RECENT SEC STAFF GUIDANCE REGARDING SHAREHOLDER PROPOSAL EXCLUSION UNDER THE ORDINARY BUSINESS EXCEPTION
On November 1, 2017, the staff of the U.S. Securities and Exchange Commission's Division of Corporation Finance (the "Staff") released Staff Legal Bulletin No. 14I ("SLB 14I"), which addressed several topics related to the exclusion of share- holder proposals from public company proxy statements. In SLB 14I, the Staff attempted, among other things, to clarify the scope and application of the Exchange Act Rule 14a-8(i)(7) "ordinary business" exception. A shareholder proposal may be excluded from a company's proxy statement under the ordi- nary business exception if it meets a subject matter test or seeks to "micromanage" the company. A proposal that raises a matter "fundamental to management's ability to run a com- pany on a day-to-day basis" meets the subject matter test, unless the matter focuses on policy issues that transcend ordinary business.
The Staff specifically addressed the "difficult judgment calls" required for determining if a shareholder proposal raises tran- scendent policy issues in SLB 14I. Such judgment calls are "in the first instance matters that the board of directors is gener- ally in a better position to determine" than the staff. Therefore, the Staff recommended in SLB 14I that no-action requests utilizing the ordinary business exception's subject matter test should include a detailed discussion of the board's process and analysis in determining that a policy issue does not tran- scend ordinary business. Some commentators have noted that this guidance from SLB 14I suggests that the Staff could defer to board decisions regarding the subject matter test, warn- ing that the rule should not "become a rubber stamp of the board's position on excludability."
The Staff's response to the first no-action request submitted in reliance on SLB 14I indicates that no such rubber stamp is currently being inked. Apple, Inc. ("Apple") submitted a no- action request letter to the Staff in response to a shareholder proposal recommending the creation of a board committee to review, assess, disclose, and make recommendations on the company's policy and practice on human rights. Apple's no- action request letter, in specific reliance on SLB 14I, included a discussion of the Apple board's analysis of the proposal and the process utilized by the board in considering it. Despite receiving the information prescribed by SLB 14I, the Staff did not defer to Apple's application of the exclusion. Instead, on December 21, 2017, the Staff refused to grant the no-action request. The Staff quoted Apple's assertion that management and the board believe that human rights are "integral" to the company's business operations as justification for the denial. Notably, the Staff also stated, without explanation, that the board's analysis failed to explain why the proposal did not raise a "significant issue" for Apple.
Companies with exposure to climate change risk and other environmental issues are susceptible to shareholder proposals. Although the Staff's interpretation and application of SLB 14I is likely to continue to develop, the Apple no-action letter illus- trates the challenges that companies may face in utilizing the ordinary business exception to exclude proposals related to climate risk and environmental issues. Practically, in crafting a request for no-action relief, companies must consider that claims about the importance of climate change or other envi- ronmental risks to the company's business may be used as justification to deny relief. Like Apple, a company seeking no action relief utilizing the subject matter test may be required to thread a needle—establishing that a proposal's subject matter is excludable as raising a fundamental business matter while simultaneously demonstrating that the proposal does not raise a "significant issue" that transcends ordinary business. More important, companies must recognize that SLB 14I is unlikely to lead the Staff to defer broadly to board decisions on these "difficult judgment calls."
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