SLB 18’s Impact on Shareholder Proposal Exclusions

The Securities and Exchange Commission (SEC) staff provides guidance on how public companies should interpret rules governing shareholder proposals. This guidance is communicated through Staff Legal Bulletins (SLBs), which clarify the application of specific regulations under the Securities Exchange Act of 1934. A recent piece of guidance, Staff Legal Bulletin No. 14M, outlines the staff’s current thinking on when a company can legally exclude a shareholder proposal from its proxy materials, which are the documents sent to shareholders before they vote on company matters.

This bulletin does not create new rules but rather explains how the SEC staff interprets existing ones, particularly those that are subject to frequent debate between companies and shareholder proponents. The guidance focuses on providing a framework for analysis that companies should use when they believe a proposal is eligible for omission. Understanding this framework is necessary for both companies managing their proxy statements and shareholders aiming to have their voices heard on corporate matters, as the interpretations affect which proposals reach a vote.

The Ordinary Business Exclusion

The ordinary business exclusion, found in Rule 14a-8(i)(7), allows a company to omit a shareholder proposal if it deals with its day-to-day business operations. Certain operational tasks are considered fundamental to management’s role and cannot be subjected to direct shareholder oversight. This includes two considerations: the proposal’s subject matter and the degree to which it attempts to micromanage the company. For example, a proposal dictating specific product development timelines would likely be considered micromanagement.

A key aspect of this exclusion is the “significant social policy” exception. Previously, if a proposal focused on a major social issue, it could transcend ordinary business and had to be included. Staff Legal Bulletin No. 14M shifted this analysis. The SEC staff now evaluates whether the policy issue has a sufficient nexus to the specific company, rather than focusing on the issue’s broad societal importance.

This means proponents must demonstrate how a policy issue is particularly relevant to the company’s business, not just point to a broad social debate. A company seeking to exclude a proposal must analyze why the issue does not have a meaningful connection to its specific circumstances. For instance, a proposal on greenhouse gas emissions at a software company might be viewed differently than the same proposal aimed at an oil and gas corporation.

The bulletin also addresses micromanagement. A proposal may be excludable if it seeks to impose specific methods for implementing complex policies, supplanting management’s judgment. This applies even if the proposal touches upon a significant policy issue. The guidance cautions against overly prescriptive proposals, such as those that dictate specific timeframes or targets without affording management any discretion.

The Economic Relevance Exclusion

Another basis for omitting a proposal is the economic relevance exclusion under Rule 14a-8(i)(5). This rule permits a company to exclude a proposal if it relates to operations that account for less than 5% of the company’s total assets, net earnings, and gross sales. However, the exclusion only applies if the proposal is also not “otherwise significantly related to the company’s business.” This second part of the test is where recent SEC staff guidance provided clarification.

Staff Legal Bulletin No. 14M emphasizes that determining whether a proposal is “otherwise significantly related” must be based on the company’s particular circumstances. It moves away from the idea that a proposal raising broad social or ethical concerns is automatically significant, regardless of its economic impact. Under this interpretation, a proposal on an ethical issue might be excludable if it is not tied to a significant effect on the company’s business.

Even if a proposal addresses a well-known social issue, a company may exclude it if the underlying operations have a negligible financial footprint and the issue does not have a meaningful relationship to its business. The bulletin clarifies that potential for reputational harm, on its own, is not enough to establish that a proposal is “otherwise significantly related.” The analysis requires a direct link between the proposal’s subject and the company’s business.

The Board of Directors Analysis Framework

Staff Legal Bulletin No. 14M provides guidance on the role of the board of directors’ analysis when a company decides to exclude a proposal. Previously, the SEC staff encouraged companies to submit a detailed analysis from their board explaining why a proposal dealt with ordinary business and was not significant to the company. This was often a detailed document outlining the board’s deliberations.

The current guidance has changed this expectation. The SEC staff has stated that it no longer expects a company’s no-action request to include a formal board analysis when seeking to exclude a proposal under the ordinary business or economic relevance exclusions. The staff noted that these analyses often did not contain the specific information needed for its review and did not have a dispositive effect on the outcome.

While a formal board analysis is no longer a standard expectation, a company may still choose to submit one. A company might do this if it believes the board’s specific insights and reasoning would help the SEC staff understand the company-specific context of the proposal. The decision to submit such an analysis is at the company’s discretion, based on whether it can add substantive weight to the argument.

Submitting a No-Action Request

When a company determines it has a valid basis to exclude a shareholder proposal, it must submit a “no-action request” to the SEC staff. This request asks the staff to confirm that it will not recommend an enforcement action against the company for omitting the proposal from its proxy materials. The request must be filed with the SEC no later than 80 calendar days before the company files its definitive proxy statement.

The submission is made via the SEC’s online shareholder proposal form and must include a copy of the proposal, a statement from the proponent, and a detailed explanation of the company’s reasons for exclusion, citing the specific rule relied upon. The company must also provide a copy of the no-action request to the shareholder proponent at the same time. The proponent then has an opportunity to respond to the company’s arguments.

The SEC staff reviews the arguments from both parties and issues a response. This response, which may be a letter or an online notification, indicates whether the staff concurs with the company’s position. If the staff agrees with the company’s reasoning, the company can exclude the proposal from its proxy materials.