SEC: Boards should determine shareholder proposal significance

A recent SEC staff release ahead of the looming 2018 proxy season expresses the view that the board of directors is generally in a better position to determine the significance of a shareholder proposal, Corporate Secretary sister publication IR Magazine reports.

Staff Legal Bulletin 14I (SLB 14I) indicates that the SEC will now be looking to an issuer’s board of directors to provide a discussion that reflects directors’ analysis of the policy issue raised and its significance, including ‘the specific processes employed by the board to ensure its conclusions are well informed and well reasoned.’

In this respect, SLB 14I appears to lay the groundwork for the staff to defer to the board’s analysis on ‘the difficult judgment call’ of determining the significance of a shareholder proposal under Rule 14a-8(i)(7). In particular, the staff paper addresses the following aspects of the shareholder proposal submission process under Rule 14a-8 that could be viewed as favorable to issuers:

• Deference to issuers’ analyses of significant policy issues under Rule 14a-8(i)(7)’s ‘ordinary business’ exception
• Expansion of the ‘economic relevance’ exception under Rule 14a-8(i)(5)
• Additional eligibility requirements for proposals ‘by proxy’ under Rule 14a-8(b)
• Application of Rule 14a-8(d) to the use of images in shareholder proposals and supporting statements, and encouraged reliance on Rule 14a-8(i)(3)’s ‘false and misleading’ standard for exclusion.

‘The SEC guidance helps shift the balance toward the issuer, but it may require boards of directors or committees to spend significant time analyzing issues in order to exclude a proposal,’ Bryan Pitko, of counsel with Stinson Leonard Street in Minneapolis, tells IR Magazine.

SLB 14I notes the SEC’s division of corporation finance’s belief that the existing application of Rule 14a-8(i)(5) has unduly limited the exclusion’s availability because it has not fully considered whether a proposal ‘deals with a matter that is not significantly related to the issuer’s business,’ and is therefore excludable.