The SEC Division of Corporation Finance (the "Division") published a staff legal bulletin providing information on the scope and application of Exchange Act Rule 14a-8 (Shareholder Proposals). The Rule specifies when a company must include a shareholder's proposal in its proxy statement.
Rule 14a-8(i)(7) (the "ordinary business exception") allows a company to omit from its proxy statement a proposal that "deals with a matter relating to the company's ordinary business operations." The Division explained that the exemption permits a proposal regarding matters that 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" to be excluded, unless the proposal concerns policy issues that are so important as to "transcend ordinary business" and thus be appropriate for a shareholder vote. Relevant no-action requests often involve judgment calls as to whether business matters are significant enough to be appropriate for such a vote. The Division determined that a company's board of directors is well suited to conduct analysis and to make an appropriate determination. As such, the Division expects that a board's analysis of these factors should accompany future no-action requests.
Under Rule 14a-8(i)(5), the "economic relevance exception," a company can 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." In contrast to traditional applications of this exception, the Division will take into greater consideration the "otherwise significantly related" prong of the exception, and make a determination based on how the proposal relates to the particular company's business. The Division acknowledged that this determination will include "difficult judgment calls," and said that it will place some reliance on analyses from boards of directors in this area, and expects such analyses to be included in company no-action requests seeking to exclude shareholder proposals. Going forward, the Division intends to make "economic relevance" determinations completely separate from the results of an "ordinary business" determination, which strays from the traditional application of the exception.
The bulletin also shared expectations for the documentation submitted by shareholders who submit a proposal by proxy, and guidelines for submitting images with a proposal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
