Client Alert

SEC Division of Corporation Finance Publishes New Guidance Regarding Shareholder Proposals

22 Oct 2019

On October 16, 2019, the Staff of the Division of Corporation Finance (“Staff”) of the Securities and Exchange Commission (“SEC”) published Staff Legal Bulletin No. 14K (“SLB No. 14K”) as part of its ongoing efforts to provide companies and shareholders with information regarding Rule 14a-8 under the Securities Exchange Act of 1934.[1] In SLB No. 14K, the Staff provided its views regarding:

  • the analytical framework of Rule 14a-8(i)(7);
  • the inclusion of a board’s analysis of a proposal’s significance in a company’s no-action request;
  • the “micromanagement” analysis under Rule 14a-8(i)(7); and
  • the manner in which a shareholder provides proof of security ownership to a company.

Our review of the Staff’s approach to shareholder proposals in the 2018-2019 proxy season is available here.

The Rule 14a-8(i)(7) Exception


SLB No. 14K notes the SEC’s prior guidance that the Rule 14a-8(i)(7) “ordinary business” exception is based on two “central considerations” – the proposal’s subject matter and the degree to which the proposal seeks to “micromanage” the company.  In considering a proposal’s subject matter under Rule 14a-8(i)(7), the Staff has set forth the two primary analyses. First, “proposals 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’ relate to a company’s ‘ordinary’ business operations.” Second, “proposals relating to such matters but focusing on a significant policy issue are not excludable under the first consideration ‘because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.’” Finally, in applying these analyses, the Staff is of the view that consideration of whether the significant policy exception applies “depends, in part, on the connection between the significant policy issue and the company’s business operations.”

“Significant Policy Issue” Analysis under the Rule 14a-8(i)(7) Exception

SLB No. 14K addresses the Staff’s considerations with respect to “the connection between the significant policy issue and the company’s business operations.” SLB No. 14K provides that the significance analysis should be “company-specific” and should not look to the “overall significance of the policy issue raised by the proposal,” stating: “The staff takes a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally ‘significant.’ Accordingly, a policy issue that is significant to one company may not be significant to another.” As a further demonstration of this analysis, the Staff provides by way of example that “although a climate change proposal submitted to an energy company may raise significant policy issues for that company, a similar proposal submitted to a software development company may not raise significant policy issues for that company.”

Based on this guidance, when a company applies Rule 14a-8(i)(7) to a proposal:

  • the company should consider whether the proposal deals with a matter relating to that company’s ordinary business operations or raises a policy issue that transcends that company’s ordinary business operations; and
  • if a proposal raises a policy issue that appears to be significant, a company’s no-action request should focus on the significance of the issue to that company.

Inclusion of a Board Analysis of Significance in a No-Action Request

SLB No. 14K reiterates the Staff’s views from SLB Nos. 14I and 14J regarding the value of a company’s inclusion in a no-action request of “a well-developed discussion of the board’s analysis of whether the particular policy issue raised by the proposal is sufficiently significant in relation to the company.”[2] The Staff indicated that, during the most recent proxy season, the discussions of board analyses in no-action requests had become more helpful in determining whether the proposal was significant to the company’s business when compared with the prior season. The Staff made the following key statements in this regard:

  • “The improvement in the board analyses provided was largely attributable to a greater proportion of requests discussing in detail the specific substantive factors, such as those set forth in SLB No. 14J, that the board considered in arriving at its conclusion that an issue was not significant in relation to the company’s business.”
  • “in a number of instances, we were unable to agree with exclusion where a board analysis was not provided, which was especially likely where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident.”
  • “If a request where significance is at issue does not include a robust analysis substantiating the board’s determination that the policy issue raised by the proposal is not significant to the company, our analysis and ability to state a view regarding exclusion may be impacted.”
  • “While we do not necessarily expect the board, or a board committee, to prepare the significance analysis that is included in the company’s no-action request, we do believe it is important that the appropriate body with fiduciary duties to shareholders give due consideration as to whether the policy issue presented by a proposal is of significance to the company.”

Delta Analysis. With regard to this “significance analysis,” the Staff expressed its view that the discussion may focus on any differences between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the specific manner in which the proposal addresses the issue presents a significant policy issue for the company.  The Staff refers to these differences as the “delta.” This “delta analysis” could be useful in situations where a company has taken efforts to implement a proposal but believes it may fall short of being able to exclude a proposal under Rule 14a-8(i)(10) as having “substantially implemented” the proposal. SLB No. 14K indicates that a “delta analysis” should:

  • identify the differences between the actions that the company has already taken to address the issue and the proposal’s specific request;
  • explain whether the difference between the company’s actions and the proposal’s request represents a significant policy issue to the company; and
  • address whether the company’s prior actions diminished the significance of the policy issue to such an extent that the proposal does not present a policy issue that is significant to the company.

In this regard, the Staff emphasized the importance of specificity in a “delta analysis,” stating: “a delta analysis is most helpful where it clearly identifies the differences between the manner in which the company has addressed an issue and the manner in which a proposal seeks to address the issue and explains in detail why those differences do not represent a significant policy issue to the company. By contrast, conclusory statements about the differences that fail to explain why the board believes that the issue is no longer significant are less helpful.”

Prior Voting Results. The Staff indicated in SLB No. 14J that a board’s significance analysis should address whether the company’s shareholders have previously voted on the matter and the board’s views on the voting results. In the past proxy season, the Staff did not agree with no-action requests seeking exclusion of proposals where the Staff “did not find the board’s discussion of the prior vote to be persuasive in demonstrating that the policy issue is no longer significant to the company.” In SLB No. 14K, the Staff noted three unsuccessful arguments in these no-action requests:

  • “The voting results were not significant given that a majority of shareholders voted against the prior proposal.”
  • “The significance of the prior voting results was mitigated by the impact of proxy advisory firms’ recommendations.”
  • “When considering the voting results based on shares outstanding, instead of votes cast, the voting results were not significant.”

Rather than making these arguments, the Staff stated that “the board’s analysis may be more helpful if it includes, for example, a robust discussion that explains how the company’s subsequent actions, intervening events or other objective indicia of shareholder engagement on the issue bear on the significance of the underlying issue to the company.”

“Micromanagement” under Rule 14a-8(i)(7)

As explained in SLB No. 14K, the “micromanagement” analysis under the Rule 14a-8(i)(7) exception “rests on an evaluation of the manner in which a proposal seeks to address the subject matter raised, rather than the subject matter itself.” The Staff provided its basic analysis in this regard, stating that the analysis 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 expressed the following key factors in this analysis:

  • “a proposal framed as a request that the company consider, discuss the feasibility of, or evaluate the potential for a particular issue generally would not be viewed as micromanaging matters of a complex nature.”
  • “a proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages.”
  • “Our (i)(7) analysis would be the same if the proposal were mandatory or precatory.”
  • “Notwithstanding the precatory nature of a proposal, if the method or strategy for implementing the action requested by the proposal is overly prescriptive, thereby potentially limiting the judgment and discretion of the board and management, the proposal may be viewed as micromanaging the company.”
  • “When analyzing a proposal to determine the underlying concern or central purpose of any proposal, we look not only to the resolved clause but to the proposal in its entirety.  Thus, 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.”
  • “This past season, where we concurred with a company’s micromanagement argument, it was not because we viewed the proposal as presenting issues that are too complex for shareholders to understand. Rather, it was based on our assessment of the level of prescriptiveness of the proposal.”
  • “When a proposal prescribes specific actions that the company’s management or the board must undertake without affording them sufficient flexibility or discretion in addressing the complex matter presented by the proposal, the proposal may micromanage the company to such a degree that exclusion of the proposal would be warranted.”
  • “When a company asserts the micromanagement prong as a reason to exclude a proposal, we would expect it to include in its analysis how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.”

The Staff provided two examples of proposals that focused on the same subject matter but were addressed differently under Rule 14a-8(i)(7) based on “the level of prescriptiveness with which the proposals approach that subject matter”:

  • The Staff agreed with the exclusion of a proposal seeking annual reporting on “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 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius.” 
  • The Staff did not agree with the exclusion of a proposal seeking a report “describing if, and how, [a company] plans to reduce its total contribution to climate change and align its operations and investments with the Paris [Climate] Agreement’s goal of maintaining global temperatures well below 2 degrees Celsius.”

As these examples demonstrate, a proposal may not be excluded under the “micromanagement” analysis even where the subject matter is complex if the proposal does not seek to supplant management’s analysis and judgment to such a degree that exclusion would be appropriate.

Proof of Shareholder Ownership

Rule 14a-8(b) provides that a proponent must prove eligibility to submit a proposal by offering proof that it “continuously held” the required amount of securities “for at least one year by the date” the proposal is submitted. The Staff has previously addressed, in SLB No. 14F, errors shareholders make when submitting proof of ownership.  In SLB No. 14F, the Staff provided the following suggested, but not required, format for shareholders and their brokers or banks to follow when supplying the required verification of ownership – “As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least one year, [number of securities] shares of [company name] [class of securities].”

In SLB No. 14K, the Staff indicated that, in the past proxy season, it observed some companies making arguments that applied an overly technical reading of proof of ownership letters or argued for exclusion where the proof of ownership letter deviated from the specific format set forth in SLB No. 14F. The analysis in these situations should not be based on compliance with the suggested format of SLB No. 14F; rather, the issue is whether the proponent “supplied documentary support sufficiently evidencing the requisite minimum ownership requirements for the one-year period, as required by Rule 14a-8(b).” The Staff expressed its views that companies are to take a “plain meaning approach to interpreting the text of the proof of ownership letter,” stating such expectations clearly: “[C]ompanies should not seek to exclude a shareholder proposal based on drafting variances in the proof of ownership letter if the language used in such letter is clear and sufficiently evidences the requisite minimum ownership requirements.”

[1] Staff Legal Bulletin No. 14K (October 16, 2019).

[2] See Staff Legal Bulletin No. 14I (November 1, 2017) and Staff Legal Bulletin No. 14J (October 23, 2018).



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