As we discussed in an earlier post, available here, Staff Legal Bulletin 14I addressed, among other things, the new requirement of the staff of the SEC’s Division of Corporation Finance (the “Staff”) that certain requests for no-action relief to exclude a proposal on “ordinary business” and/or “economic relevance” grounds include a description of the board of directors’ analysis as a condition to granting a company’s request.
At the meeting of the Proxy Statements and Business Combinations Subcommittee, chaired by Weil partner Adé Heyliger, held last Friday at the ABA Business Law Section Fall Meeting, Matt McNair, Senior Special Counsel, Office of Chief Counsel, offered clarifications and further guidance on how the board’s analysis will inform the Staff’s determination whether to permit exclusion of shareholder proposals on ordinary business or economic relevance grounds.
“Ordinary Business” Exception (Rule 14a-8(i)(7))
Mr. McNair made clear that the Staff’s traditional framework for evaluating a no-action request to exclude a proposal on ordinary business grounds has not changed. The Staff applies a three pronged analysis. First, does the proposal relate to ordinary business? Second, if yes, does it relate to a significant policy issue? Third, if yes, is there a significant connection between that issue and the company’s business? If all three answers are affirmative, the Staff will require inclusion of the proposal.
Mr. McNair noted that when a significant policy issue was identified in the past, it was difficult for the Staff to determine whether there was a sufficient nexus between that policy and the particular company’s business. As a result, the Staff tended to err on the side of the proponent and typically denied no-action relief once it was satisfied that a broad social or public policy issue was implicated by the disputed proposal.
As announced in the new SLB, however, the Staff now “invites” the board to provide its views on the third prong of the analysis – whether an issue is significant to the company’s business operations. Mr. McNair clarified that SLB14I is not asking the board to weigh in on whether the issue is significant to society generally, but whether it is, or is not, sufficiently connected to the company’s operations to warrant a shareholder vote.
Set forth below are some additional insights from the Staff to help companies prepare no-action requests in accordance with the guidance contained in SLB 14I.
- Proposals that in the past were included because they raised an issue deemed to be significant to society in general may now be excluded where the board’s analysis and a well-developed record convinces the Staff that there’s a “connection issue” – i.e., although the proposal addresses an important policy issue broadly, it is not sufficiently important to the company’s business and its shareholders.
- Board engagement with shareholders will be an important factor for the Staff in determining the level of shareholder interest in a given policy. Has the board heard from shareholders that they care about the issue and, if so, is it because the proposal relates to the company’s business operations? It will be useful for the no-action request to discuss what the board has (or hasn’t) heard from its shareholders on a given policy issue, demonstrating that the board has an informed understanding of the nature and extent of shareholders’ interest in that matter.
- If the policy issue was presented to shareholders in a prior vote but garnered little support, the board’s analysis can take that vote result into an account as an indication of low shareholder interest in the issue. However, it is unclear and dependent the particular facts, how much weight the Staff will give to the outcome of a previous vote.
- The board may, but need not, express its view on whether the particular policy is significant to society in general, but should address the nexus of the policy issue with the company’s business and the level of interest, if any, on the part of shareholders other than the proponent. In appropriate circumstances – for example, where there is a well-established line of no-action precedent to support application of the ordinary business exclusion – a board analysis may not be necessary. But no specific examples of such precedents were cited, making it difficult to anticipate when the “significant policy” judgment will be sufficiently clear-cut to permit dispensation with the board’s analysis.
- The board may consider whether to delegate its response to a committee of the board. Although SLB 14I speaks broadly about “the board,” the Staff is leaving it up to individual boards to decide whether, and to what extent, they wish to delegate this function to a board committee (e.g., the corporate governance committee). Having the full board review and approve the committee’s determinations, however, may strengthen the company’s case for no-action relief.
“Economic Relevance” Exception (Rule 14a-8(i)(5))
- Historically the SEC and Staff have interpreted this exclusion very narrowly. Typically the company needed to have no operations related to the issue in order for the proposal to be excluded – if it had any operations related to that issue, it was considered to have significant connection.
- Additionally, the Staff historically used the “ordinary business” precept as a guide for its “economic relevance” analysis – if a significant policy issue was identified for “ordinary business” purposes, the Staff often viewed that as significant for “economic relevance” purposes, which contributed to making (i)(5) exclusions extremely difficult to obtain through the no-action process. Among other things, SLB 14I seeks to decouple (i)(5) from (i)(7).
- The Staff is asking for the board analysis to facilitate its assessment of the significance of the proposal to the company’s business in order to permit (i)(5) to be interpreted more broadly than it has been in the past.
- Typically, if it the proposal relates to less than 5% of the company’s operations, and it is not otherwise obvious how the proposal relates to the company, the burden will be on the proponent to argue why it is and the board may not necessarily be required to opine.
Other Key Takeaways
- Proposals addressing corporate governance matters are generally not considered to be ordinary business under (i)(7), but rather to be significantly related to a company’s operations under (i)(5). The Staff recognizes that this presumption creates an incentive for proponents to attempt to advance an ordinary business matter through a proposed bylaw amendment or similar corporate governance mechanism.
- It is not necessary to submit board materials and board resolutions in support of a no-action request’s discussion of the board’s analysis and conclusion– the Staff will be happy to receive them, but companies should be aware that whatever is submitted will become part of the public record through EDGAR.
- Because this is all new to the Staff, too, it may take more time than before to analyze submissions and respond. Therefore, build enough time into your schedule for the board to consider and weigh in on the issues if deemed appropriate.
- The Staff will be flexible in an effort to help companies follow the guidance in the no-action context while also maintaining proxy filing/mailing and annual meeting schedules. If the Board cannot convene to opine on the proposal with sufficient timeliness, companies may start by submitting an initial letter with management’s views, stating that the board’s perspective will follow.