On November 1, 2017, the staff (Staff) of the Division of Corporation Finance of the US Securities and Exchange Commission issued Staff Legal Bulletin No. 14I (SLB 14I) to provide guidance on shareholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934.1 SLB 14I addresses four topics in the shareholder proposal area:
- the scope and application of the ordinary business grounds for exclusion under Rule 14a-8(i)(7);
- the scope and application of economic relevance grounds for exclusion under Rule 14a-8(i)(5) for proposals relating to less than five percent of a company’s total assets, net earnings and gross sales;
- proposals submitted on behalf of a shareholder by a representative, sometimes referred to as a proposal by proxy; and
- the impact of graphs and images on the 500-word limit in Rule 14a-8(d).
Because the guidance provided by SLB 14I reflects the current views and expectations of the Staff on these topics, companies that are, or may soon be, in the process of responding to shareholder proposals for the 2018 proxy season need to consider the impact of these interpretations now.
Shareholder proposals addressing “ordinary business” may be excluded from a company’s proxy statement under Rule 14a-8(i)(7) if they raise matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,” unless the proposal focuses on policy issues that are sufficiently significant because they transcend ordinary business. Many Rule 14a-8(i)(7) no-action requests focus on this analysis and require the Staff to make difficult judgment calls. SLB 14I articulates the Staff’s view that a company’s board of directors, in the first instance, generally is in a better position to make this determination.
In SLB 14I, the Staff indicates that it will be looking for an analysis by a company’s board of directors to assist the Staff in its review of no-action requests under Rule 14a-8(i)(7). Specifically, the Staff stated that it expects companies to include in such no-action requests “a discussion that reflects the board’s analysis of the particular policy issue raised and its significance.” The Staff would like to see an explanation of “the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”
Rule 14a-8(i)(5) permits a shareholder proposal that relates to operations accounting for less than five percent of a company’s total assets, net earnings and gross sales and that is not otherwise significantly related to a company’s business to be excluded from that company’s proxy statement. SLB 14I indicates that the significance test for this exclusion relates to an effect on the company’s business and that “proposals that raise issues of social or ethical significance may be included or excluded, notwithstanding their importance in the abstract, based on the application and analysis” of the factors listed in Rule 14a-8(i)(5). As with the ordinary business basis for exclusion, SLB 14I reflects the Staff’s belief that a company’s board of directors, in the first instance, generally is in a better position to make this determination. Accordingly, the Staff expects no-action requests under Rule 14a-8(i)(5) to include a discussion detailing the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.
SLB 14I also clarifies that the “otherwise significantly related” aspect of Rule 14a-8(i)(5) is distinct from the Rule 14a-8(i)(7) question of whether an issue is sufficiently significant to transcend ordinary business. Each of these exclusions represents a separate analytical framework. Accordingly, the Staff will no longer consider a Rule 14a-8(i)(7) analysis when evaluating an argument that a shareholder proposal is excludible under Rule 14a-8(i)(5).
Proposal by Proxy
If a shareholder delegates authority for a shareholder proposal to another person as his or her representative or proxy, SLB 14I indicates the proponent should provide documentation that:
- identifies the shareholder-proponent and the person or entity selected as proxy;
- identifies the company to which the proposal is directed;
- identifies the annual or special meeting for which the proposal is submitted;
- identifies the specific proposal to be submitted (e.g., proposal to lower the threshold for calling a special meeting from 25 percent to 10 percent); and
- is signed and dated by the shareholder.
SLB 14I indicates that Rule 14a-8(b) may provide a basis to exclude a shareholder proposal from a company’s proxy statement if the above information is not provided.
Graphs and Images
In SLB 14I, the Staff reiterates its previous position that graphs and images may be included in a shareholder proposal. However, the Staff clarifies that words in graphics will be counted toward the word limit established by Rule 14a-8(d). In short, a proposal is subject to exclusion from a company’s proxy statement if the total number of words exceeds 500, including any words that appear in graphics.
SLB 14I also clarifies that graphs and images are subject to exclusion for violating proxy rules under Rule 14a-8(i)(3) if they:
- make the proposal materially false or misleading;
- render the proposal inherently vague or indefinite;
- directly or indirectly impugn a person’s character, integrity or personal reputation or make charges concerning improper, illegal, or immoral conduct, without factual foundation; or
- are irrelevant to a consideration of the subject matter of the proposal.
SLB 14I signals that the Staff expects companies to provide the analyses and the conclusions of their boards of directors as to the significance tests raised in no-action requests seeking exclusion of shareholder proposals under either Rule 14a-8(i)(7) or Rule 14a-8(i)(5). However, the deadlines for shareholder proposals and related no-action requests may not line up with scheduled board meetings, particularly since this guidance was issued late in the year. Therefore companies need to develop a process for providing meaningful board input on these questions if they wish to exclude a proposal. Because the 2018 proxy season will be the first one affected by SLB 14I, companies may want to reevaluate any such procedures in future years, taking into account relevant descriptions of board analyses in no-action requests submitted under either Rule 14a-8(i)(7) or Rule 14a-8(i)(5) during the next few months.
SLB 14I does not specify whether the board analysis that the Staff is seeking can be performed by less than the full board of directors. However, boards with upcoming meetings may want to consider delegating the responsibility for analyzing such issues to a committee, such as the governance committee, to the extent not already provided for in the committee charter. Or, a committee might want to delegate this responsibility to a sub-committee or chairman to handle between meetings. Because SLB 14I indicates that no-action requests should detail the specific processes employed by the board, as described above, companies should consider what sort of process will help present their arguments and conclusions in no-action requests under Rule 14a-8(i)(7) or Rule 14a-8(i)(5) in the best light for the company.
The guidance in SLB 14I suggests that the Staff may be willing, under appropriate circumstances, to grant more deference to companies in determining whether to grant no-action requests under Rule 14a-8(i)(7) and Rule 14a-8(i)(5) than it has in the past, although it remains to be seen how much weight the Staff will give to board determinations. If a company’s board has had limited or no involvement in the shareholder proposal process in previous years or the extent of the board’s involvement has not been disclosed in no-action requests in these areas, companies should seriously consider revamping their internal processes for analyzing and responding to a shareholder proposal and expanding their disclosure to better address the Staff’s views outlined in SLB 14I and increase the chances of obtaining a favorable result from the Staff.
Companies that receive shareholder proposals submitted by proxies should promptly review the documentation provided to determine if all of the requirements of SLB 14I have been met. Under Rule 14a-8(f), companies would need to notify the proponents within 14 calendar days of receipt of deficiencies in such documentation to preserve the basis for exclusion.
1 Available at https://www.sec.gov/interps/legal/cfslb14i.htm.