More Autonomy For Boards to Decide Whether a Shareholder Proposal Should Go on a Corporate Ballot? SEC’s New Guidance on Shareholder Proposals Taken to Test
By: Jamie Yang
As public companies were getting ready for the 2018 proxy season, on November 1, 2017, the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14I (SLB 14I) on shareholder proposals. This new guidance suggests greater deference to a board’s assessment on whether to exclude certain shareholder proposals. A short 20 days after the guidance was released, on November 20, 2017, Apple Inc. filed a “no-action” letter request related to the exclusion of a shareholder proposal from the company’s proxy for its 2018 annual shareholder meeting, citing SLB 14I to support its request.
Rule 14a-8 under the Securities Exchange Act of 1934, as amended, provides a procedure by which a shareholder may require a company to submit a proposal to a shareholder vote at a shareholders’ meeting and to include that matter in the company’s proxy statement. Under Rule 14a-8, a company may exclude a properly submitted proposal on thirteen bases. The “ordinary business” exception is one of the substantive bases, which permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.”
Two central considerations for this exception are the proposal’s subject matter and the degree to which the proposal “micromanages” the company. Companies may exclude proposals that raise 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.” However, if a proposal focuses on significant policy issues that “transcend ordinary business,” the proposal may not be excluded. The Staff will consider the connection between a significant policy issue and the company’s business operations when evaluating the significance of such policy issue.
Many “no-action” requests under the “ordinary business exception” require a determination of whether a proposal addressing ordinary business matters also focuses on a significant policy issue. SLB 14I stated that these determinations often raise “difficult judgment calls” that the Staff believes are, in the first instance, matters that a board is generally in a better position to determine. SLB 14I made clear that a board of directors acting as a “steward with fiduciary duties” to a company’s shareholders, 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 and determine whether a particular issue is sufficiently significant and would be appropriate for a shareholder vote.
Accordingly, SLB 14I requires any future “no-action” requests based on the “ordinary business” exception to discuss the board’s analysis and assessment of the significance of the policy issue implicated by the shareholder proposal, detailing the specific processes the board used “to ensure that its conclusions are well-informed and well-reasoned.”
In its “no-action” letter request, Apple seeks to exclude a proposal recommending that the company establish a board committee on the company’s human rights policies and practices. Apple concludes that such proposal does not require a shareholder vote because a human rights board committee is “redundant of what the company and the board already do.” Therefore, even if the proposal is submitted to shareholders and approved, it would not call for the company to consider policies that the company does not regularly consider in its day-to-day operations, and as a result, “does not transcend the company’s ordinary business.” The “no-action” request included discussion of the significance of the policy issue and the analysis of the board process in reaching such conclusion.
The SEC’s decision on Apple’s “no-action” letter request is expected to be the first demonstration of how much deference it affords to a board when applying the “ordinary business” exception. Also, it will begin to define what a well-informed and well-reasoned board process encompasses.
As more companies seek no-action relief with the encouragement of SLB 14I, certain long-standing topics, like executive compensation and environmental matters, may become excludable as ordinary business matters rather than constituting significant social policy issues, based upon company-specific factors and a well-informed and well-reasoned board analysis.
SLB 14I has set the tone for the Staff to defer to a board’s analysis on the “the difficult judgment call” of determining the significance of a shareholder proposal under the “ordinary business” exception. With a proper deliberative process, a board is encouraged to make its own decision on when to say no to a shareholder proposal under this exception.
In addition to providing guidance on the “ordinary business” exception, SLB 14I clarified the scope and application of the “economic relevance” exception, another substantive base for excluding a shareholder proposal, and offered guidance on proposals submitted on behalf of shareholders and the use of graphs and images in proposals.