Views on the integrity of global capital markets
05 December 2017

How Will SEC Guidance on Shareowner Proposals Play Out?

In November, the US Securities Exchange Commission staff published guidance for Rule 14a-8(i)(7), the “ordinary business” exception, which will affect the ability of issuers to exclude shareowner proposals from the proxy statement as well as the ability of shareowners to include their proposals on the annual meeting agenda.

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.” 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 pertinent language from the guidance is as follows:

At issue in many Rule 14a-8(i)(7) no-action requests is whether a proposal that addresses ordinary business matters nonetheless focuses on a policy issue that is sufficiently significant. These determinations often raise difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine. A board of directors, acting as steward with fiduciary duties to a company’s shareholders, generally has significant duties of loyalty and care in overseeing management and the strategic direction of the company. A board acting in this capacity and with the knowledge of the company’s business and the implications for a particular proposal on that company’s business is well situated to analyze, determine and explain whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote.

Opponents of the guidance feel that this interpretation may significantly curtail shareholder proposals in company proxy materials. They are concerned this this guidance makes it easier for companies to omit proposals by instead presenting to the SEC staff this “well-developed discussion of the board’s analysis” of the issue raised by the proposal as well as the issue’s significance to the company.

The SEC staff says that they are trying to offer clarity on an existing rule  If the SEC staff agrees with an issuer’s argument, it can issue a no-action relief letter that would allow the company to exclude that proposal from the company’s proxy statement.

It will be interesting to see whether the numbers of no-action relief letters granted increases materially and whether the number of perfectly legitimate shareholder issues that are now permitted becomes history. Many opponents of the rule worry that gains made on corporate governance and environmental, social, and governance criteria will be significantly rolled back.

It makes sense for a company’s board be involved in and fully aware of the reasoning behind any management request to seek no action. We expect that this both improves director accountability and informs the SEC staff trying to make the judgment of whether to omit a shareholder proposal on the basis of it being part of ordinary business operations.

CFA Institute feels it is critical that this rule not become a rubber stamp of the board’s position on excludability. As part of this change, we recommend that staff should be required to document its analysis of the issuer explanation and to offer rebuttal opportunities to shareholder proponents.

It boils down to how the rule will be interpreted. Is the staff asking the board to take responsibility for drafting a reason for excluding a proposal to improve the process? Or, is it doing so to defer to the wishes of the board on most occasions when the board wants to exclude  under the ordinary course of business exclusion?

Issuers say it is the former and investors the latter.

We are concerned that this guidance was issued without any request for comment, which would have allowed all interested parties to debate the matter in a public forum that could have provided the SEC with valuable insights. We hope that this guidance will not broaden the use of ordinary business exclusion for issues that historically have not fallen in this category.

For your edification, the following two opposing views sum up the issue nicely:

 From Davis Polk

The  indicates that instead of having the SEC Staff make these “difficult judgment calls,” boards should be held responsible because they are “well suited to analyze, determine and explain” whether a particular issue is sufficiently significant as a social policy matter.  A company making a no-action letter request under Rule 14a-8(i)(7) will need to include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance.  The SLB notes that this would be most helpful if it “detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”

There is also a question of whether this suggests, as it seems to, that long-standing topics like environmental matters and executive compensation now can also be argued under company-specific facts and board determinations that those proposals are ordinary business matters, instead of being assumed to be social policy issues in all cases.  Companies may be able to draw distinctions based on different types of environmental proposals and the specific requests.  Also, a proposal that simply refers to executive compensation although the central issue is about proxy voting tallies, like we saw earlier this year, may no longer be deemed to be a social policy issue.

From Stinson Leonard Street

Ordinary Business Exception – Rule 14a-8(i)(7)

The ordinary business exception provides a basis for exclusion under Rule 14a-8(i)(7) if a shareholder proposal deals with matters “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.”  An exception to this exclusion, however, applies to proposals that “focus on policy issues that are sufficiently significant because they transcend ordinary business” that they may not be excluded.  The staff has traditionally conducted a painstaking, multi-faceted analysis to determine whether an issue may rise to the level of significant policy issue warranting a no-action letter denial.

The staff’s guidance expresses the view that the board of directors is generally in a better position to determine the significance of a shareholder proposal. As such, SLB 14I indicates that the staff will now be looking to an issuer’s boards of directors to provide a discussion that reflects the board’s analysis of the particular policy issue raised and its significance including “the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.” In this respect, SLB 14I appears to the lay the groundwork for the staff to defer to the board’s analysis on the “the difficult judgment call” of determining the significance of a shareholder proposal under Rule 14a-8(i)(7).

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Photo Credit: ©Getty Images/Enis Aksoy

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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