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US Securities and Exchange Commission

New SEC Staff Interpretation on Rules Governing Shareholder Proposals is Affecting 2022 Proxy Season

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

The 2022 proxy season is in full swing and going well, according to the SEC staff’s perspective.

The number of no-action letter requests that the staff in the Division of Corporation Finance (CorpFin) has received decreased by about 9 percent as of March 4, 2022, from 253 last year to 231 this year, CorpFin Director Renee Jones said at the Spring Conference of the Council of Institutional Investors (CII) on March 8.

A public company sends a no-action request to CorpFin staff to ask whether the staff will not recommend enforcement actions when it excludes a shareholder proposal from a ballot during an annual meeting, ranging from environmental issues to executive pay.

Rule 14a-8 of the Securities Exchange Act of 1934, which governs rules surrounding shareholder proposals, lays out 13 areas that the company could base it on when it wants to drop a shareholder proposal.

For example, when the proposal would micromanage a company or covers ordinary business operations. But the facts and circumstances are specific to each company, and the interpretation of the law could vary.

Jones said that the most common proposal topics so far were: 64 corporate governance, 31 environment, 19 discrimination, 11 human rights, 9 lobbying, 8 executive compensation, and 5 political spending.

She said that the most frequently asserted bases for exclusion were: 100 ordinary business, 88 ownership and other eligibility provisions, 86 substantially implemented, and 42 contrary to the proxy rules.

“In general, it appears that companies and proponents are continuing to engage constructively with one another this season,” Jones said. “Productive dialogue between parties often results in an amicable and constructive resolution that frequently leads to withdrawal of the shareholder proposal and, where a no-action request has been submitted, withdrawal of the no-action request.”

To date, about 20 percent of the requests have been withdrawn, she said, and the staff believes that the percentage will go up in the coming weeks.

“While not all of these withdrawals are the direct result of fruitful engagement, it appears from where we sit that the vast majority are,” she said.

However, Jones said that the staff believes that greater cooperation may help improve the process when there are disputes over a person’s eligibility to submit a proposal. The rules specify eligibility, including stock ownership.

“In many cases, procedural disputes can be resolved more easily and efficiently with greater cooperation among the parties than by the staff through the no-action process,” she said. “We encourage companies and proponents to work together to resolve these technical issues so that the parties can engage in substantive dialogue on the proposal’s merits that hopefully leads to a better outcome for all.”

Staff Interpretation Leads to Decrease in No-Action Requests

A securities law expert said that the decline in no-action requests is the result of the staff’s recent interpretations about what companies can exclude.

CorpFin in November 2020 published Staff Legal Bulletin (SLB) No. 14L (CF), Shareholder Proposals, which stated that the staff will no longer allow companies to leave out certain human capital management and climate change matters, issues that many progressive investor advocates have been pressing companies to address. SLB No. 14L rescinded the last three bulletins—14I, 14J, and 14K.

“I definitely think the decrease in no-action letters is related to the SLBs and the SEC’s position regarding the exemptions available under Rule 14a-8 particularly as it relates to climate related proposals,” said Dave Brown, a partner with Alston & Bird LLP in Washington.

“There is also a general sense given this administration that companies are unlikely to receive no-action relief,” Brown added. “That being said, we do see companies and shareholders engaging in dialogue and reaching negotiated settlements.”

By contrast, then-SEC chairman Jay Clayton during the Trump administration took a much more business-friendly approach.

Thus, two Republican commissioners, Hester Peirce and Elad Roisman, issued a joint statement, expressing their concern about the new approach in SLB No. 14L.

Many companies believe that social and environmental issues have little to do with financial performance, and addressing those issues raised by a few activist investors only adds to the burden of managing the business.

“While it is disappointing to see these two topics highlighted for special treatment, it is not altogether surprising given current SEC priorities,” they said in the statement.

In her remarks at the CII event on Tuesday, Jones defended the staff’s decision, explaining that it is important to adhere to commission statements when interpreting SEC rules and how the current proxy season is going.

Among other actions, she pointed to a 1998 rule change that made clear that proposals related to employment matters cannot be excluded if they also raise important social policy concerns. Moreover, the SEC also made clear proposals that focus sufficiently on significant social policy issues cannot be excluded on the basis of ordinary business exception because the proposals would transcend the day-to-day business matters.

“This 1998 release represents the most recent statement from the Commission on the ordinary business exception and the social policy exception, and as such, it continues to guide Division action,” Jones said.

However, whether something is significant involves judgment, and the staff’s positions can lead to controversy, which has increased in recent years because of more staff guidance and no-action letters stated that more conditions must be met for proponents to be able to put forth their proposals.

Thus, the staff had said that a proposal may be excluded if it relates to operations that account for less than 5 percent of the company’s total assets, net earnings, and gross sales, and is not otherwise significantly related to the company’s business.

“Staff legal bulletins extended a trend of staff no-action positions that had arguably strayed from the guidance the Commission has provided,” Jones said. “Feedback from market participants and staff experience indicated, among other things, that such guidance led to increasingly inconsistent decisions and unpredictable results. Our assessment of recent staff guidance and no-action letters suggested a need to reset and restate the staff’s approach to evaluating no-action requests under Rule 14a-8.”


This article originally appeared in the March 14, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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