Shareholder Proposals
Staff Legal Bulletin No. 14L (CF)
Action: Publication of CF Staff Legal Bulletin
Date: November 3, 2021
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.
Contacts: For further information, please contact the Division’s Office of
Chief Counsel by submitting a web-based request form at https://www.sec.gov/forms/corp_fin_interpretive.
A. The Purpose of This Bulletin
The Division is rescinding Staff Legal Bulletin Nos. 14I, 14J and 14K (the
“rescinded SLBs”) after a review of staff experience applying the guidance
in them. In addition, to the extent the views expressed in any other prior
Division staff legal bulletin could be viewed as contrary to those expressed
herein, this staff legal bulletin controls.
This bulletin outlines the Division’s views on Rule 14a-8(i)(7), the ordinary
business exception, and Rule 14a-8(i)(5), the economic relevance exception.
We are also republishing, with primarily technical, conforming changes, the
guidance contained in SLB Nos. 14I and 14K relating to the use of graphics
and images, and proof of ownership letters. In addition, we are providing
new guidance on the use of e-mail for submission of proposals, delivery of
notice of defects, and responses to those notices.
In Rule 14a-8, the Commission has provided a means by which shareholders can
present proposals for the shareholders’ consideration in the company’s proxy
statement. This process has become a cornerstone of shareholder engagement
on important matters. Rule 14a-8 sets forth several bases for exclusion of
such proposals. Companies often request assurance that the staff will not
recommend enforcement action if they omit a proposal based on one of these
exclusions (“no-action relief”). The Division is issuing this bulletin to
streamline and simplify our process for reviewing no-action requests, and to
clarify the standards staff will apply when evaluating these requests.
B. Rule 14a-8(i)(7)
1. Background
Rule 14a-8(i)(7), the ordinary business exception, is one of the
substantive bases for exclusion of a shareholder proposal in Rule 14a-8.
It 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.”[1]
2. Significant Social Policy Exception
Based on a review of the rescinded SLBs and staff experience applying the
guidance in them, we recognize that an undue emphasis was placed on
evaluating the significance of a policy issue to a particular company at the
expense of whether the proposal focuses on a significant social policy,[2] complicating the application of Commission policy to proposals. In
particular, we have found that focusing on the significance of a policy
issue to a particular company has drawn the staff into factual
considerations that do not advance the policy objectives behind the ordinary
business exception. We have also concluded that such analysis did not yield
consistent, predictable results.
Going forward, the staff will realign its approach for determining whether a
proposal relates to “ordinary business” with the standard the Commission
initially articulated in 1976, which provided an exception for certain
proposals that raise significant social policy issues,[3] and which the Commission subsequently reaffirmed in the 1998 Release.
This exception is essential for preserving shareholders’ right to bring
important issues before other shareholders by means of the company’s proxy
statement, while also recognizing the board’s authority over most day-to-day
business matters. For these reasons, staff will no longer focus on
determining the nexus between a policy issue and the company, but will
instead focus on the social policy significance of the issue that is the
subject of the shareholder proposal. In making this determination, the staff
will consider whether the proposal raises issues with a broad societal
impact, such that they transcend the ordinary business of the company.[4]
Under this realigned approach, proposals that the staff previously viewed as
excludable because they did not appear to raise a policy issue of
significance for the company may no longer be viewed as excludable under
Rule 14a-8(i)(7). For example, proposals squarely raising human capital
management issues with a broad societal impact would not be subject to
exclusion solely because the proponent did not demonstrate that the human
capital management issue was significant to the company.[5]
Because the staff is no longer taking a company-specific approach to
evaluating the significance of a policy issue under Rule 14a-8(i)(7), it
will no longer expect a board analysis as described in the rescinded SLBs as
part of demonstrating that the proposal is excludable under the ordinary
business exclusion. Based on our experience, we believe that board analysis
may distract the company and the staff from the proper application of the
exclusion. Additionally, the “delta” component of board analysis –
demonstrating that the difference between the company’s existing actions
addressing the policy issue and the proposal’s request is insignificant –
sometimes confounded the application of Rule 14a-8(i)(10)’s substantial
implementation standard.
3. Micromanagement
Upon further consideration, the staff has determined that its recent
application of the micromanagement concept, as outlined in SLB Nos. 14J and
14K, expanded the concept of micromanagement beyond the Commission’s policy
directives. Specifically, we believe that the rescinded guidance may have
been taken to mean that any limit on company or board discretion constitutes
micromanagement.
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 “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.”[6] The Commission clarified in the 1998 Release that specific methods,
timelines, or detail do not necessarily amount to micromanagement and are
not dispositive of excludability.
Consistent with Commission guidance, the staff will take a measured approach
to evaluating companies’ micromanagement arguments – recognizing that
proposals seeking detail or seeking to promote timeframes or methods do not
per se constitute micromanagement. Instead, we will focus on the level of
granularity sought in the proposal and whether and to what extent it
inappropriately limits discretion of the board or management. We would
expect the level of detail included in a shareholder proposal to be
consistent with that needed to enable investors to assess an issuer’s
impacts, progress towards goals, risks or other strategic matters
appropriate for shareholder input.
Our recent letter to ConocoPhillips Company[7] provides an example of our current approach to micromanagement. In
that letter the staff denied no-action relief for a proposal requesting that
the company set targets covering the greenhouse gas emissions of the
company’s operations and products. The proposal requested that the company
set emission reduction targets and it did not impose a specific method for
doing so. The staff concluded this proposal did not micromanage to such a
degree to justify exclusion under Rule 14a-8(i)(7).
Additionally, in order to assess whether a proposal probes matters “too
complex” for shareholders, as a group, to make an informed judgment,[8] we may consider the sophistication of investors generally on the
matter, the availability of data, and the robustness of public discussion
and analysis on the topic. The staff may also consider references to
well-established national or international frameworks when assessing
proposals related to disclosure, target setting, and timeframes as
indicative of topics that shareholders are well-equipped to evaluate.
This approach is consistent with the Commission’s views on the ordinary
business exclusion, which is designed to preserve management’s discretion on
ordinary business matters but not prevent shareholders from providing
high-level direction on large strategic corporate matters. As the Commission
stated in its 1998 Release:
[In] the Proposing Release we explained that one of the
considerations in making the ordinary business determination was the
degree to which the proposal seeks to micro-manage the company. We
cited examples such as where the proposal seeks intricate detail, or
seeks to impose specific time-frames or to impose specific methods
for implementing complex policies. Some commenters thought that the
examples cited seemed to imply that all proposals seeking detail, or
seeking to promote time-frames or methods, necessarily amount to
‘ordinary business.’ We did not intend such an implication. Timing
questions, for instance, could involve significant policy where
large differences are at stake, and proposals may seek a reasonable
level of detail without running afoul of these considerations.
While the analysis in this bulletin may apply to any subject matter, many of
the proposals addressed in the rescinded SLBs requested companies adopt
timeframes or targets to address climate change that the staff concurred
were excludable on micromanagement grounds.[9] Going forward we would not concur in the exclusion of similar
proposals that suggest targets or timelines so long as the proposals afford
discretion to management as to how to achieve such goals.[10] We believe our current approach to micromanagement will help to avoid
the dilemma many proponents faced when seeking to craft proposals with
sufficient specificity and direction to avoid being excluded under Rule
14a-8(i)(10), substantial implementation, while being general enough to
avoid exclusion for “micromanagement.”[11]
C. Rule 14a-8(i)(5)
Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to
exclude a proposal that “relates to operations which account for less than 5
percent of the company’s total assets at the end of its most recent fiscal year,
and for less than 5 percent of its net earnings and gross sales for its most
recent fiscal year, and is not otherwise significantly related to the company’s
business.”
Based on a review of the rescinded SLBs and staff experience applying the
guidance in them, we are returning to our longstanding approach, prior to SLB
No. 14I, of analyzing Rule 14a-8(i)(5) in a manner we believe is consistent with
Lovenheim v. Iroquois Brands, Ltd.[12] As a result, and consistent with our pre-SLB No. 14I approach and
Lovenheim, proposals that raise issues of broad social or ethical concern
related to the company’s business may not be excluded, even if the relevant
business falls below the economic thresholds of Rule 14a-8(i)(5). In light of
this approach, the staff will no longer expect a board analysis for its
consideration of a no-action request under Rule 14a-8(i)(5).
D. Rule 14a-8(d)[13]
1. Background
Rule 14a-8(d) is one of the procedural bases for exclusion of a shareholder
proposal in Rule 14a-8. It provides that a “proposal, including any
accompanying supporting statement, may not exceed 500 words.”
2. The Use of Images in Shareholder Proposals
Questions have arisen concerning the application of Rule 14a-8(d) to
proposals that include graphs and/or images.[14] The staff has expressed the view that the use of “500 words” and
absence of express reference to graphics or images in Rule 14a-8(d) do not
prohibit the inclusion of graphs and/or images in proposals.[15] Just as companies include graphics that are not expressly permitted
under the disclosure rules, the Division is of the view that Rule 14a-8(d)
does not preclude shareholders from using graphics to convey information
about their proposals.[16]
The Division recognizes the potential for abuse in this area. The Division
believes, however, that these potential abuses can be addressed through
other provisions of Rule 14a-8. For example, exclusion of graphs and/or
images would be appropriate under Rule 14a-8(i)(3) where they:
- make the proposal materially false or misleading;
- render the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires;
- directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or
- are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.[17]
Exclusion would also be appropriate under Rule 14a-8(d) if the total number
of words in a proposal, including words in the graphics, exceeds 500.
E. Proof of Ownership Letters[18]
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 the required amount of time.[19]
In Section C of SLB No. 14F, we identified two common errors shareholders make
when submitting proof of ownership for purposes of satisfying Rule
14a-8(b)(2).[20] 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.[21] Below, we have updated the suggested format to reflect recent changes to
the ownership thresholds due to the Commission’s 2020 rulemaking.[22] We note that brokers and banks are not required to follow this format.
“As of [date the proposal is submitted], [name of shareholder] held, and has held
continuously for at least [one year] [two years] [three years], [number of
securities] shares of [company name] [class of securities].”
Some companies apply an overly technical reading of proof of ownership letters as
a means to exclude a proposal. We generally do not find arguments along these
lines to be persuasive. For example, 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.[23] In those cases, we concluded that the proponent nonetheless had supplied
documentary support sufficiently evidencing the requisite minimum ownership
requirements, 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 encourage shareholders and their brokers or banks to use the sample
language provided above to avoid this issue, such formulation is neither
mandatory nor the exclusive means of demonstrating the ownership requirements of
Rule 14a-8(b).[24] 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.
We also do not interpret the recent amendments to Rule 14a-8(b)[25] to contemplate a change in how brokers or banks fulfill their role. In our
view, they may continue to provide confirmation as to how many shares the
proponent held continuously and need not separately calculate the share
valuation, which may instead be done by the proponent and presented to the
receiving issuer consistent with the Commission’s 2020 rulemaking.[26] Finally, we believe that companies should identify any specific defects in
the proof of ownership letter, even if the company previously sent a deficiency
notice prior to receiving the proponent’s proof of ownership if such deficiency
notice did not identify the specific defect(s).
F. Use of E-mail
Over the past few years, and particularly during the pandemic, both proponents
and companies have increasingly relied on the use of emails to submit proposals
and make other communications. Some companies and proponents have expressed a
preference for emails, particularly in cases where offices are closed. Unlike
the use of third-party mail delivery that provides the sender with a proof of
delivery, parties should keep in mind that methods for the confirmation of email
delivery may differ. Email delivery confirmations and company server logs may
not be sufficient to prove receipt of emails as they only serve to prove that
emails were sent. In addition, spam filters or incorrect email addresses can
prevent an email from being delivered to the appropriate recipient. The staff
therefore suggests that to prove delivery of an email for purposes of Rule
14a-8, the sender should seek a reply e-mail from the recipient in which the
recipient acknowledges receipt of the e-mail. The staff also encourages both
companies and shareholder proponents to acknowledge receipt of emails when
requested. Email read receipts, if received by the sender, may also help to
establish that emails were received.
1. Submission of Proposals
Rule 14a-8(e)(1) provides that in order to avoid controversy, shareholders
should submit their proposals by means, including electronic means, that
permit them to prove the date of delivery. Therefore, where a dispute arises
regarding a proposal’s timely delivery, shareholder proponents risk
exclusion of their proposals if they do not receive a confirmation of
receipt from the company in order to prove timely delivery with email
submissions. Additionally, in those instances where the company does not
disclose in its proxy statement an email address for submitting proposals,
we encourage shareholder proponents to contact the company to obtain the
correct email address for submitting proposals before doing so and we
encourage companies to provide such email addresses upon request.
2. Delivery of Notices of Defects
Similarly, if companies use email to deliver deficiency notices to
proponents, we encourage them to seek a confirmation of receipt from the
proponent or the representative in order to prove timely delivery. Rule
14a-8(f)(1) provides that the company must notify the shareholder of any
defects within 14 calendar days of receipt of the proposal, and accordingly,
the company has the burden to prove timely delivery of the notice.
3. Submitting Responses to Notices of Defects
Rule 14a-8(f)(1) also provides that a shareholder’s response to a deficiency
notice must be postmarked, or transmitted electronically, no later than 14
days from the date of receipt of the company's notification. If a
shareholder uses email to respond to a company’s deficiency notice, the
burden is on the shareholder or representative to use an appropriate email
address (e.g., an email address provided by the company, or the email
address of the counsel who sent the deficiency notice), and we encourage
them to seek confirmation of receipt.
Footnotes
[1]
Release No. 34-40018 (May 21, 1998) (the “1998 Release”). Stated
a bit differently, the Commission has explained that “[t]he
‘ordinary business’ exclusion is based in part on state
corporate law establishing spheres of authority for the board of
directors on one hand, and the company’s shareholders on the
other.” Release No. 34-39093 (Sept. 18, 1997).
[2]
For example, SLB No. 14K explained that the staff “takes a
company-specific approach in evaluating significance, rather than
recognizing particular issues or categories of issues as universally
‘significant.’” Staff Legal Bulletin No. 14K (Oct. 16, 2019).
[3]
Release No. 34-12999 (Nov. 22, 1976) (the “1976 Release”) (stating,
in part, “proposals of that nature [relating to the economic and
safety considerations of a nuclear power plant], as well as others
that have major implications, will in the future be considered
beyond the realm of an issuer’s ordinary business operations”).
[4]
1998 Release (“[P]roposals . . . focusing on sufficiently significant
social policy issues. . .generally would not be considered to be
excludable, 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”).
[5]
See, e.g.,
Dollar General Corporation (Mar. 6, 2020) (granting no-action
relief for exclusion of a proposal requesting the board to issue a
report on the use of contractual provisions requiring employees to
arbitrate employment-related claims because the proposal did not
focus on specific policy implications of the use of arbitration at
the company). We note that in the 1998 Release the Commission
stated: “[P]roposals relating to [workforce management] but focusing
on sufficiently significant social policy issues (e.g., significant
discrimination matters) generally would not be considered to be
excludable, 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.” Matters related to
employment discrimination are but one example of the workforce
management proposals that may rise to the level of transcending the
company’s ordinary business operations.
[6]
1998 Release.
[7]
ConocoPhillips Company (Mar. 19, 2021).
[8]
See 1998 Release and 1976 Release.
[9]
See, e.g., PayPal Holdings, Inc. (Mar. 6, 2018)
(granting no-action relief for exclusion of a proposal asking the
company to prepare a report on the feasibility of achieving net-zero
emissions by 2030 because the staff concluded it micromanaged the
company); Devon Energy Corporation (Mar. 4, 2019) (granting
no-action relief for exclusion of a proposal requesting that the
board in annual reporting include disclosure of short-, medium- and
long-term greenhouse gas targets aligned with the Paris Climate
Agreement because the staff viewed the proposal as requiring the
adoption of time-bound targets).
[10]
See
ConocoPhillips Company (Mar. 19, 2021).
[11]
To be more specific, shareholder proponents have expressed concerns
that a proposal that was broadly worded might face exclusion under
Rule 14a-8(i)(10). Conversely, if a proposal was too specific it
risked exclusion under Rule 14a-8(i)(7) for micromanagement.
[12]
618 F. Supp. 554 (D.D.C. 1985).
[13]
This section previously appeared in SLB No. 14I (Nov. 1, 2017) and is
republished here with only minor, conforming changes.
[14]
Rule 14a-8(d) is intended to limit the amount of space a shareholder
proposal may occupy in a company’s proxy statement. See 1976
Release.
[15]
See General Electric Co. (Feb. 3, 2017, Feb. 23, 2017);
General Electric Co. (Feb. 23, 2016). These decisions
were consistent with a longstanding Division position. See
Ferrofluidics Corp. (Sept. 18, 1992).
[16]
Companies should not minimize or otherwise diminish the appearance of
a shareholder’s graphic. For example, if the company includes its
own graphics in its proxy statement, it should give similar
prominence to a shareholder’s graphics. If a company’s proxy
statement appears in black and white, however, the shareholder
proposal and accompanying graphics may also appear in black and
white.
[17]
See General Electric Co. (Feb. 23, 2017).
[18]
This section previously appeared in SLB No. 14K (Oct.16, 2019) and is
republished here with minor, conforming changes. Additional discussion is
provided in the final paragraph.
[19]
Rule 14a-8(b) requires proponents to have continuously held at least
$2,000, $15,000, or $25,000 in market value of the company’s securities
entitled to vote on the proposal for at least three years, two years, or
one year, respectively.
[20]
Staff Legal Bulletin No. 14F (Oct. 18, 2011).
[21]
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].”
[22]
Release No. 34-89964 (Sept. 23, 2020) (the “2020 Release”).
[23]
See Amazon.com, Inc. (Apr. 3, 2019); Gilead Sciences, Inc.
(Mar. 7, 2019).
[24]
See Staff Legal Bulletin No.14F, n.11.
[25]
See 2020 Release.
[26]
2020 Release at n.55 (“Due to market fluctuations, the value of a
shareholder’s investment in a company may vary throughout the applicable
holding period before the shareholder submits the proposal. In order to
determine whether the shareholder satisfies the relevant ownership
threshold, the shareholder should look at whether, on any date within
the 60 calendar days before the date the shareholder submits the
proposal, the shareholder’s investment is valued at the relevant
threshold or greater. For these purposes, companies and shareholders
should determine the market value by multiplying the number of
securities the shareholder continuously held for the relevant period by
the highest selling price during the 60 calendar days before the
shareholder submitted the proposal. For purposes of this calculation, it
is important to note that a security’s highest selling price is not
necessarily the same as its highest closing price.”) (citations
omitted).