SEC Staff Issues Bulletin Setting Forth Views on Shareholder Proposal Rule; New Approach Expected to Result in More ESG Proposals

November 8, 2021

On November 3, 2021, the staff of the SEC’s Division of Corporate Finance (Staff) issued a legal bulletin regarding Rule 14a-8 under the Securities Exchange Act of 1934 that rescinds certain prior legal bulletins and issues new guidance related to certain bases for the exclusion of shareholder proposals from a company’s proxy statement. Among other things, the bulletin outlines the Staff’s views on Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception.

Notably, the bulletin states that the Staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard that the SEC initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the SEC subsequently reaffirmed in 1998. The bulletin indicates that the Staff will no longer take a company-specific approach to evaluating the significance of a policy issue, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making a 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.

Consequently, many anticipate that more ESG shareholder proposals will appear in company proxy statements – for example, certain proposals related to issues like climate change and human capital management. In this regard, note that the bulletin states that, under the realigned approach, proposals that the Staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable.

With regard to the economic relevance exception, which permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business,” the Staff stated that it will return to its prior long-standing approach of analyzing Rule 14a-8(i)(5). As a result, proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded even if the relevant business falls beneath the economic thresholds of the Rule.

Commissioners Peirce and Roisman expressed opposition to the bulletin in a statement that can be found here.


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Compliance, Investment Advisers, Investment Companies, Miscellaneous, Mutual Funds, Regulatory