Corp Fin provides additional guidance on the application of the “economic relevance” and “ordinary business” exclusions to no-action requests submitted under Rule 14a-8.
The Division of Corporation Finance (Corp Fin) issued Staff Legal Bulletin No. 14J (“SLB No. 14J”) this week as supplemental guidance on the application of the “economic relevance” (Rule 14a-8(i)(5)) and “ordinary business” (Rule 14a-8(i)(7)) exclusions to shareholder proposals submitted under Rule 14a-8. SLB No. 14J provides insight on:
- The Securities and Exchange Commission (SEC) staff’s assessment of board analyses in companies’ no-action letters relating to Rule 14a-8(i)(5) and Rule 14a-8(i)(7)
- Use of the “micromanagement” argument as a basis to exclude a shareholder proposal under Rule 14a-8(i)(7)
- The application of Rule 14a-8(i)(7) to exclude shareholder proposals related to senior executive and/or director compensation matters
Board Analyses Under Rule 14a-8(i)(5) and Rule 14a-8(i)(7)
SLB No. 14J provides additional context to last year’s Staff Legal Bulletin No. 14I (SLB No. 14I), which, noting that the board of directors generally is well-suited to make “economic relevance” and “ordinary business” assessments, encouraged companies in no-action requests presented under these bases to include a discussion reflecting the board’s analysis of the particular policy issues raised by the shareholder proposal and its significance relative to the company.
Corp Fin clarifies in SLB No. 14J that the inclusion of a board analysis is voluntary, but can be helpful in the SEC staff’s evaluation of a no-action request, particularly where the analysis focuses on specific substantive factors that the board has considered. According to Corp Fin, a well-developed discussion of a board’s analysis may address the following factors:
- The extent to which the proposal relates to the company’s core business activities
- Quantitative data, including any financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company
- Whether the company already has addressed the issue in some manner, including the differences between the proposal’s specific request and the actions that the company has taken, and an analysis of whether the delta between the request and such actions presents a significant policy issue
- 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 previously have voted on the matter, and an indication of the board’s views as to the related voting results
Corp Fin noted that the above list of factors is exemplary in nature and not intended to be exhaustive, nor is a company expected to address each listed factor
To summarize, while the absence of a board analysis will not be dispositive in the SEC staff’s ruling on a no-action request, failure to include such an analysis may impede the likelihood of success in obtaining no-action relief.
The “ordinary business” exclusion is premised on the idea that management and the board of directors are best suited to resolve “ordinary business problems … since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” As such, the exclusion is designed, in part, to exclude proposals that seek 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.”
A determination as to a proposal under a micromanagement theory is evaluated on a case-by-case basis. The SEC staff will deem a proposal as impermissibly “micromanaging” the company if it “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.” For example, the SEC staff has applied this framework to exclude a proposal to generate a plan to reach net-zero greenhouse gas emissions by 2030, as well as proposals that call for intricately detailed studies or reports.
SLB No. 14J reaffirms the aforementioned framework; however, Corp Fin noted that the SEC staff’s concurrence with a company’s micromanagement argument does not necessarily mean that the subject matter of the proposal itself is improper for a Rule 14a-8 submission. Rather, a grant of no-action relief may instead mean that the SEC staff believes the proposal’s methodology is problematic, meaning the would-be proponent could address the subject matter in a different way.
SLB No. 14J also provides additional guidance for proposals that implicate the following issues:
- Senior executive and/or director compensation and ordinary business matters
- Aspects of senior executive and/or director compensation that are also available or applicable to the general workforce
- Micromanagement of senior executive and/or director compensation practices
Takeaway #1: Proposals that focus on, or apply solely to, senior executive and/or director compensation generally may not be excluded under Rule 14a-8(i)(7).
In reviewing no-action requests under Rule 14a-8(i)(7) for these types of proposals, the SEC staff will assess whether a proposal is merely styled as a senior executive and/or director compensation proposal or if its underlying focus truly relates to senior executive and/or director compensation. A proposal that purports to address senior executive and/or director compensation, but has an underlying concern that is primarily an ordinary business matter, will be excludable under the “ordinary business” exclusion. In other words, the focus of the proposal is the determining factor, which, in turn, ensures that substance remains superior to form and that proposals are not included simply because they touch upon senior executive and/or director compensation.
Takeaway #2: Proposals that focus on aspects of compensation that are available or apply to senior executive officers, directors, and the general workforce generally are eligible for exclusion under Rule 14a-8(i)(7).
SLB No. 14J further explains that proposals that address senior executive and/or director compensation may still be excluded under the “ordinary business” exclusion if (1) “a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce”; and (2) “the company demonstrates that the executives’ or directors’ eligibility to receive the compensation does not implicate significant compensation matters.”
Takeaway #3: Proposals that seek to “micromanage” a company, but relate to executive officer and/or director compensation, will continue to be evaluated under the SEC staff’s historical approach to micromanagement arguments under Rule 14a-8(i)(7).
Historically, proposals relating to senior executive and/or director compensation have not been deemed excludable on the basis of a company’s claim of micromanagement. In SLB No. 14J, Corp Fin stated its belief that there is no reason to treat senior executive and/or director compensation proposals differently than other proposals for which a micromanagement argument is claimed. Therefore, going forward, proposals may be excludable under Rule 14a-8(i)(7) under a micromanagement theory if such proposals seek intricate detail, impose specific timeframes, and/or call for specific methods for implementing complex policies. Accordingly, a no-action letter requesting exclusion of a senior executive and/or director compensation proposal on the basis of micromanagement will be evaluated under the same micromanagement framework as described above.
While Corp Fin left the majority of its previous guidance intact, SLB No. 14J provides significant additional guidance that will enable companies to better assess and predict the excludability of a shareholder proposal under the “economic relevance” and “ordinary business” bases.