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US Securities and Exchange Commission

Near-Term Implications of New SEC Staff Interpretation on Rules Governing Shareholder Proposals May Not be Big

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

As the 2022 proxy season comes up, how much the SEC staff’s recent interpretation on rules governing shareholder proposals will exactly play out in the real world is unclear right now.

The SEC signaled that it will be more difficult for public companies to leave out certain shareholder proposals—especially on environmental, social, and governance (ESG) matters—from proxy statements to be voted on during annual meetings.

In particular, companies will no longer be able to leave out certain human capital management and climate change matters, according to Staff Legal Bulletin (SLB) No. 14L(CF), Shareholder Proposals, published on November 3, 2021. SLB No. 14L rescinds last three bulletins—14I, 14J, and 14K—on Rule 14a-8 of the Securities Exchange Act of 1934, which lays out the operations of shareholder proposal rules.

“It will be interesting to see how this plays out in practice as there have not been very many sustainability or social related goals excluded through the no-action process in recent years,” said Dave Brown, a partner at Alston & Bird LLP.

In Brown’s view, this may be part of a bigger ESG effort at the SEC.

“I see this tying into the SEC’s overall focus on social and environmental issues and will be reflected in upcoming rulemaking on human capital management and climate change,” he said. “So, while this is a significant policy shift, practically speaking it may not result in a large increase in shareholder proposals for this upcoming proxy season.”

The staff bulletin came after the SEC under previous chairman Jay Clayton made it much more difficult for shareholders to put forth proposals. Clayton took a more business-friendly approach to regulation during the Trump administration.

Under thresholds revised in September 2020 despite strong objections from investors during Clayton’s tenure, Rule 14a-8 lets a shareholder—with at least $2,000 of a company’s securities and held them for at least three years—bring proposed resolutions up for vote. If a shareholder holds more than $15,000, then the waiting period is two years, with $25,000 it is one year.

Previously, a shareholder who held at least $2,000 or 1 percent of a company’s securities for at least one year could bring forth a proposal.

Rule 14a-8 provides several ways for a company to exclude proposals from its proxy materials. When a company is not entirely sure that it can safely exclude a proposal to be voted on during annual meetings, the company sends a “no-action” letter request to the SEC staff. The company wants to know whether the staff agrees with the company and that it will not recommend enforcement action for having violated securities laws. And SLB No. 14L deals with Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception.

With new interpretations, the staff said that certain proposals that were previously excluded will no longer be allowed to do so under the rules.

“The SEC seems intent on rolling back recent interpretations of the shareholder proposal rules that gave companies a few more options for responding to proposals that push into day-to-day management decisions,” said Joseph Hall, a partner with Davis Polk & Wardwell LLP.

For example, the new bulletin said that the previous bulletins expanded the concept of micromanagement beyond the commission’s policy directives.

“Specifically, we believe that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement,” SLB No. 14L stated.

The bulletin provides an example with a recent letter to ConocoPhillips Co. to explain the staff’s current approach to micromanagement. The staff rejected no-action relief on a proposal requesting that the company set targets covering the greenhouse gas emissions.

“The proposal requested that the company set emission reduction targets and it did not impose a specific method for doing so,” the staff guidance noted. “The staff concluded this proposal did not micromanage to such a degree to justify exclusion.”

But Brown said that “it is certainly not a surprise that the SEC is shifting its stance under the new administration to make it more difficult to exclude shareholder proposals.”

This is because the SEC under the leadership of Chair Gary Gensler has been much more sympathetic to investor advocates’ views.

Thus, the new interpretation was a win for some investor protection advocates.

By contrast, the U.S. Chamber of Commerce, which applauded when Clayton’s SEC revised the shareholder proposal rules, has predictably been outraged by the latest turn of events.

The SEC staff “has acted in an opaque and seemingly capricious manner under your direction,” Tom Quaadman, an executive vice president with the U.S. Chamber wrote to Gensler on November 16. “The issuance of SLB 14L jettisons decades of SEC policy for the sake of political expediency. Coupled with other recent announcements not to enforce recent duly-enacted rules, we fear that the SEC is putting its hard-earned reputation for even-handedness and rationality at risk. The SEC cannot expect the many thousands of businesses it regulates to respect the rule of law when the agency itself does not.”


This article originally appeared in the December 6, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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