Corp Fin has just released a new staff legal bulletin on shareholder proposals—we’re up to 14J—that once again examines the exclusions under Rules 14a-8(i)(5), the “economic relevance” exception, and 14a-8(i)(7), the “ordinary business” exception. Notably, these rules were also the subject of SLB 14I. More specifically, the new SLB provides guidance with regard to the following:
- the nature of the board analysis the staff would find most “helpful” in evaluating a no-action request to exclude a shareholder proposal,
- “micromanagement” as a basis for exclusion under Rule 14a-8(i)(7) and
- the application of Rule 14a-8(i)(7) to exclude proposals related to senior executive and/or director compensation matters.
Rule 14a-8(i)(7). Under Rule 14a-8(i)(7), a company is permitted to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” Why? Because the resolution of these types of matters is considered to be more properly the province of management and the board of directors than of the shareholders. In SLB 14I, the staff explained that the ordinary business exception is based on “two central considerations”: the extent to which the proposal “micromanages” the company as well as the “subject matter” of the proposal. Generally, proposals may be excluded under Rule 14a-8(i)(7) if they “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,’” unless, that is, the “significant policy exception” applies. That exception would preclude exclusion of the proposal if the proposal focuses on policy issues that are so significant that “they transcend ordinary business and would be appropriate for a shareholder vote. Whether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company’s business operations.” SLB 14I advised that whether a policy issue is sufficiently significant to fall under the exception
“often raise[s] difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine. A board of directors, acting as steward with fiduciary duties to a company’s shareholders, generally has significant duties of loyalty and care in overseeing management and the strategic direction of the company. A board acting in this capacity and with the knowledge of the company’s business and the implications for a particular proposal on that company’s business is well situated to analyze, determine and explain whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote.”
As a result, the SLB introduced a new element into the no-action request: in light of the difficult judgment calls involved, the staff “would expect a company’s no-action request to include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance. That explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”
Rule 14a-8(i)(5). 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 guidance in SLB 14I addressed the second prong of the rule, the proposal’s significance to the company’s business, indicating that the staff’s analysis would be focused on a proposal’s significance to the company’s business when it otherwise related to operations that accounted for less than 5% of total assets, net earnings and gross sales. The SLB noted that the burden was on the proponent to show that a proposal was “otherwise significantly related to the company’s business.” That is, if the “proposal’s significance to a company’s business is not apparent on its face,” it “may be excludable unless the proponent demonstrates that it is ‘otherwise significantly related to the company’s business.’” As with the “ordinary business” exception in Rule 14a-8(i)(7), Corp Fin advised that it would expect a company’s Rule 14a-8(i)(5) no-action request to include a discussion that reflects the board’s analysis of the proposal’s significance to the company, again detailing “the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.” (See this PubCo post.)
In this past proxy season, a number of companies submitted no-action requests that, consistent with SLB 14I, included a discussion of the board’s analysis, but, for the most part, without successfully persuading the staff to agree with a request for exclusion of the proposal. Accordingly, new SLB 14J offers guidance on ways to provide board analyses that might be more “helpful” to the staff. In the new guidance, the staff advises that board discussions were not as “helpful” where they did not describe the specific factors considered by the board, but were instead just conclusory or simply described the processes followed by the board—apparently notwithstanding SLB 14I’s advocacy of analyses that “detailed the specific processes employed by the board.” In contrast, the discussions that the staff “found most helpful focused on the board’s analysis and the specific substantive factors the board considered in arriving at its conclusion [emphasis added].” In addition, the staff indicated that, although the “absence of a board analysis will not create a presumption against exclusion… without having the benefit of the board’s views on the matters raised, the staff may find it difficult in some instances to agree that a proposal may be excluded. This is especially the case where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident and that the board may be well-positioned to consider and evaluate. Likewise, the presence of a board analysis will not create a presumption of exclusion.”
On a 2017 webcast regarding SLB 14I, “Shareholder Proposals: Corp Fin Speaks,” presented by TheCorporateCounsel.net, Matt McNair, Senior Special Counsel in Corp Fin’s Office of Chief Counsel, confirmed that a board analysis was not mandatory. For example, where, based on a long trail of prior no-action letters, the proposal falls clearly within the exclusion, a board analysis may not be necessary. Note that this position was consistent with the positions previously articulated by Corp Fin director William Hinman and Corp Fin Associate Director Michele Anderson at the PLI Securities Regulation Institute. (See this PubCo post.) In addition, McNair’s view was that the board discussion should focus on the board’s insight with regard to the sufficiency of the connection or nexus to the company’s business. (See this PubCo post.)
The new SLB then outlines the types of “specific substantive factors” that the staff expects to see discussed “in sufficient detail” in a “well-developed discussion,” adding that the factors identified below are “not exclusive or exhaustive, nor is it necessary for a board analysis to address each one of the… factors”:
- “The extent to which the proposal relates to the company’s core business activities.
- Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
- Whether the company has already addressed the issue in some manner, including the differences—or the delta—between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company. [Note, however, that the staff distinguished this analysis from the analysis required for “substantial implementation under Rule 14a-8(i)(10).]
- The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
- Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
- Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.”
If a previous vote was significantly in favor or against, the staff will consider whether the company has taken any subsequent actions or whether other intervening events have occurred since the vote that may have mitigated or increased the issue’s significance to the company. In addition, the more recent a vote, the more likely it is to be “indicative of the topic’s significance to a company and its shareholders.” Staff determinations will be made on a case-by-case basis, although the staff will generally not concur in exclusion of proposals that focus on substantive governance matters.
Micromanagement under Rule 14a-8(i)(7)
As noted above, one of the central considerations of the “ordinary business” exception is the extent to which the proposal seeks to “micromanage” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Under this prong of the exclusion, the staff does not look at the subject matter, but rather “only to the degree to which a proposal seeks to micromanage.” Excessive micromanagement could arise “where the proposal involves intricate detail, or seeks to impose specific timeframes or methods for implementing complex policies.” In applying that framework, the staff has agreed to the exclusion of a proposal to “generate a plan to reach net-zero greenhouse gas emissions by the year 2030, which sought to impose specific timeframes or methods for implementing complex policies.” Similarly, the staff has also granted no-action relief for the exclusion of a proposal seeking an intricately detailed study or report, including where the “substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies.” The new SLB emphasizes, however, that “the staff’s concurrence with a company’s micromanagement argument does not necessarily mean that the subject matter raised by the proposal is improper for shareholder consideration. Rather, in that case, it is the manner in which a proposal seeks to address an issue that results in exclusion on micromanagement grounds.”
Application of Rule 14a-8(i)(7) to proposals that address senior executive and/or director compensation
Consistent with prior SEC guidance, proposals that relate to general employee compensation and benefits are excludable under Rule 14a-8(i)(7), while proposals that focus on significant aspects of senior executive and/or director compensation generally are not excludable under that rule. In analyzing the availability of the exclusion in this context, the SLB indicates that the staff takes into account both the actual resolution and the supporting statement. The SLB addresses the issues of proposals that relate to both executive comp and ordinary business, proposals that relate to both executive comp and workforce comp and proposals that may be viewed to micromanage executive comp.
Proposals that address senior executive and/or director compensation and ordinary business matters
In some cases, the availability of the exclusion depends on whether, at the end of the day, the focus of the proposal is executive comp or ordinary business. For example, the staff has agreed to exclusion of proposals that were styled as executive comp proposals but were considered by the staff to be primarily concerned with ordinary business, such as “a proposal requesting that the board prohibit payment of incentive compensation to executive officers unless the company first adopted a process to fund the retirement accounts of certain retired employees.” In that case, the staff viewed the proposal to be focused not on executive comp but rather on “the ordinary business matter of employee benefits.” By looking at the underlying focus of the proposals, the staff seeks to avoid elevating form over substance: the new SLB confirms that “including an aspect of senior executive or director compensation in a proposal that otherwise focuses on an ordinary business matter will not insulate a proposal from exclusion under Rule 14a-8(i)(7).”
Proposals that address aspects of senior executive and/or director compensation that are also available or applicable to the general workforce
Proposals related to executive comp are typically not excludable under Rule 14a-8(i)(7), but may be excludable “if a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce and the company demonstrates that the executives’ or directors’ eligibility to receive the compensation does not implicate significant compensation matters. For example, a proposal that seeks to limit when senior executive officers will receive golden parachutes may be excludable under Rule 14a-8(i)(7) if the company’s golden parachute provision broadly applies to a significant portion of its general workforce.” The rationale for this position is that, even where the proposal is framed in terms of executive comp, if the form of comp is broadly available or applicable to a company’s general workforce, the proposal would “not generally raise significant compensation issues that transcend ordinary business matters.” In the new SLB, the staff advises that it will take the following approach:
- Companies will generally not be permitted to rely on Rule 14a-8(i)(7) to exclude proposals that focus on aspects of compensation that are available or apply only to senior executive officers and/or directors.
- Companies will generally be permitted to rely on Rule 14a-8(i)(7) to exclude proposals that focus on aspects of compensation that are available or apply to senior executive officers, directors and the general workforce.
Proposals that micromanage senior executive and/or director compensation practices
Although, historically, the staff has not concurred in exclusion of proposals addressing executive comp on the basis of micromanagement, the staff has now changed its position and does “not believe there is a basis for treating executive compensation proposals differently than other types of proposals.” Accordingly, the staff may now agree to exclusion, on the basis of micromanagement, of executive comp proposals “that seek intricate detail, or seek to impose specific timeframes or methods for implementing complex policies.” As an example of a potentially excludable proposal, the SLB describes a proposal “detailing the eligible expenses covered under a company’s relocation expense policy such as the type and duration of temporary living assistance, as well as the scope of eligible participants and amounts covered.