The Securities and Exchange Commission announced the rescission of guidelines, established during Gary Gensler’s tenure as Chair of the agency, that governed the exclusion of certain shareholder proposals from proxy statements, marking a shift that favors companies in shareholder proposal exclusions.
The SEC announced its decision in a Staff Legal Bulletin, rescinding a previous bulletin that had restricted companies from excluding proposals with “broad societal impact.” Due to this rescission, the SEC is expected to take a more company-specific approach and as a result, companies are expected to be increasingly successful in excluding such proposals.
An Overview of Shareholder Proposal Exclusion Rules
The exclusion of shareholder proposals is governed by Rule 14a-8 of the SEC. Although this rule has many factors to it, the SEC’s announcement mainly focuses on Rule 14a-8(i)(5) and Rule Rule 14a-8(i)(7).
Rule 14a-8(i)(5), also known as the “Economic Relevance” rule, provides that a company may exclude a shareholder proposal if the proposal relates to operations that account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.
Under the former Legal Bulletin, the SEC was directed to analyze whether a proposal fell under this rule by focusing on whether the issue covered by the proposal has broad societal impact rather than the significance of the issue to the company. Under the new framework, proposals that raise issues of social or ethical significance may now be excludable, despite their importance in the abstract.
Meanwhile, Rule 14a-8(i)(7), also known as the “Ordinary Business” rule, provides that a company may also exclude a shareholder proposal if the proposal deals with a matter relating to the company’s ordinary business operations.
When analyzing whether a proposal fits such a description, the significant question is whether a proposal raises matters that 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.”
With the SEC’s announcement, its staff will take a company-specific approach in evaluating significance, as opposed to focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally significant.
“A policy issue that is significant to one company may not be significant to another,” according to the bulletin. “The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.”
The SEC is seemingly shifting towards a pro-company approach when analyzing an exclusion of certain shareholder proposals. In support of its change in policy the Commission provided its interpretation of Rule 14a-8.
“Because the rule allows exclusion only when the matter is not ‘otherwise significantly related to the company,’ we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted,” the bulletin states. “That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.” 
Jacob Horowitz is a contributing editor at Compliance Chief 360°