The SEC’s Division of Corporation Finance staff has issued 22 legal bulletins since July 2001. Of those 22, 12 have dealt with shareholder proposals. The most recent release, Staff Legal Bulletin No. 14K (CF), adds some interesting twists, expanding on prior staff advice concerning the “ordinary business” exclusion in Exchange Act Rule 14a-8(i)(7).
Under the ordinary business exclusion, as described by the SEC, companies may exclude proposals from their proxy materials that raise matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The issuer may not, however, exclude a proposal if it “focuses on policy issues that are sufficiently significant because they transcend ordinary business and would be appropriate for a shareholder vote.”
Company-Specific Approach to Policy Significance
The staff noted that proponents and companies have tended to focus on the overall significance of the policy issue raised by the proposal. This “big picture” approach misses the point, according to the staff. Both proponents and companies should direct their arguments for exclusion to the question of whether the proposal deals with a matter relating to that specific company’s ordinary business operations or raises policy issues that transcend that company’s ordinary business operations. The staff does not consider particular policy issues as universally “significant,” and a policy issue that is significant to one company may not be significant to another.
This position raises an interesting question. The staff has a long track record of holding that certain matters, such as executive pay or environmental issues, generally implicate significant policy issues, while several other matters, such as what to sell (guns or tobacco, for example), fall within the purview of ordinary business. Will these previously settled conclusions now be subject to company-specific policy arguments?
Role of the Board
The legal bulletin also addressed an issue that has been percolating through Corporation Finance interpretations since 2017, when Staff Legal Bulletin No. 14I (CF) noted that the policy issue questions “often raise difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine.” According to the staff, due to the board’s knowledge of the company’s business and the implications for a particular proposal on that company’s business, the board should be tasked with determining “whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote.”
This staff approach to board review of exclusionary requests is rather curious. Management and corporate lawyers that deal with boards generally do so with a view to making the most of the board’s limited time. Boards and management have different functions and obligations, as the directors are responsible for strategic planning and have general oversight authority while management deals with day-to-day business operations. The series of staff legal bulletins, however, practically require boards to take up matters that the SEC itself defined to be specifically within the purview of management.
The legal bulletins suggest that boards should engage in a significant substantive review of these exclusionary requests. In Staff Legal Bulletin No. 14J (CF), the staff compiled a lengthy list of factors that boards might consider when examining a proposal’s ordinary business implications:
1) the extent to which the proposal relates to the company’s core business activities;
2) quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company;
3) whether the company has already addressed the issue in some manner, including the differences between the proposal’s specific request and the actions the company has already taken;
4) the extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement;
5) whether anyone other than the proponent has requested the type of action or information sought by the proposal (looking at you, John Chevedden); and
6) whether the company’s shareholders have previously voted on the matter and the board’s views as to those voting results.
Although the staff stated that the factors “are not exclusive or exhaustive, nor is it necessary for a board analysis to address each one of the above factors,” the intent is clear. Boards would be well-advised to establish a regular review procedure and spend significant time considering what are, in management’s view, ordinary and routine matters.
The staff also discussed micromanagement, the second prong of the ordinary business exclusion, under which the staff looks “to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board.” The staff addressed this issue in part to attempt to resolve confusion over the differing treatment of two climate change study requests that had observers scratching their heads last proxy season. Those observers may still be scratching those heads.
In Devon Energy Corp., a shareholder proponent called on Devon’s board to “include disclosure of short, medium and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2°C and to pursue efforts to limit the increase to 1.5°C.” The staff allowed Devon to exclude the proposal under the micromanagement prong. In Anadarko Petroleum Corp., however, the staff required the inclusion of a proposal calling for a report “describing if, and how, it plans to reduce its total contribution to climate change and align its operations and investments with the Paris Agreement’s goal of maintaining global temperatures well below 2 degrees Celsius.”
The proposals can be distinguished from one another. While the Anadarko request asks for a report, the Devon request also requests the company to pursue efforts to limit the greenhouse gas-related temperature increase to 1.5°C. This request for company action would have provided ample grounds for exclusion. The staff went further, however, and rather confusingly read into this request that the proponents were “prescribing the method for addressing reduction of greenhouse gas emissions” when the resolution called for no particular steps to be taken. In fact, the proposal called for reporting on time-based targets (short, medium and long-term), but did not call for any specific methods for implementing such a policy.
Both companies and proponents should note an interesting statement in the most recent legal bulletin. According to the staff, when analyzing a proposal, “we look not only to the resolved clause but to the proposal in its entirety.” It is important to pay attention to the entire request, because “if a supporting statement modifies or re-focuses the intent of the resolved clause, or effectively requires some action in order to achieve the proposal’s central purpose as set forth in the resolved clause, we take that into account in determining whether the proposal seeks to micromanage the company.”
Proof of Ownership Letters
Finally, the staff advised companies to go easy on technical flaws in documentation submitted to show that the proponent satisfied the rule’s ownership requirements. Several issuers “applied an overly technical reading of proof of ownership letters as a means to exclude a proposal,” according to the staff.
In a 2011 legal bulletin, the staff provided sample language for shareholders to use to reduce errors when submitting proof of ownership to companies. In the most recent legal bulletin, the staff advised that the suggested language was not mandatory, and that companies should use a plain meaning approach when interpreting the text of the proof of ownership letter. The staff will generally not allow exclusion on this basis if the language used by the shareholder “is clear and sufficiently evidences the requisite minimum ownership requirements.”