United States: New Staff Guidance On Shareholder Proposals

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.

Board Analysis

Background

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.

Read more about SLB 14I.

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)

Micromanagement

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.

Footnotes

1 Release No. 34-40018 (May 21, 1998).

2 Id.

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

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions