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SEC Modifies Shareholder Proposal Rules, Making it More Difficult for Companies to Exclude ESG Proposals

Michael Levitt


Partner, New York

Valerie Jacob


Global Co-head of Capital Markets & Partner, New York

In early November 2021 the SEC issued new guidance regarding the shareholder proposal process in Staff Legal Bulletin 14L (“SLB 14L”), which served to reverse, at times significantly, some of the positions taken over the past few years regarding the “ordinary business” and “economic relevance” exceptions.

The reversal follows a number of years of increasingly detailed guidance and comes amid a time when there have been instances in which the SEC has messaged its discomfort with being the arbiter and decision-maker regarding certain proposal topics, including ESG. SLB 14L clearly indicates that the SEC will increasingly be disinclined to grant no-action relief for proposals driven by environmental, social and political and related issues during the 2022 proxy season and beyond.

Importantly for boards of directors, the SEC’s decision-making affects some of its expectations on board action. Recent prior bulletins suggested board analysis should be included in requests for no action relief when making an argument for ordinary business or economic relevance. Critically, SLB 14L revokes the SEC’s prior position regarding board analysis and the SEC will no longer require or expect it (although shareholders may anticipate it as part of shareholder engagement).

In particular:

  • proposals with a broad societal impact may no longer be excludable as addressing “ordinary business operations,” with the SEC staff “realigning” its focus to the social policy significance of the issue raised rather than on the nexus between the social policy issue and a particular company;
  • “micromanagement” arguments will face a “measured” SEC approach and requests for timeframes or targets will not be as easily excluded;
  • proposals affecting only a small percentage of a company’s operations (5 percent of assets, earnings, and revenues) will no longer be automatically excludable if they address issues of broad social or ethical concern; and
  • the SEC staff reiterated a number of procedural provisions mostly aimed at facilitating the shareholder proposal process for the benefit of shareholders.

The new guidance highlighted two specific areas where proposals will be more difficult for companies to exclude:

  • those raising human capital management issues with a broad societal impact (which will be more difficult to exclude as ordinary business operations); and
  • proposals that request companies adopt timeframes or targets to address climate change (which will be more difficult to exclude as shareholder micromanagement).

However, while SLB 14L is likely to make it more difficult for companies to exclude shareholder proposals, the new eligibility rules that require a greater holding period with lower holding levels may initially counterbalance the effect when analyzing total shareholder proposals.

Proposals with a broad societal impact may no longer be excludable as “ordinary business operations”

The ordinary business exception under Rule 14a-8 allows companies to exclude shareholder proposals to the extent the proposal “deals with a matter relating to the company’s ordinary business operations.” Historically, the SEC would evaluate the significance of a policy issue to the particular company, rather than focusing on whether the proposal addresses a significant social policy. Under SLB 14L, the SEC “will no longer focus on determining the nexus between a policy issue and the company but will instead focus on the social policy significance of the issue … the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”

Specifically, the SEC noted that “proposals … raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.” Further, the SEC said that proposals related employment discrimination is an example of an issue that may transcend the ordinary business operations.

“Micromanagement” arguments will face a “measured” SEC approach and requests for timeframes or targets will not be as easily excluded

The staff previously excluded proposals that dealt with the company’s ordinary business operations that persuasively argued that the proposal “prob[ed] too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Going forward, the SEC staff will take “a measured approach” to evaluating companies’ micromanagement arguments – recognizing that “proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement.” Instead, the SEC will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.

The new SEC approach is particularly relevant for proposals related to climate change. Going forward the SEC said it would not concur in the exclusion of proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals. As an example, the SEC recently concluded that a proposal requesting establishment of emission reduction targets, without imposing a specific method for doing so, was not excessive micromanagement.

Moreover, in assessing whether a proposal deals with matters “too complex” for shareholders (and therefore suggestive of micromanagement), the SEC may consider:

  • the sophistication of investors on the topic;
  • the availability of data on the topic; and
  • the robustness of public discussion of the topic.

The SEC may consider references to well-established national or international frameworks when assessing proposals related to disclosure, target-setting and timeframes as indicative of topics that shareholders are able to evaluate.

Other Considerations from SLB 14L

The “economic relevance” exception, allows companies to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets or net earnings and gross sales, and is not otherwise significantly related to the company’s business.” Going forward, 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 below the specified thresholds.

Under the shareholder proposal rules, proposals may not exceed 500 words, but they are silent on whether images and graphics may be used. The SEC reaffirmed its view that shareholders are not precluded from using graphics in connection with their proposals. Companies may still request the exclusion of graphics where they make the proposal materially misleading, render the proposal too vague or indefinite, impugn character or personal reputation, are irrelevant to a consideration of the subject matter, or if the words in a proposal (including words in the graphics) exceed 500.

Key takeaways for boards

  • Companies should expect that under its new guidance, the SEC will be less likely to permit companies to exclude shareholder proposals that relate to broad societal issues, including ESG, even if there is overlap with the company’s ordinary business or it relates to a small portion of a company’s business.
  • The SEC is no longer expecting, requiring or even committed to reviewing board analysis related to a company’s request to exclude a shareholder proposal. However, the information and the board’s position are likely to remain of interest to shareholders and expected to be part of shareholder engagement.
  • With the SEC less likely to play referee to many shareholder proposals, the dynamics regarding negotiated withdrawal are likely to change, and the importance for companies to engage with shareholders and understand issues of importance will increase.