A Win for Environmental and Social Shareholder Proponents? Corp Fin Issues SLB 14L, Rescinding Prior SLBs on Economic Relevance and Ordinary Business Exclusions

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On November 3, 2021, Corp Fin issued new guidance which signals a major shift in the SEC’s approach to no-action requests to exclude shareholder proposals relating to environmental and social ("E&S") matters. Previously, the SEC allowed a company to exclude a shareholder proposal if the company demonstrated that it did not have social or ethical significance for the company. Now, a company will need to demonstrate that the proposal does not raise significant social or ethical issues with broad societal impact. 

The new guidance also suggests that proposals requesting that companies report in line with established E&S national or international frameworks may not amount to the impermissible “micromanagement” companies have recently alleged with mixed success. An apparent push by the SEC to promote sustainability initiatives, this guidance creates an ostensibly more difficult threshold for no-action relief, and will likely result in more E&S-styled shareholder proposals—which may not be significant to a particular company’s business or call for detailed sustainability reporting—either making it onto the agenda for a company’s shareholder meeting or ending in a settlement with the company.

Specifically, the Division of Corporation Finance (“Corp Fin”) of the SEC issued Staff Legal Bulletin 14L (“SLB 14L”)1, which rescinds Corp Fin’s prior positions in Staff Legal Bulletins 14I, 14J and 14K (the “rescinded SLBs”)2 regarding Rule 14a-8(i)(5), the economic relevance exception, and Rule 14a-8(i)(7), the ordinary business exception, greatly limiting the availability of these bases to omit shareholder proposals, which will likely make it more difficult for companies to exclude shareholder proposals—particularly E&S-related proposals—through no-action requests. The new guidance appears to position Corp Fin to advance certain larger policy priorities of the SEC via the shareholder proposal process. Key takeaways are discussed below.


“Company-Specific Significant Policy Issue” Framework Rescinded, Prior “Socially Significant Policy Issue” Reinstated 

SLB 14L restores Corp Fin’s historical standard for evaluating “significant policy issues” in Rule 14a-8(i)(5) or (i)(7) no-action requests. Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to exclude from its proxy materials a proposal relating to operations accounting for less than five percent of total assets, net earnings and gross sales for its most recent fiscal year. Rule 14a-8(i)(7), the ordinary business exception, permits a company to exclude from its proxy materials a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.”Both exceptions are subject to important caveats: proposals relating to matters accounting for less than five percent of the relevant thresholds are not excludable under Rule 14a-8(i)(5) if they are “significantly related to the company’s business,” and proposals relating to ordinary business matters are not excludable under Rule 14a-8(i)(7) if focused on a “significant policy issue.”4

Under the now-rescinded SLBs, when evaluating whether a proposal raised a significant policy issue, Corp Fin took “a company-specific approach [to] significance…rather than recognizing particular [policy] issues or categories of [policy] issues as universally ‘significant.’”5  In other words, proposals that raised issues of social or ethical significance were assessed based on whether they were significant for the company or its business, “notwithstanding their importance in the abstract,”6 so that “a matter significant to one company [might] not be significant to another.”7 In the rescinded SLBs, Corp Fin encouraged companies to provide a multi-pronged, in-depth board analysis describing how the board concluded the issue in the shareholder proposal they looked to omit was not significant to the company.8 

Rescinding this prior guidance in favor of its historical practice, Corp Fin states in SLB 14L that it will decide whether to allow in a proposal under Rule 14a-8(i)(5) or (i)(7) based on “whether the proposal raises issues with a broad societal impact” (emphasis added) and the “social policy significance of the issue [in] the shareholder proposal,” rather than the significance of the policy issue to the subject company.9  This was the framework in place prior to SLB 14I. Additionally, since Corp Fin will no longer take a company-specific approach to evaluating the significance of a policy issue, it will not expect a company to include a board analysis in its argument that a proposal is excludable under the economic relevance or ordinary business exclusions.10


Limiting Application of “Micromanagement” Arguments

SLB 14L also significantly limits a company’s ability to assert that a proposal impermissibly “micromanages” it and thus merits exclusion under the Rule 14a-8(i)(7) ordinary business exception. As noted above, under the second prong of Rule 14a-8(i)(7), a proposal relates to ordinary business operations if it concerns a task so “fundamental to management’s ability to run a company on a day-to-day basis” and “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature.”

In recent years, based on SEC guidance in the rescinded SLBs, companies have frequently argued that proposals should be excluded because they “micromanage” their boards or executives by requesting a report or action item based on specific timeframes, methods or details. SLB 14L, however, makes clear that Corp Fin “will take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement” and will not automatically consider a proposal to “micromanage” a company if it requests detail “needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.” SLB 14L reiterates prior guidance that “specific methods, timelines, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.”

SLB 14L also notes that, as part of its assessment of whether a matter is “too complex” for shareholders, as a group, to make an informed judgment, Corp Fin may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. Corp Fin may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.


Impacts on E&S Proposals and Sustainability Reporting

  • Likely Harder to Succeed in Excluding E&S Proposals under Rules 14a-8(i)(5) and (i)(7): SLB 14L’s revised approach appears to impose intentional hurdles on companies seeking to exclude E&S-related shareholder proposals, making it harder for them to succeed against proponents on Rule 14a-8(i)(5) and (i)(7) grounds than during the period when SLBs 14I, 14J and 14K were in effect (i.e., November 2017 to the present). While the success of Rule 14a-8(i)(5) and (i)(7) arguments was never certain in most cases during this period, this new guidance provides Corp Fin more leeway to rule in favor of proponents, aligning with the SEC’s expanding agenda on E&S issues, such as climate change and diversity. In fact, SLB 14L cites recent letters granting no-action relief to exclude certain proposals, and explains how the outcomes may have differed under SLB 14L, including in the areas of human capital management and climate change. As stated in SLB 14L, under the new guidance, proposals raising human capital management issues with a broad societal impact, such as employment discrimination, may no longer be excludable on economic relevance and ordinary business grounds,11 given the social importance of the issue. Additionally, where a proposal suggests that a company adopt targets or timelines for climate change initiatives, Corp Fin may not grant no-action relief on the basis of ordinary business, “so long as the proposals afford discretion to management as to how to achieve such goals”—a significant departure from recent practice.12 Although the SEC has not defined “well-established national or international frameworks…related to disclosure, target setting, and timeframes,” the SEC appears to be deferring to sustainability reporting frameworks, such as the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures, and climate-related goals. That said, we do not anticipate that SLB 14L will trigger a shift in the SEC’s approach to governance proposals, which, consistent with the guidance in the rescinded SLBs and historical practice, have been generally viewed as raising significant policy issues for all companies.13
  • A New Process for Making Rule 14a-8(i)(5) and (i)(7) Arguments: SLB 14L will also change the class of precedent no-action letters companies should cite in making Rule 14a-8(i)(5) and (i)(7) arguments. The SEC will likely be more inclined to cast aside the Rule 14a-8(i)(5) and (i)(7) sections of its no-action letters from November 2017 to the present, including those containing board analyses, and instead focus on its pre-SLB 14I no-action letters, where it tended to take definitive positions about what constituted significant policy issues in the abstract. Companies should spend time examining these pre-SLB 14I precedents in order to understand the SEC’s established positions on significant policy matters. Even still, with the passage of time, it is unclear how much weight the SEC will give to all of its pre-SLB 14I precedents. Considering the substantial social, environmental and governmental shifts that have occurred during the past five to ten years, the SEC may possess both legitimate and politically motivated reasons for finding that an issue which it previously did not deem as one of broad social or ethical significance now rises to that level, preventing exclusion of a proposal focused on it. While this may create a more uniform body of precedent and therefore more certainty for companies in terms of Rule 14a-8(i)(5) and (i)(7) outcomes over the next several years, it will likely also leave companies more at the mercy of the SEC’s policy priorities. Lastly, although board analyses were rarely outcome determinative during the period when Corp. Fin. encouraged them for Rule 14a-8(i)(7) and Rule 14a-8(i)(5) arguments14, many companies felt compelled to undertake this step, which involved a fair amount of work by both companies and outside counsel. Removing this component can be seen as a benefit for companies.
  • “Substantial Implementation” More Important Now Than Ever: Given the limits imposed by SLB 14L on Rule 14a-8(i)(5) and (i)(7) arguments, companies should continue to consider other grounds for exclusion, including Rule 14a-8(i)(10) (substantial implementation), or pursue other forms of resolution, including settling with proponents. Substantial implementation tended to be the stronger argument for exclusion even during the period when the rescinded SLBs were in effect.
  • Reading the Tea Leaves on Sustainability Reporting: When looked at in tandem with the SEC’s recent sample comment letter and other statements on climate change disclosures and its approval of the Nasdaq board diversity directive, SLB 14L goes beyond addressing shareholder proposals and lays out a roadmap for the SEC’s role in the E&S space and sustainability reporting. As the SEC may believe, if a company cannot successfully argue that a shareholder proposal requesting detailed sustainability reporting relates to ordinary business (i.e., because the SEC finds that they implicate significant policy issues or that the metrics are based on “well-established national or international frameworks” or informed by robust public data), the company may eventually find itself obligated to report, at least somewhat in line with proposal, whether due to a settlement with the proponent or a prevailing shareholder vote. The defensive advantages of being able to argue that a proposal has already been substantially implemented may also add to the growing list of reasons that companies create and expand on their sustainability disclosures. As support for E&S proposals has increased significantly in recent months (with average support for climate-change reporting proposals at 52 percent and average support for emissions reductions proposals over 60 percent in 2021), the SEC is providing an additional push for additional sustainability reporting by public companies ahead of the 2022 proxy season.

In sum, while perhaps reducing some of the potential work for companies when making Rule 14a-8(i)(5) and (i)(7) exclusion arguments, SLB 14L also severely limits the availability of these grounds to companies. Although the success of such arguments in most cases was never a certainty, the new guidance will make it much harder for companies to argue exclusion under these grounds.

1 SLB 14L is available here
2 See SLB 14I, SLB 14J and SLB 14K
3 Under Rule 14a-8(i)(7), a proposal relates to ordinary business operations if it concerns a task so “fundamental to management’s ability to run a company on a day-to-day basis” and “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature.” SEC Release No. 34-40018 (May 21, 1998).
4 Proposals raising a significant policy issue “transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”
5 SLB 14K.
6 In the case of Rule 14a-8(i)(5), companies were advised to look at the “impact on other segments of the issuer’s business” or the risk of “significant contingent liabilities” as a result of the matter covered by the proposal.
7 SLB 14K. 
8  A board analysis was expected to address (i) the extent to which the proposal relates to the company’s core business activities; (ii) the extent of shareholder engagement on the issue; (iii) whether anyone other than the proponent has requested the type of information sought by the proposal; and (iv) whether the company has already addressed the issue in some manner, including “the delta…between the proposal’s specific request and the actions the company has taken, and an analysis of whether the delta presents a significant policy issue for the company.”
9 In Corp Fin’s view, as stated in SLB 14L, the analysis of whether a policy issue was significant for each subject company raised “factual considerations that [did] not advance the policy objectives behind the ordinary business exception” and prevented “consistent, predictable results” in Corp Fin’s responses to Rule 14a-8(i)(7) no-action requests.
10 In SLB 14K, Corp Fin noted that a “board analysis may distract the company and the staff from the proper application of the exclusion” and that “the ‘delta’ component of board analysis…sometimes confounded the application of Rule 14a-8(i)(10)’s substantial implementation standard.”
11 See, e.g., Dollar General Corporation (Mar. 6, 2020) (granting no-action relief for exclusion of a proposal requesting the board to issue a report on the use of contractual provisions requiring employees to arbitrate employment-related claims because the proposal did not focus on specific policy implications of the use of arbitration at the company). 
12 See, e.g., PayPal Holdings, Inc. (Mar. 6, 2018) (granting no-action relief for exclusion of a proposal asking the company to prepare a report on the feasibility of achieving net-zero emissions by 2030 because the staff concluded it micromanaged the company); Devon Energy Corporation (Mar. 4, 2019) (granting no-action relief for exclusion of a proposal requesting that the board in annual reporting include disclosure of short-, medium- and long-term greenhouse gas targets aligned with the Paris Climate Agreement because the staff viewed the proposal as requiring the adoption of time-bound targets).
13 SLB 14J.
14 In 2021, 16 no-action requests included a board analysis, out of approximately 272 total requests submitted (down from 19 and 25 in 2020 and 2019, respectively). The Staff concurred with the exclusion of five proposals this season (compared to four in 2020 and one in 2019) in reliance on the company’s use of a board analysis: four under the ordinary business exclusion and one under the economic relevance exception. 


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