SEC Provides Additional Guidance on Excluding Shareholder Proposals
Time 4 Minute Read

On October 23, 2018, the SEC Division of Corporation Finance issued Staff Legal Bulletin No. 14J (“SLB 14J”), which reiterated and expounded upon prior guidance regarding when companies may exclude shareholder proposals under the economic relevance exception of Rule 14a-8(i)(5), and the ordinary business exception of Rule 14a-8(i)(7).

First, the staff discussed the usefulness of companies’ including a discussion of the board’s analysis in their no-action requests under Rule 14a-8(i)(5) and Rule 14a-8(i)(7). The Division found that last proxy season, it was most helpful when discussions included specific substantive factors used by the board in determining whether a shareholder proposal may be excluded. Such factors may include, but are not limited to: (i) the extent to which the proposal relates to the company’s core business activities; (ii) quantitative data showing whether or not the matter is significant to the company; (iii) whether the company has previously addressed the issue in some way; (iv) the extent of shareholder engagement on the issue; (v) whether other parties have made similar requests as those contained in the shareholder proposal; and (vi) whether shareholders have previously voted on the matter and the results of any such vote. While the staff may find discussion of these and other specific factors considered in the board’s analysis to be helpful, inclusion of such discussion is voluntary and failure to provide this analysis will not create a presumption either for or against exclusion of the proposal.

Next, SLB 14J discussed considerations for determining whether a shareholder proposal is excludable under the ordinary business exception of Rule 14a-8(i)(7) on micromanagement grounds,  due to probing too deeply into complex areas of the company about which shareholders are unequipped to make informed decisions. The Division reiterated the SEC’s existing framework that a proposal may involve micromanagement if it requests intricate detail or seeks to have the company implement complex policies within specific time frames or using particular methods. Also, proposals that seek to have a company conduct a detailed study or prepare a report within a certain time period may be excluded on micromanagement grounds. The staff also noted that although a shareholder proposal may be excludable on micromanagement grounds, that exclusion is based only on the manner sought to address an issue, and does not necessarily mean the subject matter of the proposal is inappropriate.

Finally, the staff addressed the application of the business exception rule to executive compensation proposals. Typically, proposals related to general employee compensation and benefits are excludable as relating to ordinary business matters, while proposals that focus on significant aspects of senior executive and director compensation are not excludable under Rule 14a-8(i)(7). Although a shareholder proposal may be phrased in a manner to appear related to senior executive or director compensation, if the underlying focus is on ordinary business matters, the proposal may be excludable. Sometimes shareholder proposals address senior executive and director compensation but are also applicable to the general workforce. In these cases, (i) companies may not exclude proposals where the focus is on aspects of compensation that only apply to senior executives or directors, and (ii) companies may exclude proposals where the focus is on aspects of compensation that apply to both senior executives or directors and the general workforce. Additionally, although historically, proposals relating to senior executive and director compensation practices have not been excludable on the basis of micromanagement, the Division has stated that going forward, executive compensation proposals may otherwise be excludable on micromanagement grounds.

As companies begin to receive shareholder proposals for next proxy season, this additional guidance may be helpful in developing a more comprehensive framework for analyzing such proposals and determining whether there is a sound basis for exclusion.


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