SEC Staff Narrows The 'Ordinary Business' Exclusion For Shareholder Proposals

Author:Ms Jackie Liu, David M. Lynn and Alina Ball
Profession:Morrison & Foerster LLP
 
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On October 27, 2009, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Staff") announced new guidance on the application of Rule 14a-8(i)(7) of the Securities Exchange Act of 1934 with regard to shareholder proposals relating to company risk assessments and CEO succession planning.1

Rule 14a-8 addresses when a company must include a shareholder proposal in its proxy statement (and include the proposal on its form of proxy) when the company holds an annual or special meeting of shareholders. A company must include a shareholder's proposal in its proxy statement unless the proposal is excludable pursuant to the enumerated substantive and procedural bases for exclusion under Rule 14a-8. Companies often rely on Rule 14a-8(i)(7) to exclude a shareholder proposal based on the position that the proposal relates to the company's ordinary business operations. Under the Staff's new guidance, it will no longer permit companies to exclude a shareholder proposal solely because the proposal requires the company to engage in an evaluation of the risks and liabilities that it faces as a result of its operations. Rather, the Staff will consider whether the underlying subject matter of the risk evaluation involves an "ordinary business" matter to determine whether the shareholder proposal is excludable under Rule 14a-8(i)(7). Similarly, the Staff stated in its new guidance that it generally will not allow a company to rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.

Subject Matter Analysis of Shareholder Proposals Relating to Risk The Staff explained that it will now apply a subject matter analytical framework to determine whether a company may exclude a shareholder proposal related to risk assessment pursuant to Rule 14a-8(i)(7). This new guidance reverses prior guidance provided in Staff Legal Bulletin No. 14C released in 2005, which provided that companies could omit proposals referencing environmental, financial or health risks under the "ordinary business" exception if such proposals "focused on the company engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations."2 In SLB No. 14E, the Staff acknowledges that application of the framework set forth in SLB No. 14C may have resulted in "the unwarranted exclusion of proposals that relate to the evaluation of risk but that focus on significant policy issues." In addition, the Staff...

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