US SEC Staff Offers Guidance On Exclusion of Shareholder Proposals from Company Proxy Statements

Originally published October 30, 2009

Keywords: SEC Staff, shareholder proposals, company proxy statements, Division of Corporation Finance, Securities and Exchange Commission, shareholder proposal

Rule 14a-8(i) of the Securities Exchange Act of 1934 provides a list of the permitted, non-procedural reasons for an issuer to exclude a shareholder proposal from its proxy statement. Rule 14a-8(i)(7) allows an issuer to exclude a proposal that "deals with a matter relating to the company's ordinary business operations."

On October 27, 2009, the Division of Corporation Finance of the Securities and Exchange Commission issued a staff legal bulletin, available at http://www.sec.gov/interps/legal/cfslb14e.htm, that provides guidance relating to shareholder proposals submitted for inclusion in an issuer's proxy statement. The bulletin addresses application of Rule 14a-8(i)(7) to proposals relating to risk or to chief executive officer succession planning. The bulletin also suggests that shareholder proponents and issuers inform the staff in advance if they intend to submit correspondence in connection with a no-action request involving a shareholder proposal.

Proposals Relating to Risk Prior Position. In a bulletin issued in 2005, available at http://www.sec.gov/interps/legal/cfslb14c.htm, the SEC staff analyzed Rule 14a-8(i)(7) in the context of environmental or public health proposals. In the 2005 bulletin, the staff indicated that it evaluated whether the shareholder proposal and supporting statement, as a whole, related to a company's internal evaluation of the risks and liabilities faced by the company as a result of its operations, and, if they did, the staff permitted the company to exclude the proposal. On the other hand, if the staff concluded that the proposal and supporting statement were directed at minimizing or eliminating operations that may adversely affect the environment or the public's health, the staff did not permit the proposal to be excluded on the ordinary business operations ground provided by Rule 14a-8(i)(7).

New Position. In the new bulletin, the staff revised its position regarding risk-based shareholder proposals. Instead of focusing on whether a proposal essentially calls for the company to evaluate its risk, the staff will now examine the "subject matter to which the risk pertains or that gives rise to the risk" to determine "whether the underlying subject matter of the risk evaluation involves a matter of ordinary...