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November 5, 2021

Corp Fin Issues Staff Legal Bulletin 14L


Exchange Act Rule 14a-8 addresses when a company must include a shareholder’s proposal in its proxy statement, as well as several bases for exclusion of such proposals. On November 3, 2021, the SEC’s Division of Corporation Finance issued Staff Legal Bulletin (SLB) 14L to clarify the standards it will apply when evaluating requests for assurance that the SEC staff will not object to the omission of proposals relating to a company’s ordinary business operations or to economically insignificant portions of its business. It also clarifies certain procedural matters. SLB 14L rescinds SLB 14I, 14J and 14K. The effect of this new guidance will likely be to make it more difficult for companies to exclude shareholder proposals relating to matters of significant social policy.

Rule 14a-8(i)(7)

Rule 14a-8(i)(7) permits exclusion of a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” Under SLB 14L, the staff has realigned its approach for determining whether a proposal relates to “ordinary business” with a previously-articulated standard regarding proposals that raise significant social policy issues. As a result, the staff will no longer focus on determining the nexus between a policy issue and the company (as it has done in recent years), but will instead focus on whether the proposal raises issues with a broad societal impact that transcend the ordinary business of the company. As an example, SLB 14L states that “proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.” Because the staff is no longer taking a company-specific approach, the board analysis described in the rescinded SLBs is no longer required.

Evaluation of shareholder proposals based on the ordinary business exception also includes consideration of the degree to which the proposal “micromanages” 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.” As the staff has previously recognized that proposals seeking specific methods, timelines or detail do not constitute micromanagement per se, instead of focusing on such matters in evaluating micromanagement arguments, it will assess the level of “granularity” sought, and whether and to what extent the proposal inappropriately limits board or management discretion. SLB 14L notes that the rescinded guidance may have been interpreted to mean that any limit on company or board discretion would constitute micromanagement. In assessing the complexity of a proposal, the staff may also consider investors’ general sophistication on the matter, the availability of data and level of public discussion on the topic, and “references to well-established national or international frameworks” when assessing proposals related to disclosure, target setting, and timeframes. Importantly, the staff stressed that although it previously agreed that proposals requesting companies adopt timeframes or targets to address climate change were excludable on micromanagement grounds, it would no longer “concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.”

Rule 14a-8(i)(5)

Rule 14a-8(i)(5) permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” Under SLB 14L, proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below these thresholds (and a board analysis will no longer be required).

Rule 14a-8(d)

Rule 14a-8(d) provides that a proposal (including any accompanying supporting statement), may not exceed 500 words. This limitation does not preclude shareholders from using graphics in their proposals (so long as the total number of words in the proposal, including words in the graphics, does not exceed 500). To avoid potential for abuse, however, exclusion of graphs and/or images would be appropriate where they: (i) make the proposal materially false or misleading; (ii) render the proposal too vague or indefinite; (iii) impugn character, integrity or personal reputation, or make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or (iv) are irrelevant to a consideration of the proposal’s subject matter, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.

Proof of Ownership Letters

Rule 14a-8(b) provides that a proponent must offer proof that it continuously held the requisite amount of securities for the required amount of time. The staff previously provided a suggested format to supply the required verification of ownership. The suggested format has been updated to reflect recent changes to the ownership thresholds,1 but is neither mandatory nor the exclusive means of demonstrating ownership. In this regard, the staff stated that arguments applying an overly technical reading of proof of ownership letters as a means to exclude a proposal are generally unpersuasive. Companies are instructed to identify any specific defects in the proof of ownership letter, even where a deficiency notice was previously sent prior to receiving the proponent’s proof of ownership, if such deficiency notice did not identify the specific defect(s).

Use of E-mail

The staff suggests that to prove delivery of an email for purposes of Rule 14a-8 (including with respect to the submission of proposals, deficiency notices sent by the company to proponents, and responses to such deficiency notices), the sender should seek an acknowledgment of receipt of the e-mail. The staff also encourages both companies and shareholder proponents to acknowledge receipt of emails when requested. Email read receipts, if received by the sender, may also help to establish that emails were received.

Commissioners’ Statement

In an unusual move, SEC Commissioners Peirce and Roisman issued a statement regarding the issuance of SLB 14L, asserting, inter alia, that the guidance: “furthers the recent trend of erasing previous Commissions’ and staffs’ work and replacing it with the current Commission’s flavor-of-the-day regulatory approach,” declaring that the rationale for SLB 14L is “a bit of a mystery” because it “lays out a case for repealing the last three bulletins,” but “does not fill the void left by their repeal.” Further, the Commissioners state that “it is hard to see how this resource-intensive review is time (or tax dollars) well spent given that the proposals can involve issues that are, at best, only tangential to our securities laws.”

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. Rule 14a-8(b) requires proponents to have continuously held at least $2,000, $15,000, or $25,000 in market value of the company’s securities entitled to vote on the proposal for at least three years, two years, or one year, respectively.