The SEC’s Division of Corporation Finance just published Staff Legal Bulletin No. 14M (SLB 14M), rescinding Staff Legal Bulletin No. 14L (SLB 14L), which came into force in November 2021.

By rescinding SLB 14L, the SEC has now narrowed the ability of registered firms to exclude shareholder proposals with “broad societal impact.” The new guidance even states that late shareholder requests for no action will be OK due to the publication of SLB 14M, as long as the legal arguments in the request relate to the new staff guidance.

The ‘economic relevance’ exclusion

SEC Rule 14a-8(i)(5) permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” The former bulletin interpreted that rule by focusing on whether the issue covered by the proposal has broad societal impact rather than the significance of the issue to the company. SLB 14M outlines a more company-specific approach.

Under SLB 14M, “proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.”

Under the new framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.

A matter significant to one company may not be significant to another.

The rule allows exclusion only when the matter is not “otherwise significantly related to the company,” and the SEC said it views this analysis as “dependent upon the particular circumstances of the company to which the proposal is submitted.” A matter significant to one company may not be significant to another.

The SEC’s announcement noted that it would generally view substantive governance matters to be significantly related to almost all companies.

Where a proposal’s significance to a company’s business is not apparent on its face, a proposal may now be excludable unless the proponent demonstrates that it is “otherwise significantly related to the company’s business.”

The “unless” here is important, because this is not a total exclusion of social or ethical issues as shareholder proposals.

For example, the SEC said, the proponent can provide information demonstrating that the proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.”

The proponent could continue to raise social or ethical issues in its arguments, but it would need to tie those matters to a significant effect on the company’s business, the SEC said. But the SEC also said this: “The mere possibility of reputational or economic harm alone will not demonstrate that a proposal is otherwise significantly related to the company’s business.” In evaluating whether a proposal is “otherwise significantly related to the company’s business,” the staff will consider the proposal in light of the “total mix” of information about the issuer, it said.

Significant issue

SLB 14M explicitly returns the SEC to a focus on whether a particular policy issue raised by a proposal is significant to a particular company, rather than a view that certain issues or categories of issues are universally “significant.”

The Staff’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations – and do so on a case-by-case basis.

Use of graphs and images

The SEC says that its rule does not prohibit the inclusion of graphs and/or images in proposals. But there are parameters around such permission, including but not limited to the following:

• they cannot make the proposal materially false or misleading;
• they cannot render the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires;
• they cannot directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; and
• they cannot be irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.

Crenshaw dissents

SEC Commissioner Caroline Crenshaw, now in the minority in terms of political affiliation, dissented from the rescission of SLB 14L, noting at the top of her statement that this move was coming right in the middle of this year’s shareholder proposal process.

“The rescission comes as no surprise given that the shareholder proposal process has become the target of politicized messaging and a preferred punching bag of those who wish to diminish corporate democracy,” Crenshaw said. “This is the case even though there are already numerous other mechanisms in place to limit the availability of the proxy ballot to shareholders,” she observed.

(Some of those mechanisms include the requirement that shareholders meet certain ownership and resubmission thresholds to submit a proposal. Plus, proposals are subject to a 500 word limit.)

She said the SEC’s new leadership rushed out this staff guidance “for the sake of political expediency.”