News + Events
SEC Staff Legal Bulletin No. 14E (CF) Executive Summary
October 29, 2009
Terry C. Bridges
On Tuesday, October 27, 2009, the Division of Corporation Finance (the "Staff") of the Securities and Exchange Commission ("SEC") issued Staff Legal Bulleting No. 14 E (CF) (the "Legal Bulletin")i regarding Rule 14a-8(i)(7) under the Securities Exchange Act of 1934. The Legal Bulletin essentially reverses the Staff’s prior position of allowing companies to exclude shareholder proposals relating to environmental, financial, or health risks on the grounds that these proposals related to evaluations of risk, a matter the Staff traditionally viewed as relating to a company’s ordinary business operations.ii The Staff has now indicated that going forward it will evaluate such shareholder resolutions based on whether they raise a major social policy issue (and presumably, not permit exclusion of those which do), and not whether they inquire as to evaluation of risks associated with such issues.
In all likelihood, this will result in the Staff refusing to permit exclusion of virtually every shareholder proposal addressing matters of social policy, such as climate change issues, including greenhouse gas emissions, regulations, and other environmental-related risks. As a result, Boards of Directors and management of public companies will, no doubt, be spending increasing amounts of time negotiating with shareholders concerning these proposals, or eventually responding to them within the proxy framework.
Previous Analytical Framework
Under Rule 14a-8, eligible shareholders can submit a proposal that recommends or requires a company and/or its board of directors to take action, which the shareholder plans on presenting at a meeting of the company’s shareholders. Rule 14a-8(i)(7) permits a company to exclude a proposal if it relates to the company’s ordinary business operations, by following the procedure set forth by the Staff.
Previously, under Staff Legal Bulletin No. 14C (CF), released on June 28, 2005, the Staff routinely allowed exclusion of any proposal and supporting statement which called for a company to engage in an evaluation of risk, without much regard to the subject matter to which the risk pertained. The Staff considered this evaluation of risk to be within the company’s ordinary course of business.
New Analytical Framework
The Staff stated that its previous analytical framework resulted in the unwarranted exclusion of proposals which, while relating to the evaluation of risk, also focused on significant policy issues. Going forward, the Staff will not stop its inquiry with whether or not a proposal calls for the evaluation of risk. Instead, the Staff will consider the underlying subject matter of the risk evaluation. If the underlying subject matter transcends the ordinary day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote, the proposal probably cannot be excluded under Rule 14a-8(i)(7).
Effect on Public Companies
We predict that many shareholder resolutions directed to energy companies, most of which are filed in November, can now expressly inquire into the issues that are garnering the greatest public attention and interest, namely climate change and other major social and environmental issues, and companies will be required to deal with these proposals since they can no longer be routinely excluded from the companies’ proxy materials. However, shareholders will still need to comply with the existing shareholder resolution rules, including that the company has not already substantially implemented the proposal, which may in some instances prove difficult given that boards and management of energy companies are increasingly focused and proactive on climate change and environmental issues. At the very least however, the Legal Bulletin is widely viewed as a major victory for shareholders and indicative of the Staff’s departure from the views it held during the Bush administration.
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i The Staff Bulletin only represents the views of the Division of Corporation Finance and is not a rule, regulation or statement from the SEC.
ii The Staff Bulletin also essentially reversed the Staff’s previous position on companies relying on Rule 14a-8(i)(7) to exclude proposals that focused on CEO succession planning, which is not addressed in this Executive Summary.