[This is the third in a series of posts on SEC Staff Legal Bulletin No. 14L. You can read the first post here and the second post here.]
Picking up where I left off on my series of posts looking at SEC Staff Legal Bulletin No. 14L, I turn to this question:
How Does the Staff Determine Whether Something is a “Significant Social Policy Issue”?
The official SEC answer, as explained in SEC Release No. 34-40018 (1998), is:
In applying the “ordinary business” exclusion to proposals that raise social policy issues, the Division [of Corporation Finance] seeks to use the most well-reasoned and consistent standards possible, given the inherent complexity of the task.
Here are other statements that give more hints on what the SEC looks for:
The 1998 Release referred to the “relative importance of certain social issues [that have emerged] as… consistent topic[s] of widespread public debate.”
SLB 14A, issued in 2002, reiterated that “the presence of widespread public debate regarding an issue is among the factors to be considered in determining whether proposals ‘transcended the day-to-day business matters.’”
SLB 14L says "the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company."
SLB 14L also says, in the context of micromanagement, “[I]n order to assess whether a proposal probes matters ‘too complex’ for shareholders, as a group, to make an informed judgment, we may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic.”
That’s really it as far as how the staff looks at significant social policy issues. Practitioners try to glean what they can from the decades of letters that the SEC staff has written in response to No Action requests. But, as I’ve explained before, these response letters merely give a thumbs up or down with one or two cryptic sentences for context. They don’t provide any detailed explanation of the staff’s reasoning like a court opinion would (more on that later).
Practitioners can attempt to catalogue the social policy issues that been determined by the staff to be sufficiently significant. But it’s a challenging task because the staff’s decisions are not always consistent, and the issues that make it onto the unwritten list change over time without explanation. Here’s how the SEC explained shifts that take place in the 1998 Release:
From time to time, in light of experience dealing with proposals in specific subject areas, and reflecting changing societal views, the Division adjusts its view with respect to “social policy” proposals involving ordinary business. Over the years, the Division has reversed its position on the excludability of a number of types of proposals, including plant closings, the manufacture of tobacco products, executive compensation, and golden parachutes.
Based on What?
We don’t know what sources the SEC staff relies on to make these determinations about what is a significant social policy issue. The 1998 Release cited two newspaper articles in a footnote when declaring that "since 1992, the relative importance of certain social issues relating to employment matters has reemerged as a consistent topic of widespread public debate."
In my experience, some shareholders use Google searches and other methods to collect reams of articles, essays, and videos that they provide to the SEC staff to demonstrate the level of “widespread debate,” "broad societal impact," and “public discussion and analysis” referred to in the statements above. Others do the research and provide more organized written arguments without wholesale data dumps. But it’s a one-sided contest since there’s nothing a company can do to prove that something is not a significant policy issue.
For How Long?
Once something is deemed to be a significant social policy issue, it’s rare for the SEC to affirmatively say when it stops being one. The staff has reversed its position on the excludability of various types of proposals (this time proposals for companies to adopt timeframes or targets to address climate change and proposals on major human capital management issues), but that doesn’t always get announced via SEC release or SLB.
Let’s think about a policy issue we can all agree is significant today: company mandates for employees to be vaccinated against COVID-19. Would a shareholder proposal about this be seen as relating to an issue of widespread debate that transcends the ordinary business of a company? I think there’s a good chance that today’s SEC and its staff would see it that way. The staff pointed to COVID as the significant policy issue when it sided with The Humane Society’s proposal on virtual shareholder meetings at Brinker International. Will this still apply five years from now, or will shareholder proposals related to day-to-day employee (and shareholder meeting attendee) health and safety go back to being ordinary business? We likely won’t know unless and until that gets tested (no pun intended).
Solutions
It would be great if the staff annually published a SLB listing the policy issues that rise to the level of being so significant that investors get to vote on them and the ones that don’t (or used to be and are now being retired). That’s probably not going to happen. But there may be a better solution that doesn’t require definitive lists and regular updates.
Determining what is a significant social policy issue desperately needs a multi-pronged test, similar to what courts have given to understand how they methodically analyze certain common situations. Anyone who sat through a first year law school civil procedure class will recall the Erie doctrine for how federal courts should apply state substantive law in diversity jurisdiction cases. There are various legal tests on what sorts of business prospects constitute “corporate opportunities.” To name a few others, there’s the Miller test (for whether expression constitutes obscenity); the federal alter ego liability test (for piercing the corporate veil); and the Chevron doctrine (for the extent to which a court should defer to statutory determinations of administrative agencies). Recently, the Delaware Supreme Court gave us the Zuckerburg test (for demand futility in stockholder derivative actions) to replace the old Aronson and Rales tests. These sorts of doctrines and tests can be controversial, but at least they give all parties, including the arbiters, something to analyze knotty issues that frequently arise.
Creating guidance to lay out a structured analysis on whether something is a significant social policy issue would create more predictability for the companies and the proponents. It would help shareholders decide what issues to file proposals on and help companies decide whether to challenge proposals via No Action requests. It would also make the job of the SEC staff much easier when those No Action requests come in.
Going the next step to provide explanations in the No Action response letters would be even more helpful for the parties that depend on answers. But since that would take a lot more work, and probably lengthen the turnaround time for the parties waiting for answers, it’s not ideal for a SEC staff that is already stretched to capacity. Developing a test or set of questions for everyone to strategize around would be a good first step.
Can We Help?
I continue to be amazed that the SEC staff has not given us any kind of test, framework, rubric, roadmap, recipe, or what have you to determine what is a significant social policy issue. One of these days, I may just try to draft one and then enlist all of you to help sculpt it into something that shareholder proponents and companies can reasonably agree on to propose to the SEC. If the staff needs "well-reasoned and consistent standards," maybe we can help.