In preparation for the 2020 proxy season, Morrison & Foerster presents its top 10 expectations for shareholder proposals. We hope our clients and friends find this list useful as the proxy season unfolds. Please also check out our other resources such as the publication: “Shareholder Proposal No-Action Letters – 2018–2019 Review” and our on-demand webinar “Preparing for the 2020 Proxy Season.”
1. Process – Until the proxy season unfolds, there will continue to be concerns about if, or how often, the Staff will decide not to take a view on shareholder proposal no-action requests.
In Staff Legal Bulletin No. 14 (July 13, 2001) (“SLB 14”), the Staff first described the basic no-action letter process in response to SLB 14’s Question B.2 (How does Rule 14a-8 operate?):
…if the company intends to exclude the proposal from its proxy materials, it must submit its reason(s) for doing so to the Commission and simultaneously provide the shareholder with a copy of that submission. This submission to the Commission of reasons for excluding the proposal is commonly referred to as a no-action request . . . we issue a no-action response that either concurs or does not concur in the company’s view regarding exclusion of the proposal.
The Staff then stated its reason for providing these responses in its response to SLB 14’s Question 8 (Are we required to respond to no-action requests?):
No. Although we are not required to respond, we have, as a convenience to both companies and shareholders, engaged in the informal practice of expressing our enforcement position on these submissions through the issuance of no-action responses. We do this to assist both companies and shareholders in complying with the proxy rules.
The Staff then discussed an exception to the standard procedure, as well as the reasoning for that exception, in its response to SLB 14’s Question 9 (Will we comment on the subject matter of pending litigation?):
No. Where the arguments raised in the company’s no-action request are before a court of law, our policy is not to comment on those arguments. Accordingly, our no-action response will express no view with respect to the company’s intention to exclude the proposal from its proxy materials.
The Staff’s “Announcement Regarding Rule 14a-8 No-Action Requests (September 6, 2019)” raised the possibility that the third possible outcome — that the Staff’s “no-action response will express no view with respect to the company’s intention to exclude the proposal from its proxy materials” — could become a common possibility instead of a rare exception. The Staff announcement stated:
The staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents as appropriate. In cases where a company seeks to exclude a proposal, the staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion.
Accordingly, it remains to be seen how frequently the Staff may decline to state a view and the circumstances that will lead to such a conclusion.
2. Process – The Staff has addressed concerns regarding the transparency of the Rule 14a-8 process with a chart of no-action requests and responses that provides all of the information needed with regard to no-action requests and will make it easier for companies and proponents to analyze that information.
The Staff made three statements describing its approach to Rule 14a-8 no-action requests in Staff Legal Bulletin No. 14K (“SLB 14K”):
- “The Staff will continue to inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion.”
- “Starting with the 2019–2020 shareholder proposal season, however, the staff may respond orally instead of in writing to some no-action requests.”
- “The staff intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.”
This raised concerns among companies and proponents regarding the continued transparency of the Rule 14a-8 no-action process. The Staff has addressed these issues with the presentation of a new approach to presenting Rule 14a-8 no-action letters on its website. This chart will present the following information with respect to each no-action request:
3. Proof of Ownership – There will not be as many arguments based on unartful drafting or potential misreading of a proponent’s proof of ownership; however, companies and proponents will still be held to the procedural requirements of Rule 14a-8. Where a company can fairly argue that a proponent has not satisfied those procedural requirements — even where a failure to satisfy a requirement is by one day or by failing to include proof of “continuous” ownership — companies will continue to send notices of deficiencies and, where an appropriate response is not received, omit proposals.
The Staff stated the following in SLB 14K:
In this section we address shareholder proof of ownership for purposes of Rule 14a-8(b). In relevant part, 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.
In Section C of Staff Legal Bulletin No. 14F (October 18, 2011) (“SLB 14F”), the Staff discussed common errors a shareholder may make in a Rule 14a-8 proof of ownership and suggested language to use in verifying ownership. This language was not required and was merely suggested to assist in compliance.
In SLB 14K, the Staff expressed its view that companies were, in some instances, taking an “overly technical” approach to considering whether a proponent had satisfied the eligibility requirements of Rule 14a-8. The Staff stated:
This season, we observed that some companies applied an overly technical reading of proof of ownership letters as a means to exclude a proposal. We generally do not find such arguments persuasive. For example, in two recent instances we did not concur with the excludability of a proposal based on Rule 14a-8(b) where the proof of ownership letter deviated from the format set forth in SLB No. 14F. In those cases, we concluded that the proponent nonetheless had supplied documentary support sufficiently evidencing the requisite minimum ownership requirements for the one-year period, as required by Rule 14a-8(b). We took a plain meaning approach to interpreting the text of the proof of ownership letter, and we expect companies to apply a similar approach in their review of such letters. (Footnote omitted.)
Following its statement of its observations and conclusions during the past proxy season, the Staff stated its views regarding the consideration of a proponent’s proof of ownership:
While we continue to encourage shareholders and their brokers or banks to use the sample language provided in [SLB 14F] to avoid this issue, such formulation is neither mandatory nor the exclusive means of demonstrating the ownership requirements of Rule 14a-8(b). As previously stated, we recognize that the requirements of Rule 14a-8(b) can be quite technical. Accordingly, companies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.” (Footnotes omitted and emphasis added.)
The Staff cited two no-action responses to demonstrate its observations during the 2018-2019 proxy season.
In the first no-action request, the date the shareholder submitted the proposal and the date of the proof of ownership were the same. The proof of ownership in that situation, however, stated that a certain number of shares had been held as of a date eight days prior to the date of the proof of ownership. The proof of ownership then stated that the proponent had “continuously held more than $2,000 worth of these shares for at least one year and intends to continue to hold at least $2,000 worth of these shares at the time of your next annual meeting.” The Staff did not concur that exclusion of the proposal in reliance on Rule 14a-8(b) was appropriate.
In the second no-action request, the proof of ownership stated that the requisite number of shares “have been held in this account continuously for at least one year prior to [the date of submission].” The Staff did not concur that exclusion of the proposal in reliance on Rule 14a-8(b) was appropriate.
4. Rule 14a-8(i)(3) – This paragraph should not, except for very unique circumstances, be looked to as a basis for excluding a shareholder proposal.
During the 2018–2019 proxy season, the Staff granted one no-action request relying on Rule 14a-8(i)(3) as the basis to exclude a proposal. During that season, the Staff denied 23 such requests.
Where it did not concur on an (i)(3) basis, the Staff generally stated that the company had not:
- “demonstrated objectively” that the language of the proposal or a specific statement in the supporting statement was materially false or misleading;
- shown that a portion of the proposal or a specific statement in the supporting statement was so irrelevant as to cause shareholders to be uncertain as to the action sought by the proposal; or
- shown that the language of the proposal or a specific statement in the supporting statement was so vague or indefinite as to be materially false or misleading.
The Staff concurred with one no-action request relying on Rule 14a-8(i)(3); in that request, the proposal called for stockholders to recommend that the company “reform the company’s executive compensation committee,” and the proposal’s supporting statement did not include any guidance regarding the nature of the “reform” sought. In its response, the Staff stated:
There appears to be some basis for your view that the Company may exclude the Proposal under [R]ule 14a-8(i)(3), as vague and indefinite. We note in particular your view that neither shareholders nor the Company would be able to determine with any reasonable certainty the nature of the “reform” the Proposal is requesting. Thus, the Proposal, taken as a whole, is so vague and indefinite that it is rendered materially misleading.
5. Rule 14a-8(i)(7) – There will continue to proposals that may be excluded because their subject matter is in the category of matters that fall within the “ordinary business” analysis of Rule 14a-8(i)(7), without the need for a board analysis of the significance of the proposal to the company. These “self-evident” ordinary business matters will fit within categories that have been previously described by the Commission and the Staff.
In Exchange Act Release No. 34-40018 (May 31, 1998), the Commission stated:
The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. Certain tasks 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. Examples include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers. However, proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote. (Footnote omitted and emphasis added.)
During the 2018–2019 proxy season, the Staff concurred in an issuer’s stated intention to exclude a proposal in reliance on the Rule 14a-8(i)(7) basis for exclusion in response to 19 no-action requests that relied on the Rule 14a-8(i)(7) “ordinary business matters” analysis.
The Staff concurred in the exclusion of proposals in response to several no-action requests that did not include a separate discussion regarding a board analysis of the proposal’s significance to the company:
- A proposal requested that the company “offer its shareholders the same discounts on its products and services that are available to its employees”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “relates to the Company’s discount pricing policies.”
- A proposal requested that the board “conduct a face-to-face annual meeting with common shareowners starting in 2020, changing all relevant Company governance documents to require such a face-to-face meeting to replace the current ‘remote’ or ‘virtual’ meeting”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “relates to the determination of whether to hold annual meetings in person.”
- A proposal requested that the board “complete a report to shareholders evaluating overdraft policies and practices and the impacts they have on customers”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “relates to the products and services offered for sale by the Company.”
- A proposal requested that the board “commission an independent study, including recommendations to shareholders regarding options for the board to amend the Company’s governance documents to enhance fiduciary oversight of matters relating to customer service and satisfaction”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “relates to decisions concerning the Company’s customer relations.”
- A proposal requested that the board “take the steps necessary to allow the Company’s Stakeholder Advisory Council to appoint an employee representative to the Stakeholder Advisory Council”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “concerns employee relations.”
- A proposal requested that the board “prepare a report to evaluate the risk of discrimination that may result from the Company’s policies and practices for hourly workers taking absences from work for personal or family illness”; the Staff concurred in the exclusion of the proposal in reliance on Rule 14a-8(i)(7), stating that the proposal “relates generally to the Company’s management of its workforce, and does not focus on an issue that transcends ordinary business matters.”
6. Rule 14a-8(i)(7) – There will be a significant increase in micromanagement arguments in no-action requests, even where the subject matter of the proposal has historically not been considered to be excludable in reliance on Rule 14a-8(i)(7).
During the 2018–2019 proxy season, the Staff concurred in a company’s stated intention to exclude a proposal in reliance on the Rule 14a-8(i)(7) basis for exclusion in response to 21 no-action requests that relied on the Rule 14a-8(i)(7) “micromanagement” analysis.
The Staff made the following statements in SLB 14K regarding the micromanagement analysis under Rule 14a-8(i)(7):
- “Under the Commission’s second consideration, a proposal may be excludable under the ‘ordinary business’ exception if it ‘micromanages’ the company. This prong of the Rule 14a-8(i)(7) analysis rests on an evaluation of the manner in which a proposal seeks to address the subject matter raised, rather than the subject matter itself.” (Emphasis added.)
- “… a proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages.”
- “When analyzing a proposal to determine the underlying concern or central purpose of any proposal, we look not only to the resolved clause but to the proposal in its entirety. Thus, 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, we take that into account in determining whether the proposal seeks to micromanage the company.”
- “This past season, where we concurred with a company’s micromanagement argument, it was not because we viewed the proposal as presenting issues that are too complex for shareholders to understand. Rather, it was based on our assessment of the level of prescriptiveness of the proposal. When a proposal prescribes specific actions that the company’s management or the board must undertake without affording them sufficient flexibility or discretion in addressing the complex matter presented by the proposal, the proposal may micromanage the company to such a degree that exclusion of the proposal would be warranted.”
- “When a company asserts the micromanagement prong as a reason to exclude a proposal, we would expect it to include in its analysis 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.”
7. Rule 14a-8(i)(7) – Due to the discussion of the Rule 14a-8(i)(7) micromanagement analysis in SLB 14K, there will be a change in how proposals are drafted; there will be fewer prescriptive proposals and more “if and how will the company address…” proposals.
The Staff stated the following in SLB 14K:
… a proposal framed as a request that the company consider, discuss the feasibility of, or evaluate the potential for a particular issue generally would not be viewed as micromanaging matters of a complex nature. However, a proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. (Footnote omitted.)
8. Rule 14a-8(i)(10) – Companies will seek to exclude more proposals under Rule 14a-8(i)(10) exclusion relying on the argument that the company’s policies, practices, and procedures “compare favorably” to the request in the proposal and, therefore, the company has “substantially implemented” the proposal.
In prior years, the Staff rarely concurred with a no-action request relying on the Rule 14a-8(i)(10) exclusion. During the 2018–2019 proxy season, however, the Staff concurred specifically in a company’s stated intention to exclude a proposal in reliance on the Rule 14a-8(i)(10) in 25 no-action responses the company had “substantially implemented” a proposal where the company’s policies, practices, procedures, or public disclosures “compared favorably” to the action sought by the proposal.
9. Rule 14a-8(i)(10) – There will be more no-action requests premised on the view that the company is implementing the proposal through amendments that will be put to a vote at the next shareholders’ meeting.
During the 2018–2019 proxy season, the Staff concurred specifically in a company’s stated intention to exclude a proposal in reliance on the Rule 14a-8(i)(10) exclusion in response to 16 no-action requests responses where the company was of the view that the company had “substantially implemented” a proposal because the proposal sought a specific governance action (e.g., bylaw amendments relating to a specific issue) and the company demonstrated that: (1) its board had approved the necessary amendments for submission to a vote of company shareholders; and (2) the company intended to present those amendments to a vote of shareholders at the company’s next annual meeting of shareholders.
10. Rule 14a-8(i)(10) – Companies will begin to undertake a new initial analysis of the substance of a proposal. In this analysis, companies will determine their current policies, practices, and procedures and compare them to the specific action requested in the proposal. Companies will then assess the Rule 14a-8(i)(10) and Rule 14a-8(i)(7) analysis of the “delta” between current company actions and the actions sought by the proposal; specifically, companies will assess whether they can make the Rule 14a-8(i)(10) “compares favorably” analysis and they will assess whether a board analysis can demonstrate that the “delta” is insignificant to the company for purposes of Rule 14a-8(i)(7).
The Staff made the following statements in SLB 14K:
- “In the past, proponents and companies have often focused on the overall significance of the policy issue raised by the proposal, instead of whether the proposal raises a policy issue that transcends the particular company’s ordinary business operations. The staff takes a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally ‘significant.’ Accordingly, a policy issue that is significant to one company may not be significant to another.” (Footnote omitted.)
- “In reflecting on the language of the Rule 14a-8 and the Commission’s statements on its purpose, we believe the focus of an argument for exclusion under Rule 14a-8(i)(7) should be on whether the proposal deals with a matter relating to that company’s ordinary business operations or raises a policy issue that transcends that company’s ordinary business operations. When a proposal raises a policy issue that appears to be significant, a company’s no-action request should focus on the significance of the issue to that company. If the company does not meet that burden, the staff believes the matter may not be excluded under Rule 14a-8(i)(7).” (Footnote omitted.)
- In SLB No. 14J, the Staff explained that a board analysis could address, among other substantive factors, whether the company has already addressed in some manner the policy issue raised by the proposal, 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 specific manner in which the proposal addresses the issue presents a significant policy issue for the company. A delta analysis could be useful for companies that have already addressed the policy issue in some manner but may not have substantially implemented the proposal’s specific request for purposes of exclusion under Rule 14a-8(i)(10) (e.g., by addressing the issue in a manner not contemplated by the proposal).
- Based on our evaluation of no-action requests this past season, a delta analysis is most helpful where it clearly identifies the differences between the manner in which the company has addressed an issue and the manner in which a proposal seeks to address the issue and explains in detail why those differences do not represent a significant policy issue to the company. By contrast, conclusory statements about the differences that fail to explain why the board believes that the issue is no longer significant are less helpful.
The Staff concurred in only one no-action request where the company expressed the view that a proposal could be excluded because it was insignificant to the company (in that instance the analysis was under Rule 14a-8(i)(5)). In that matter, the proposal requested that the company “provide a report on political contributions and expenditures that contains information specified in the Proposal.” The Staff concurred in the Company’s view that it could exclude the proposal in reliance on Rule 14a-8(i)(5), stating:
In reaching this position, we note your representations that: the Proposal relates to operations that account for less than 5 percent of the Company’s total assets, net earnings and gross sales for its most recent fiscal year; the Company does not make direct contributions or other expenditures to any candidate for public office or to influence the general public with respect to any election or referendum nor does the Company make indirect contributions for the purpose of supporting a candidate or referendum or influencing legislation or public affairs; and the only expenditure that could be considered an indirect political contribution or expenditure is the Company’s paid dues to a single trade association that is not permitted to make contributions to political candidates or political action committees.