SEC Staff Issues New Guidance on Shareholder Proposals

November 10, 2017

On November 1, 2017, the staff of the Securities and Exchange Commission (the “Staff”) published Staff Legal Bulletin No. 14I (SLB 14I), available here, which sets forth additional Staff guidance on shareholder proposals submitted under SEC Rule 14a-8.

SLB 14I addresses the Staff’s views on four issues:

  • the scope and application of Rule 14a-8(i)(7) (the “Ordinary Business Exception”);
  • the scope and application of Rule 14a-8(i)(5) (the “Economic Relevance Exception”);
  • proposals submitted on behalf of shareholders by third parties (so-called “Proposals by Proxy”); and
  • the use of graphs and images consistent with Rule 14a-8(d).

This alert provides an analysis of SLB 14I and highlights key considerations related to SLB 14I for public companies headed into the 2018 proxy season.

Summary of SLB 14I           

A.   Staff Guidance on the Ordinary Business Exception

The Ordinary Business Exception permits the exclusion of a shareholder proposal where “the proposal deals with a matter relating to the company’s ordinary business operations.”  The Securities and Exchange Commission (“Commission”) has long stated that one of the reasons for this provision is to allow the exclusion of proposals addressing matters that are “fundamental to management’s ability to run a company on a day-to-day basis” unless a proposal focuses on policy issues that are sufficiently significant because they transcend ordinary business and would be appropriate for a shareholder vote.  In this context, the Staff has long conducted a company-specific analysis that takes into account whether “a sufficient nexus exists between the nature of the proposal and the company.”[1]

Noting that some shareholder proposals present particularly difficult questions of whether the proposal focuses on a sufficiently significant policy issue in the context of a company’s business, SLB 14I states that the company’s board of directors, which has fiduciary duties to all shareholders, is well situated to analyze the implications of a particular proposal.  Accordingly, SLB 14I states that the Staff expects future no-action requests to include, if relevant, a discussion that reflects the board’s “analysis of the particular policy issue raised and its significance,” and believes that “explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”

The issue of whether a proposal raises a significant policy issue has long been one of the more difficult aspects of Rule 14a-8.  The Staff has long both taken a broad view of factors that it will take into account in assessing such matters and recognized distinctions in how a proposal may have different implications for different companies.  Thus, we view the call in SLB 14I for information on a board’s perspective as consistent with the Staff’s past administration of the rule, particularly as considerations such as the extent of media coverage have ceased to provide meaningful insight in our media-heavy society.  While SLB 14I is not entirely clear on the point, we understand that the board’s analysis is not required in every no-action request where a company is seeking to rely on the Ordinary Business Exception, and will not necessarily be dispositive in cases where it is provided.  Instead, SLB 14I offers an additional avenue of analysis that companies should consider providing when addressing social or other policy considerations that are raised by a proposal.  In those contexts, a board’s perspective on whether the specific actions called for under a proposal raise significant policy issues in the context of their company’s specific operations will provide relevant additional context for the Staff’s analysis.

B.   Staff Guidance on the Economic Relevance Exception

The Economic Relevance Exception permits exclusion of a shareholder proposal that relates to operations which (1) account for less than 5% of each of a company’s total assets, net earnings and gross sales, and (2) are not otherwise significantly related to the company’s business.  When the Commission amended this provision in 1983, it characterized the exemption as relating to proposals “concerning the functioning of the economic business of an issuer” and not to corporate governance matters such as “shareholders’ rights.”  By adopting the economic relationship tests set forth in the rule, the Commission sought to break from past interpretations that had denied exclusion of a proposal when it raised social or ethical issues without regard to the economic significance of such matters.  Notwithstanding that Commission action, the Staff’s past interpretation of the “otherwise significantly related” prong of the Economic Relevance Exception has largely collapsed the administration of the Economic Relevance Exception with the Ordinary Business Exception, taking the position that a proposal would be deemed to be “significantly related” to a company’s business if it raised significant policy issues.

In SLB 14I, the Staff announced that it will refocus on the language of the Economic Relevance Exception when administering the rule.  Thus, going forward, the Staff’s focus in considering requests to exclude a shareholder proposal under the Economic Relevance Exception will be whether the proposal otherwise relates to operations that account for less than 5% of each of total assets, net earnings and gross sales.  SLB 14I notes that, under this framework, “proposals that raise issues of social or ethical significance may be included or excluded, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors” in the Economic Relevance Exception.  In applying this standard, the analysis of whether a proposal raises significant policy issues under the Ordinary Business Exception will no longer be conflated with or germane to the Economic Relevance Exception.  Instead, the Staff notes that a shareholder may be able to avoid exclusion by demonstrating other economic significance of the proposal to the specific company, such as demonstrating that the proposal has “a significant impact on other segments of the issuer’s business or subject[s] the issuer to significant contingent liabilities.”  The Staff notes that social or ethical issues may continue to be relevant, but “[t]he mere possibility of reputational or economic harm will not preclude no-action relief.”  In contrast, corporate governance proposals generally will not be excludable under the Economic Relevance Exception.

As with the Ordinary Business Exception, SLB 14I notes that a company’s board is well positioned to determine whether a particular proposal is “otherwise significantly related to the company’s business.”  Accordingly, the Staff again states that a company’s request under the Economic Relevance Exception should include, if relevant, a discussion that reflects the board’s analysis of the proposal’s significance to the company, and as in its discussion of the Ordinary Business Exception, further notes that an “explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”

C.   Staff Guidance on Proposals by Proxy

Rule 14a-8 does not address the submission of proposals by non-shareholders, and states that “The references [in Rule 14a-8] to ‘you’ are to a shareholder seeking to submit the proposal.”  Accordingly, Rule 14a-8 does not explicitly address a third party’s ability to submit proposals on behalf of a shareholder, a process frequently referred to as Proposals by Proxy.  In SLB 14I, the Staff reaffirms its position that a shareholder’s submission of a proposal by proxy is permissible as long as the submission is consistent with Rule 14a-8.

As Proposals by Proxy have increased in recent years, there have been numerous instances where the shareholder’s involvement with the shareholder proposal was at best tenuous.[2]  Recognizing that Proposals by Proxy raise concerns as to whether a shareholder truly stands behind a proposal and whether the eligibility requirements of Rule 14a-8 are satisfied, the Staff in SLB 14I has addressed the documentation that a shareholder should provide to document its delegation of authority to submit a proposal.

Under SLB 14I, shareholders who submit Proposals by Proxy will be expected to provide documentation to:

  • identify the shareholder-proponent and the person or entity selected as the proxy;
  • identify the company to which the proposal is directed;
  • identify the annual or special meeting for which the proposal is submitted;
  • identify the specific proposal to be submitted (e.g., proposal to lower the threshold for calling a special meeting from 25% to 10%); and
  • be signed and dated by the shareholder.

The Staff’s guidance in this regard applies only to proposals submitted by proxy after November 1, 2017, the date SLB 14I was published.  When a shareholder has not provided such documentation, a company will need to provide a timely deficiency notice that specifically identifies the defects with the shareholder’s submission.  If a shareholder fails to correct the defects within the 14-day time period established under Rule 14a-8, the proposal may be excludable.

While the Staff’s position is helpful in recognizing one of the concerns that have contributed to the current debate over the shareholder proposal rules, it addresses only a very minor aspect of the Proposal-by-Proxy issue and does not go far enough to address other abuses of Rule 14a-8 that harm both companies and their shareholders.

D.   Staff Guidance on Graphs and Images in Shareholder Proposals

Rule 14a-8(d) is a procedural basis for exclusion of shareholder proposals, and provides that a “proposal, including any accompanying supporting statement, may not exceed 500 words.”  In recent years, the Staff has conflated the issue of whether Rule 14a-8(d) prohibits the inclusion of graphs and/or images in proposals with the fact that the rule was designed to limit the amount of space a shareholder proposal may occupy in a company’s proxy statement.  Accordingly, the Staff has not concurred that proposals containing images or graphics in addition to words can be excluded.[3]

Recognizing the potential for abuse in this context, the Staff believes that Rule 14a-8(i)(3) can address these issues.  In SLB 14I, the Staff notes that graphs and/or images can be excluded under Rule 14a-8(i)(3) if they:

  • make the proposal materially false or misleading;
  • render the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires;
  • directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or
  • are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.

While the Staff’s reaffirmation that images and graphics remain subject to the substantive bases for exclusion under Rule 14a-8, SLB 14I stops short of addressing the key issue of how a graphic or image is to be evaluated under the objective 500-word procedural standard of the rule.  Instead, SLB 14I notes only that exclusion of a proposal would also be appropriate under Rule 14a-8(d) if the total number of words, including words in the graphics, exceeds 500.  As well, SLB 14I addresses only the exclusion of an image or graphic, and does not address when the inclusion of an image or graphic will justify exclusion of the entire proposal.

The Staff further indicates that “companies should not minimize or otherwise diminish the appearance of a shareholder’s graphic,” and gives two examples of how graphics should be treated in a company’s proxy statement:

  • if the company includes its own graphics in its proxy statement, it should give similar prominence to a shareholder’s graphics; and
  • if a company’s proxy statement appears in black and white, the shareholder proposal and accompanying graphics may also appear in black and white.

Considerations for 2018 Proxy Season

Below are some considerations for companies in assessing the Staff guidance.

  • While SLB 14I calls for analysis from a company’s board of directors, it is unclear on how it will evaluate determinations made by board committees.  In recent years, many boards have delegated authority to consider shareholder proposals on various topics to relevant board committees, such as a governance committee or a sustainability committee in the case of proposals involving environmental and social issues, and the compensation committee in the case of executive compensation-related proposals.  Given that boards routinely delegate responsibilities to committees (and indeed, are required to do so under stock exchange listing standards), we believe the Staff should be comfortable relying on the analysis of a board committee.  However, pending further guidance or precedent on this aspect of SLB 14I, companies may wish to consider having an appropriate board committee conduct an initial analysis and bringing the analysis to the full board for its review and discussion.
  • Companies seeking to rely on arguments under the Ordinary Business Exception and/or the Economic Relevance Exception that are supported by input from the board of directors will need to review their board calendars and determine whether the board is scheduled to meet in advance of the company’s deadline for filing a no-action request with the SEC.  If it is not feasible for the board to meet prior to the deadline, companies could consider filing the initial request and then submitting a supplemental letter that includes the board analysis.  Additionally, as SLB 14I indicates that a no-action request relying on either of these exceptions should “detail the specific processes by the board to ensure that its conclusions are well-informed and well-reasoned,” when planning the board’s agenda it will also be necessary to accommodate the specific processes that are appropriate for the board to analyze the implications of a proposal.
  • Companies applying SLB 14I’s guidance to the Ordinary Business Exception and/or the Economic Relevance Exception should consider how the board’s analysis will be received by various stakeholders.  For example, while reputational considerations may not block exclusion of a proposal under the Economic Relevance Exception, it may still be a factor to take into account in determining whether to seek exclusion of a shareholder proposal.  In this respect, it may often be helpful to carefully focus a no-action request on the specifics of a particular proposal as it relates to the company and to distinguish that from broader societal concerns that a proposal may touch upon.
  • While SLB 14I sets forth the Staff’s views, both the Ordinary Business Exception and the Economic Relevance Exception have been the subject of litigation, and it remains possible that some shareholder proponents may seek judicial review of the applicability of those exclusions involving the analysis described in SLB 14I.
  • Companies will need to address insufficient documentation of Proposals by Proxy in the deficiency notice sent within 14 days of receiving the proposal in order to preserve the argument for a procedural no-action request.

Overall, SLB 14I provides important guidance for companies as well as for shareholder proponents on the Staff’s administration of the rule.  Nevertheless, the shareholder proposal process remains under intense scrutiny, and there remain calls for the Commission to take further action on the rule.  For example, on November 8, 2017, Chairman Jay Clayton remarked that “[q]uestions exist about the appropriate level of ownership that should be required to submit shareholder proposals, as well as whether our current resubmission thresholds are too low.”[4]


[1]        Staff Legal Bulletin No. 14E (Oct. 27, 2009).

[2]       See Baker Hughes Inc. (avail. Feb. 22, 2016); Chevron Corp. (avail. Mar. 11, 2014, recon. denied Apr. 4, 2014).

[3]        See General Electric Co. (avail. Feb. 3, 2017, recon. granted Feb. 23, 2017); General Electric Co. (avail. Feb. 23, 2016).

[4]        See “Remarks at the PLI 49th Annual Institute on Securities Regulation: Governance and Transparency at the Commission and in our Markets”, available at https://www.sec.gov/news/speech/speech-clayton-2017-11-08.


The following Gibson Dunn lawyers assisted in the preparation of this client update: Ronald O. Mueller, Elizabeth Ising, Lori Zyskowski and Gillian McPhee.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group:

Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com)
Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com)
Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)


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