On October 23, 2018, the Staff of the Division of Corporation Finance (the "Staff") of the Securities and Exchange Commission ("SEC") released Staff Legal Bulletin No. 14J ("SLB 14J") to provide new guidance on how the Staff will evaluate a company's arguments for omission of a shareholder proposal from their proxy materials under Rule 14a-8(i)(5) and Rule 14a-8(i)(7).
Following up on last year's guidance, SLB 14J provides clarity on the Staff's views on discussions of the board's analysis submitted in no-action requests seeking exclusion under Rule 14a-8(i)(5) and Rule 14a-8(i)(7). SLB 14J also provides guidance on the micromanagement basis for exclusion under Rule 14a-8(i)(7) and discusses the Rule 14a-8(i)(7) framework for proposals that touch upon senior executive and/or director compensation matters.
On November 1, 2017, the Staff released Staff Legal Bulletin No. 14I ("SLB 14I"), which introduced the concept of a discussion of the board's analysis being presented in companies' requests for no action under Rule14a-8(i)(5), the "economic relevance" exception, and Rule 14a-8(i)(7), the "ordinary business" exception.
The Staff recognized the difficult judgment calls inherent in evaluating whether a proposal raises an issue that is "otherwise significantly related" to a company's business or an issue that transcends ordinary business matters. Accordingly, in SLB 14I, the Staff provided its view that the board of directors generally is well-situated to analyze such judgment calls and indicated that a company's no-action request arguing for the exclusion of a shareholder proposal under Rule 14a-8(i)(5) or Rule14a-8(i)(7) may benefit from a discussion of the board's analysis of the particular policy issue raised in the shareholder proposal and that policy issue's significance to the company.
Practical Guidance for Helpful Discussions of the Board's Analysis
SLB 14J provides further insight on the discussions of the board's analysis and outlines specific guidelines as to the Staff's evaluation of such analyses. According to SLB 14J, among the no-action requests that included a discussion of the board's analysis received by the Staff in the most recent proxy season, the "most helpful" were those that explained the board's analysis in addition to the "specific substantive factors" considered. The analyses that were conclusory and lacked detailed factors were "[l]ess helpful."
SLB 14J emphasizes that the Staff continues to be of the view that a "well-developed discussion of the board's analysis" of whether the particular policy issue raised by the proposal is otherwise significantly related to the company's business or is sufficiently significant in relation to the company can assist the staff in evaluating a company's no-action request. The Staff considers this to be particularly true where the significance of a policy issue to a particular company "may depend on factors that are not self-evident," such that the board is well-positioned to evaluate and offer its analysis.
Further to the Staff's description of the discussions that are the most persuasive, SLB 14J provides helpful examples of items to be considered:
- The extent to which the proposal relates to the company's core business activities.
- Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
- Whether the company has already addressed the issue in some manner, including the differences – or the delta – between the proposal's specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company.
- The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
- Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
- Whether the company's shareholders have previously voted on the matter and the board's views as to the related voting results.
Rule 14a-8(i)(7) allows a company to exclude a proposal that "deals with a matter relating to the company's ordinary business operations."
SLB 14J notes the SEC's long-held policy that the "ordinary business" exception rests on two central considerations. The first consideration relates to the subject matter of the proposal. The second relates to "the degree to which the proposal seeks to 'micro-manage' 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."1 Further, the Staff noted that the SEC has stated that a proposal may probe too deeply into matters of a complex nature if it "involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies."2 The Staff affirmed that it will continue to apply this framework when evaluating whether a proposal is seeking to micromanage a company.
In SLB 14J the Staff emphasizes that the second consideration looks only to the degree to which the proposal seeks to micromanage. In this regard, such determinations are made on a case-by-case basis, and the subject matter is not necessarily indicative of the extent to which a proposal unduly micromanages a company. Further, SLB 14J reiterates that this analysis also applies to proposals that ask for a study or report.
Proposals That Address Senior Executive and/or Director Compensation
SLB 14J also discusses the Rule 14a-8(i)(7) framework for analyzing proposals that address senior executive and/or director compensation.
Historically, the SEC has been of the view that "the management of the workforce, such as the hiring, promotion, and termination of employees," generally relate to ordinary business matters, but that proposals that focus on significant aspects of senior executive and/or director compensation generally are not excludable.
SLB 14J provides further clarification regarding the manner in which the Staff will evaluate proposals that implicate senior executive and/or director compensation. In this regard, SLB 14J makes clear that, where a proposal raises both ordinary business and senior executive and/or director compensation matters, the Staff will assess which of the two matters the proposal is focused on. Accordingly, if the Staff concurs with a company's view that the proposal focuses on the ordinary business matter, rather than the senior executive and/or director compensation matters, the proposal may be excluded in reliance on Rule 14a-8(i)(7).
Where a proposal addresses aspects of senior executive and/or director compensation that are also available to the general workforce, SLB 14J provides that the proposal may be excludable as being ordinary business when a primary aspect of the targeted compensation is broadly available or applicable to a company's general workforce and the company demonstrates that the executives' or directors' eligibility to receive the compensation does not implicate significant compensation matters.
Staff Legal Bulletin No. 14A ("SLB 14A") provides that where the focus of a proposal is on aspects of compensation that are available or apply only to the general workforce, companies may generally rely on Rule 14a-8(i)(7) to omit the proposal. SLB 14J states that, similar to the analysis set forth in SLB 14A, the Staff will take the following approach with respect to proposals that address aspects of senior executive and/or director compensation that are also available or applicable to a company's general workforce:
- Proposals where the focus is on aspects of compensation that are available or apply only to senior executive officers and/or directors. Companies generally may not rely on Rule 14a-8(i)(7) to omit these proposals from their proxy materials.
- Proposals where the focus is on aspects of compensation that are available or apply to senior executive officers, directors, and the general workforce. Companies may generally rely on Rule 14a-8(i)(7) to omit the proposals from their proxy materials.
Lastly, SLB 14J acknowledges that the Staff historically has not agreed with the exclusion of proposals addressing senior executive and/or director compensation on the basis of micromanagement. However, upon recent consideration of the micromanagement exclusion, the Staff, going forward, will take the view that executive compensation proposals should not be treated differently than other types of proposals. Accordingly, the Staff may agree that proposals addressing senior executive and/or director compensation "that seek intricate detail, or seek to impose specific timeframes or methods for implementing complex policies," may be excluded under Rule 14a-8(i)(7) on the basis of the micromanagement exclusion.
Morrison & Foerster associate Hillary Daniels contributed to the writing of this alert.
1 Release No. 34-40018 (May 21, 1998).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved