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E-MailThomas Kim is partner, Andrea Reed is counsel, and Claire Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Kim, Ms. Reed, Ms. Holland, Holly Gregory, John Kelsh, and Rebecca Grapsas.
On October 16, 2019, the staff of the SEC’s Division of Corporation Finance (the Division Staff) issued Staff Legal Bulletin No. 14K (CF) (SLB No. 14K), which provides additional guidance on the excludability of shareholder proposals under Exchange Act Rule 14a-8. SLB No. 14K clarifies and expands upon previous guidance provided by the Division Staff, including most recently in Staff Legal Bulletin No. 14J (CF) (SLB No. 14J) and Staff Legal Bulletin No. 14I (CF) (SLB No. 14I). [1] It provides useful insight into how the Division Staff will approach future no-action requests seeking exclusion of shareholder proposals on the basis of Rules 14a-8(i)(7) (the “ordinary business” exception) and 14a-8(b) (deficient proof of ownership).
Heightened Expectations for No-Action Requests Relying on the “Ordinary Business” Exception
Discussion of a Policy Issue’s Significance Should Be Company-Specific
A company may exclude a proposal under Rule 14a-8(i)(7) if it “deals with a matter relating to the company’s ordinary business operations.” However, the Division Staff will not permit a company to exclude a proposal if it transcends the company’s day-to-day business matters by raising a policy issue so significant that it would be appropriate for a shareholder vote.
SLB No. 14K clarifies that, when evaluating whether a policy issue raised by a proposal is significant, the Division Staff will take a “company-specific approach” rather than characterizing certain issues as universally significant. Therefore, a company’s no-action request seeking to exclude a proposal that potentially raises a significant policy issue should discuss the significance of the issue to that particular company’s business.
Failure to Include Board Analysis Likely to Negatively Impact SEC’s Analysis and Decision
The Division Staff believes the company’s board is generally in a better position than the Staff to make determinations about the significance of a policy issue to the company given the board’s fiduciary duties and knowledge of the company’s business. In SLB No. 14I, the Division Staff encouraged companies to include in no-action requests where significance is at issue a well-developed discussion of the board’s analysis of the policy issue raised by the proposal and its significance to the company. Last year in SLB No. 14J, the Division Staff noted that the “most helpful” discussions in no-action requests “focused on the board’s analysis and the specific substantive factors the board considered in arriving at its conclusion” that a policy issue is not significant. The Division Staff also proposed a non-exhaustive list of factors that may be included in the board’s analysis.
In SLB No. 14J, the Division Staff made clear that the submission of a board analysis is voluntary but noted that “without having the benefit of the board’s views on the matters raised, the Staff may find it difficult in some instances to agree that a proposal may be excluded.” The Division Staff reiterates this guidance in SLB No. 14K. Based on observations from the 2019 proxy season, the Division Staff states in SLB No. 14K that “its analysis and ability to state a view regarding exclusion may be impacted” where a no-action request in which significance is at issue fails to include a robust analysis supporting the board’s conclusion that the policy issue raised by the proposal is not significant to the company.
Delta Analysis May Be Useful to Support Board Analysis
In SLB No. 14J, the Division Staff proposed as a factor to include in the board’s analysis “whether the company has already addressed the policy issue in some manner, including the difference between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the specific manner in which the proposal addresses the issue presents a significant policy issue for the company.” In SLB No. 14K, the Division Staff advises that this type of “delta analysis” could be helpful where a company has addressed the policy issue in some way but has not substantially implemented the proposal’s request (which could render it excludable under Rule 14a-8(i)(10)).
In SLB No. 14K, the Division Staff states that, based on its review of no-action requests in 2019, a delta analysis is most helpful when it (1) pinpoints the differences between the way in which the company took action to address an issue versus the way in which the proposal sought to address the issue and (2) explains why that difference does not represent a significant policy issue.
Board Analysis Should Address the Board’s Views on Prior Vote Results Where Applicable
Last fall, the Division Staff made clear in SLB No. 14J that it expects the board analysis in a no-action request to address any previous shareholder vote results related to the subject matter of the proposal. The Division Staff notes in SLB No. 14K that there were times during the 2019 proxy season when it did not concur with exclusion of proposals because it was not convinced that the board’s analysis of the prior vote results meant that the policy issue was no longer significant to the company.
In SLB No. 14K, the Division Staff states that it will consider subsequent company actions or intervening events since the last shareholder vote that may have mitigated—or increased—the significance of the issue to the company. The new guidance suggests that the board’s analysis in a no-action request could address (1) efforts by the company to engage with shareholders to determine why a proposal received significant support or (2) actions taken by the company to address concerns raised by the proposal. Given the Division Staff’s encouragement to include a discussion of prior vote results, it is likely the Staff would also find helpful any information regarding shareholder engagement or feedback on the subject matter of the proposal, even if prior vote results are not available.
Excludability Based on Micromanagement Will Depend on the Prescriptiveness of the Proposal
A shareholder proposal may be excludable under Rule 14a-8(i)(7) if it “micromanages” the company. In SLB No. 14K, the Division Staff indicates that it may view a proposal as micromanaging the company if the plan for implementing the action requested by the proposal is overly prescriptive (e.g., it imposes a specific strategy, method, action, outcome or timeline for addressing an issue), thereby potentially limiting the judgment and discretion of the board and management. This analysis will be the same even if the proposal is precatory in nature rather than mandatory. On the other hand, the Division Staff will generally not view a proposal as micromanaging the company if it merely requests that the company “consider, discuss the feasibility of, or evaluate” an issue.
Finally, in SLB No. 14K, the Division Staff:
- notes that, when evaluating whether a proposal seeks to micromanage the company, it will consider not only the “resolved clause,” but the entire proposal, including the supporting statement; and
- advises that a company seeking to exclude a proposal on the basis of micromanagement should discuss in its no-action request how the proposal would unduly restrict the company’s board and management from addressing the issue raised by the proposal.
Companies Should Not Exclude Proposals Based on an “Overly Technical Reading” of Proof of Ownership Letters
Under Rule 14a-8(b), to be eligible to submit a shareholder proposal, a proponent must provide the company with proof of continuous ownership of at least $2,000 in market value or 1% of the company’s voting securities for at least one year before the proposal is submitted. If a proponent fails to provide this proof of ownership, the company may exclude the proposal, subject to a notice and cure period. In previous guidance, [5] the Division Staff included a suggested format for shareholders and their banks and brokers to use to verify ownership, but explicitly stated that the format is not mandatory or exclusive.
During the 2019 proxy season, the Division Staff did not concur when two companies sought to exclude proposals based on an “overly technical reading” of the proof of ownership letters supplied by proponents that deviated from the suggested format. In one case, the Division Staff found a letter from a bank verifying ownership as of November 20, 2018 sufficient to prove continuous ownership for one year as of November 28, 2018, the date the proposal was submitted. [6] The Division Staff’s denial of the no-action request on these facts reflects a shift in practice.
In SLB No. 14K, the Division Staff:
- cautions that it will generally not be persuaded by arguments based on an “overly technical reading” of a proof of ownership letter;
- reiterates that proof of ownership is not required to be identical to the format suggested by the Division Staff; and
- advises companies to apply a “plain meaning approach” when evaluating proof of ownership letters, and to not seek exclusion where the language in the proof of ownership letter “is clear and sufficiently evidences the requisite minimum ownership requirements.”
Endnotes
1SLB No. 14J (Oct. 23, 2018) and SLB No. 14I (Nov. 1, 2017) are summarized in the Sidley Updates available here and here.(go back)
2Devon Energy Corp. (Mar. 4, 2019), available here.(go back)
3Anadarko Petroleum Corp. (Mar. 4, 2019), available here.(go back)
4Johnson & Johnson (Feb. 14, 2019), available here.(go back)
5Staff Legal Bulletin No. 14F (Oct. 18, 2011) (SLB No. 14F), available here.(go back)
