New SEC guidance does not seem to guarantee that companies will succeed in asking for the go-ahead to exclude shareholder proposals on the grounds that they relate to their ‘ordinary business operations.’
That’s according to a provisional analysis by Governance Intelligence of the roughly 60 14a-8 decisions handed down by the Division of Corporation Finance since it released Staff Legal Bulletin (SLB) No 14M on February 12. It suggests that any changes in the division’s approach to no-action requests may not be as black-and-white as some companies have hoped or some proponents have feared.
The new guidance rescinds SLB No 14L, which the division had released in November 2021 and was seen as opening the door for more ESG-based proposals by making it harder for companies to argue they could legitimately omit them. Both bulletins focus on two of these possible bases for omission: Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception. The ordinary business exclusion is based on the proposal’s subject matter and the degree to which it seeks to ‘micromanage’ the company.
Governance experts on both sides of the shareholder proposal process believe SLB No 14M will lead to companies more frequently securing no-action relief on one of these grounds, with environmental and social-related resolutions particularly at risk of exclusion. But they acknowledge that there remains room for interpretation of the guidance by the SEC staff. Proposals also vary in terms of their framing even when they tackle similar topics.
Since the new guidance came into effect the division has issued decisions declining to give the green light to omit proposals based on companies’ ‘ordinary business’ arguments.
For example, the SEC declined a no-action request from The Goodyear Tire & Rubber Company regarding a proposal from As You Sow asking the board to ‘adopt policies that result in setting tire wear shedding reduction goals and timelines.’ Goodyear had not ‘demonstrated that the proposal relates to its ordinary business operations. In addition, in our view, the proposal does not seek to micromanage the company,’ the SEC wrote.
In a second example, the SEC declined a no-action request from Levi Strauss & Co. The National Center for Public Policy Research has filed a proposal asking the company to ‘consider abolishing its [diversity, equity and inclusion] program, policies, department and goals.’ The agency again concluded that the firm did not demonstrate that the proposal relates to its ordinary business operations and does not seek to micromanage the company.
The SEC also disagreed with Levi Strauss’ argument that the resolution, taken as a whole, ‘is so vague or indefinite that it is rendered materially misleading’ and said the company ‘has not substantially implemented the proposal.’
In another example, the SEC ran the rule over a proposal from the Office of the Comptroller of the City of New York asking Wells Fargo & Company to ‘disclose annually its energy supply ratio, defined as its total financing through equity and debt underwriting and project finance in low-carbon energy supply relative to that in fossil-fuel energy supply.’
The agency declined to agree that Wells Fargo should be allowed to exclude the resolution, again concluding that the company had not demonstrated that it relates to ordinary business operations. It added that the proposal does not seek to micromanage the firm.
In the same period, the SEC has also given companies the go-ahead to omit shareholder proposals on the ordinary business and/or micromanagement bases.
An SEC spokesperson declined to comment.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
