Shareholder proposals – the great reset again! (Part 2)

By Sanjay Shirodkar & Jenna Fontenot on March 4, 2025

Posted in Annual meetings, Corporate governance, Proxy solicitations, SEC developments, Shareholder proposals

In our earlier blog post, we discussed Staff Legal Bulletin 14M (SLB 14M), which rescinded prior Staff Legal Bulletin 14L (SLB 14L). The staff of the US Securities and Exchange Commission (SEC) indicated that 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).

Our prior installment on SLB 14M did a deeper dive into some of the changes to certain interpretive positions related to Rule 14a-8(i)(5). In this installment, we discuss the remaining interpretive guidance of SLB 14M.

Ordinary business exclusion

The basics

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” In 1998, the SEC indicated that the purpose of the exclusion is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” The SEC explained that the policy underlying the “ordinary business” exclusion rests on two central considerations: (i) the proposal’s subject matter and (ii) the degree to which the proposal “micromanages” the company.

In understanding the first consideration, the SEC has indicated that proposals which raise 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” relate to a company’s “ordinary” business operations. An exception to this general rule relates to matters that “raise policy issues so significant that it would be appropriate for a shareholder vote.” In 1976, the SEC explained that proposals that “have major implications, will in the future be considered beyond the realm of an issuer’s ordinary business operations.” Determinations of whether a proposal relates to a company’s ordinary business operations are “made on a case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed.” Therefore, whether the significant policy exception applies depends on the particular policy issue raised by the proposal and its significance in relation to the individual company at issue.

The new interpretation

In SLB 14L, the Staff indicated that it “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 that is the subject of the shareholder proposal. In making this determination, the Staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company” and that the Staff would “no longer taking a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7).”

SLB 14M reverses SLB 14L and clarifies that, going forward, it “will take a company-specific approach in evaluating significance” and that “a policy issue that is significant to one company may not be significant to another.” This company-specific approach may be welcome news for public companies since the focus of the analysis will be on whether the proposal deals with a matter relating to its ordinary business operations or raises a policy issue that transcends its ordinary business operations.

Micromanagement exclusion

The basics

The SEC has explained that the second consideration may be relevant when a “proposal involves intricate detail or seeks to impose specific timeframes or methods for implementing complex policies.” Stated differently, the second consideration looks only to the degree to which a proposal seeks to “micromanage,” and that a proposal that is not excludable under the first consideration may be excludable under the second if it micromanages the company and that such determinations are to be made on a “case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed.” As the SEC has explained, a proposal may probe too deeply into matters of a complex nature if it “involves intricate detail or seeks to impose specific timeframes or methods for implementing complex policies.”

The new interpretation

In SLB 14L, the Staff observed that its recent application of the “micromanagement” exclusion “expanded” its scope, and that, going forward, it would take a “measured approach” to evaluating a company’s micromanagement argument. The Staff indicated that it would “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 Staff explained that, in reviewing arguments that asserted that a proposal addressed matters “too complex” for shareholders, it might consider issues such as:

The sophistication of investors generally on the matter
The availability of data
The robustness of public discussion and analysis on the topic, and
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 well equipped to evaluate.

SLB 14M reverses SLB 14L and reinstates portions of SLB 14J and 14K. In SLB 14K, the Staff explained that the analysis of the “micromanagement” consideration was dependent on “an evaluation of the manner in which a proposal seeks to address the subject matter raised, rather than the subject matter itself” and that the fundamental analysis would relate to the level of prescriptiveness with which the proposal approached a subject matter. Put another way, if the method or strategy for implementing the action requested by the proposal is overly prescriptive, the proposal may be viewed as micromanaging the company since it potentially limited the judgment and discretion of the board and management. SLB 14M also reinstates portions of SLB 14J relating to the application of Rule 14a-8(i)(7) to proposals that address senior executive and/or director compensation.

In addition to clarifying the views of the Staff on the scope and application of Rule 14a-8(i)(5) and Rule 14a-8(i)(7), SLB 14M addresses the following topics:

Board analysis: In SLB 14M, the Staff reverses its position in prior guidance regarding the need to include the board’s analysis of the particular policy issue raised and its significance to the company with no-action requests under Rules 14a-8(i)(5) and 14a-8(i)(7).

Word count, graphics, and images: The Staff clarifies that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals and that companies should not minimize or otherwise diminish the appearance of a shareholder’s graphic.

Proof of ownership letter: The Staff provides additional guidance regarding Rule 14a-8(b), which requires a proponent to prove eligibility to submit a proposal, and does away with the need for a company to provide a second deficiency notice to a proponent if 1) the company previously sent an adequate deficiency notice prior to receiving the proponent’s proof of ownership and 2) the company believes that the proponent’s proof of ownership letter contains a defect.

Use of emails: The Staff suggests that, when using emails to submit proposals and make other communications, companies and shareholder proponents should seek a reply email acknowledging receipt and encourages both parties to use another method of communication or email another contact if a requested confirmation of receipt is not provided.

Note that the guidance provided under staff legal bulletins are the opinions of the Staff and have no legal force or effect. We are following these developments closely and are prepared to advise clients for their annual meetings as the 2025 proxy season moves forward.