(First in a Series of) Thoughts on Staff Legal Bulletin No. 14L
Updated: Nov 10, 2021
Seemingly out of nowhere, the staff of the SEC's Division of Corporation Finance released Staff Legal Bulletin (SLB) No. 14L, which rescinds a number of the recent SLBs and tries to uncloud the murky waters of the “ordinary business” exclusion and the exception to the exclusion for “significant policy issues.” If you want a summary of SLB 14L, there are some good ones out there, including by the always reliable folks at Cooley and Wachtell. I’ve got a lot of thoughts on the issues addressed in SLB 14L, which can be divided into answers to the following questions:
Shouldn’t there be a nexus between a shareholder proposal and the company at which it is filed?
How does the SEC staff determine whether something is a "significant policy issue"?
Why are people on the SEC staff the ones to determine what is a "significant policy issue"?
What about due process?
Shouldn’t there be limits on images submitted as part of shareholder proposals?
Neither SLB 14L nor any of the previous SLBs or SEC releases answer these questions, at least not to my satisfaction. I’m going to give my answers to each of these questions in a series of separate blog posts. But before I do that, I’d like to spend some time in the vault to review where this whole significant policy issue thing came from.
Paragraph (i)(7) of the Rule 14a-8 says a company may exclude a shareholder proposal from its proxy statement “[i]f the proposal deals with a matter relating to the company's ordinary business operations.” The heading for this basis for exclusion is “Management functions.” The term “significant policy issue” doesn’t appear in paragraph (i) or anywhere else in Rule 14a-8. So, where does this exception come from?
SLB 14L points us to SEC Release No. 34-12999 (41 Fed. Reg. 55873) from way back in 1976 when the SEC’s headquarters were on the other side of Union Station at 500 North Capitol Street. The 1976 release on “Adoption of Amendments Relating to Proposals by Security Holders” said, in relevant part (with emphasis added):
The Commission is of the view that the [“Management functions” exclusion] can be effective in the future if it is interpreted somewhat more flexibly than in the past. Specifically, the term “ordinary business operations” has been deemed on occasion to include certain matters which have significant policy, economic or other implications inherent in them. For instance, a proposal that a utility company not construct a proposed nuclear power plant has in the past been considered excludable… In retrospect, however, it seems apparent that the economic and safety considerations attendant to nuclear power plants are of such magnitude that a determination whether to construct one is not an “ordinary business matter.” Accordingly, proposals of that nature, as well as others that have major implications, will in the future be considered beyond the realm of an issuers ordinary business operations, and future interpretative letters of the Commission’s staff will reflect that view.”
[T]his should not be construed to mean that the provision will not be available for the omission of proposals that deal with truly “ordinary” business matters. Thus, where proposals involve business matters that are mundane in nature and do not involve any substantial policy or other considerations, the subparagraph may be relied upon to omit them.
Although the SEC’s 1976 release adopted extensive amendments to the rules on shareholder proposals, the above paragraphs come from the narrative explanation of the rule amendments, not the amended rules themselves or the even the notes that are sometimes included with the rules. The language is inconsistent and imprecise, making interpretation difficult. Should the terms:
“matters which have significant policy, economic or other implications inherent in them;”
“matters that have major implications;” and
“business matters that involve substantial policy or other considerations”
be treated as interchangeable or do they have different meanings? (I know, it depends.)
SLB 14L also directs us to SEC Release No. 34-40018 from 1998, when the SEC was located at 450 Fifth Street, on “Amendments To Rules On Shareholder Proposals,” which said, in relevant part (with emphasis added):
Certain tasks 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. Examples include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers. However, proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.
This language also comes from the narrative explanation for the rule amendments, but doesn’t show up in the amended rules themselves or the notes to the rules. And again the wording is inconsistent and imprecise. How do the terms:
“matters focusing on sufficiently significant social policy issues;” and
“matters that raise policy issues so significant that it would be appropriate for a shareholder vote”
relate to the terms from the SEC's 1976 release? Do they supersede the 1976 terms? Are they interchangeable or different?
And how big a deal is it that the SEC's 1998 release added the word “social” to modify “policy issues”? Should that narrow or otherwise change the analysis? Apparently, the word “social” is here to stay. The staff uses the modifier six times in SLB 14L under the heading “Significant Social Policy Exception" and once when discussing paragraph (i)(5) of Rule 14a-8, the “economic relevance” exclusion.
The "economic relevance" exclusion has a seemingly similar exception with its own history, in which the SEC and courts have thrown around terms such as:
"proposals that raise issues of broad social or ethical concern related to the company’s business;"
proposals that have "raised policy questions important enough to be considered 'significantly related' to the issuer's business;" and
"the ethical and social significance" of a proposal.
Could the terms used for the analysis of making exceptions to the "economic relevance" exclusion, and the discussion around them, be at all helpful to the analysis of the "significant policy" exception to the "ordinary business" exclusion? A law school professor would tell you that if the language of one part of a law is not clear, look at the language used in other parts of the same law for clues on how to interpret it. Or is there an impenetrable wall between these two paragraphs of Rule 14a-8, such that whatever the SEC and courts have said about one may not be used when thinking about the other?
In case you are wondering why I referenced the locations of the SEC's headquarters over time, I just read that the SEC will be moving its headquarters to 60 New York Avenue, NE, which is a 21-minute walk north of its current location at 100 F Street. This will make it much less convenient for those of us who are used to taking Amtrak to Union Station and grabbing a cup of coffee while walking to a meeting at the SEC without ever having to go outside!