SLB 14L, issued on November 3, 2021, will reduce the costs and uncertainties for both shareholders and boards associated with shareholder proposals. Shareholders will be able to get to the point on important environmental, social, and governance (ESG) issues without so much careful word crafting by attorneys. Companies will not waste time on expensive analysis by their board, trying to read previous SEC Staff roadmaps on how to exclude a shareholder proposal from its proxy.
SEC Staff Legal Bulletin 14L (SLB 14L) finally provides needed clarification to the shareholder proposal process after years of attempting to obfuscate the process during the Trump years. SLB 14L rescinds prior SLBs 14I, 14J, and 14K, which attempted to protect company managers from their shareholders. Under Chair Gary Gensler, the SEC appears more focused on protecting investors. Sanford Lewis provides a definitive analysis on 12/23/21.
Rule 14a-8(i)(7) Ordinary Business
Rule 14a-8(i)(7) permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” SLB 14L announced staff will no longer evaluate the applicability of the ordinary business exception by focusing on the effect of the proposal on the particular company, but will instead consider whether the proposal raises issues with a “broad societal impact,” an approach the staff noted this approach aligned with the standard initially articulated in 1976 and affirmed in its final Rule 14a-8 rulemaking in 1998.
Staff will “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.” Staff will assume if a proposal addresses widely discussed ESG issues, such as human capital management and climate change, the proposal transcends ordinary business.
If a proposal seeks to “micromanage” 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,” it can be excluded. Under now-rescinded SLB 14K, the staff could exclude if, for example, it sought greenhouse gas targets aligned with the goals established by the Paris Climate Agreement. Under SLB 14L staff will evaluate to what extent a proposal inappropriately limits the discretion of the board or management. Timeframes and targets are less likely to be excluded so long as the proposals afford discretion to management as to how to achieve the goals.
Rule 14a-8(i)(5), Economic Relevance
A company is permitted 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.” However, that 5% rule was not intended to apply to proposals that raise issues of broad social or ethical concern related to the company’s business, and that’s the standard that will apply under SLB 14L.
SLB 14L Procedural Clarifications
SLB 14L also clarifies several procedural requirements. “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.” John Chevedden and I have found companies increasingly using “vote no” graphics to recommend against our proposals symbolically. We have countered with graphics such as those above, willing to de-weaponize if companies will also remove their graphics.
Proof of Ownership Letters. “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” and shareholders should be allowed to fix defects upon company notice.
Use of E-mail. “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.” “The staff also encourages both companies and shareholder proponents to acknowledge receipt of emails when requested.” When I call to get the corporate secretary’s email address so that I can submit a proposal, I hope it will no longer be acceptable to decline to disclose that information.
SLB 14L: What Others Write
SEC Resets the Shareholder Proposal Process – Sanford Lewis, posted to the Harvard Law School Forum on Corporate Governance on 12/23/21. This is now the definitive read for shareholders involved in the proxy proposal process.
- Shareholder Rights Group Hails New SEC Staff Legal Bulletin: Important Relief for Investor Rights – Sanford Lewis. His efforts on behalf of the Shareholder Rights Group appear to have paid off. Sanford Lewis will speak to our Corporate Accountability Forum on December 6th. There is still time to join the group. Leo Strine and others will speak in the Spring.
- SEC Decision Will Strengthen Investor Proxy Action on Companies’ Climate Targets, Jackie Cook, Morningstar.
- In new SLB 14L, Corp Fin takes new (old) approach to “ordinary business” and “economic relevance” exceptions – Cydney Posner of Cooley
- SEC reveals new guidance on shareholder proposal exclusions, Ben Maiden of Corporate Secretary.