Action: Publication of CF Staff Legal Bulletin
Date: October 16, 2019
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 bulletin represent the views of the Division of Corporation Finance (the “Division”). This bulletin is not a rule, regulation or statement of the Securities and Exchange Commission (the “Commission”). Further, the Commission has neither approved nor disapproved its content. This bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
Rule 14a-8(i)(7), the “ordinary business” exception, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” The Commission has stated that the policy underlying the “ordinary business” exception rests on two central considerations. The first relates to the proposal’s subject matter; the second relates to the degree to which the proposal “micromanages” the company.
Under the first consideration, proposals that 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” relate to a company’s “ordinary” business operations. The Commission has stated, however, that proposals relating to such matters but focusing on a significant policy issue are not excludable under the first consideration “because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” We have previously expressed the view that whether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company’s business operations.
In the past, proponents and companies have often focused on the overall significance of the policy issue raised by the proposal, instead of whether the proposal raises a policy issue that transcends the particular company’s ordinary business operations. The staff takes a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally “significant.” Accordingly, a policy issue that is significant to one company may not be significant to another.
In reflecting on the language of the Rule 14a-8 and the Commission’s statements on its purpose, we believe the focus of an argument for exclusion under Rule 14a-8(i)(7) should be on whether the proposal deals with a matter relating to that company’s ordinary business operations or raises a policy issue that transcends that company’s ordinary business operations. When a proposal raises a policy issue that appears to be significant, a company’s no-action request should focus on the significance of the issue to that company. If the company does not meet that burden, the staff believes the matter may not be excluded under Rule 14a-8(i)(7).
>>3. Board analysis
In SLB Nos. 14I and 14J, we noted that evaluating whether a proposal transcends ordinary business matters often raises difficult judgment calls that we believe are matters that the board of directors generally is well-situated to analyze. In this regard, we continue to believe that a well-developed discussion of the board’s analysis of whether the particular policy issue raised by the proposal is sufficiently significant in relation to the company can assist the staff in evaluating a company’s no-action request and, in turn, assist the company in demonstrating that it may exclude the proposal.
In SLB No. 14J, we noted our view that a well-developed discussion of the board’s analysis will describe in sufficient detail the specific substantive factors the board considered in arriving at its conclusion, and set forth a non-exclusive list of such factors. Overall, we found during the most recent proxy season that the no-action requests that included a discussion of the board’s analysis were more helpful in determining whether the proposal was significant to the company’s business. We also found the analysis helpful even in instances where we granted relief under Rule 14a-8(i)(7) but did not explicitly reference the board’s analysis in our response letter. The improvement in the board analyses provided was largely attributable to a greater proportion of requests discussing in detail the specific substantive factors, such as those set forth in SLB No. 14J, that the board considered in arriving at its conclusion that an issue was not significant in relation to the company’s business.
Additionally, in a number of instances, we were unable to agree with exclusion where a board analysis was not provided, which was especially likely where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident.8 If a request where significance is at issue does not include a robust analysis substantiating the board’s determination that the policy issue raised by the proposal is not significant to the company, our analysis and ability to state a view regarding exclusion may be impacted. While we do not necessarily expect the board, or a board committee, to prepare the significance analysis that is included in the company’s no-action request, we do believe it is important that the appropriate body with fiduciary duties to shareholders give due consideration as to whether the policy issue presented by a proposal is of significance to the company.
>>>a. Delta analysis
In SLB No. 14J, the staff explained that a board analysis could address, among other substantive factors, whether the company has already addressed in some manner the policy issue raised by the proposal, including the differences – or the delta – 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. A delta analysis could be useful for companies that have already addressed the policy issue in some manner but may not have substantially implemented the proposal’s specific request for purposes of exclusion under Rule 14a-8(i)(10) (e.g., by addressing the issue in a manner not contemplated by the proposal). In these cases, it would helpful if the delta analysis identifies, for example, the differences between the actions that the company has already taken to address the issue and the proposal’s specific request. It also is helpful when the board’s analysis explains whether the difference between the company’s actions and the proposal’s request represents a significant policy issue to the company. In other words, have the company’s prior actions diminished the significance of the policy issue to such an extent that the proposal does not present a policy issue that is significant to the company?
Based on our evaluation of no-action requests this past season, a delta analysis is most helpful where it clearly identifies the differences between the manner in which the company has addressed an issue and the manner in which a proposal seeks to address the issue and explains in detail why those differences do not represent a significant policy issue to the company. By contrast, conclusory statements about the differences that fail to explain why the board believes that the issue is no longer significant are less helpful.
>>>b. Prior voting results
Another substantive factor identified in SLB No. 14J was whether the company’s shareholders have previously voted on the matter and the board’s views on the voting results. In SLB No. 14J, we noted that where a company’s shareholders have previously voted on the matter we would expect the voting results to be addressed as part of the board’s analysis. This past season, we were unable to agree with exclusion in some instances where a board’s analysis was provided because we did not find the board’s discussion of the prior vote to be persuasive in demonstrating that the policy issue is no longer significant to the company. In these instances, companies argued unsuccessfully that:
The voting results were not significant given that a majority of shareholders voted against the prior proposal.
The significance of the prior voting results was mitigated by the impact of proxy advisory firms’ recommendations.
When considering the voting results based on shares outstanding, instead of votes cast, the voting results were not significant.
Based on our evaluation of recent no-action requests, the board’s analysis may be more helpful if it includes, for example, a robust discussion that explains how the company’s subsequent actions, intervening events or other objective indicia of shareholder engagement on the issue bear on the significance of the underlying issue to the company. For example, if after a proposal receives significant support, a company engages with its shareholders to better understand the level of support, we believe that it may be more helpful if the board’s analysis includes a discussion that describes how its view on significance is informed by those engagements as well as any actions the company may have taken to address concerns expressed in the proposal.
Under the Commission’s second consideration, a proposal may be excludable under the “ordinary business” exception if it “micromanages” the company. This prong of the Rule 14a-8(i)(7) analysis rests on an evaluation of the manner in which a proposal seeks to address the subject matter raised, rather than the subject matter itself. As illustrated below, two proposals focusing on the same subject matter may warrant different outcomes based solely on the level of prescriptiveness with which the proposals approach that subject matter.
In considering arguments for exclusion based on micromanagement, and consistent with the Commission’s views, we look to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. Thus, a proposal framed as a request that the company consider, discuss the feasibility of, or evaluate the potential for a particular issue generally would not be viewed as micromanaging matters of a complex nature. However, a proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages. Following a successful vote on a shareholder proposal, management and the board generally consider whether and how to implement the proposal. Notwithstanding the precatory nature of a proposal, if the method or strategy for implementing the action requested by the proposal is overly prescriptive, thereby potentially limiting the judgment and discretion of the board and management, the proposal may be viewed as micromanaging the company.
For example, this past season we agreed that a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius” was excludable on the basis of micromanagement. In our view, the proposal micromanaged the company by prescribing the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.
In contrast, we did not concur with the excludability of a proposal seeking a report “describing if, and how, [a company] plans to reduce its total contribution to climate change and align its operations and investments with the Paris [Climate] Agreement’s goal of maintaining global temperatures well below 2 degrees Celsius.” The proposal was not excludable because the proposal transcended ordinary business matters and did not seek to micromanage the company to such a degree that exclusion would be appropriate.13 In our view, the proposal did not seek to micromanage the company because it deferred to management’s discretion to consider if and how the company plans to reduce its carbon footprint and asked the company to consider the relative benefits and drawbacks of several actions.
When analyzing a proposal to determine the underlying concern or central purpose of any proposal, we look not only to the resolved clause but to the proposal in its entirety. Thus, if a supporting statement modifies or re-focuses the intent of the resolved clause, or effectively requires some action in order to achieve the proposal’s central purpose as set forth in the resolved clause, we take that into account in determining whether the proposal seeks to micromanage the company.
This past season, where we concurred with a company’s micromanagement argument, it was not because we viewed the proposal as presenting issues that are too complex for shareholders to understand. Rather, it was based on our assessment of the level of prescriptiveness of the proposal. When a proposal prescribes specific actions that the company’s management or the board must undertake without affording them sufficient flexibility or discretion in addressing the complex matter presented by the proposal, the proposal may micromanage the company to such a degree that exclusion of the proposal would be warranted. For example, a proposal urging the board to adopt a policy prohibiting adjusting financial performance metrics to exclude compliance costs when determining executive compensation would be excludable on micromanagement grounds because such proposal prohibits any such adjustments without regard to specific circumstances or the possibility of reasonable exceptions. When a company asserts the micromanagement prong as a reason to exclude a proposal, we would expect it to include in its analysis how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.
>C. Proof of ownership letters
In this section we address shareholder proof of ownership for purposes of Rule 14a-8(b). In relevant part, Rule 14a-8(b) provides that a proponent must prove eligibility to submit a proposal by offering proof that it “continuously held” the required amount of securities “for at least one year by the date” the proposal is submitted.
In Section C of SLB No. 14F, we identified several common errors shareholders make when submitting proof of ownership for purposes of satisfying Rule 14a-8(b)(2). In an effort to reduce such errors, we provided a suggested format for shareholders and their brokers or banks to follow when supplying the required verification of ownership. We note that brokers and banks are not required to follow this format.
This season, we observed that some companies applied an overly technical reading of proof of ownership letters as a means to exclude a proposal. We generally do not find such arguments persuasive. For example, in two recent instances we did not concur with the excludability of a proposal based on Rule 14a-8(b) where the proof of ownership letter deviated from the format set forth in SLB No. 14F. In those cases, we concluded that the proponent nonetheless had supplied documentary support sufficiently evidencing the requisite minimum ownership requirements for the one-year period, as required by Rule 14a-8(b). We took a plain meaning approach to interpreting the text of the proof of ownership letter, and we expect companies to apply a similar approach in their review of such letters.
While we continue to encourage shareholders and their brokers or banks to use the sample language provided in SLB No. 14F to avoid this issue, such formulation is neither mandatory nor the exclusive means of demonstrating the ownership requirements of Rule 14a-8(b). As previously stated, we recognize that the requirements of Rule 14a-8(b) can be quite technical. Accordingly, companies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.
For example, although a climate change proposal submitted to an energy company may raise significant policy issues for that company, a similar proposal submitted to a software development company may not raise significant policy issues for that company.
Release No. 34-40018. The Commission explained that micromanagement “may come into play in a number of circumstances, such as where the proposal involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”
Id. The Division suggested the following formulation: “As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least one year, [number of securities] shares of [company name] [class of securities].”