The staff of the US Securities and Exchange Commission (SEC) rescinded prior Staff Legal Bulletin 14L (SLB 14L) and issued Staff Legal Bulletin 14M (SLB 14M) on February 12, 2025. SLB 14M is intended to clarify the views of the SEC staff (Staff) on the scope and application of Rule 14a-8(i)(5) and Rule 14a-8(i)(7) of the Securities Exchange Act of 1934 (Exchange Act).

As it did in SLB 14L, which was issued under the Biden Administration, the Staff explains that the rescission and replacement of SLB 14L is based on its experience applying the guidance contained in it. In many respects, this appears to be a reset to the Staff’s positions that existed before November 2021 and will likely be received as a welcome change by public companies.

The timing of this reset by the Staff is a bit unusual, as it came in the middle of the period during which companies are preparing for the 2025 proxy season. The Staff indicated that it will consider the guidance in place at the time it issues a response. This is welcome news to public companies, because many of them have already submitted no-action letters or have taken other measures to address any pending shareholder proposals. In other words, public companies have a small window within which they can review their previously submitted no-action relief letter or submit new requests. Specifically, the Staff indicated that it will consider the publication of this SLB to be “good cause” if it relates to legal arguments made by the new request under Rule 14a-8(j)(1) of the Exchange Act.

Due to the many changes, our analysis is presented in two parts. This first blog principally relates to the changes in Rule 14a-8(i)(5) – the “economic relevance” exclusion, while the second blog will cover Rule 14a-8(i)(7) – the “ordinary business” exclusion.

Economic relevance exclusion

The basics

Rule 14a-8(i)(5) permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business” (emphasis added).

Substantive changes to this rule were made by the SEC in 1983. Previously, the rule permitted companies to omit proposals that dealt “with a matter that is not significantly related to the issuer’s business.” The SEC proposed changes to the rule in 1982 based on the premise that its prior interpretations may have “unduly limit[ed] the exclusion.” The SEC proposed adopting the economic tests that appear in the rule today and reasoned that the change related to “proposals concerning the functioning of the economic business of an issuer and not to such matters as shareholders’ rights, eg, cumulative voting.”

Subsequent to the adoption of this rule, a US District Court in Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554 (DDC 1985) preliminarily enjoined a company from excluding a proposal regarding sales of a product line. In that case, the product line represented 0.05 percent of assets, $79,000 in sales, and a net loss of $3,121, compared to the company’s total assets of $78 million, annual revenues of $141 million and net earnings of $6 million. The court based its decision to grant the injunction “in light of the ethical and social significance” of the proposal and on “the fact that it implicates significant levels of sales.” This decision has served as one of the fundamental reasons why the Staff had previously changed its interpretation of Rule 14a-8(i)(5). SLB 14M clarifies that instead of the District Court’s decision, the Staff intends to focus on the SEC’s prior statements on the rule.

The new framework

SLB 14M essentially reverts to the Staff’s interpretive positions noted in Staff Legal Bulletin 14I (SLB 14I).  Noted below are some key takeaways from the new guidance:

• Going forward, the Staff will focus on a proposal’s significance to a particular company’s business when it otherwise relates to operations that account for less than 5 percent of total assets, net earnings, and gross sales.

Implication: Under the new guidance, a company might be able to exclude proposals that raise issues of social or ethical significance if it concludes that they do not impact the specific circumstances of the company.

• If the proposal’s significance to a company’s business is not apparent on its face, the proponent has the burden to demonstrates that it is “otherwise significantly related to the company’s business.”

Implication:  In order for a proponent to satisfy this provision, the proponent will need to provide information demonstrating that the proposal “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.”

• If a proponent wishes to raise social or ethical issues in its arguments, it needs to tie those matters to a significant effect on the company’s business.

Implication:  A proponent cannot merely raise the possibility of reputational or economic harm in order to demonstrate that a proposal is “otherwise significantly related to the company’s business.” The Staff expects to consider each proposal in light of the “total mix” of information about the issuer.

• The Staff has bifurcated the “otherwise significantly related” exception under Rule 14a-8(i)(5) from the “ordinary business” exception under Rule 14a-8(i)(7).

Implication:  This clarification is consistent with the Staff’s position in SLB 14I and presents a separate and independent opportunity for a company to assert that a proposal can be excluded under Rule 14a-8(i)(5) independent of the ordinary business exclusion under Rule 14a-8(i)(7).

Note that the guidance provided under staff legal bulletins represents the opinions of the Staff and have no legal force or effect.

In our next installment, we discuss the remaining interpretive guidance of SLB 14M. We are following these developments closely and are prepared to advise clients for their annual meetings as the 2025 proxy season moves forward.