Clarity, a beautiful thing. U.S. SEC Corporation Finance Senior Special Counsel Matt McNair (accompanied by Davis Polk’s Ning Chiu) recently joined TheCorporateCounsel.net’s webcast “Shareholder Proposal Guidance” to provide clarity on Corp Fin’s new shareholder proposal staff legal bulletin (as discussed in previous blog post). Key takeaways regarding Rule 14a-8(i)(7) “ordinary business” and Rule 14a-8(i)(5) “economic relevance” exceptions, courtesy of The Society for Corporate Governance’s weekly Alert found below:
- Companies may – but are not required to – include a board analysis with their Rule 14a-8(i)(7) and Rule 14a-8(i)(5) no-action requests. As to both of these exceptions, Staff is focused on the nexus between the issue raised in the proposal and the company’s operations. If the proposal is clearly excludable based on the company’s ordinary business operations (14a-8(i)(7)) or significant relation to the company’s business (14a-8(i)(5)), Staff doesn’t expect to see a board analysis (but an analysis isn’t prohibited either).
- Even in those instances when a board analysis would be helpful to Staff in evaluating the no-action request, a board analysis is not required in connection with these no-action requests. If included, a board analysis will be an important factor, but won’t be determinative, as respects Staff’s decision.
- In those cases where a board analysis would be helpful (i.e., not clearly “ordinary” or “significantly related”), greater weight will be given to a “more developed” board analysis. Along those lines, Staff is deferring to the board as to the scope of its involvement, including whether the processes it uses “to ensure that its conclusions are well-informed and well-reasoned” are fully delegated to a board committee. However, a well-developed analysis prepared by a board committee that is then reviewed and approved by the full board will carry more weight than a committee-only-approved analysis.
- Subject to the foregoing, Staff is not expecting boards to follow any specific process, but rather is relying on companies and boards to determine what they believe is most appropriate. The lack of specifics in the SLB was deliberate in that regard.
- Similarly, Staff has no preconceived notions as to what companies need to or should provide in the way of information about their board processes other than they should provide whatever they believe would be most useful/helpful to Staff in making its decision, understanding that the premise of this aspect of the guidance is that the board is in a better position than Staff is to understand the nexus between the issue(s) raised in the proposal and the company’s operations. In that regard, past no-action request “precedent” may differ from future determinations where Staff did not have the benefit of board input.
- Staff does not expect board materials to accompany no-action requests and, in fact, companies are reminded that whatever materials they submit will become part of the public record. However, companies may elect to provide whatever materials they believe will be helpful.
- Companies may supplement pending no-action requests with a board analysis; however, this will logically require that additional time be earmarked for the no-action request determination process to allow Staff sufficient time to evaluate the additional information.
Hopefully this guidance will assist companies as they assess shareholder proposal strategy for the upcoming proxy season.
If you missed the webcast, listen here.