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On November 1, 2017, the staff of the Division of Corporate Finance of the Securities and Exchange Commission published Staff Legal Bulletin No. 14I. SLB 14I provides additional guidance to companies and shareholders regarding circumstances in which the Staff will consider granting no-action relief for a company to exclude a shareholder proposal from its proxy statement pursuant to Rule 14a-8. Specifically, the bulletin provides helpful insight into the Staff’s decision-making process as it relates to the “ordinary business” and “economic relevance” exceptions under Rule 14a-8, and the type of information the Staff will consider persuasive. SLB 14I also provides additional guidance regarding proposals submitted by third parties on behalf of shareholders and the use of graphs or images in shareholder proposals.
Under the “ordinary business” exception to Rule 14a-8, a company may exclude a shareholder proposal from its proxy statement if the proposal is “so fundamental to management’s ability to run a company on a day-to-day basis that [it] could not, as a practical matter, be subject to direct shareholder oversight.” However, companies may not exclude proposals that focus on “policy issues that are sufficiently significant [that] they transcend ordinary business and would be appropriate for a shareholder vote.”
In SLB 14I, the Staff states that the board of directors of the company, given its fiduciary duties to the company’s shareholders and its intimate knowledge of the company’s business, is best positioned to determine whether a particular proposal is sufficiently significant to transcend the company’s ordinary business. In light of this view, the Staff expects that future no-action requests on these grounds will include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance to the company, as well as a detailed description of the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.
Shareholders submitting a shareholder proposal to a company under Rule 14a-8 should be mindful of the Staff’s deferential view toward the board’s judgment, and seek to present their proposal in a manner that highlights to the board the significance of the policy in question and the connection between the policy and the company’s business operations.
Under the “economic relevance” exception, a company may exclude a shareholder proposal that (i) relates to operations that account for less than 5% of its total assets, net earnings and gross sales and (ii) is not otherwise significantly related to the company’s business. The Staff, however, acknowledged the lack of emphasis it has historically placed on the second prong of this test in considering no-action requests, noting that the Staff has historically rejected a company’s request for no-action relief regardless of a proposals significance to the business if “a company conducted any amount of business related to the issue in the proposal and…that issue was of broad social or ethical concern.”
Going forward, the Staff’s analysis will focus on a proposal’s significance to the company’s business when the proposal does not meet one of the 5% tests described above. In SLB 14I, the Staff provides certain practical guidance to shareholders and companies with respect to the “economic relevance” exception:
While Rule 14a-8 does not expressly address shareholders’ ability to submit proposals through a representative, shareholders frequently elect to do so, a practice commonly referred to as “proposal by proxy.” The Staff continues to be of the view that a shareholder’s submission by proxy is consistent with Rule 14a-8. However, SLB 14I provides that, going forward, a shareholder submitting a proposal by proxy must provide documentation that is signed and dated by the shareholder and identifies:
SLB 14I reaffirms the Staff’s position taken in no-action letters issued to General Electric that the 500-word limitation set forth in Rule 14a-8(d) does not prohibit the use of graphs or images in shareholder proposals to convey information about their proposals. While the Staff recognizes the potential for abuse in this area, it believes that these potential abuses are appropriately addressed through other provisions of Rule 14a-8. The Staff also confirmed that any words used in the graphics themselves, however, do count towards the 500-word limit.
The full text of SLB 14I can be found here.