In January, Securities and Exchange Commission Commissioner Hester Peirce discussed her desire to reevaluate the SEC's shareholder proposal process, suggesting that the SEC do "a better job protecting investors from having their resources diverted to deal with shareholder proposals that are not aimed at maximizing corporate value." Commissioner Peirce pointed out that the number of shareholder proposals related to topics other than corporate governance, such as the environment and other social policy issues, has increased, and suggested that the financial and opportunity costs of such proposals are too high for companies. Instead, she recommended that the SEC work to "ensure that a proponent has some meaningful economic stake or investment interest in a company" and reconsider the operation of Exchange Act Rule 14a-8 as a basis to exclude proposals.
Subsequently, on February 12, the Staff of the Republican-led Commission issued new Staff Legal Bulletin No. 14M ("SLB 14M"), rescinding old Staff Legal Bulletin No. 14L ("SLB 14L") and providing new guidance for companies and shareholders regarding shareholder proposals. Among other changes, SLB 14M clarified the Commission's interpretations of Rules 14a-8(i)(5) and 14a-8(i)(7), both of which it will interpret narrowly, on a company-specific basis, without looking to broad societal impacts. Rule 14a-8(i)(5), the "economic relevance" exclusion, allows exclusion of a shareholder proposal that relates to operations accounting for less than 5% of the company's total assets, net earnings or gross sales, and is not otherwise significantly related to the company's business. Rule 14a-8(i)(7), the "ordinary business" exclusion, permits a company to exclude a proposal that "deals with a matter relating to the company's ordinary business operations." Historically, matters focusing on a significant policy issues were not excludable because they "transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote."
Pursuant to SLB 14M, the SEC's analysis under both Rules will focus more strongly on the significance of any proposal to the company's business, rather than on any related social policy and/or broad societal impacts. In both cases, excluding a given proposal will be a facts and circumstances decision based on the "total mix" of information about the company, and significance will not be determined by blanket rule extending to all companies. While a proponent can raise social or ethical issues to support significance, these must have a direct connection to matters significantly and actually impacting the company's business.
In addition, the Commission reinstated previously rescinded guidance regarding proposals that (i) seek to "micromanage" a company under Rule 14a-8(i)(8) and (ii) deal with senior executive and/or director compensation. SLB 14M also encourages companies to omit board analyses regarding shareholder proposals from their submissions to the staff, on the grounds that these analyses were generally not helpful. Last, SLB 14M clarifies guidance on the use of images in shareholder proposals and proof of ownership letters and related deficiency letters, suggests some best practices for the use of email in connection with shareholder proposals, and provides FAQs as to how the guidance will apply in the current shareholder proposal season
Commissioner Caroline Crenshaw responded to SLB 14M, sharing her disapproval of the SEC's changes to the shareholder proposal process "smack dab in the middle" of proxy season. She argued that the new guidance creates uncertainty for both proposal proponents and companies at a time when many shareholder proposal have already been submitted to the SEC for consideration, at potentially significant costs to all parties, and when only companies, not shareholders, have additional time to revise their requests. Commissioner Crenshaw finished by stating that "[i]nstead of taking a measured approach that would ensure market stability and a meaningful consideration of cost and benefit, this leadership has rushed out staff guidance for the sake of political expediency, and at significant cost to shareholders, corporations, and SEC staff resources."
Over the past few weeks, the Commission and its Staff have taken several new positions along party lines. SLB 14M is likely to make it more challenging for proponents of shareholder proposals to succeed in having their proposals included in a proxy statement for social policy reasons, and requires proponents to tie proposals closely to a company's business for a chance of success. Public companies, shareholders, and those in other roles dealing with the federal securities laws, including investment advisers and asset managers, should continue to watch closely for new developments, perhaps continuing the trend of addressing the items Commissioner Peirce pointed out in January.
Read Commissioner Peirce's speech here, Staff Legal Bulletin No. 14M here, and Commissioner Crenshaw's statement here.
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