Some 2020 Foresight from the SEC? New Staff Guidance on Shareholder Proposals
The Background: SEC Staff Legal Bulletin 14K offers new guidance for companies seeking to exclude Rule 14a-8 shareholder proposals relating to a company's "ordinary business" operations.
The Issue: The SEC's previously announced changes to the process for handling shareholder proposal no-action letters still leave unanswered questions for the 2020 proxy season. While SLB 14K does not shed much light, it does provide a roadmap on the issues the SEC deems critical when analyzing requests based on the "ordinary business" exception.
The Outcome: SLB 14K underscores the importance of the board's role in analyzing shareholder proposals that relate to a company's ordinary business—which arguably may include at least some ESG proposals expected for the 2020 proxy season. Directors should stand ready to address incoming shareholder proposals in light of the new Staff guidance with arguments tailored specifically to their company.
The SEC previously revamped its process for addressing no-action requests under Rule 14a-8 as part of its ongoing effort to reform the U.S. proxy system. In prior years, the SEC provided a written response to every no-action request, but the SEC may now offer oral guidance on a request or decline to state a view altogether. Companies seeking the comfort of a Staff no-action position on a particular shareholder proposal—particularly those that that are novel or otherwise untested—will need to craft persuasive no-action requests in order to capture the Staff's attention and elicit a favorable response.
The new Staff guidance, however, provides useful instruction on how to approach no-action requests based on the "ordinary business" exception. Most importantly, SLB 14K indicates that a well-developed board-level analysis is crucial in the Staff's assessment of whether these types of proposals may be excluded—and that the absence of that analysis may cause the Staff to stand down. Accordingly, boards should become more actively involved in the no-action process than they may have been previously.
Of course, no-action requests under the "ordinary business" exclusion will continue to present challenges because of the amorphous nature of the exclusion and the difficulties inherent in the analyses. As the Staff reiterates in SLB 14K, there are two central considerations when analyzing the application of the exclusion. First, whether the subject matter of the proposal relates to the company's ordinary business and whether it raises a policy issue significant enough to be deemed to transcend the company's day-to-day business matters, therefore being appropriate for a shareholder vote. Second is the degree to which a proposal "micromanages" a company.
So how should companies and their boards address the expected influx of ESG shareholder proposals for the 2020 proxy season—particularly those that deal with a company's day-to-day business yet also raise significant policy issues? Some highlights from SLB 14K are outlined below.
The Staff's guidance reminds companies that the focus should not be on the overall significance of the policy issue but instead on the connection between the policy issue and the company's specific business operations. Accordingly, companies should provide substantive reasons why the board has determined that the policy matter is not sufficiently significant to them in particular from a company-specific perspective. SLB 14K notes as an example that a software company presented with a climate change proposal may be more likely to have that proposal excluded than an energy company, since climate change may not be significant to a software company with operations entirely online.
Focus on the Delta
In addition, if the company has already taken actions to address the policy issue raised in the proposal, the board's analysis should clearly identify the difference—or delta—between the action requested in the proposal and the actions that the company has already taken, and explain why the difference does not present a significant policy issue to the company. For example, if a proposal requests that a company prepare a report that examines the risk of using plastic straws, but the company has already prepared an assessment of the use of plastic, the board's analysis should focus on how the difference between the two reports does not present a significant policy issue.
Explain Response to Prior Votes
If a company's shareholders have previously voted on a matter, the board's analysis should also address the past voting results and the board's views on those results. SLB 14K indicates that the level of shareholder support for the prior proposal may not be determinative or even convincing. Instead, the board should explain how the company engaged with shareholders on the issue and any actions taken in response to the shareholder vote, as well as intervening events or other objective factors that have a bearing on the significance of the issue. We expect that the SEC will be more focused on recent votes than those taken years ago.
The analysis of whether a proposal "micromanages" a company focuses on the manner in which a proposal seeks to address the underlying issue, rather than the subject matter of the proposal. In particular, SLB 14K notes that the Staff will examine whether a proposal seeks intricate detail or imposes a specific strategy, method, or timeline for addressing an issue. If so, the proposal may supplant the judgment of the company's management and board and limit their discretion in addressing the matter contemplated by the proposal with a level of flexibility necessary for directors to fulfill their fiduciary duties to shareholders. A company will need to detail with specificity how its board and management would be limited by the proposal when requesting no-action relief.
Two Key Takeaways
- SLB 14K focuses on tailoring no-action requests under the ordinary business exception to a company's specific circumstances rather than on determining whether a particular policy issue is generally "significant."
- While directors or at least nominating and governance committees are typically involved in considering shareholder proposals, more specific board involvement may be indicated. The board-level analyses contemplated by the Staff's guidance may also provide a useful approach in the event a company turns to litigation to exclude shareholder proposals in the upcoming proxy season and beyond.
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