Staff Legal Bulletin clarifies SEC’s thinking on shareholder proposals ahead of proxy roundtable

By Anne Sherry, J.D.

A few weeks in advance of the SEC’s November 15 roundtable on the proxy process, the Division of Corporation Finance issued a staff legal bulletin explaining its views on several proposal-related topics. The bulletin elaborates on board analyses in no-action requests that seek to rely on the economic relevance and ordinary business exceptions. Staff Legal Bulletin 14J also describes CorpFin’s views on the application of the ordinary business exception to proposals touching on D&O compensation matters and micromanagement as a basis for exclusion using that exception.

Board analysis. The Division’s previous SLB noted that the board is often well-positioned to make the judgment calls necessary to evaluating whether a proposal raises an issue that is “otherwise significantly related” to a company’s business (for purposes of the Rule 14a-8(i)(5) economic relevance exception) or transcends ordinary business matters (for purposes of Rule 14a-8(i)(7)’s ordinary business exception). That bulletin invited companies to include discussions of a board’s analysis in their requests for no-action relief.

CorpFin said in the latest bulletin that it found those discussions helpful in evaluating the no-action requests, even when the Division ultimately disagreed with the company’s position. The most helpful discussions focused on the board’s analysis and specific substantive factors it considered, rather than the board’s conclusions or process. While a failure to discuss the board’s analysis will not create a presumption against excluding the proposal, CorpFin cautioned that “staff may find it difficult in some instances to agree that a proposal may be excluded,” particularly where the issue’s significance depends on factors that are not self-evident.

Among the substantive factors the board may have considered and that should be described in specific detail are: 

• The extent to which the proposal relates to the company’s core business activities; 
• Related quantitative data, including financial statement impact; 
• Whether the company has already addressed the issue in some manner and if so, the delta between its action and the proposal’s request; 
• The extent of shareholder engagement and interest on the issue; 
• Whether anyone other than the proponent requested the action or information proposed; and
• Whether shareholders had previously voted on the matter. 

As to that last factor, the Division would expect that the discussion would adequately address the related voting results. If a matter received significant shareholder support, CorpFin staff will consider whether the company took action or whether subsequent events may have mitigated the issue’s significance to the company. If a matter received scant support, the Division will consider whether subsequent actions or events may have increased the issue’s significance to the company. The more recent a vote, the more likely CorpFin is to consider the results indicative of the topic’s importance to a company and its shareholders. Finally, the Division would not expect to agree with a company wishing to exclude proposals focusing on substantive governance matters, which it generally views as significantly related to almost all companies.

The ordinary business exception. The SEC has described the ordinary business exception as resting on two policy considerations. The first relates to the subject matter of the proposal: certain tasks such as managing the workforce or retaining suppliers are so fundamental to management’s ability to run a company that, as a practical matter, they cannot be subject to direct shareholder oversight. The second policy consideration relates to the degree to which the proposal seeks to micromanage the company. Even if a proposal is not excludable under the first consideration, it may be excludable if it micromanages.

CorpFin may find that a proposal probes too deeply into complex matters if it involves intricate detail or seeks to impose specific timelines or methods for implementing complex policies. For example, an Apple shareholder’s 2016 proposal to generate a plan to reach net-zero greenhouse gas emissions by 2030 was excludable on the basis of micromanagement. Proposals that call for a study or report may also be excludable on this ground, particularly if the substance of the report relates to specific time frames or methods for implementing complex policies.

Proposals relating to general employee compensation and benefits are excludable under the ordinary business exception, but those focusing on significant aspects of senior executive and/or director compensation generally are not. CorpFin has concurred in the exclusion of proposals styled as D&O compensation proposals where the underlying concern involved ordinary business matters. For example, it allowed Delta Air Lines to exclude a proposal requesting that the board prohibit paying executives incentive compensation until the company adopted a process to fund the retirement accounts of certain retirees. The focus of this proposal was on the ordinary business matter of employee benefits, rather than on senior executive compensation.

Proposals addressing D&O compensation may be excludable if a primary aspect of the compensation applies more broadly, such as certain golden parachute provisions that apply to a significant portion of the workforce. CorpFin clarified that companies may generally not rely on the ordinary business exception to omit proposals that focus on aspects of compensation that are available or apply only to senior executive officers and/or directors. However, companies may exclude proposals where the focus is on aspects of compensation that are available or apply to the general workforce, including D&Os.

The Division also said that it historically has not agreed with excluding proposals addressing D&O compensation on the basis of micromanagement. After further consideration of the SEC’s statements on micromanagement, CorpFin does not find a basis for treating compensation proposals differently from other proposals. Consistent with its treatment of shareholder proposals generally, the Division may agree that executive compensation-related proposals that seek intricate detail or seek to impose specific timeframes or methods for implementing complex policies can be excluded on the basis of micromanagement. Proposals focusing on significant D&O compensation matters that do not micromanage remain non-excludable.