The staff of the Division of Corporation Finance stated in a new Staff Legal Bulletin that submitting a shareholder proposal through a representative, often referred to as "proposal by proxy," is consistent with 1934 Act Rule 14a-8 and will continue to be permitted. This approach stands in contrast to the provisions of the proposed CHOICE Act, which passed the House in June and calls for a prohibition on proposals by proxy.
In the Staff Legal Bulletin, the staff acknowledged the challenges and concerns that proposals by proxy may present, including questions about whether the eligibility requirements of Rule 14a-8(b) have been satisfied. The staff has also heard concerns that shareholders may not know that proposals are being submitted on their behalf.
Documentation requirement. In response to these challenges, and to help the staff and companies better evaluate whether the eligibility requirements have been satisfied, the staff said that it will now expect shareholders who submit a proposal by proxy to provide documentation describing the shareholder’s delegation of authority to the proxy. The staff warned that if the documentation is not provided, there may be a basis to exclude the proposal under Rule 14a-8(b).
The guidance indicates that the proposal by proxy documentation should identify the shareholder-proponent and the person or entity selected as proxy, as well as the company to which the proposal is directed. It also must identify the annual or special meeting for which the proposal is submitted, and the specific proposal to be submitted. The staff noted that the documentation must be signed and dated by the shareholder.
The Staff Legal Bulletin provides guidance on other aspects of the shareholder proposal process, including the application of Rule 14a-8 paragraphs (i)(7) and (i)(5), and the use of graphs and images under Rule 14a-8(d).
Ordinary business exclusion. Rule 14a-8(i)(7) permits a company to exclude a proposal that deals with matters related to ordinary business operations. At issue in many Rule 14a-8(i)(7) no-action requests, according to the staff, is whether a proposal that addresses ordinary business matters nonetheless focuses on a policy issue that is sufficiently significant.
The staff believes that these determinations are matters that the board of directors is generally in a better position to make. Accordingly, going forward, the staff will expect a company’s no-action request to include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance. The explanation should detail the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned, the staff said.
Economic relevance exception. Rule 14a-8(i)(5) permits a company to exclude a proposal that relates to operations that account for less than five percent of the company’s total assets at the end of its most recent fiscal year, less than five percent of its net earnings and gross sales for that year, and is not otherwise significantly related to the business. Historically, the staff has infrequently agreed with exclusion under the economic relevance exception. The staff has not allowed a company to exclude a proposal even where it related to operations that accounted for less than five percent of total assets, net earnings and gross sales, where the company conducted business, no matter how small, related to the issue raised in the proposal. The staff’s analysis simply considered whether a company conducted any amount of business related to the issue in the proposal and whether that issue was of broad social or ethical concern.
The staff now believes that the application of Rule 14a-8(i)(5) has unduly limited the exclusion’s availability by not fully considering the second prong of the rule, which is the question of whether the proposal deals with a matter not significantly related to the company’s business. Going forward, the staff’s analysis will focus on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than five percent of total assets, net earnings and gross sales.
New approach. Under the new approach, proposals that raise issues of social or ethical significance may be included or excluded based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business, the staff stated. The staff noted that because the test only allows exclusion when the matter is not "otherwise significantly related to the company," it considers the analysis to be dependent upon the company’s particular circumstances. The staff added that it generally views substantive governance matters to be significantly related to almost all companies.
The staff advised that where a proposal’s significance to a company’s business is not apparent on its face, a proposal may be excludable unless the proponent demonstrates that it is "otherwise significantly related to the company’s business." As with the ordinary business exception, the staff is of the view that determining whether a proposal is "otherwise significantly related to the company’s business" can raise difficult judgment calls that are best made by a company’s board of directors.
As a result, the staff will now expect a company’s Rule 14a-8(i)(5) no-action request to include a discussion that reflects the board’s analysis of the proposal’s significance to the company. As with the 14a-8(i)(7) approach, the staff would prefer that the discussion include the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.
The staff noted that in the past its analysis of whether a proposal is "otherwise significantly related" under Rule 14a-8(i)(5) has been informed by its analysis under the ordinary business exception, and the availability or unavailability of Rule 14a-8(i)(7) has been determinative of the availability or unavailability of Rule 14a-8(i)(5). The staff advised that it will no longer look to its analysis under Rule 14a-8(i)(7) when evaluating arguments under Rule 14a-8(i)(5). The staff believes that applying separate analytical frameworks will ensure that each basis for exclusion serves its intended purpose.
Word limit exclusion. Rule 14a-8(d) provides an exclusion if a proposal, including any accompanying supporting statement, exceeds 500 words. The staff noted that questions have recently arisen concerning the application of Rule 14a-8(d) to proposals that include graphs and/or images.
The staff stated its view that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals. While there is potential for abuse in this area, the staff believes that potential abuses can be addressed through other provisions of Rule 14a-8.
In particular, the staff stated that the exclusion of graphs and/or images would be appropriate under Rule 14a-8(i)(3) where they: (1) make the proposal materially false or misleading; (2) render the proposal so inherently vague that neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires; (3) directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or (4) are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote. The staff added that exclusion would also be appropriate under Rule 14a-8(d) if the total number of words in a proposal, including words in the graphics, exceeds 500.
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