Rule 14a-8 of the Securities Exchange Act of 1934 provides a framework allowing a public company shareholder to request that a proposal be included in the company's proxy statement, to be voted upon at a company's shareholder meeting. While Rule 14a8 provides a means for shareholders to propose changes to a company's governance practices, it can also be a source of controversy, particularly when proposals deviate from the preferences of the board of directors or other shareholders. This risk has become more significant as the number of shareholder proposals submitted to a vote has increased in recent years, in part as a result of a heightened focus by shareholders on ESG-related matters, as well as changes in the Securities and Exchange Commission's ("SEC") rules and practices governing the ability of companies to exclude shareholder proposals under certain circumstances.
As the 2023 proxy season nears, public companies should take stock of the current environment relating to shareholder proposals under Rule 14a-8 so as to effectively respond in the event one or more are submitted.
A company subject to Section 14A of the Exchange Act must include a shareholder proposal in its proxy statement for a shareholder meeting if the proposal complies with the procedural and eligibility requirements of Rule 14a-8, unless the company excludes the proposal on one of 13 substantive bases. 1 Once included in a company's proxy statement, the shareholder proposal may be voted on by shareholders at the next annual meeting or special meeting on a non-binding and advisory basis.
Rule 14a-8 contains a number of procedural requirements2 relating to the shareholder proposal and accompanying materials, as well as eligibility requirements applicable to the proponent shareholder. 3 Among other requirements, a shareholder proposal must be submitted at least 120 days before the anniversary of the company's proxy statement for the prior year, and no more than one proposal may be submitted by a shareholder for a single shareholder meeting. A shareholder proposal that satisfies the procedural and eligibility requirements of Rule 14a-8 may nonetheless be excluded by a company if the substance of the proposal relates to certain matters enumerated by Rule 14a-8(i). 4 A company that wishes to exclude such a proposal will typically seek informal relief from the staff of the SEC's Division of Corporation Finance that it will not recommend enforcement action against the company for excluding the shareholder proposal from its proxy statement. This "no-action request" must be submitted to the SEC and the proponent shareholder simultaneously at least 80 days before the company files its definitive proxy statement. The SEC staff will then typically respond to the request by providing informal relief, denying relief, or denying relief subject to the proponent shareholder submitting a revised proposal within seven days.
Evolving Standards on Substantive Exclusion
The substantive bases on which a shareholder proposal submitted under Rule 14a-8 may be excluded from a proxy statement have recently been narrowed in application, with further limitations on certain exclusions recently proposed. This has led, and is expected to continue to lead, to more Rule 14a-8 shareholder proposals required to be included in companies' proxy statements. In November 2021, the SEC staff published Staff Legal Bulletin 14L ("SLB 14L"), which rescinded three prior staff legal bulletins,5 and, with them, settled approaches to the application of two of the more commonly relied upon bases of substantive exclusion: the "ordinary business" and "economic relevance" grounds for exclusion. 6 Similarly, the SEC staff's responses to company requests for noaction relief in 2022 overall reflected a more restrictive application of the "substantial implementation" and "duplication" grounds for exclusion, at times conflicting with noaction relief provided previously. Further, in July 2022, the SEC proposed amendments to Rule 14a-8 that would further limit the ability of a company to exclude shareholder proposals on the grounds of "substantial implementation," "duplication," and "resubmission."
The ordinary business ground for exclusion permits a company to exclude a shareholder proposal that relates to "a matter relating to the company's ordinary business operations." The rationale is that the subject matter of a proposal should not infringe on matters that are "so fundamental to management's ability to run a company on a day-today basis that they could not, as a practical matter, be subject to direct shareholder oversight" and should not have the effect of "micromanaging" a company on matters where shareholders would not be in a position to make informed decisions. Note, however, that this ground for exclusion does not apply to a proposal that focuses on social policy issues that are sufficiently significant so as to transcend ordinary business.
A common example of the ordinary business ground for exclusion involves a proposal relating to employee matters such as workforce turnover, employee safety, or the written content of employee training materials. The SEC staff has generally concurred that such matters relate to, and do not transcend, ordinary business matters.
In SLB 14L, however, the SEC staff took a more expansive view of "significant social policy," noting that exclusion is not appropriate if the proposal raises issues of broad societal impact that transcend the ordinary business of the company. SLB 14L also narrowed the "micromanagement" element of the ground for exclusion by stating that proposals "seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement." SLB 14L referred specifically to relief granted in prior years for the exclusion, based on the micromanagement element of the ordinary business ground for exclusion, of proposals requesting companies to adopt timeframes or targets to address climate change. An example is a shareholder proposal requesting a company to prepare a report on the feasibility of achieving net-zero emissions by 2030, where the SEC staff concurred that such a proposal would constitute micromanagement of the company.7 SLB 14L stated that relief will not be granted for the exclusion of similar proposals suggesting targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.
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1. Rule 14a-8 is distinct from advance notice bylaw provisions, which typically allow shareholders to propose director nominees or business at a shareholder meeting (although outside of the company's proxy statement). Rule 14a-8 is also distinct from Rule 14a-19 under the Exchange Act, which allows shareholder proposed director nominees to be included on a company's proxy card, subject to certain requirements. Refer to the Debevoise & Plimpton Update dated December 14, 2022 (accessible here).
2. The proponent shareholder must submit written statements to the company that the shareholder intends to hold the requisite amount of securities through the date of the shareholder meeting and that the shareholder is able to meet with the company between 10 to 30 days after submission of the proposal.
3. Rule 14a-8 specifies holding period (ranging between one and three years) and market value (ranging between $2,000 and $25,000) thresholds, and requires that the shareholder proposal is limited to 500 words.
4. The 13 substantive grounds for exclusion are: improper under state law; violation of law; violation of proxy rules; personal grievance/special interest; economic relevance; absence of power/authority; ordinary business; director elections; conflict with company's proposal; substantial implementation; duplication; resubmissions; and specific amount of dividends
5. Staff Legal Bulletin 14I, Staff Legal Bulletin 14J and Staff Legal Bulletin 14K.
6. SLB 14L also contained clarifications and guidance related to the use of graphics in proposals, proof of ownership letters and email delivery confirmations
7. Refer to the no-action letter dated March 6, 2018 (accessible here).
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.