Wednesday, June 26, 2019

CII objects to CorpFin’s 'too-complex-for-shareholders' exclusions

By John M. Jascob, J.D., LL.M.

The Council of Institutional Investors (CII) has expressed concern about the evolving views of the Division of Corporation Finance staff concerning the “ordinary business” exclusion of shareholder proposals under Exchange Act Rule 14a-8(i)(7). In a letter to Director William Hinman, CII wrote that staff’s “too-complex-for-shareholders” basis for omission risks permitting only proposals that are “no-brainers” while providing no clear guidance on what makes a subject “too complex” for shareholders to understand.

Specifically, CII's concern relates to recent no-action letters from the CorpFin staff that rely on the second prong of the exclusion under Rule 14a-8(i)(7)—the “micromanagement” or “too-complex-for-shareholders” grounds for omission discussed in Staff Legal Bulletin No. 14J. CII noted that there will always be some degree of complexity in any issue worthy of discussion in a shareholder proposal, and the fact that a proposal is debatable should not be deemed to render it too complex. Moreover, the lines drawn by staff on this area appear to be arbitrary, with the result being that both company management and investors are confused on what staff currently considers to be “micromanagement.”

CII observed that staff recently agreed with the omission of proposals to AbbVie and Johnson & Johnson requesting that the companies adopt policies providing that no performance metrics used for senior executive compensation be adjusted to exclude legal or compliance costs. In agreeing that the proposals could be omitted, staff said that the proposals “micromanage the company by seeking to impose specific methods for implementing complex policies.” In CII’s view, however, shareholders should be permitted to vote on whether they think these recommendations to the board are a good idea or not. The board is free to argue that the proposal is too sweeping and does not request the creation of a policy that the board could use flexibly. But that is an argument for the board to make in the proxy statement, CII wrote, rather than for CorpFin staff to use to preclude consideration of a valid proposal.

CII also took issue with staff's concurrence with omission of proposals at Devon Energy, ExxonMobil, and J.B. Hunt Transport Services to report on greenhouse gas emission targets related to the goals of the Paris Agreement on climate change. CII strongly disagreed with the view that shareholders as a group would be unable to express a coherent view on these proposals. While climate change and greenhouse gas emissions do pose complicated questions, investors have devoted considerable attention to the issue, arguably one of the preeminent public policy matters involving material risks and opportunities for public companies, CII wrote.

CII also believes that the recent no-action letters appear to disregard elements stated by the SEC in its 1998 amendments to the rules governing shareholder proposals. In that rulemaking, the Commission rejected the implication that proposals seeking detail, or seeking to promote time-frames or methods, “necessarily amount to ‘ordinary business.’” The release also noted that timing questions could involve significant policy where large differences are at stake. In CII’s view, the Devon, Exxon, and Hunt proposals request a reasonable level of detail necessary to make the proposals substantive and not excessively vague. Moreover, “large differences” are clearly at stake in the proposals, as indicated by the fact that Exxon had not established goals for reducing companywide greenhouse gas emissions consistent with the Paris goals on any timeframe, CII wrote.