Guidance Bolsters Ability to Exclude Proposals Under Economic Relevance and Ordinary Business Grounds
On February 12, 2025, the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) published Staff Legal Bulletin No. 14M (“SLB 14M”), which outlines the Staff’s updated interpretation of the shareholder proposal rule, Rule 14a-8 under the Securities Exchange Act of 1934.
Key takeaways include the following:
- SLB 14M rescinds the Staff’s Gensler-era guidance on Rule 14a-8 in Staff Legal Bulletin No. 14L (Nov. 3, 2021) (“SLB 14L”).
- The Staff will take a company-specific approach when analyzing the relevance and significance of policy issues under Rules 14a-8(i)(5) and (i)(7).
- Companies may supplement pending no-action requests or submit new no-action requests, even if the submission deadline has passed, if the legal arguments for exclusion are based on the updated guidance in SLB 14M.
Below we provide a summary of the Staff’s new guidance.
Rule 14a-8(i)(5): Economic Relevance
Under Rule 14a-8(i)(5), the “economic relevance” basis for exclusion, a company may exclude a shareholder proposal from its proxy materials if the proposal (a) relates to operations which account for less than 5% of a company’s total assets, net earnings and gross sales and (b) is not otherwise “significantly related” to the company’s business.
SLB 14M updates the Staff’s framework for analyzing whether a proposal is “significantly related” to a company’s business. The Staff’s analysis will focus on the company’s particular circumstances, and a matter that is significant for one company may not be significant for another. Under the Staff’s previous interpretation in SLB 14L, proposals that raised issues of broad social or ethical concern were deemed to be significantly related to a company’s business and could not be excluded, even if the proposal related to operations that fell below the 5% thresholds. Under SLB 14M, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract. In certain circumstances social or ethical issues may be significantly related to a company, but a proponent will need to tie those matters to a significant effect on the company’s business that goes beyond the possibility of reputational or economic harm. For example, SLB 14M states that a proponent could provide information demonstrating that the proposal may have a significant impact on a company’s business segments or subject the company to significant contingent liabilities. SLB 14M further states that in evaluating whether a proposal is significantly related to a company’s business, the Staff will consider the proposal in light of the total mix of information about the issuer.
Even with a company-specific approach to analyzing whether a proposal is significantly related to a company’s business, the Staff stated that it generally views substantive governance matters as being significantly related to almost all companies. Additionally, SLB 14M emphasizes that the Staff will not look to its analysis under Rule 14a-8(i)(7) when evaluating arguments under Rule 14a-8(i)(5).
Rule 14a-8(i)(7): Ordinary Business
Under Rule 14a-8(i)(7), the “ordinary business” basis for exclusion, a company may exclude a shareholder proposal that deals with a matter relating to the company’s ordinary business operations. The policy underlying the ordinary business exclusion rests on two separate considerations: (a) the proposal’s subject matter and (b) the degree to which the proposal “micromanages” the company. Under the first prong, a company may exclude a proposal that raises matters which are so fundamental to management’s ability to run a company on a day-to day basis that they could not, as a practical matter, be subject to direct shareholder oversight. However, proposals that relate to ordinary business matters but also focus on a significant policy issue are generally not excludable. Under the second prong, a company may exclude a proposal on micromanagement grounds if the proposal probes 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.
SLB 14M updates the Staff’s framework for analyzing whether the significant social policy exemption applies to a particular proposal. Under the Staff’s previous interpretation in SLB 14L, proposals that raised issues of broad societal impact that transcended the ordinary business of a company generally could not be excluded, even if there was no nexus between the policy issue and the company. Under SLB 14M, the Staff will now take a company-specific approach and will not focus solely on whether the proposal raises an issue that has a broad societal impact or whether particular issues or categories of issues are universally significant. As a result, a policy issue that is significant for one company may not be significant for another.
SLB 14M also reinstates previous guidance on the micromanagement prong of the rule, which had been rescinded by SLB 14L. The Staff will now take a more expansive view of what constitutes micromanagement pursuant to the reinstated guidance.
Board Analysis No Longer Required
Prior to the adoption of SLB 14L, the Staff encouraged companies seeking to exclude certain proposals under Rules 14a-8(i)(5) or (i)(7) to include in their no-action requests an analysis by the board of directors of the particular policy issue raised and its significance to the company. After SLB 14M, the Staff no longer expects a company’s no-action request to include a board analysis.
No Change in Analysis for Substantial Implementation, Duplication or Resubmission Bases for Exclusion
On July 13, 2022, the SEC proposed amendments to Rules 14a-8(i)(10), (i)(11), and (i)(12), which are respectively the substantial implementation, duplication and resubmission bases for exclusion. SLB 14M confirms that unless and until the SEC adopts these amendments, the Staff will review no-action requests under the current SEC rules and Staff guidance. The 2022 amendments are unlikely to be adopted as both Acting Chairman Uyeda and Commissioner Peirce voted against them in 2022.
Proof of Ownership Letters
SLB 14M largely republishes previous guidance from SLB 14L on Rule 14a-8(d), specifically with regard to the use of images, proof of ownership letters and the use of email as a method for companies and proponents to communicate.
SLB 14M also states that the Staff does not view Rule 14a-8 as requiring a company to send a second deficiency notice to a proponent if the company sent a deficiency notice prior to receiving the proponent’s proof of ownership and the company subsequently receives the proponent’s proof of ownership letter and determines that it contains a defect.
Impact on Pending No-Action Requests
The Staff will interpret pending no-action requests in light of SLB 14M. In a “Frequently Asked Questions” section, the Staff clarified that companies may supplement pending no-action requests with new arguments based on the Staff’s updated guidance in SLB 14M. Companies may also submit new no-action requests, even if their deadline has passed, if the arguments for exclusion are based on SLB 14M.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Capital Markets and Securities practice.
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