In new guidance, Staff Legal Bulletin ("SLB") No. 14L, the SEC Division of Corporation Finance (the "Division") rescinded SLB Nos. 14I, 14J and 14K, thereby narrowing corporate boards' ability to exclude proposals related to matters of "significant social policy" from a company's proxy statement. The Division also made a variety of other changes to the proxy review process.
The Ordinary Business Exception - SEA Rule 14a-8(i)(7)
Until now, corporate issuers have been able to exclude proposals that deal with matters of "ordinary business" from their proxy statements. Going forward, the SEC indicated that its staff will no longer permit the application of the ordinary business exception if the underlying proposal is of "social policy significance" or "raises issues with a broad social impact [that] transcend the ordinary business of the company."
With respect to the ability of issuers to exclude proposals constituting "micromanagement," the Division stated that staff will now focus on a proposal's "granularity" and whether it inappropriately impedes the board's or management's discretion.
The Division also explained that in determining whether a proposal examines matters that are "too complex" for shareholders, it might assess (i) the "sophistication of investors" as to the matters at hand, (ii) the availability of relevant data and (iii) the robustness of public discussion and analysis concerning the matters.
The Division stated that when evaluating whether shareholders are "well-equipped" to evaluate disclosure-, target setting- and timeframe-related proposals, staff may also take into consideration "references to well-established national or international frameworks." In addition, the Division clarified that, going forward, staff will not agree to exclude proposals for companies to adopt climate change-related timelines or targets if such proposals provide company management with discretion as to how such goals should be achieved.
The Economic Relevance Exception - SEA Rule 14a-8(i)(5)
The Division stated that proposals concerning broader social or ethical issues in connection with a company's operations may not be excluded, regardless of whether the proposal relates to operations that fall below the economic materiality thresholds under SEA Rule 14a-8(i)(5).
Dissenting Statement
In a joint statement, SEC Commissioners Hester M. Peirce and Elad L. Roisman expressed disappointment at the new SLB, stating that it singles out Environmental, Social, and Governance ("ESG")-related topics for "special treatment." The Commissioners asserted that the new SLB aligns with a recent trend in the SEC's decisions to "eras[e] previous Commissions' and staffs' work and replac[e] it with the current Commission's flavor-of-the-day regulatory approach."
The Commissioners further criticized the new SLB for failing to (i) address the issues that the rescinded SLBs attempted to solve and (ii) explain why the rescinded SLBs had unfavorable effects. The Commissioners emphasized that the new SLB will make the SEC staff's jobs more difficult and does not make the best use of the SEC's resources considering that "the proposals can involve issues that are, at best, only tangential to our securities laws."
Commentary
The SEC's new guidance facilitates the ability of activists to engage in proxy fights as to matters that are not material to a company, so long as the matters are judged to be of "social" interest. This seems unlikely to produce happy results.
Presumably the SEC majority believes that such fights will produce social outcomes that they support. Perhaps that will be the case, but it is not a foregone conclusion, as witness the recent election results. In light of the election, one may guess that significant pushback against ESG proxies will come not from investment advisers, but more likely from state governments and state-controlled pension plans, which are more representative of the electorate than are investment advisers.
At the end of the day, the proxy votes may go one way or the other, but the SEC facilitation of bringing the culture wars to the annual meetings seems most likely to elevate further political antagonisms. If we can't all get along, can't we at least confine our political hostility to Thanksgiving dinner?
Primary Sources
- SEC Statement, Gary Gensler: Statement regarding Shareholder Proposals: Staff Legal Bulletin No. 14L
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