By John Filar Atwood
With one new Staff Legal Bulletin, the SEC’s Division of Corporation Finance has undone three Legal Bulletins released during former Chair Jay Clayton’s tenure and refashioned the staff’s approach to applying the “significant social policy” analysis to shareholder proposals. The new approach gives the staff greater discretion to allow proposals with broad social implications to be included in a company’s proxy materials and eliminates the expectation that a company will provide a board analysis to argue that a proposal is excludable under Rule 14a-8(i)(7).
Staff Legal Bulletin 14L (SLB14L) rescinds Staff Legal Bulletins 14I (November 2017), 14J (October 2018), and 14K (October 2019). Chair Gary Gensler said that he believes SLB14L more closely aligns the staff’s approach with the Commission’s intent behind its 1998 rulemaking on shareholder proposals. Part of that intent, according to SLB14L, is to preserve management’s discretion on ordinary business matters but not prevent shareholders from providing high-level direction on large strategic corporate matters.
Rule 14a-8(i)(7) is among the substantive bases a company may use to exclude a shareholder proposal and sometimes includes an assessment of whether a significant social policy is relevant to a company’s business. In SLB 14L, the staff stated that, based on its review of the rescinded SLBs, it believes that an undue emphasis was being placed on evaluating the significance of a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy. 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 said, and has yielded inconsistent results.
New approach. Going forward, the staff will no longer focus on determining the nexus between a policy issue and the company, but will consider the social policy significance of the issue that is the subject of the shareholder proposal. According to SLB 14L, in making this determination the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.
As an example, the staff noted that a proposal that raises human capital management issues with a broad societal impact would not be subject to exclusion under paragraph (i)(7) solely because the proponent did not demonstrate that the human capital management issue was significant to the company.
SLB 14L also eliminates the expectation that a company will include a board analysis as part of demonstrating that the proposal may be omitted under the ordinary business exclusion. That expectation was created by SLB 14I with the reasoning that the board was well situated to analyze and explain whether a particular issue is sufficiently significant to the company’s business.
In undoing that requirement, the staff stated in SLB 14L that, based on its experience, the board’s analysis may distract the company and the staff from the proper application of the exclusion. In addition, the staff found that the requirement that the board demonstrate that the difference between the company’s existing actions addressing the policy issue and the proposal’s request is insignificant sometimes confounded the application of Rule 14a-8(i)(10)’s “substantially implemented” standard.
Micromanagement. Rule 14a-8(i)(7) also permits a company to omit a proposal that is deemed to try to micromanage the company’s operations. The staff believes that SLB 14J and SLB14K expanded the concept of micromanagement beyond the Commission’s policy directives by creating the impression that any limit on company or board discretion constitutes micromanagement.
Commissioners Hester Peirce and Elad Roisman, who objected to the approach outlined in SLB14L in a joint public statement, took specific issue with this claim. They said that, although SLB 14L rejects the recent micromanagement analysis because it “may have been taken to mean that any limit on company or board discretion constitutes micromanagement,” in practice the staff frequently rejected micromanagement arguments, including ones that related to climate change proposals. They noted that during the 2021 proxy season, no climate change proposals were excluded based on micromanagement arguments and in 2020 only four climate change proposals were excluded based on micromanagement.
In SLB 14L, the staff stated that going forward it will take an approach that recognizes that proposals seeking detail or wanting to promote timeframes or methods do not automatically constitute micromanagement. The staff will focus on the level of granularity sought in the proposal and whether, and to what extent, it inappropriately limits discretion of the board or management. The staff said that it expects the level of detail in a shareholder proposal to be consistent with what is needed to enable investors to assess an issuer’s impacts and progress toward goals, risks, or other strategic matters appropriate for shareholder input.
As guidance to its new approach to the micromanagement exclusion, the staff cited its March 2021 letter to ConocoPhillips (SEC No-Action Letters Ind. & Summaries (WSB) #0322202121 (March 19, 2021)). In that letter the staff denied relief for a proposal requesting that the company set targets covering the greenhouse gas emissions of the company’s operations and products. The proposal requested that the company set emission reduction targets but did not impose a specific method for doing so. In the staff’s view the proposal did not micromanage to such a degree to justify exclusion under Rule 14a-8(i)(7).
Too complex. SLB 14L also stated that when determining whether a proposal probes matters “too complex” for shareholders to make an informed judgment, the staff may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. It also may consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.
The staff noted that many of the proposals addressed in the rescinded SLBs requested that companies adopt timeframes or targets to address climate change. The staff determined that they were excludable on micromanagement grounds. Going forward, the staff will not concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.
The staff hopes that this new stance on micromanagement will help to avoid the dilemma many proponents faced when seeking to craft proposals with sufficient specificity and direction to avoid being excluded as substantially implemented under Rule 14a-8(i)(10), while being general enough to avoid exclusion for micromanagement.
Economic relevance. In addition to the ordinary business and micromanagement elements of 14a-8(i)(7), SLB 14L also discusses the economic relevance exception in Rule 14a-8(i)(5). This paragraph allows a company to exclude a proposal that relates to operations that account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.
Based on its experience in applying the guidance in the rescinded SLBs, the staff has decided to return to its prior approach to this exception. Specifically, proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the (i)(5) economic thresholds. Along with this new approach, the staff will no longer expect a board analysis for its consideration of a no-action request under Rule 14a-8(i)(5).