On November 3, Chairman Gary Gensler announced that the staff of the corporate finance division of the Securities and Exchange Commission (SEC) issued SLB 14L (“new guidelines”) regarding shareholder proposals.
The new guidance significantly changes staff’s approach to determining whether a shareholder proposal can properly be excluded from a company’s proxy circular. The new directives cancel SLB 14I, 14J and 14K (canceled SLB), as well as any provisions of other previous staff directives which could be considered incompatible with the new directives. A few of these changes are highlighted below.
Important social policy exception
The new guidelines have a significant impact on rule 14a-8 (i) (7), commonly referred to as the “ordinary business exception”. This substantial basis of exclusion allows a company to exclude a proposal that “deals with a matter relating to the ordinary business operations of the company”. Under the new guidelines, staff will realign their approach to determining whether a proposal relates to “ordinary business” with the standard originally established by the SEC in 1976, which provided an exception for certain proposals raising significant social policy concerns.
Under the new guidelines, staff believe that an “emphasis has been placed on assessing the importance of a policy issue for a particular company at the expense of whether the proposal focuses on social policy. important “.
In the future, staff will no longer focus on determining the link between a policy issue and the particular company. Rather, it will focus on the importance of social policy that is the subject of the shareholder proposal. In making this decision, staff will consider whether the proposal “raises issues with a broad impact on society, so that they transcend the ordinary activities of the business”. As an example, staff stated that “Proposals that clearly raise human capital management issues with broad societal impact would not be subject to exclusion simply because the proponent has not demonstrated that the issue of human capital management was important to the company ”. Since staff no longer take into account the specific company context in this scenario, companies no longer need to consider including a board analysis in their no-action letter requests. when they assert this exception.
The micromanagement component
As part of the new focus, staff reported that their recent application of the concept of micromanagement, as described in some of the canceled SLBs, has broadened the concept of micromanagement “beyond Commission policy guidance”, to potentially mean that any limit at the discretion of the company or the board constitutes micromanagement. Going forward, staff will assess the micromanagement component of the regular business exception focusing (among other things) on the ‘level of granularity sought in the proposal and whether and to what extent this inappropriately limits the discretion of the board. administration or management ”.
Staff said they expected the level of detail in shareholder proposals to meet “what is necessary for investors to assess the impacts of an issuer, the progression towards objectives, risks or other strategic issues appropriate for the contribution of shareholders ”. In addition, staff noted that it could take into account factors such as “the sophistication of investors in general on the issue, the availability of data and the robustness of public discussions and analyzes on the topic”, as well as other resources available to shareholders, including references to well-established national or international frameworks, to assess whether the proposal is indeed micromanaged.
The new micromanagement guidelines will likely result in more detailed shareholder proposals, such as those suggesting goals or timelines but giving management discretion over how to achieve those goals, which will be included in proxy circulars. .
Economic relevance exception
Under Rule 14a-8 (i) (5), or the “economic relevance” exception, a company may exclude a proposal that “relates to transactions which represent less than 5% of total assets. of the company at the end of its most recent fiscal year, and for less than 5% of its net income and gross sales for its most recent fiscal year, and is not otherwise significantly related to the business of the business.
Under the new directive, in the future, staff will revert to an approach taken before certain canceled SLBs, so that proposals that raise general social or ethical questions related to the company’s activities cannot not be excluded, even if the business concerned falls below the economic thresholds of Rule 14a-8 (i) (5). With this new approach, staff will no longer expect a board analysis to consider a request for no action under Rule 14a-8 (i) (5).
The new directive also recommends certain practices when emailing proposal submissions and subsequent correspondence between the company and shareholders. A specific area of encouragement expressed by staff is for companies that do not provide an email address for submitting proposals in their power of attorney statements to provide proposers with this information upon request. To this end, companies may want to consider including the appropriate email address for submitting proposals in their next proxy circular.
Staff also substantially reworded the guidelines in SLB Nos. 14I and 14K regarding the use of graphics and images and proof of ownership letters.
Companies, due to the revised guidelines, may find it more difficult to exclude shareholder proposals on the basis described herein. Some SEC commissioners have also expressed concern in response to the new guidelines.