SEC Issues New Staff Legal Bulletin on Shareholder Proposals and C&DI on Schedule 13G Eligibility

Staff Legal Bulletin No. 14M

Rule 14a-8(i)(7) (Ordinary Business Exception)

Companies may once again more easily exclude shareholder proposals on grounds of “ordinary business” when the proposal “deals with a matter relating to the company’s ordinary business operations.” As the Staff notes, the purpose of the exception has been “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” Under previous SEC guidance, the ordinary business exception had  been interpreted more narrowly and thus had prevented issuers from excluding certain proposals that arguably dealt with a company’s ordinary business.

Staff Legal Bulletin No. 14M (“SLB 14M”), issued on February 12, rescinds the prior guidance in Staff Legal Bulletin No. 14L (“SLB 14L”), which previously had the effect of making it more difficult for companies to exclude certain policy proposals under the ordinary business exclusion, such as those related to climate change and human capital management, by not requiring those proposals to demonstrate their policy issue had a particular significance to the company’s business. SLB 14L had effectively created a high bar for exclusion whereby any proposal that dealt with a significant social policy issue, was viewed by the SEC as transcending day-to-day business matters of a company and thus was generally not excludable. Under SLB 14M, the Staff will once again take a company-specific approach to the analysis, considering both whether policy issue (i) transcends day-to-day management and (ii) is significant to the company’s business.

Rule 14a-8(i)(7) (Micromanagement Exclusion)

SLB 14M also reinstates the portions Staff Legal Bulletin Nos. 14J and 14K related to micromanagement. Under Rule 14a-8(i)(7), a company may exclude a shareholder proposal that 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.” Under SLB 14L, the micromanagement exclusion had, similar to the “ordinary business exception,” been interpreted more narrowly.

In contrast to SLB 14L, the reinstated guidance will consider whether a shareholder proposal “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.” This may include, for instance, a proposal that seeks an intricately detailed study or report. In addition, Staff may once again consider the underlying substance of the matters addressed by the study or report, such as if the substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies. In addition, the Staff will look to whether a shareholder proposal is overly prescriptive in such a manner that it limits the judgment and discretion of the board and management, as in the case of a proposal that prescribes the method and requirements for reporting on reduction of greenhouse gas emissions.

Rule 14a-8(i)(5) (Economic Relevance)

Companies may exclude proposals on grounds of “economic relevance” where a proposal “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

In SLB 14M, the Staff noted that it will return to the SEC’s prior statements on the rule by focusing on a proposal’s significance to the company’s business, and allowing for the exclusion of proposals that raise issues of social or ethical significance without particularizing the significance to the company’s business. If not prima facie significant to the company’s business, the proponent will also bear the burden of showing significance. However, the Staff generally views substantive governance matters as significantly related to most companies.

The Staff also notes that, despite historical practices of analyzing the significant relationship prong of Rule 14a-8(i)(5) based on the availability of the ordinary business exception in Rule 14a-8(i)(7), the Staff will not base its decisions on such determinations going forward, and that the mere possibility of reputational or economic harm, without more, does not necessarily demonstrate a proposal is significantly related to the company’s business. Instead, the Staff will consider the proposal in light of the “total mix” of information about the issuer.

Board Analysis

In Staff Bulletin No. 14I, the Staff began encouraging companies to include with their no-action letters a discussion of the board’s analysis of particular policy issues raised and their significance to the company. SLB 14M notes that those discussions often were not included and, when included, did not influence the outcome of the decision. As such, the Staff no longer expects companies to include such a discussion, although they are welcome to do so if the company believes it will be helpful in the Staff’s analysis.

Rule 14a-8(d) (Shareholder Proposal Length and Content)

Companies may exclude shareholder proposals on the basis of length if the proposal, including any accompanying supporting statement, exceeds 500 words. The Staff noted that the inclusion of graphs and images are not prohibited in shareholder proposals. While the Staff recognizes potential for abuse, it notes that other protections, such as prohibitions against materially false or misleading statements, vagueness, and irrelevance, serve to prevent such abuses.

Rule 14a-8(b) (Proof of Ownership Letters)

A proponent must prove its eligibility to submit a proposal by offering proof that it “continuously held” the requisite amount of securities for the required amount of time. Although the Staff provided sample language for verifying proof of ownership in Staff Legal Bulletin No. 14F and updated the language in SLB 14L with the 2020 amendments to Rule 14a-8(b), the Staff notes that the sample language is not required and serves only to minimize errors, and that overly technical readings of proof of ownership letters are generally not persuasive in determining whether to exclude a proposal. Instead, companies should consider whether the letter is clear and sufficiently evidences the requisite minimum ownership requirements. In addition, companies are not required to send a second deficiency notice to the proponent in cases where the company previously sent an adequate deficiency notice prior to receiving a proponent’s proof of ownership and the company believes the proponent’s proof of ownership letter contains a defect.

Compliance and Disclosure Interpretation Questions 103.11 and 103.12

On February 11, 2025 the Staff also published new C&DI Questions 103.11 and 103.12. The C&DI clarify under which circumstances a shareholder’s engagement with an issuer’s management would disqualify the shareholder from making reports on Schedule 13G. Generally, an investor with control intent files a Schedule 13D, whereas exempt investors and investors without a control intent, including qualified institutional investors and passive investors, file a Schedule 13G.

The Staff notes that, generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. However, Schedule 13G may be unavailable in cases where the shareholder discusses with management its voting policy on a particular topic, describes how the issuer fails to meet the shareholder’s expectations on such topic, and, in order to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.

The changes in guidance regarding 13G eligibility seems to indicate a view by the SEC that large asset managers or other institutional investors – who in recent years have leveraged their significant proxy voting power, including implicitly using their highly influential voting guidelines to influence corporate behavior – should not receive a presumption that their activities are wholly passive. This change in interpretive guidance suggests a general skepticism that these types of investors are not, in fact, passive investors and that their proxy voting and shareholder engagement activities are in reality the behaviors of active investors.

Notably, this C&DI does not squarely answer the question as to whether a shareholder that publishes voting guidelines or policies that clearly indicate how it would vote (arguably with the intention that such policies will lead to changes in behavior or reporting by an issuer) might cause that shareholder to lose its eligibility to report on Schedule 13G.

Furthermore, Question 103.11 removes certain categorical language that Schedule 13G filers previously relied upon when determining whether  a shareholder acquired or held securities with the purpose or effect of changing or influencing control of the issuer. The removed language was revised and moved to Question 103.12, as discussed above.

Please reach out to your Vinson & Elkins team to discuss the potential impacts of these developments on your company.