SEC revamps approach to shareholder proposal exclusions

“Economic Relevance” Exclusion 

The “economic relevance” exclusion allows a company to exclude a shareholder proposal that “relates to operations which account for less than 5 percent” of the company’s “net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”¹ The Staff previously viewed this exclusion with an eye towards the overall economic or social effect of a shareholder proposal, rather than the effect of the proposal on the individual business. Under the New Guidance, shareholder proposals that “raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract.” Based on the language of the rule, which states that exclusion is permissible when the matter is not “otherwise significantly related to the company,” the New Guidance reasons that the analysis of whether a proposal must be set forth in a company’s proxy materials “would need to tie those matters to a significant effect on the company’s business” in order to avoid exclusion. By refocusing the “economic relevance” exclusion on the potential impact to the company itself, the New Guidance provides companies with a wider basis to exclude shareholder proposals that may have broad economic or social import, but would not necessarily affect the individual company’s operations. 

“Ordinary Business” Exclusion

Under the “ordinary business” exclusion, companies may exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.”² Whether a proposal can be excluded on this basis depends on two factors: (a) whether the proposal relates to a matter that is fundamental to management’s ability to run the company and (b) the degree to which the proposal micromanages the company. The New Guidance clarifies the Staff’s view of each of these prongs, with a focus on tailoring the analysis to the company’s operations. 

(a) Subject Matter of the Proposal 

A proposal is excludable because it relates to a company’s ordinary business operations if, in part, the proposal addresses an item that is “so fundamental to management’s ability to run a company on a day-to-day basis that [it] could not, as a practical matter, be subject to direct shareholder oversight.”³ The Staff’s prior guidance interpreted this to mean that companies should evaluate whether a proposal “raises broad societal impact, such that [it] transcend[s] the ordinary business of the company.” The New Guidance, on the other hand, alters the analysis to a company-specific approach, focusing on whether the proposal would have significance to the particular business, rather than whether the proposal raises questions that are “universally” significant. As a result, the Staff will now likely view as excludable many proposals that may otherwise be broadly significant, but do not address the operations of the specific business at issue. 

(b) Degree of Micromanagement 

The New Guidance reinstates a prior Staff position that a proposal is considered related to a company’s business operations, such that said proposal is excludable, if the proposal “micromanages” certain aspects of a company’s day-to-day work. For example, if a proposal involves “intricate detail, or seek[s] to impose specific timeframes or methods” for adopting certain policies, such proposals are likely excludable. This guidance impacts shareholder proposals requesting that companies adopt environmental policies to achieve benchmarks by particular timeframes, or proposals related to executive compensation that involve specific calculation methods. Under the New Guidance, the Staff also rescinded its prior position requiring companies to demonstrate that a particular proposal would be too complex for other shareholders to understand when arguing that a proposal has the effect of micromanaging its business. Rather, the Staff will now evaluate proposals using its own assessment of the prescriptiveness of the proposal, rather than analyzing the proposal from the perspective of a company’s shareholder.  

Practical Implications 

Companies that have received or anticipate receiving shareholder proposals for their upcoming annual meetings should consider reviewing the New Guidance to evaluate if the Staff’s new analysis impacts whether those proposals can be excluded from consideration at such meetings. The new focus of the “economic relevance” exclusion may provide a more straightforward avenue for companies to demonstrate that a shareholder proposal is too attenuated to the company’s business. Similarly, the Staff’s clarification that the social significance of a shareholder proposal does not necessarily mean that it is immune from exclusion will likely make it easier for companies to argue that certain proposals are excludable, notwithstanding the possibility that such proposals may still have theoretical economic or social value. As a result of these changes, companies also should evaluate whether their pending no-action requests, or future no-action requests, can be revised to add supplemental justifications for exclusion based on the Staff’s positions set forth in the New Guidance. 

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1 Rule 14a-8(i)(5).

_{2 Rule 14a-8(i)(7)}

_3 Id.