Will New SEC Bulletin Stifle Shareholder Proposals?
The SEC’s administration of the shareholder proposal process has entered an era of “disruptive ideas,” some of which provide companies with new opportunities to exclude proposals from the annual proxy.
In June 2017, the US House of Representatives passed the Financial CHOICE Act. If it were enacted into law it would roll back Dodd-Frank consumer protections and one section of the bill would severely restrict shareholder democracy, confining the filing of shareholder proposals to only the wealthiest few shareowners. While the prospects are dim for that bill passing in the Senate in its current form, the pressure on the SEC to limit shareholder proposals persists from some factions of the corporate community.
A new SEC guidance issued in November (Staff Legal Bulletin 14I) seemed to open a non-legislative path to cut back on shareholder rights. Through the Bulletin, the SEC for the first time invites boards for directors to weigh in on whether particular proposals are “relevant” (Rule 14a-8(i)(5)) or address a “significant policy issue” for a company (Rule 14a-8(i)(7)).
Since investors have long used shareholder proposals to shed light on blind spots of boards and management, including risks of crushing liabilities or reputational damage, proponents are expressing grave doubts about when board opinions should receive deference.
The first SEC action on the new bulletin came when Apple filed challenges to four proposals that requested a human rights committee, an executive pay link to sustainability, a report on freedom of expression and a net-zero greenhouse gas emissions target. Apple and its board asserted all four proposals address only ordinary business and need not be included. In the end, three of the four were omitted (two for reasons not relevant to the bulletin).
Notably, Apple’s board did not claim that the issues behind the proposals were not “significant” for the company, but only claimed that they delved into day to day issues for the company. The SEC staff disagreed with the board on the human rights proposals: “the board’s analysis does not explain why this particular proposal would not raise a significant issue for the Company.”
However, the SEC agreed that the proposal requesting net zero greenhouse gases at Apple was excludable under the ordinary business rule. The proposal asked the company to evaluate the potential for achieving, by a fixed date, “net-zero” emissions of greenhouse gases… and prescribed how to account for “net zero.” The SEC decision stated the proposal seeks “to micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
After the Apple decisions in December, the SEC received numerous requests to exclude proposals; the challenges often used the Apple letters as a template, asserting boards’ opinions that a particular proposal should be disallowed either as economically irrelevant, not a significant policy issue for the company, or micromanaging. In late February, the SEC extended the “micromanagement” exclusion to a proposal asking oil and gas company EOG Resources to set greenhouse gas reduction targets.
As we write this commentary, several important staff determinations are yet to come. Preliminary observations include:
Proposals that once were categorically non-excludable and “safe” to file are now subject to case-by-case analysis. Proponents must fend off challenges even on proposals with a long history of shareholder support at multiple companies.
Shifting SEC interpretations under the Bulletin and the rules:
a. Extending “micromanagement” exclusions to proposals for target-setting on issues such as greenhouse gas reduction.
b. Requiring proponents to prove economic harm to defend reputation risk management proposals.
c. Allowing company proposals that merely ratify the status quo to substitute for a shareholder’s proposal seeking reforms.
It is clear that the new Bulletin demands more, both from shareholders and from board rooms. After the season is over, all will be assessing the process and outcomes through which new SEC guidance and leadership has altered proxies in 2018.
Disclosure Statement: The author has represented proponents in defense of proposals during the current proxy season including the Apple net zero GHG proposal discussed in the article.
Sanford J. Lewis