Summary: This staff legal bulletin provides information for companies and shareholders regarding Rule 14a-8 under the Securities Exchange Act of 1934.
Supplementary Information: The statements in this legal bulletin represent the views of the Division of Corporation Finance. This bulletin is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content. The references to "we," "our" and "us" are to the Division of Corporation Finance.
Contacts: For further information, please contact the Office of Chief Counsel in the Division of Corporation Finance at (202) 551-3500.
>A. What is the purpose of this bulletin?
This bulletin is part of a continuing effort by the Division of Corporation Finance to provide guidance on important issues arising under Rule 14a-8. Specifically, this bulletin contains information regarding:
the application of Rule 14a-8(i)(7) to proposals relating to risk;
the application of Rule 14a-8(i)(7) to proposals focusing on succession planning for a company's chief executive officer (CEO); and
the manner in which shareholder proponents and companies can notify us that they will be submitting correspondence in connection with a no-action request.
>B. What analytical framework will we apply in determining whether a company may exclude a proposal related to risk under Rule 14a-8(i)(7)?
Over the past decade, we have received numerous no-action requests from companies seeking to exclude proposals relating to environmental, financial or health risks under Rule 14a-8(i)(7). As we explained in SLB No. 14C, in analyzing such requests, we have sought to determine whether the proposal and supporting statement as a whole relate to the company engaging in an evaluation of risk, which is a matter we have viewed as relating to a company's ordinary business operations. To the extent that a proposal and supporting statement have focused on a company engaging in an internal assessment of the risks and liabilities that the company faces as a result of its operations, we have permitted companies to exclude these proposals under Rule 14a-8(i)(7) as relating to an evaluation of risk. To the extent that a proposal and supporting statement have focused on a company minimizing or eliminating operations that may adversely affect the environment or the public's health, we have not permitted companies to exclude these proposals under Rule 14a-8(i)(7).
We have recently witnessed a marked increase in the number of no-action requests in which companies seek to exclude proposals as relating to an evaluation of risk. In these requests, companies have frequently argued that proposals that do not explicitly request an evaluation of risk are nonetheless excludable under Rule 14a-8(i)(7) because they would require the company to engage in risk assessment.
Based on our experience in reviewing these requests, we are concerned that our application of the analytical framework discussed in SLB No. 14C may have resulted in the unwarranted exclusion of proposals that relate to the evaluation of risk but that focus on significant policy issues. Indeed, as most corporate decisions involve some evaluation of risk, the evaluation of risk should not be viewed as an end in itself, but rather, as a means to an end. In addition, we have become increasingly cognizant that the adequacy of risk management and oversight can have major consequences for a company and its shareholders. Accordingly, we have reexamined the analysis that we have used for risk proposals, and upon reexamination, we believe that there is a more appropriate framework to apply for analyzing these proposals.
On a going-forward basis, rather than focusing on whether a proposal and supporting statement relate to the company engaging in an evaluation of risk, we will instead focus on the subject matter to which the risk pertains or that gives rise to the risk. The fact that a proposal would require an evaluation of risk will not be dispositive of whether the proposal may be excluded under Rule 14a-8(i)(7). Instead, similar to the way in which we analyze proposals asking for the preparation of a report,1 the formation of a committee2 or the inclusion of disclosure in a Commission-prescribed document3 — where we look to the underlying subject matter of the report, committee or disclosure to determine whether the proposal relates to ordinary business — we will consider whether the underlying subject matter of the risk evaluation involves a matter of ordinary business to the company. In those cases in which a proposal's underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote, the proposal generally will not be excludable under Rule 14a-8(i)(7) as long as a sufficient nexus exists between the nature of the proposal and the company.4 Conversely, in those cases in which a proposal's underlying subject matter involves an ordinary business matter to the company, the proposal generally will be excludable under Rule 14a-8(i)(7). In determining whether the subject matter raises significant policy issues and has a sufficient nexus to the company, as described above, we will apply the same standards that we apply to other types of proposals under Rule 14a-8(i)(7).5
In addition, we note that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation. In light of this recognition, a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote.
>C. May a company rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning?
During the past two proxy seasons, we received a number of no-action requests from companies seeking to exclude proposals relating to CEO succession planning in reliance on Rule 14a-8(i)(7). These proposals generally requested that the companies adopt and disclose written and detailed CEO succession planning policies with specified features, including that the board develop criteria for the CEO position, identify and develop internal candidates, and use a formal assessment process to evaluate candidates. We expressed the view that these proposals could be excluded in reliance on Rule 14a-8(i)(7) because the proposals related to the termination, hiring or promotion of employees.6
The Commission stated in Exchange Act Release No. 40018 (May 21, 1998) that proposals involving "the management of the workforce, such as the hiring, promotion, and termination of employees" relate to ordinary business matters. Our position to date with respect to CEO succession planning proposals was based on this guidance and the Division's historical approach to proposals relating to employee hiring and promotion. In the same release, however, the Commission recognized that a proposal relating to ordinary business matters may transcend the company's day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.7
One of the board's key functions is to provide for succession planning so that the company is not adversely affected due to a vacancy in leadership. Recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals. Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.8
>D. May companies and shareholder proponents alert us that they intend to submit correspondence related to a no-action request?
Yes. If a company or a shareholder proponent intends to submit correspondence in connection with a no-action request, we encourage them to contact us so that, if possible, we can review the correspondence prior to issuing our no-action response. We also encourage companies and shareholder proponents to provide us with the date by which they intend to submit their correspondence. Companies and shareholder proponents can either call us at (202) 551-3500 or e-mail us at firstname.lastname@example.org to notify us of the pending submission. As we stated in SLB No. 14, if a shareholder proponent intends to reply to the company's no-action request, he or she should try to send the reply as soon as possible after the company submits its no-action request.
We hope that this bulletin, along with our other bulletins, helps you gain a better understanding of Rule 14a-8, the no-action request process, and our views on some significant issues that commonly arise during our review of Rule 14a-8 no-action requests. We believe that these bulletins contain information that will assist in the efficient operation of the Rule 14a-8 process for both companies and shareholders.
See Exchange Act Release No. 20091 (Aug. 16, 1983) [48 FR 38218] ("In the past, the staff has taken the position that proposals requesting issuers to prepare reports on specific aspects of their business or to form special committees to study a segment of their business would not be excludable under Rule 14a-8(c)(7). Because this interpretation raises form over substance and renders the provisions of paragraph (c)(7) largely a nullity, the Commission has determined to adopt the interpretative change set forth in the Proposing Release. Henceforth, the staff will consider whether the subject matter of the special report or the committee involves a matter of ordinary business; where it does, the proposal will be excludable under Rule 14a-8(c)(7).").
See Johnson Controls, Inc. (Oct. 26, 1999) ("Similar to our previous change in position regarding the excludability of proposals requesting preparation and dissemination of special reports to shareholders on specific aspects of a registrant's business (see Release 34-20091 (Aug. 16, 1983)), we have determined that proposals requesting additional disclosures in Commission-prescribed documents should not be omitted under the 'ordinary business' exclusion solely because they relate to the preparation and content of documents filed with or submitted to the Commission. We now believe that our prior interpretation elevated form over substance. Beginning today, we therefore will consider whether the subject matter of the additional disclosure sought in a particular proposal involves a matter of ordinary business; where it does, we believe it may be excluded under rule 14a-8(i)(7).").
The determination as to whether a proposal deals with a matter relating to a company's ordinary business operations is made on a case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed. See Exchange Act Release No. 40018 (May 21, 1998) [63 FR 29106].
The Commission also noted that, "[f]rom time to time, in light of experience dealing with proposals in specific subject areas, and reflecting changing societal views, the Division adjusts its view with respect to 'social policy' proposals involving ordinary business." Exchange Act Release No. 40018.
Such a proposal could be excluded under Rule 14a-8(i)(7), however, if it seeks to micro-manage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment. See Exchange Act Release No. 40018.
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