Friday, November 19, 2021

CCMC objects to SEC’s rescission of staff legal bulletins on shareholder proposals

By Elena Eyber, J.D.

In a letter to the SEC, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) expressed its concerns regarding the SEC’s rescission of three Staff Legal Bulletin Nos. 14I, 14J and 14K (rescinded SLBs) and replacement of them with Staff Legal Bulletin No. 14L (SLB 14L). The CCMC believes that the SEC should reverse its decision because SLB 14L injects uncertainty into the shareholder proposal process, degrades investor protection, and harms competition and capital formation. The CCMC further stated that if the SEC believes that changes to the shareholder proposal process are necessary and in the best interest of investors, then the SEC should solicit input from the public and consider changes in a transparent manner.

Ordinary business exception. In Rule 14a-8, the SEC has provided a means by which shareholders can present proposals for the shareholders’ consideration in the company’s proxy statement. Rule 14a-8 sets forth several bases for exclusion of such proposals. Companies often request assurance that the SEC will not recommend enforcement action if they omit a proposal based on one of these exclusions (no-action relief). Under rule 14a-8(i)(7), a company may exclude a shareholder proposal if it deals with a subject involving a company’s ordinary business operation. This exception allows the day-today operational issues of a business to remain with its management and board. Nonetheless, shareholders may bring forth proposals on issues such as governance or on items that impact the strategy and direction of a business.

Social policy significance approach. In issuing SLB 14L, the SEC stated that it will no longer focus on determining the nexus between a policy issue and the company but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the SEC will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company. Under this realigned approach, proposals that the SEC previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). Because the SEC is no longer taking a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7), it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion.

CCMC’s concerns. The CCMC is concerned that the SEC’s new approach of examining issues through the lens of broad societal impact and no longer looking at proposals on a company by company basis will ignore investor protection, competition, and capital formation, and the SEC will now have to opine on societal issues outside of its legal remit. The CCMC believes that SLB 14L fails to provide companies, boards and investors with any certainty, and the SEC has positioned itself as a subjective governmental arbiter of how the capital markets should assess social issues. To some degree, in requiring the SEC staff to make a determination about broad societal impact, the SEC will be taking a position on the worthiness of an issue and therefore could be seen as weighing in on one side or another. The CCMC believes that SLB 14L creates an unworkable system that is beyond the mission of the SEC.