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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 8 minutes read

SEC Modifies Shareholder Proposal Rules, Making it More Difficult for Companies to Exclude ESG Proposals

In November 2021, the SEC issued new guidance regarding the shareholder proposal process in Staff Legal Bulletin 14L, reversing company-friendly positions taken over the past few years regarding the “ordinary business” and “economic relevance” exceptions and indicating that the SEC will be more disinclined to permit the exclusion of proposals related to social and political issues during the 2022 proxy season and beyond. Looking ahead to the 2022 proxy season, we expect that the Bulletin may encourage a greater number of ESG-related shareholder proposals, particularly in the areas of climate change and human capital practices such as diversity.

In particular:

  1. proposals with a broad societal impact may no longer be excludable as addressing “ordinary business operations,” with the SEC staff “realigning” its focus to the social policy significance of the issue raised rather than on the nexus between the social policy issue and a particular company;
  2. “micromanagement” arguments will face a “measured” SEC approach and requests for timeframes or targets will not be as easily excluded;
  3. proposals effecting only a small percentage of a company’s operations (5% of assets, earnings and revenues) will no longer be automatically excludable if they address issues of broad social or ethical concern; and
  4. the SEC staff reiterated a number of procedural provisions mostly aimed at facilitating the shareholder proposal process for the benefit of shareholders.

The new guidance highlighted two areas in particular where proposals will be more difficult for companies to exclude: 

  1. proposals raising human capital management issues with a broad societal impact (which will be more difficult to exclude as ordinary business operations); and
  2. proposals that request companies adopt timeframes or targets to address climate change (which will be more difficult to exclude as shareholder micromanagement).  

Two Republican SEC commissioners, Hester Peirce and Elad Roisman, issued an unusual statement in response to Staff Legal Bulletin 14L, criticizing the SEC’s “flavor-of-the-day regulatory approach,” asserting that the bulletin would create much less clarity for companies and waste money on shareholder proposals that involve “issues that are, at best, only tangential to our securities laws,” and questioning the rationale for issuing the new bulletin and changing prior guidance. The two Commissioners suggested that at some point the SEC may decide to relieve the SEC staff and/or the SEC itself from the burden of reviewing shareholder proposals, given that the issues raised in shareholder proposals are “matters of state corporate law and areas outside our expertise.” In contrast, the SEC’s Chairman Gensler issued his own statement endorsing the staff bulletin, which he said would provide additional clarity for companies in the shareholder proposal process.

The bulletin will make it more difficult for companies to exclude some proposals, even if the topic raised in the proposal is not significant for the particular company’s business. Various no-action letters from recent years may no longer be useful precedent given the SEC’s change in position. At the same time, however, while the ordinary business, micromanagement and economic relevance exclusions may face challenges, they are still available to companies where appropriate, and there are still available other grounds for exclusion, such as the argument that the proposal already has been substantially implemented, not to mention procedural issues which can still be raised. We encourage companies to work closely with counsel in evaluating with creativity shareholder proposals received for the 2022 proxy season.

Proposals with a Broad Societal Impact may no longer be Excludable as “Ordinary Business Operations”

Rule 14a-8(i)(7), the ordinary business exception, allows companies to exclude shareholder proposals pursuant to Rule 14a-8 to the extent the proposal “deals with a matter relating to the company’s ordinary business operations.” Historically, in evaluating whether to exclude shareholder proposals related to policy issues, the SEC would evaluate the significance of a policy issue to the particular company, rather than focusing on whether the proposal addresses a significant social policy. In a significant realignment, the SEC “will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the “ ordinary business of the company.”

Going forward, a proposal that previously might have been excluded because it did not appear to raise a policy issue of significance for the company now may no longer be viewed as excludable. As an example, the SEC said that “proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.” Further, the SEC said that “matters related to employment discrimination are but one example of the workforce management proposals that may rise to the level of transcending the company’s ordinary business operations.”

As a result of the new position, the SEC staff will no longer require or expect a board analysis as part of demonstrating that a proposal is excludable under the ordinary business exclusion.

“Micromanagement” Arguments will face a “Measured” SEC Approach and Requests for Timeframes or Targets will not be as Easily Excluded

The SEC staff has previously excluded proposals which dealt with the company’s ordinary business operations under Rule 14a-8(i)(7) where companies persuasively argued that the proposal was micromanaging the company – “probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For example, the SEC has allowed exclusion of: 

  1. a proposal asking the company to prepare a report on the feasibility of achieving net-zero emissions by 2030; and 
  2. a proposal requesting that the board disclose short, medium and long-term greenhouse gas targets aligned with the Paris Climate Agreement.

Going forward, the SEC staff will take “a measured approach” to evaluating companies’ micromanagement arguments – recognizing that “proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement.” Instead, the SEC will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.

The new SEC approach is particularly relevant for proposals related to climate change. While historically the SEC has excluded proposals which requested that companies adopt timeframes or targets to address climate change, going forward the SEC said it would not concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals. 

Moreover, in assessing whether a proposal deals with matters “too complex” for shareholders (and therefore suggestive of micromanagement), the SEC may consider:

  1. the sophistication of investors on the topic;
  2. the availability of data on the topic; and 
  3. the robustness of public discussion of the topic.  

The SEC may consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting and timeframes as indicative of topics that shareholders are able to evaluate.

Proposals Effecting only a Small Percentage of a Company’s Assets or Revenue will not be Automatically Excludable

Rule 14a-8(i)(5), the “economic relevance” exception, allows companies to exclude a proposal that “relates to operations which account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” 

Going forward, proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded using Rule 14a-8(i)(5), even if the relevant business falls below the specified thresholds. Given this change, the SEC will no longer require a board analysis for its consideration of no-action requests under this provision (as these board analyses had been used to show the insignificance of the subject matter to the company’s business).

Other Procedural Provisions Will Facilitate the Shareholder Proposal Process

Images and Graphics may be used in Shareholder Proposals

Rule 14a-8(d) requires a shareholder proposal to not exceed 500 words, but is silent on whether shareholders may utilize images and graphics in their proposals. 

The SEC reaffirmed its view that shareholders are not precluded from using graphics to convey information about their proposals. Companies may still request the exclusion of graphics where they make the proposal materially misleading, render the proposal too vague or indefinite, impugn character or personal reputation, are irrelevant to a consideration of the subject matter, or if the words in a proposal including words in the graphics exceed 500.

The SEC also stated that companies are not required to give greater prominence to the graphics in shareholder proposals as compared to the company’s, and companies can reprint the shareholder graphics in the same colors used by the company for its own images and graphics.

Proof of Ownership from Shareholders does not need to Conform to the Suggested Format

Rule 14a[8](b) requires a proponent to prove eligibility to submit a proposal by offering proof that it continuously held a required amount of securities for a required amount of time. Proponents must have continuously held at least $2,000, $15,000 or $25,000 in market value of the company’s voting securities for at least three years, two years or one year, respectively. The SEC has provided a suggested format for shareholders and their brokers or banks to use when supplying the required verification of meeting these ownership criteria.

The SEC reiterated its view that use of the suggested format is not mandatory and is not the exclusive means of proving ownership. The staff bulletin also advised that companies should not seek to exclude proposals based on drafting variances in the proof of ownership letter if the language used sufficiently evidences the requisite minimum ownership requirements. 

In connection with the shareholder’s submission of proof of ownership, the SEC staff clarified that brokers can continue to confirm the number of shares the proponent held continuously and need not separately calculate the share valuation, which may instead be done by the proponent.

Finally, the staff added a requirement that companies should identify any specific defects in the shareholder’s proof of ownership letter, even if the company already sent a deficiency notice prior to receiving the shareholder’s proof of ownership, if the company’s original deficiency notice did not identify the specific defects.

Clarifications for Easing the Use of Email in the Shareholder Proposal Process

The SEC staff provided a series of suggestions in order to facilitate the use of email as part of the shareholder proposal process. In particular:

  • Under Rule 14a-8(e)(1), shareholders need to submit their proposals by means that permit them to prove the date of delivery. Therefore, the SEC suggested that shareholders who use email should seek a reply e-mail from the company in which the company acknowledges receipt of the shareholder proposal, so that the shareholder will be in a position to prove timely delivery of the proposal.
  • The SEC also encouraged shareholders to contact companies to obtain the company’s email address for submitting proposals, and encouraged companies to provide such email addresses upon request.
  • Rule 14a-8(f)(1) provides that the company must notify the shareholder of defects in the proposal within 14 calendar days of receipt. The SEC encouraged companies who use email to deliver deficiency notices to seek a confirmation of receipt from the shareholder in order to be in a position to prove timely delivery.
  • Rule 14a-8(f)(1) provides that a shareholder’s response to a deficiency notice must be sent no later than 14 days from the date of receipt of the company notification. If a shareholder uses email to respond to the deficiency notice, the SEC encouraged them to seek confirmation of receipt from the company, in order to avoid potential future debates.


capital markets and securities, corporate, corporate governance