On October 16, 2019, the U.S. Securities Exchange Commission Division of Corporate Finance (the Division) issued Staff Legal Bulletin No. 14K (SLB 14K), regarding the ordinary business exception to the requirement that a company include shareholder proposals in its proxy. John Crowley, partner in the Capital Markets Group at Davis Polk & Wardwell LLP, discussed the practical effects of SLB 14K for public companies.
As a general matter, what is the ordinary business exception?
The ordinary business exception permits a company to exclude from its proxy materials proposals involving the company’s ordinary business that do not focus on “significant policy issues,” or where the proposals “micromanage” the company.
How does SLB 14K change the Division’s prior analysis under the ordinary business exception?
SLB 14K doesn’t overhaul the analysis, but it does clarify the Division’s analysis of both significant policy issues and micromanagement of a company.
Starting with the determination of a significant policy issue, what has been clarified with SLB 14K?
SLB 14K reiterated that whether a proposal involves a significant policy issue is a company-specific inquiry. The major question is whether there is a connection between the policy issue and a company’s business operations. A policy issue significant to one company may not be to another. For example, SLB 14K notes that the same climate change proposal may be a significant policy issue for an oil and gas company but not necessarily for a software development company.
Previous staff legal bulletins have discussed that a company board’s review of a proposal can play a critical role in helping the Division determine its significance. Does SLB 14K address this?
SLB 14K emphasizes the importance of a company’s board providing specific analysis of a proposal to the Division. Two analyses are highlighted in SLB 14K: a “delta” analysis and an analysis of “prior voting results.”
What is a delta analysis, and how should a board conduct such an analysis?
A delta analysis is where a board looks at the differences between the manner in which a company has addressed an issue and the manner in which a proposal requests the same issue be addressed. SLB 14K states that the most useful delta analysis will clearly identify such differences “in detail” and explains “in detail” why the differences do not represent a significant policy issue to the company.
And what about prior voting results?
Prior voting results have historically been informative to the Division if a prior similar or identical proposal received support of 25 percent or more from shareholders. If a company argues to the Division that the current proposal nonetheless does not address a significant policy issue, SLB 14K clarifies that the Division finds helpful a “robust” discussion of the company’s response to the prior support, if there were other intervening events or any “other objective indicia of shareholder engagement” that demonstrate the significance (or lack thereof) to the company. The Division specifically noted that unpersuasive arguments include that the prior proposal did not have majority shareholder support or that proxy advisory firm recommendations influenced the vote.
Aside from significant policy issues, proposals that micromanage the company are also excluded under the ordinary business exception. How does SLB 14K explain what the Division deems micromanagement?
The Division evaluates micromanagement by considering the manner in which the proposal addresses a subject matter, rather than the subject matter itself. SLB 14K clarifies that the important consideration is not the complexity of the actions in the proposal but rather whether a proposal requests intricate detail or imposes a specific strategy, method, action, outcome, or timeline for addressing an issue.
This language still seems to involve significant judgment by the Division. How is it applied in practice?
SLB 14K provided helpful examples of the micromanagement analysis from real proxies. An example of a proposal that could be excluded was one that prescribed specific, time-bound targets for greenhouse gas emissions reductions; on the other hand, a proposal that could not be excluded asked a company to describe how and if it planned to reduce its contribution to climate change, which left management with discretion on how to implement the proposal.
Amanda Schwarzenbart is an attorney at Davis Polk & Wardwell LLP in New York, New York.
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