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Focus: New guidance on US shareholder resolutions

11 December 2009

In brief: The US Securities and Exchange Commission has just released new guidance on shareholder proposals that relate to ordinary business matters but also focus on significant social policy issues. This guidance indicates that it will no longer be possible to exclude such proposals on the basis that they require a company to engage in an assessment of the risks and liabilities that it may face as a result of its operations. Partner Annette Hughes , Senior Associate Rachel Nicolson and Lawyer Catie Shavin review the guidance, which has been issued in time for the 2010 proxy season.

• Exclusion of shareholder proposals relating to ordinary business operations
• Previous guidance on 'significant social policy issues'
• New guidance
• Conclusion

Exclusion of shareholder proposals relating to ordinary business operations

Rule 14a-8 of the US Securities Exchange Act of 1934 provides for the inclusion of shareholder proposals in a company's proxy materials for presentation to a vote at an annual or special meeting of shareholders. Companies are generally required to include such shareholder proposals unless they:

• do not comply with procedural requirements; or
• may be excluded on one of 13 substantive bases provided by rule 14a-8(i).

One of the bases for exclusion is found in rule 14a-8(i)(7), which provides that a procedurally compliant shareholder proposal may be excluded if, among other things, the proposal deals with a matter relating to the company's ordinary business operations. Matters related to a company's ordinary business operations include a range of governance issues including the assessment of risks and liabilities.

That a proposal relates to ordinary business matters, however, is not necessarily sufficient to establish that it may be excluded from the company's proxy materials. The SEC has stated that proposals that relate to ordinary business matters that also focus on 'sufficiently significant social policy issues...would not be considered to be excludable because the proposals would transcend the day-to-day business matters'.¹

The Division of Corporations Finance of the SEC has provided its views on the operation of aspects of Rule 14a-8 generally, and the meaning of 'significant social policy issues' specifically, in a series of Staff Legal Bulletins.² These bulletins refer to the views of the Division of Corporations Finance staff (the CF staff), and do not constitute rules, regulations or statements of the SEC. However, this guidance is useful because a 'no-action' request by a company intending to exclude a shareholder proposal is considered by the CF staff.

Previous guidance on 'significant social policy issues'

Staff Legal Bulletin No. 14C, issued in 2005, previously provided the CF staff's view as to what constitutes a significant social policy issue for the purposes of rule 14a-8(i)(7). This guidance was provided in the context of shareholder proposals that relate to ordinary business matters and focus on environmental and public health issues.³

The CF staff considered that there would be a basis for the exclusion of a proposal to the extent that it focused on the company engaging in an internal assessment of the risks or liabilities faced by the company as a result of operations that may adversely affect the environment or public health.

There would not, however, be a basis for excluding a proposal to the extent that the proposal focused on the company minimising or eliminating operations that may adversely affect the environment or public health. It was considered that such proposals transcend the company's day-to-day business matters.

New guidance

On 27 October 2009, the CF staff issued a further bulletin that considered the application of rule 14a-8(i)(7) to proposals relating to risk, which had been considered excludable on the basis of the guidance provided by Staff Legal Bulletin No. 14C.⁴ This was addressed in the context of proposals concerning environmental, financial and health risks, although the guidance provided is not limited to specific types of risk.

The CF staff expressed concern that the exclusion of proposals that relate to the evaluation of risk may have had the effect of unwittingly excluding proposals that focus on significant policy issues. The CF staff further noted that, as corporate decisions often involve some evaluation of risk, this evaluation should be viewed as the means to an end, rather than an end in itself.

Having re-examined the analysis used for risk proposals, the CF staff consider that there is a more appropriate framework for the analysis of these proposals. The CF staff will now focus on the subject matter that gives rise to the risk, or to which it pertains, instead of whether the proposal requires an evaluation of risk.

Proposals relating to ordinary business matters may no longer be excluded on the basis of rule 14a-8(i)(7) merely because they require an evaluation of risk. Instead, consideration will be made of whether the underlying subject matter of the risk evaluation involves a matter of ordinary business to the company. A proposal will not generally be excludable where:

• the underlying subject matter transcends the company's day-to-day business matters; and
• the proposal raises policy issues of such significance that a shareholder vote would be appropriate; and
• a sufficient nexus exists between the nature of the proposal and the company.

However, where the underlying subject matter of the proposal concerns an ordinary business matter, the proposal will be excludable under rule 14a-8(i)(7).

The CF staff further note that a proposal focusing on the board's role in the oversight of the company's management of risk may transcend the day-to-day business matters of the company and raise policies of sufficient significance that a shareholder vote is appropriate. Such a proposal would therefore not be excludable under rule 14a-8(i)(7).

Conclusion

In considering that the assessment of risk does not constitute a sufficient basis for the exclusion of a shareholder proposal, the new CF staff guidance effectively expands the scope of permissible proposals. Shareholder proposals that require an assessment of risk relating to significant social policy issues may now be permitted.

This shift in position reflects the CF staff's view that most corporate decisions involve some evaluation of risk and its increasing awareness that the adequacy of a company's risk management and oversight, potentially, has significant consequences for both the company and its shareholders.

This shift may lead to a broader spectrum of shareholder proposals in proxy materials and for presentation to a vote at an annual or special meeting of shareholders.

Footnotes

1. Securities and Exchange Commission, Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 40018 (21 May 1998).
2. Division of Corporation Finance, Staff Legal Bulletin No. 14 (13 July 2001); Division of Corporation Finance, Staff Legal Bulletin No. 14A (12 July 2002); Division of Corporation Finance, Staff Legal Bulletin No. 14B (15 September 2004); Division of Corporation Finance, Staff Legal Bulletin No. 14C (28 June 2005); Division of Corporation Finance, Staff Legal Bulletin No. 14D (7 November 2008); Division of Corporation Finance, Staff Legal Bulletin No. 14E (27 October 2009).
3. Division of Corporation Finance, Staff Legal Bulletin No. 14C (28 June 2005).
4. Division of Corporation Finance, Staff Legal Bulletin No. 14E (27 October 2009).

For further information, please contact:

• Guy FosterPartner, Sydney
  Ph: +61 2 9230 4798
  Guy.Foster@aar.com.au
• Tracey HarripPartner, Brisbane
  Ph: +61 7 3334 3215
  Tracey.Harrip@aar.com.au
• Robyn GlindemannSpecial Counsel, Perth
  Ph: +61 8 9488 3712
  Robyn.Glindemann@aar.com.au
• Simon McConnellManaging Partner - Hong Kong and China, Hong Kong
  Ph: +852 2840 1202
  Simon.McConnell@aar.com.au