Securities Regulation Daily Staff Legal Bulletin clarifies ‘ordinary business’ analysis, proof of ownership requirements with respect to proposal exclusion
Thursday, October 17, 2019

Staff Legal Bulletin clarifies ‘ordinary business’ analysis, proof of ownership requirements with respect to proposal exclusion

By Amy Leisinger, J.D.

Boards should be involved in determining the significance of a policy issue in relation to business operations and potential "micromanagement," and companies should not place undue emphasis on technicalities when evaluating proof of ownership.

In a new Staff Legal Bulletin, the staff of the Division of Corporation Finance has provided guidance for companies and shareholders under Exchange Act Rule 14a-8 regarding shareholder proposals. Specifically, the staff discusses the importance of analysis when considering the significance of a policy issue under the "ordinary business" exception and the scope and application of micromanagement as a basis to exclude a proposal. In Staff Legal Bulletin 14K, the staff also notes that overly technical reading of proof of ownership letters should not be used to exclude a proposal.

Significance and board analysis. Rule 14a-8(i)(7), the "ordinary business" exception, permits a company to exclude proposals that implicate a company’s "ordinary business operations," including matters that are "so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight." In the past, the Commission has noted that proposals focusing on significant policy issues that transcend day-to-day business matters are not excludable. However, the bulletin explains, the focus of an exclusion analysis regarding this exception should be on the connection between the significant policy issue and the company’s operations. When a proposal raises a policy issue, a no-action request should center on the specific significance of the issue to that company, according to the bulletin.

In addition, the bulletin continues, the issue of whether a proposal involves ordinary business matters is one that the board of directors is "well-situated to analyze." A request for exclusion should include a detailed discussion of the board’s consideration of the significance of a policy issue, which can assist the SEC staff in evaluating a company’s no-action request, the staff explains. The discussion of the board’s analysis should detail the specific factors the board considered in concluding that an issue is not significant, including whether the company has already addressed the issue raised and the differences between how a proposal seeks to address the issue and the actions already taken, according to the bulletin. Whether shareholders have previously voted on the matter and the voting results also should be addressed in the board’s analysis, the staff explains.

"[I]t is important that the appropriate body with fiduciary duties to shareholders give due consideration as to whether the policy issue presented by a proposal is of significance to the company," the bulletin notes.

Micromanagement. A shareholder proposal also may be excludable if it attempts to "micromanage" the company. The bulletin states that, in considering arguments for exclusion under this theory, the staff considers whether the proposal imposes a specific method, action, or timeline for addressing an issue. If the method requested by the proposal is overly prescriptive, the proposal is attempting to limit the management discretion and could be viewed as micromanaging the company, the staff explains. When a company seeks to assert micromanagement as a basis for exclusion, its analysis should include a specific discussion of how the proposal may unduly limit management to act with the flexibility necessary to fulfill their fiduciary duties, according to the staff.

Proof of ownership. The bulletin also notes that some companies have attempted to apply an overly technical reading of proof of ownership letters to exclude a proposal. The staff found in certain cases, the proponents had provided documentation sufficiently evidencing the requisite ownership for a one-year period, taking a plain-meaning approach to interpreting the proof of ownership letters. While sample language for ownership statements is provided in Staff Legal Bulletin 14F, the format is not mandatory and should not be considered the exclusive means of demonstrating ownership, the staff explains. If the language used is clear and sufficiently evidences ownership, a company should not seek to exclude a shareholder proposal based on "drafting variances," the bulletin concludes.

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