United States: SEC Issues Additional Guidance Related To Shareholder Proposals

Last Updated: November 24 2017
Article by Jason Zachary

On Nov. 1, 2017, the Securities and Exchange Commission (SEC) issued Staff Legal Bulletin (SLB) No.14I to provide additional guidance related to shareholder proposals and Exchange Act Rule 14a-8. Specifically, the SLB provides that:

  • A company's no-action request under the ordinary business exception should include a detailed discussion that reflects the board's analysis of the particular policy issue raised and its significance to the company's business operations, in order to help the Division determine whether a proposal that addresses ordinary business matters nonetheless focuses on a policy issue that is sufficiently significant to be appropriate for a shareholder vote.
  • A company's no-action request under the rarely used economic relevance exception should include a detailed discussion that reflects the board's analysis of the particular policy issue raised and its significance to the company.
  • Proposals by proxy must include documentation identifying the proponent, the person serving as proxy, the company and the proposal, and be signed and dated by the proponent.
  • Exclusion under the 500-word proposal limitation is appropriate only if the total number of words in a proposal, including words in the graphics, exceeds 500.

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

Rule 14a-8(i)(7), the "ordinary business" exception, 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 For the 2017 proxy season, the ordinary business exception was the most common basis for denial as well as success of a no-action request.

The SEC 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 (which the SLB does not address), the degree to which the proposal "micromanages" the company. Under the first consideration, proposals that raise matters that are "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" may be excluded, unless such a proposal focuses on policy issues that are sufficiently significant to transcend ordinary business and would be appropriate for a shareholder vote.2

Whether the significant policy exception applies depends in part on the connection between the policy issue and the company's business operations. These determinations often raise difficult judgment calls that the Division believes are, in the first instance, matters that the board of directors, acting as steward with fiduciary duties to a company's shareholders, is generally in a better position to determine. A board acting in this capacity and with the knowledge of the company's business and the implications of a particular proposal for that company's business is well-situated to analyze, determine and explain whether a particular issue is sufficiently significant to transcend ordinary business and be appropriate for a shareholder vote.

Accordingly, the Division expects a company's no-action request to include a discussion that reflects the board's analysis of the particular policy issue raised and its significance to the company's business operations. In addition, the Division noted that the explanation 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.

Although it is unclear what the "specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned" may encompass, we expect that a board may reasonably rely upon the long line of SEC no-action precedents with respect to similar proposals – which is entirely consistent with its fiduciary duties – and those precedents will help shape the specifics of the board's deliberative process. In addition, we further expect that, under certain circumstances, a company may be able to argue that proposals related to certain executive compensation or environmental topics, for example, may be excludable as ordinary business matters rather than constituting social policy issues, based upon company-specific factors and a well-informed and well-reasoned board analysis.

Economic Relevance Exception (Rule 14a-8(i)(5))

Rule 14a-8(i)(5), the "economic relevance" 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 "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." Over the years, the Division has rarely allowed this exclusion. Under its historical application, the Division simply considered whether a company conducted any amount of business related to the issue in the proposal and whether that issue was of broad social or ethical concern.

The Division now believes its application of Rule 14a-8(i)(5) has unduly limited the exclusion's availability because it has not fully considered the second prong of the rule as amended in 1982 – the question of whether the proposal "deals with a matter that is not significantly related to the issuer's business" and is therefore excludable. Accordingly, going forward, the Division's analysis will focus on a proposal's significance to the company's business when it otherwise relates to operations that account for less than 5 percent of total assets, net earnings and gross sales. Under this framework, proposals that raise issues of social or ethical significance may be included or excluded, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal's relevance to the company's business.

When a proposal's significance to a company's business is not apparent on its face, a proposal may be excludable unless the proponent demonstrates that it is "otherwise significantly related to the company's business."3 For example, the proponent can provide information demonstrating that the proposal "may have a significant impact on other segments of the issuer's business or subject the issuer to significant contingent liabilities."4 The proponent could continue to raise social or ethical issues in its arguments, but it would need to tie those to a significant effect on the company's business. The mere possibility of reputational or economic harm will not preclude no-action relief. In evaluating significance, the Division will consider the proposal in light of the "total mix" of information about the company.

As with the ordinary business exception, determining whether a proposal is otherwise significantly related to the company's business can raise difficult judgment calls. Accordingly, the Division expects a company's Rule 14a-8(i)(5) no-action request to include a discussion that reflects the board's analysis of the proposal's significance to the company. Similarly, that explanation 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.

The Division also noted that it will no longer look to its ordinary business exception analysis under Rule 14a-8(i)(7) when evaluating arguments under Rule 14a-8(i)(5).

Proposals Submitted on Behalf of Shareholders

While Rule 14a-8 does not address shareholders' ability to submit proposals through a representative, shareholders frequently elect to do so, a practice commonly referred to as "proposal by proxy." The Division has been, and continues to be, of the view that a shareholder's submission by proxy is consistent with Rule 14a-8.

The Division is nevertheless mindful of challenges that proposals by proxy may present. For example, there may be questions about whether the eligibility requirements of Rule 14a-8(b) have been satisfied or even whether shareholders know that proposals are being submitted on their behalf. As a result, the Division will look to whether the shareholders who submit a proposal by proxy provide documentation describing the shareholder's delegation of authority to the proxy. In general, this documentation should:

  • Identify the shareholder-proponent and the person or entity selected as proxy.
  • Identify the company to which the proposal is directed.
  • Identify the annual or special meeting for which the proposal is submitted.
  • Identify the specific proposal to be submitted.
  • Be signed and dated by the shareholder.

The Division also notes that when this information is not provided, there may be a basis to exclude the proposal under Rule 14a-8(b) (i.e., because the shareholder has not complied with an eligibility or procedural requirement). Please note that this guidance applies only to proposals submitted by proxy after Nov. 1, 2017 – the date on which the SLB was published. However, companies that intend to seek exclusion under Rule 14a-8(b) based on a shareholder's failure to provide some or all of this information must notify the proponent of the specific defect within 14 calendar days after receiving the proposal so that the proponent has an opportunity to cure the defect.5

500-Word Proposal Limitation (Rule 14a-8(d))

Rule 14a-8(d) is one of the procedural bases for exclusion of a shareholder proposal; it provides that a "proposal, including any accompanying supporting statement, may not exceed 500 words."

In two recent no-action decisions, the Division expressed the view that the use of "500 words" and absence of express reference to graphics or images in Rule 14a-8(d) does not prohibit the inclusion of graphs and/or images in proposals. The Division recognizes the potential for abuse in this area, but that these potential abuses are better 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) when they make the proposal materially false or misleading; render the proposal inherently vague or indefinite; directly or indirectly impugn character, integrity or personal reputation 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. In addition, 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.


1 SEC Release No. 34-40018 (May 21, 1998).

2 Id.

3 Proponents bear the burden of demonstrating that a proposal is "otherwise significantly related to the company's business." See Release No. 34-39093 (Sep. 18, 1997), citing Release No. 34-19135.

4 SEC Release No. 34-19135 (Oct. 14, 1982).

5 See Rule 14a-8(f)(1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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