shareholders and their brokers or banks could follow when supplying the required verification of ownership.3
In SLB 14K the Staff, while encouraging shareholders and their brokers or banks to use the sample format, reiterates that such formulation is neither mandatory nor the exclusive means of demonstrating the ownership requirements of Rule 14a-8(b) and cautions companies against seeking to exclude a shareholder proposal based on the proof of ownership letter if the language in the letter is clear and sufficiently evidences the requisite minimum ownership requirements.
As companies approach the upcoming proxy season without much clarity on how Corp Fin will apply its New Policy, which can include the Staff declining to state a view on a no-action request, SLB 14K sheds further light on how the Staff will think through significant policy issues, as well as provides clues on how the wording of a proposal will inform the Staff’s determination of whether or not a proposal seeks to micromanage. While prior Staff letters may tell a different story on the significance of including a board analysis as part of an “ordinary business” argument, SLB 14K leaves little doubt that companies will be better off including a robust board analysis along the lines described in the Staff Legal Bulleting No. 14J (October 23, 2018) and SLB 14K, which may improve the chances of the Staff taking a position on a company’s no action request, rather than declining to state a view.