Thursday, November 30, 2017

Corporation Finance director provides clarification on Staff Legal Bulletin 14I

By John Filar Atwood

Staff Legal Bulletin 14I (the SLB) encourages, but does not require, a company’s board to provide analysis on shareholder proposals under paragraphs (i)(5) and (i)(7) of Rule 14a-8, according to Bill Hinman, director of the SEC’s Division of Corporation Finance. At Practising Law Institute’s securities regulation conference, he said that the staff would like to see a board’s analysis of whether a proposal is of transcending importance, but not all companies have to provide it.

The SLB includes guidance on the application of paragraph (i)(7), which is the ordinary business exclusion, and paragraph (i)(5), which permits exclusion of a proposal based upon its economic relevance to the company. For both provisions, the SLB requests that companies provide a discussion that reflects the board’s analysis of the particular policy issue raised in a shareholder proposal and its significance.

Hinman said that judgment calls about whether a proposal is so significant to a company’s business that it should not be excluded from the proxy are difficult for the staff to make. The SLB is designed to provide the staff with more information to improve its decision-making process.

Board analysis. Hinman encouraged boards to provide the requested analysis for proposals that fall under paragraphs (i)(5) and (i)(7) and assured that it would be carefully considered by the staff. Asked how much detail the staff would like to see in the board’s analysis, Hinman said that companies can decide for themselves how much information they feel is compelling. Companies should analyze the issue with their specific shareholder base in mind, he advised.

He believes that much of the board’s analysis will take place at the nominating committee and governance committee level. The staff would like to see if these committees have considered the issue in the proposal, and whether a company has met with the affected shareholders, he said. The analysis process may result in more companies working out issues with shareholders before they reach the proposal stage, in his opinion.

Ronald Mueller, a partner at Gibson, Dunn & Crutcher, said that he was initially surprised by the SLB’s request for board input on the shareholder proposal issues. However, he acknowledged that when deciding whether a proposal rises to the level of significance under (i)(7), no one is more qualified to weigh in than the board of directors.

Michele Anderson, a deputy director in the Division of Corporation Finance, reiterated Hinman’s advice that the board analysis is welcome, but not required. A company may be able to argue its point and persuade the staff without the board analysis, she noted. Mueller said that since the board analysis is not required, it should not be seen as an additional burden, but rather as an additional avenue to make the case that a proposal qualifies as ordinary business.

Anderson believes that the SLB breathes new life into paragraphs (i)(5) and (i)(7). She noted that paragraph (i)(5) was adopted in 1983, but has only rarely been used since 1985. In her view, the SLB will enable (i)(5) to be used as it was intended.

Proposals by proxy. On the issue of proposals by proxy, Hinman said that the staff has heard that issuers were not sure who they were dealing with when proposals are submitted by proxy. The SLB outlines four elements that would be useful in providing a more complete record in determining who the proponent is. The proposal will not necessarily be excludable if a company does not hit on all four elements, he said.

Hinman told Wolters Kluwer that the SLB was not issued as a response to the CHOICE Act, which calls for a prohibition on proposals by proxy. The staff was mindful of the CHOICE Act, he noted, but included the proposal-by-proxy guidance in the SLB simply to make more information available on who is submitting the proposal. He emphasized that the staff believes that proposals by proxy are acceptable.