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. In SLB No. 14K, the Staff provided its views regarding:
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:
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.” 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:
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:
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:
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:
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”:
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.”
 Staff Legal Bulletin No. 14K (October 16, 2019).
 See Staff Legal Bulletin No. 14I (November 1, 2017) and Staff Legal Bulletin No. 14J (October 23, 2018).