SEC Staff Issues Legal Bulletin Narrowing Interpretation of Certain Exceptions to Rule 14a-8 Allowing Shareholder Proposals in Proxy Statements

Client Alert
November 10, 2021

Climate-related issues have taken on an enhanced level of concern at the federal government level since the Biden administration rejoined the Paris Agreement in an effort to stem climate change impacts, and the administration intensified its focus on achieving significant nationwide reduction of greenhouse gas (GHG) emissions. As climate change can directly and indirectly impact a company’s present value and prospects for the future, the SEC is pursuing actions that strongly signal an intention to require the disclosure by public companies of a broader range of climate-related risks to potential investors.

Moreover, pursuant to Rule 14a-8 under the Securities Exchange Act, shareholder activists have been submitting an increasing number of proposals concerning environmental, social and governance (ESG) topics to be included in public company proxy statements and voted on at annual shareholder meetings. Many of these proposals seek to require public companies to disclose information concerning, or undertake actions to address, climate change risk. Traditionally, companies have relied upon SEC staff’s legal interpretation of certain exceptions to Rule 14a-8 to seek assurances of "no enforcement action" as a basis for excluding such shareholder proposals from consideration in a proxy statement. On November 5, 2021, the Division of Corporation Finance (Division) rescinded three such Staff Legal Bulletins (SLB), and issued a new SLB (No.14L (CF)) to replace them that makes it significantly more difficult for companies to exclude from a proxy statement a shareholder’s climate-related proposal based upon the "ordinary business exception" (Rule 14a-8(i)(7)), or the "economic relevance exception" (Rule14a-8(i)(5)).

The ordinary business exception permits a company to exclude a shareholder proposal that addresses a matter concerning the company’s ordinary business operations. The Commission has stated that the application of this exception involves two central considerations: 1) the proposal’s subject matter; and 2) the degree to which the proposal micromanages the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment. The new SLB states that the Division previously placed an undue emphasis on evaluating the significance of a policy issue to a particular company, instead of considering whether the proposal raised a significant policy issue. Going forward, the staff will no longer take a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7). Rather, it will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

Moreover, Division staff explains that in its recently rescinded SLBs the micromanagement concept was expanded beyond the Commission’s policy directives to the point that the prior guidance may have been interpreted to mean that any limit on company or board discretion constituted micromanagement. Going forward, consistent with Commission guidance, the staff will evaluate companies’ micromanagement arguments recognizing that shareholder proposals seeking detail, or to promote timeframes or methods, do not per se constitute micromanagement. Rather, Division staff would expect the level of detail included in a shareholder proposal to be consistent with the detail needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.

Further, in assessing whether a proposal probes matters "too complex" for shareholders, as a group, to make an informed judgment, Division staff says that it may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discourse and analysis on the topic. The staff also may consider references to well-established national or international frameworks when assessing proposals concerning disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.

Division staff notes that while operating under the rescinded SLBs, many of the shareholder proposals that it considered excludable on micromanagement grounds requested that companies adopt timeframes or targets to address climate change. Under the new guidance, staff advises that it would not concur in the exclusion of similar proposals that suggest targets or timelines, so long as the proposals afford discretion to management as to how to achieve such goals. According to Division staff, its approach in the new SLB is consistent with the Commission’s views on the ordinary business exception, which is designed to preserve management’s discretion on ordinary business matters, but not prevent shareholders from providing high-level direction on major corporate strategic matters.

The economic relevance exception allows companies to exclude from a proxy statement a shareholder proposal that "relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business." (emphasis added). In analyzing this exception’s applicability, the Division will place increased focus on the last clause of the provision (highlighted above). Accordingly, shareholder proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the five percent economic thresholds in Rule 14a-8(i)(5) are not met.

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