SEC efforts to reform the proxy system has included written no-action responses. As the SEC turns to oral guidance, companies seeking a staff no-action position will need to craft a persuasive request.
The Staff Legal Bulletin 14K of the U.S. Securities and Exchange Commission (SEC) offers new guidance for companies seeking to exclude Rule 14a-8 shareholder proposals relating to a companyʼs “ordinary business” operations.
The SEC previously revamped its process for ad-dressing no-action requests under Rule 14a-8 as part of its ongoing effort to reform the U.S. proxy system. In prior years, the SEC provided a written response to every no-action request, but the SEC may now offer oral guidance on a request or decline to state a view altogether. Companies seeking the comfort of a Staff no-action position on a particular shareholder proposal – particularly those that that are novel or otherwise untested – will need to craft persuasive no-action requests in order to capture the Staffʼs attention and elicit a favorable response.
The new Staff guidance, however, provides useful instruction on how to approach no-action requests based on the “ordinary business” exception. Most importantly, SLB 14K indicates that a well-developed board-level analysis is crucial in the Staffʼs assess-ment of whether these types of proposals may be excluded – and that the absence of that analysis may cause the Staff to stand down. Accordingly, boards should become more actively involved in the no-ac-tion process than they may have been previously.
Of course, no-action requests under the “ordinary business” exclusion will continue to present challenges because of the amorphous nature of the exclusion and the difficulties inherent in the analyses. As the Staff reiterates in SLB 14K, there are two central considerations when analyzing the application of the exclusion. First, whether the subject matter of the proposal relates to the companyʼs ordinary business and whether it raises a policy issue significant enough to be deemed to transcend the companyʼs day-to-day business matters, therefore being appropriate for a shareholder vote. Second is the degree to which a proposal “micromanages” a company.
So how should companies and their boards address the expected inf lux of ESG shareholder proposals for the 2020 proxy season – particularly those that deal with a companyʼs day-to-day business yet also raise significant policy issues? Some highlights from SLB 14K are outlined below.
The Staffʼs guidance reminds companies that the focus should not be on the overall significance of the policy issue but instead on the connection between the policy issue and the companyʼs specific business operations. Accordingly, companies should provide substantive reasons why the board has determined that the policy matter is not sufficiently significant to them in particular from a company-specific per-spective. SLB 14K notes as an example that a software company presented with a climate change proposal may be more likely to have that proposal excluded than an energy company would, since climate change may not be significant to a software company with operations entirely online.
Focus on the Delta
In addition, if the company has already taken actions to address the policy issue raised in the proposal, the boardʼs analysis should clearly identify the difference – or delta – between the action requested in the proposal and the actions that the company has already taken, and explain why the difference does not present a significant policy issue to the company. For example, if a proposal requests that a company prepare a report that examines the risk of using plas-tic straws, but the company has already prepared an assessment of the use of plastic, the boardʼs analysis should focus on how the difference between the two reports does not present a significant policy issue.
Explain Response to Prior Votes
If a companyʼs shareholders have previously voted on a matter, the boardʼs analysis should also address the past voting results and the boardʼs views on those results. SLB 14K indicates that the level of shareholder support for the prior proposal may not be determinative or even convincing. Instead, the board should explain how the company engaged with shareholders on the issue and any actions taken in response to the shareholder vote, as well as intervening events or other objective factors that have a bearing on the significance of the issue.
We expect that the SEC will be more focused on recent votes than those taken years ago.
The analysis of whether a proposal “micromanages” a company focuses on the manner in which a proposal seeks to address the underlying issue, rather than the subject matter of the proposal. In particular, SLB 14K notes that the Staff will examine whether a proposal seeks intricate detail or imposes a specific strategy, method, or timeline for addressing an issue. If so, the proposal may supplant the judgment of the companyʼs management and board and limit their discretion in addressing the matter contemplated by the proposal with a level of f lexibility necessary for directors to fulfill their fiduciary duties to shareholders. A com-pany will need to detail with specificity how its board and management would be limited by the proposal when requesting no-action relief.
This article represents the personal views and opinions of the authors and not necessarily those of the law firm with which they are associated.
Published January 29, 2020.