On October 27, 2009, the SEC's Division of Corporation Finance issued Staff Legal Bulletin No. 14E ("SLB 14E"), providing guidance regarding its interpretation of the "ordinary business matters" exclusion in Rule 14a-8(i)(7) under the Securities Exchange Act of 1934. In SLB 14E, the Division sets forth the basic analysis for determining those issues that will "transcend" the ordinary business matters exclusion in Rule 14a-8(i)(7). The Division also addresses the application of this analysis to particular types of shareholder proposals, setting forth the new positions that:
- Shareholder proposals concerning an assessment of risk will no longer be generally excludable under Rule 14a-8(i)(7);
- Shareholder proposals concerning the board's role in the oversight of a company's risk management will no longer be generally excludable under Rule 14a-8(i)(7); and
- Shareholder proposals concerning CEO succession planning will no longer be generally excludable under Rule 14a-8(i)(7).
The analysis described in SLB 14E will significantly limit the ability of companies to exclude shareholder proposals from their proxy materials in reliance on the ordinary business matters exclusion set forth in Rule 14a-8(i)(7).
The Application Of The Ordinary Business Exclusion To Shareholder Proposals That Focus On "Significant Policy Issues"
SLB 14E addresses proposals that focus on "significant policy issues" and, therefore, transcend the day-to-day matters that generally may be excluded in reliance on Rule 14a-8(i)(7). This is a change in terminology, as the Commission and the Division have traditionally termed those issues that transcend ordinary business matters to be "significant social policy issues."
At the Practising Law Institute's 2009 Securities Regulation Institute in New York, representatives of the Division acknowledged that specific consideration was given to the terminology used in describing their analysis under the ordinary business exclusion. Further, the Division indicated that significant policy issues — not merely significant social policy issues — have been and will be viewed as transcending ordinary business matters.
This new analysis described in SLB 14E significantly expands the category of proposals that companies may not exclude in reliance on Rule 14a-8(i)(7). Most importantly, under this analysis a number of corporate governance issues will now be considered to be "significant policy issues" and, therefore, companies may no longer rely on Rule 14a-8(i)(7) to exclude shareholder proposals relating to those issues from their proxy materials.
Shareholder Proposals Concerning An Assessment Of Risk
The Division previously viewed shareholder proposals relating to the assessment of environmental, financial, or health risks or potential liabilities as relating to ordinary business matters. As such, the Division had allowed these types of proposals to be excluded under Rule 14a-8(i)(7).1 In SLB 14E, the Division states that it will reverse these positions and, instead, focus on the underlying subject matter of these types of proposals in determining whether a proposal relates to an ordinary business matter.
SLB 14E states that in those instances where the underlying subject matter of a proposal relating to an assessment of risk transcends day-to-day business matters and raises policy issues appropriate for a shareholder vote, the Division will take the position that these proposals will no longer be excludable under Rule 14a-8(i)(7). Conversely, where the subject matter of a proposal relating to an assessment of risk does not raise significant policy issues, or there is not a sufficient nexus between the nature of the proposal and the company, the shareholder proposal will continue to be excludable under Rule 14a-8(i)(7).
This new analytical framework is similar to the Division's current analysis of shareholder proposals relating to the preparation of a report, the formation of a committee, or the inclusion of disclosure in an SEC-required document. In SLB 14E, the Division states that its determination of whether the subject matter of a proposal raises significant policy issues and has a sufficient nexus to the company will be based upon the same standards that it applies to other types of proposals under Rule 14a-8(i)(7).
Shareholder Proposals Concerning Risk Management
In SLB 14E, the Division indicates that, in light of the widespread recognition that the board's oversight of the risk management of a company is a significant policy issue concerning the company's corporate governance, proposals focusing on a board's role in the oversight of a company's risk management may transcend ordinary business matters and raise policy issues that are appropriate for a shareholder vote. Based on this discussion, it appears that the Division likely will view shareholder proposals that focus on a board's role in the oversight of a company's risk management function as generally not relating to ordinary business matters and, therefore, not excludable under Rule 14a-8(i)(7).
Shareholder Proposals Concerning CEO Succession Planning
The Division previously viewed shareholder proposals concerning CEO succession planning as proposals that related to an ordinary business matter for purposes of Rule 14a-8(i)(7). In its no-action letters regarding these proposals, the Division took the position that these proposals were excludable under Rule 14a-8(i)(7) because they related to the termination, hiring or promotion of employees. In SLB 14E, however, the Division states that it will now view CEO succession planning as a significant policy issue concerning corporate governance that transcends ordinary business operations.
Under the position expressed in SLB 14E, a company generally may no longer rely on Rule 14a-8(i)(7) to exclude a shareholder proposal relating to CEO succession planning. It is important to note that the Division states in SLB 14E that this position will not apply where such a proposal seeks to micro-manage the succession process or delves too deeply into complex matters about which it would be inappropriate for shareholders as a group to make an informed decision. The Division did not indicate how it intends to interpret the term "micro-manage" in this regard.
Conclusion
The analysis set forth by the Division in SLB 14E narrows the ordinary business exclusion for shareholder proposals for the 2010 proxy season and beyond. An almost certain result of this analysis will be an increase in the submission — and required inclusion in company proxy materials — of shareholder proposals relating to a broad range of corporate governance matters that were previously considered to be ordinary business matters. As such, companies must consider SLB 14E in determining the appropriate response to these types of shareholder proposals submitted for 2010 annual meetings.
Footnote
1. See CF Staff Legal Bulletin No. 14C (June 28, 2005).
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