Monday, March 14, 2022

CorpFin Director highlights shareholder proposal process as ‘cornerstone of corporate democracy’

By Anne Sherry, J.D.

In her first in-person address as CorpFin Director, Renee Jones discussed the shareholder proposal rule and specifically the November 2021 Staff Legal Bulletin that rescinded three earlier bulleting. Speaking before the Council of Institutional Investors spring conference, Jones highlighted the Division’s work in evaluating no-action requests and clarifying when a shareholder proposal raises significant social policy issues that go beyond the ordinary business of the company.

History of the rule. Jones observed that Rule 14a-8 dates back to 1942 and called the rule “a cornerstone of corporate democracy.” While shareholders used to be able to debate corporate governance matters in person at shareholder meetings, proxy voting eventually became the primary mechanism for shareholders to exercise their state-law rights. Regulating the proxy process is a core function of the SEC, where its role is to replicate, as much as possible, the opportunity that shareholders would have to exercise their voting rights personally at an in-person meeting. While Rule 14a-8 facilitates shareholder participation, it does not allow unfettered access to the proxy statement, giving corporations the ability to exclude certain proposals.

Particularly, Rule 14a-8(i)(7) allows companies to exclude proposals dealing with a matter relating to the company’s ordinary business operations. The SEC has interpreted the ordinary business exception as resting on two central considerations: the subject matter of the proposal itself and the degree to which it would micromanage the company. Beginning in the late 1960s, the number of proposals focused on social policy issues increased, and the SEC reckoned with dual-nature proposals that related both to an ordinary business matter and social policy—such as a proposal asking Dow Chemical Company’s board to prohibit the company from selling napalm. Eventually, in 1998, the SEC amended Rule 14a-8 to clarify that proposals on employment matters (and ordinary business matters more generally) may not be excluded if they also raise important social policy concerns.

The 1998 release is still the most recent statement from the SEC on the ordinary business exception, but Division staff, exercising its judgment in attempting to resolve whether a proposal raises significant social policy issues, issued staff legal bulletins that “extended a trend of staff no-action positions that had arguably strayed from the guidance the Commission has provided,” Jones said. The guidance led to inconsistent decisions and unpredictable results, leading to the issuance of the November 2021 bulletin, Staff Legal Bulletin 14L.

Staff Legal Bulletin 14L. In the three now-rescinded bulletins, staff stated that a company’s no-action request should describe the board’s analysis of the particular policy issue raised and its significance to the company. The Division found, though, that this drew the staff into factual considerations that did not advance the policy objectives of the shareholder proposal rule and failed to yield consistent results. SLB 14L, accordingly, announced that the staff’s review will focus on the broader social policy significance of the issue in the proposal and not on the significance of that issue to a particular company.

As for micromanagement, the staff will more closely follow the directive of the 1998 release that proposals seeking detail, timeframes, or methods do not constitute micromanagement per se. The analysis will focus on the level of granularity sought and whether the proposal limits discretion of the board or management. “Put differently, we expect the level of detail included in a proposal to accord with what investors need to assess an issuer’s impacts, progress towards goals, risks or other strategic matters that are appropriate for shareholder input,” Jones said. Finally, SLB 14L returns to the approach that proposals raising issues of broad social or ethical concern may not be excluded even if the economic relevance to the company’s business falls below the rule’s 5-percent threshold. Still, Jones said, there must be a nexus between the policy issue and the company.

Other announcements. Jones also discussed the Division’s decision to return to the practice of issuing a letter in response to each no-action request, rather than simply stating the outcome in a chart. CorpFin will continue to publish the chart at the end of the proxy season to summarize its responses to no-action requests. The Division is also extending COVID-19 guidance that encourages companies to allow proponents or their representatives to present their proposals through alternative means, such as by phone, and clarifies that an inability to travel due to COVID-19 constitutes “good cause” for failure to present the proposal in person.

Current proxy season. Jones summarized the most common proposal topics and asserted bases for exclusion and said that companies and proponents engaged constructively for the most part. About one-fifth of no-action requests so far this proxy season have been withdrawn, mostly as a direct result of fruitful engagement. However, she said there could be more cooperation with respect to disputes over a proponent’s eligibility. She encouraged companies and proponents to work together rather than resolve eligibility disputes through the no-action process.

Recent rulemakings. Finally, Jones highlighted recent and potential rules related to proxies. Universal proxy rules go into effect for meetings held after August 31, 2022, ensuring that shareholders voting by proxy can vote for directors consistent with their right to vote in person at a shareholder meeting. Second, she noted that Rule 14a-8 is an item on Chair Gensler’s regulatory agenda. CorpFin is considering recommending amendments that would make the no-action process more efficient and predictable, and she said she strongly encourages comments on any future release.