On November 3, 2021, the Division of Corporation Finance of the SEC (the “Staff”) issued Staff Legal Bulletin (“SLB”) No. 14L, which rescinds SLBs Nos. 14I, 14J and 14K, all of which provided guidance with respect to no-action letter requests that sought relief from the Staff to exclude shareholder proposals on the basis of Rule 14a-8(i)(7) and Rule 14a-8(i)(5). SLB No. 14L also provides guidance on (i) certain technical exclusions, (ii) the use of graphics and images in proposals and (iii) the use of email between proponents and companies.
The likely effect of SLB No. 14L will be to reduce the number of environmental and social policy proposals that the Staff will agree may be excluded from proxy statements under the ordinary business and economic relevance exceptions of Rule 14a-8.
In summary, SLB No. 14L provides the following guidance:
- Rule 14(a)-8(i)(7) – “Ordinary Business”
Significant policy issue
- SLB No. 14L rescinds prior guidance that a company may exclude a shareholder proposal in respect of its ordinary business operation if the proposal did not raise a significant policy issue of the company. Instead, the Staff will now look to whether the policy issue may have broad societal impact such that it transcends the ordinary business of the company, regardless of nexus between the issue and the company’s business.
- In explaining the change, the Staff notes, “[W]e have found that focusing on the significance of a policy issue to a particular company has drawn the Staff into factual considerations that do not advance the policy objectives behind the ordinary business exception.” The Staff also cites concerns over whether the existing framework provided consistent, predictable results.
- Since there is no nexus required between the company and the issue, the Staff will no longer expect board analysis on the issue of determining whether a proposal is excludable.
- Given the public statements of Chair Gensler and the Democratic Commissioners in support of investors’ interest in climate, sustainability and social policy matters, the new guidance would indicate a hard path for exclusion of shareholder proposals regarding those topics on the basis of the ordinary business exception.
- Rule 14a-8(i)(7) – “Ordinary Business”
- SLB No. 14L also provides guidance on the Staff’s position on micromanagement when evaluating requests to exclude a proposal on that basis under the ordinary business exception. The Staff will no longer view proposals that seek detail or seek to promote timeframes or methods as per se micromanagement. Instead, the Staff will focus on the level of detail and granularity sought in the proposal and may look to well-established frameworks or references in considering what level of detail may be too complex for shareholder input. The Staff also notes that it will look to the sophistication of investors generally, the availability of data and the robustness of public discussion in considering whether a proposal’s matter is too complex for shareholders, as a group, to make an informed judgment.
- We would expect that, under this guidance, proposals that request short timeframes for the production of reports or tie proposed reports to specific environmental or social targets or frameworks will likely not be excludable under the ordinary business exception on the basis that they seek to micromanage the company.
- Rule 14a-8(i)(5) – “Economic Relevance”
- SLB No. 14L provides that companies may not exclude proposals that raise issues of broad social or ethical concern solely on the basis that the issue is not economically relevant to the company. Accordingly, the Staff will no longer require board analysis for consideration of a no-action letter request under this exception.
- Technical Guidance
Use of images in shareholder proposals
- The Staff clarified that shareholder proposals may use graphs, images and graphics. Exclusion may be appropriate where graphs or images would make a proposal materially false or misleading or inherently vague, would directly or indirectly impugn character, integrity or personal reputation or are irrelevant to a consideration of the subject matter of the proposal.
- While noting that the words in graphics would count towards the 500 word limit, the SEC did not weigh in on the important practical, if not substantively thorny, questions of size, color and placement of graphics, which are increasingly vexing to companies balancing a holistic approach to a proxy against a proponent’s specific detailed instructions on graphics.
Proof of ownership letters
- The Staff also clarified that proof of a proponent’s continuous ownership of a company’s securities does not need to be in a specified format and that brokers are not required to calculate share valuation. Instead, proponents can now present the share valuation to the issuer.
- The Staff also noted that companies should identify any specific defects in the proof of ownership letter, even if the company previously sent a deficiency notice prior to receiving the proponent’s proof of ownership, if the deficiency notice did not identify specific defects.
Use of e-mail
- Finally, the Staff provided guidance that where email is used to communicate, to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply email from the recipient in which the recipient acknowledges receipt of the email, and asks that parties so acknowledge. Where a controversy develops as to whether an email was timely delivered, it will be up to the sending party to show proof of receipt.
While a review of the Staff’s determinations in no–action letter requests in the past year has perhaps indicated a trend toward allowing environmental and social policy proposals over the objection of companies that they should be excluded under the ordinary business and/or economic relevance exceptions, SLB No. 14L further indicates that the current SEC’s Chair and Democratic Commissioners view environmental and social matters as being of significant importance to shareholders and therefore material and appropriate for shareholder consideration, Staff oversight and SEC action.
With the new guidance, it would appear unlikely that many companies will be able to make successful arguments to the Staff that proposals relating to environmental and social matters can be excluded from proxy statements unless the companies can make effective arguments that the matters are not ones of significant policy interest in general or truly seek to micromanage the company, or can be excluded on other grounds.