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ANALYSIS: Three Takeaways From Race-Related No-Action Requests

Sept. 21, 2022, 9:00 AM

Companies are challenging race-related shareholder proposals for the very first time—likely a result of the steady influx of race-related shareholder proposals in H1 2022.

On at least nine occasions, companies have claimed a legal basis exists for excluding these proposals from their proxy statements, and they’ve sought non-binding “no-action letters” from the SEC’s Division of Corporation Finance.

Of the five substantive grounds covered by the no-action requests, the SEC’s responses provide three key takeaways.

1. Race-related public disclosures help excludability.

Companies anticipating race-related shareholder proposals should consider including relevant DEI reports and policies in their public disclosures.

In January, the SEC said that there was a substantive basis (substantial implementation under Rule 14a-8(i)(10)) for Starbucks Inc. to exclude a civil rights and non-discrimination audit proposal from the National Center for Public Policy Research (NCPPR) based on the company’s public disclosures.

2. Race-related proposals require proper framing.

Shareholders looking to have their proposals included in proxy materials should ensure that their proposals don’t delve too deeply into business functions.

In March, the SEC indicated that American Express Co. has a substantive basis (management functions under Rule 14a-8(i)(7)) for excluding an NCPPR civil rights audit because it required disclosure of intricate employment and training practices.

3. No two race-related proposals are alike (yet).

Thus far, the SEC hasn’t allowed companies to exclude race-related proposals alleged to be too alike.

Johnson & Johnson and Amazon.com Inc. sought to prevent race-related proposals from reaching proxy materials because they were allegedly similar to ones the companies had already received. J&J received a proposal for a racial equity audit and a racial justice audit proposal (which was approved by shareholders), while Amazon received a proposal requesting a report on racial and gender disparities at the company and a racial equity audit proposal received the year prior. Although all proposals were based on DEI initiatives, the SEC said they were not excludable under Rule 14a-8(i)(11).

As race-related proposals continue, companies are likely to analyze the nuances of different DEI proposals and make public disclosures on these matters, while shareholders are likely to craft more targeted proposals.

Bloomberg Law subscribers can find related content on our ESG Practice page, as well as our Practical Guidance: Shareholders page.

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