In this new memo: "SEC Staff Issues First No-Action Letter Under “Economic Relevance” Exclusion Following Updated Guidance," Ropes & Gray describes how Dunkin' Brands Group successfully used Rule 14a-8(i)(5) (economic relevance exception) pursuant to the new shareholder proposal guidance, SLB 14I, to exclude a shareholder proposal requesting that the company's board issue a report assessing the environmental impacts of continuing to use K-Cup Pods brand packaging. Rule 14a-8(i)(5) allows exclusion of a proposal that relates to operations that account for less than 5% of the company's total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business.
In its support of the latter prong, i.e., absence of significant relation to the company's business, Dunkin' Brands incorporated a detailed description of its board's analysis that met the otherwise somewhat opaque standards contemplated by SLB 14I. The company's no-action request reportedly detailed the board's consideration of these factors:
- The fact that sales of K-Cup Pods and related operations accounted for less than 5% of total assets, net earnings and gross sales in 2016 and were expected to account for similar percentages in 2017
- The subject matter of the proposal did not address the company's primary business operations (i.e., acting as a franchisor of Dunkin’ Donuts and Baskin-Robbins quick service restaurants), but instead focused on the packaging used in certain products manufactured by a third party under licensing arrangements
- The absence of engagement with the company by any of its other shareholders on the proposal’s topic
- The fact that a substantially identical proposal included in the prior year’s proxy statement garnered only approximately 14% support
- The staff's guidance in SLB 141 that the mere possibility of reputational or economic harm is insufficient on its own to support a conclusion that a matter is significantly related to a company's business
- The fact that the proponent provided no factual or other support in its proposal or supporting statement to carry its burden of demonstrating that the proposal is otherwise significantly related to the company's business
Also noteworthy: From a process standpoint, the no-action request indicates that the board's Nom/Gov Committee "considered the Proposal's significance to the Company, including both the economic contribution of licensing fees and royalty income to the Company from the sale of K-Cup pods, as well as whether the Proposal is otherwise significantly related to the Company's business. The Committee then reported its findings and analysis, along with its recommendation, to the board of directors… to consider and act upon the question."