On Feb. 12, the Securities and Exchange Commission's Corporation Finance Division released Staff Legal Bulletin (SLB) 14M on shareholder proposals. The latest bulletin rescinds Staff Legal Bulletin 14L, which was issued in 2021 during Chair Gary Gensler's tenure and contributed to a significant increase in the number of environmental and social proposals appearing in corporate proxy statements.
The new bulletin updates the SEC staff's approach to corporate requests for no-action letters relating to the exclusion of shareholder proposals based on "economic relevance" (Rule 14a-8(i)(5)) and "ordinary business" (Rule 14a-8(i)(7)). In SLB 14M, the staff noted that it would apply the new guidance to pending no-action requests and that companies did not need to refile their requests to reference the new guidance.
In explaining how it would apply its new approach to economic relevance, the Corporation Finance staff stated:
The Division's analysis will focus on a proposal's significance to the company's business when it otherwise relates to operations that account for less than 5% of total assets, net earnings and gross sales. Under this framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal's relevance to the company's business.
Because the rule allows exclusion only when the matter is not "otherwise significantly related to the company," we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted. That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.
Where a proposal's significance to a company's business is not apparent on its face, the Commission has stated that a proposal may be excludable unless the proponent demonstrates that it is "otherwise significantly related to the company's business." For example, as the Commission has stated, the proponent can provide information demonstrating that the proposal "may have a significant impact on other segments of the issuer's business or subject the issuer to significant contingent liabilities." The proponent could continue to raise social or ethical issues in its arguments, but in accordance with these Commission statements it would need to tie those matters to a significant effect on the company's business. The mere possibility of reputational or economic harm alone will not demonstrate that a proposal is "otherwise significantly related to the company's business." In evaluating whether a proposal is "otherwise significantly related to the company's business," the staff will consider the proposal in light of the "total mix" of information about the issuer.
In explaining its updated approach to ordinary business and proposals that purport to raise "significant social policy" issues, the staff said it: "will take a company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally 'significant.' Accordingly, a policy issue that is significant to one company may not be significant to another. The Division's analysis will focus on whether the proposal deals with a matter relating to an individual company's ordinary business operations or raises a policy issue that transcends the individual company's ordinary business operations."
The staff noted that it would not expect companies to submit a "Board Analysis" reflecting a board's views of a particular policy issue raised and its significance to the company (which was encouraged by Staff Legal Bulletin 14I before that guidance was repealed by SLB 14L). However, the staff said "a company may submit a board analysis for the staff's consideration if it believes it will help the staff analyze the no-action request."
SLB 14M also noted that the staff was reinstating the following sections of guidance that were previously rescinded by SLB 14L: Staff Legal Bulletin 14J, Section C.2. (Micromanagement); Staff Legal Bulletin 14J, Section C.3 (the application of Rule 14a-8(i)(7) to proposals that address senior executive and/or director compensation); and Staff Legal Bulletin 14K, Section B.4. (Micromanagement).
In SLB 14M, the staff further explained that it would not apply the proposed Gensler-era amendments to Rule 14a-8 when considering no-action requests based on substantial implementation (i)(10), proposal duplication (i)(11), and the resubmission of low polling proposals (i)(12). Those amendments, which would have increased the number of proposals to appear on corporate ballots, were proposed in 2022 but were never approved.
In a recent letter to Acting Chair Mark Uyeda, the Society urged the SEC to rescind the portions of SLB 14L that relate to proposals that invoke significant social policy issues. The Society also called for a repeal of SLB 14L in its comment letter that opposed the proposed 2022 amendments to Rule 14a-8.