In his statement announcing the latest Securities and Exchange Commission (SEC) Staff Legal Bulletin(SLB) on shareholder proposals, agency Chairman Gary Gensler made it clear that the Commission is returning to its former and less permissive position as it applies to granting “no-action” relief to companies seeking to exclude certain shareholder proposals.
In backing the new guidance, Gensler argued it aligned with the intent of 1998 rulemaking on federal proxy regulations (Rule 14a-8 of the Exchange Act) that were designed “to improve the operation of the rules governing shareholder proposals” And that the new SLB would provide greater clarity to companies and shareholders alike. Gensler also announced that the Division of Corporate Finance is rescinding SLBs 14I, 14J and 14K, “after a review of staff experience applying the guidance in them.” Each of these SLBs were issued under the previous administration’s SEC, in November 2017, October 2018, and October 2019, and each was seen by shareholder proposal proponents as constraining the ability to file resolutions while facilitating companies’ ability to exclude them from their proxy statements using the no-action petition process. That process allows companies to confirm with the SEC that the agency will take no-action against them were they to exclude shareholder proposals for one or more of 13 substantive reasons—ranging from being duplicative with a management-sponsored proposal to the proposal’s implementation conflicting with state law—under the federal proxy rules.
The new SLB, supporters contend, will help reverse the uptick in granting of no-action relief by making it more difficult for companies to omit proposals. According to an ISS Corporate Solutions analysis, 146 shareholder resolutions were successfully excluded in 2021, compared to 129 in 2020 and 122 in 2019.
The updated SLB outlines the Division’s thinking on two exceptions: the ordinary business exception and the economic relevance exception.
Under the ordinary business exception, the SLB says that staff will again consider whether a “proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company” rather than allowing them to be excluded because they do not relate to the company’s ordinary business. Under this “realigned” approach – the SLB is careful in its use of language and does not refer to the approach as “new” but as a realignment with established past practice – 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.” Because decisions will no longer be company specific, the board analysis that was recently required as part of the previous administration’s approach to the no-action process will no longer be necessary.
Also part of the ordinary business exception is the application of the micromanagement concept, whereby it can be determined that a proposal is seeking to micromanage a company’s business. The concept has been applied too widely, however, the SLB says, such that any limit on company or board discretion was deemed micromanagement. The SLB gives a useful, concrete example of its “realigned” position on micromanagement. Its letter to ConocoPhillips in March this year 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. While the proposal did request targets, it did not impose a specific method for doing so, therefore staff concluded it did not micromanage to a degree that would justify exclusion.
The rescinded SLBs also removed the 1998 rulemaking that allowed proposals to remain on the proxy, even if they were not economically relevant. To do so, they needed to raise issues of broad social or ethical concern related to the company’s business. SLB 14I, in particular, allowed companies to exclude proposals if they pertained to less than 5% of the company’s total assets and to less than 5% of its net earnings and gross sales regardless of whether they were of broad social or ethical concern. But the exception has been restored. As with the other changes, no board analysis will be needed in no-action requests on this issue.
However, two commissioners issued a statement the same day questioning the efficacy of the new SLB. Commissioners Hester Peirce and Elad Roisman expressed concern not only that the new SLB would increase the burden on staff time to determine whether proposals were excludable but also that it would make decisions more difficult. For example, they ask, what “criteria, timeframe, or proof support a finding that a topic is socially significant or has a broad societal impact?” The new SLB does not make this clear, they say, while the rescinded SLBs did provide some criteria for making these decisions. They also question how widespread the micromanagement exclusion has actually been used, noting that no climate change proposals were excluded based on micromanagement arguments during the 2021 proxy season. More radically, they express the wish that the Commission remove itself from this process altogether and allow state corporate law to take over.
Head of ISS Corporate Solutions
ISS Corporate Solutions