Further to yesterday's post and our prior reports here, here and here concerning the ongoing efforts to understand Corp Fin's new shareholder proposal guidance, while the fact that the SEC Staff will consider the board's informed judgment in its analysis of Rule 14a-8(i)(7) and 14a-8(i)(5) no-action requests is a welcome move, the following several of numerous law firm memos (see here) merely illustrate the various and, in many cases, divergent interpretations and related perceived implications and suggestions for companies to effect the new guidance.
Ideally, to the extent Staff clarifies the guidance in response to issuers' understandable confusion, it will do so publicly rather than piecemeal in non-public forums so that all issuers may benefit. Most companies' boards (and board committees) are already extremely and increasingly busy, and thus for efficiency purposes (among other things), reasonably expect accurate information and direction from their corporate secretaries and other governance professionals and in-house counsel on the SEC's expectations in connection with the shareholder proposal process.
Here are just three key issues (of many) that need clarity (see full memos linked for additional context):
1) Can the board process be delegated to a properly constituted board committee?
Davis Polk: The Staff expects most of the work to be done by the governance committee, who can develop a record and give that to the board. It appears then that although the governance committee can and is expected to handle the bulk of the workload, the board itself would need to be involved eventually.
Gibson Dunn: While SLB 14I calls for analysis from a company's board of directors, it is unclear on how it will evaluate determinations made by board committees. In recent years, many boards have delegated authority to consider shareholder proposals on various topics to relevant board committees, such as a governance committee or a sustainability committee in the case of proposals involving environmental and social issues, and the compensation committee in the case of executive compensation-related proposals. Given that boards routinely delegate responsibilities to committees (and indeed, are required to do so under stock exchange listing standards), we believe the Staff should be comfortable relying on the analysis of a board committee. However, pending further guidance or precedent on this aspect of SLB 14I, companies may wish to consider having an appropriate board committee conduct an initial analysis and bringing the analysis to the full board for its review and discussion.
Shearman & Sterling: Does the whole board need to meet? It is unclear to what degree that the SEC will consider the analysis by a board committee to be sufficient in demonstrating that a board has undertaken “specific processes” in considering the issues underlying the shareholder proposal. Boards have wide latitude to delegate authority to committees and subcommittees, so we would expect that delegation to a properly constituted committee of a board to satisfy the requirement set out in SLB 14I.
Sullivan & Cromwell: This level of board involvement in the Rule 14a-8 no-action process is new and may present some challenges for companies this season. For example, until no-action practices develop in this area, it is unclear the extent to which a well-informed and well-reasoned process will require the board to become familiar with the staff’s historical practices in this area and how they apply to the company’s particular situation or whether the process would benefit from multiple meetings. For companies that receive multiple shareholder proposals to which the ordinary course of business exclusion may be applicable, the staff’s new position may well present challenges in terms of timing, although delegating shareholder proposals to a committee may facilitate compliance with the new guidance and the company’s ability to stay within the Rule 14a-8 timing requirements.
Ropes & Gray: For matters that the staff has in the past concluded are significant policy issues, however, the guidance appears to allow companies to argue, based on the board’s conclusion as fiduciaries, that the policy issue is not significant to their company. We believe that this analysis could be undertaken and presented by a properly constituted committee of the board.
2) If the full board is required to weigh in in lieu of a properly constituted committee, what if a company can't convene its board within the 14a-8 time limits?
Gibson Dunn: If it is not feasible for the board to meet prior to the deadline, companies could consider filing the initial request and then submitting a supplemental letter that includes the board analysis.
Bryan Cave: At a minimum, the proliferation of shareholder proposals generally and in particular so-called “ESG” proposals (those relating to environmental, social policy, and/or governance issues) may present a substantial additional burden to public company boards if management believes that a shareholder proposal is properly excludable under Rule 14a-8(i)(7). The tenor of SLB 14I suggests that the staff aims to provide greater deference to management, which theoretically could expand the application of the “ordinary business” exclusion. However, the more clearly the proposal deals with ordinary business matters, the less management may feel justified in using the time and resources of the board to engage in the processes contemplated by SLB 14I. As a consequence, the new requirements could have the effect of allowing some proposals to run in a company’s proxy materials that otherwise would be properly excluded under the “ordinary business” exception.
3) Does the board always need to weigh in on 14a-8(i)(7) and/or (i)(5) exclusion requests, or just in certain cases? What is the role of precedential decisions by Staff on past no-actions?
Davis Polk: The board analysis set forth in the SLB is not required for a company to make an argument on the basis of ordinary business or economic relevance. The staff does not expect the analysis to be included in every no-action letter making 14a-8(i)(7) arguments, especially where there is already a “well worn” path. This would seem to imply that to the extent that there is a long line of precedents supporting an ordinary business argument, those should continue to be persuasive to permit proposals on the same subject matters to be excluded. The new SLB then may only come into play on close calls, particularly if there is already a presumption that the proposal transcends ordinary business. Including a board analysis in those cases may serve to help rebut that presumption.
Cleary: The “ordinary business” exception: Accordingly, any no-action requests based on the “ordinary business” exception should discuss the board’s analysis and assessment of the significance of the policy issue implicated by the shareholder proposal, detailing the specific processes the board used “to ensure that its conclusions are well-informed and well-reasoned." The “economic relevance” exception: Again, no-action requests should include a discussion of the board’s analysis.
White & Case: No-action requests made in reliance on Rule 14a-8(i)(7) will now be required to include a discussion of the board’s analysis of the particular policy issue raised and its significance to the company, and this discussion should detail the specific processes that the board used to ensure its conclusions were “well-informed and well-reasoned.” The Guidance does not provide insight into the level of board processes and analysis or how in-depth the description in the no-action relief request must be to be considered sufficient from the Staff’s perspective.
Ropes & Gray: We do not believe that this board analysis must be included in all no-action requests. It does not, for example, affect the objection that a proposal “micromanages” the company.
Bryan Cave: The staff will now require no-action requests made in reliance on Rule 14a-8(i)(7) (the “ordinary business” exception) to include a discussion of the board’s analysis of the particular policy issue raised by the proposal and its significance to the company, as well as detailed disclosure of the board’s “specific processes” in reaching its “well-informed and well-reasoned” conclusions that the policy is not “sufficiently significant” to the company and does not “transcend the day-to-day business matters” of the company. Similarly, the staff will now require no-action requests made in reliance on Rule 14a-8(i)(5) (the “economic relevance” exception) to include a discussion of the board’s analysis of whether a proposal is “otherwise significantly related to the company’s business,” with a detailed disclosure of the “specific processes” used by the board in reaching its “well-informed and well-reasoned” conclusions that the proposal is not “otherwise significantly related to the company’s business.”
Stay tuned for more insights both here on Randi's Riches and in our weekly Society Alert.