The Securities and Exchange Commission (SEC) has proposed amendments to Rule 14a-8 that revise three of the thirteen existing bases for the exclusion of shareholder proposals from a publicly traded company’s proxy statement and will likely narrow the ability of companies to exclude shareholder proposals under that rule. These proposed revisions issued July 13, 2022, follow guidance issued by the SEC in November 2021 that narrows the ability of companies to exclude shareholder proposals under the ordinary business exception rule.
While these amendments will have broader impacts, these changes may have a significant impact on shareholder proposals related to environmental matters, especially considering current efforts by the SEC to strengthen greenhouse gas emissions reporting requirements.
Background
Rule 14a-8 under the Securities Exchange Act of 1934, as amended, provides a means by which shareholders can include in a company’s proxy materials proposals for consideration at the company’s annual shareholder meetings. Rule 14a-8 also sets forth the bases that companies may rely upon when requesting assurance (“no-action relief”) that the SEC staff will not recommend enforcement action if a company excludes a shareholder proposal submitted under Rule 14a-8 from its proxy materials.
Recently Proposed Amendments
The SEC proposed amendments do three things:
First, the proposed amendments specify that a shareholder proposal may be excluded if the company has already implemented the “essential elements” of the proposal. Currently, under Rule 14a-8(i)(10), a company can exclude a shareholder proposal that the company has already “substantially implemented.” With the proposed amendment, it is possible that the staff may defer to the shareholder’s assessment of what constitutes an “essential element” of a proposal.
Second, the amendments specify that a shareholder proposal “substantially duplicates” another proposal if it addresses the same subject matter and seeks the same objective by the same means. Currently, under Rule 14a-8(i)(11), the staff looks at whether a new proposal shares the same “principal focus” as an earlier submitted proposal. With this proposed amendment, unless the proposals are seeking exactly the same things, neither may be excludable as duplicative.
Third, the amendments provide that a shareholder proposal constitutes a “resubmission” if it duplicates a previously submitted proposal for the same company’s prior shareholder meeting(s). Currently, under Rule 14a-8(i)(12), a proposal is excludable if it deals with “substantially the same subject matter” as prior failed proposals. With the proposed revision, only proposals that “substantially duplicate” prior failed proposals would be excludable.
Each of these three revisions may further limit a company’s ability to exclude shareholder proposals from their proxy statements.
Prior Guidance
The proposed amendments follow previously released SEC guidance regarding the ordinary business exception exclusion, which permits a company to exclude a proposal that deals with a matter relating to the company’s “ordinary business operations.” Previously, under Rule 14a-8(i)(7), the SEC allowed companies substantial leeway to exclude shareholder proposals if they did not appear to raise a policy issue of significance for the company or if they appeared to micromanage the company by probing too deeply into complex matters upon which shareholders would not be in a position to make an informed judgment.
The November 2021 guidance issued by the SEC’s Division of Corporation Finance in Staff Legal Bulletin No. 14L (SLB 14L) in indicated a change in the SEC’s approach to this rule. Under SLB 14L, the staff will review requests for no-action relief based on the ordinary business exception with a view towards the broad societal impact of the issues raised by the proposal rather than the significance of a policy issue to a particular company. In addition, this SLB largely reversed the staff’s prior approach to micromanagement arguments by significantly narrowing their applicability.
As an example, in a recent SEC letter to the ConocoPhillips Company, staff denied the company’s no-action relief for a proposal that would require the company to set targets associated with the greenhouse gas emissions of the company’s operations and products. The SEC determined that, although the proposal requested that the company set emissions reduction targets, it did not impose a specific method for doing so and thus did not qualify as micromanagement.
This example is particularly relevant, as the SEC also recently proposed that companies who have set greenhouse gas emissions targets or goals that include Scope 3 emissions (emissions upstream and downstream in the company’s value chain) must publicly disclose those Scope 3 emissions, even if the emissions are from private companies.
Conclusion
The proposed amendments to Rule 14a-8 coupled with the previous guidance regarding the interpretation of the “ordinary business exception” rule could raise even more awareness and publicity with respect to environmental topics, including greenhouse gas emissions, possibly forcing shareholder votes on these matters more frequently. It is also possible that these amendments, coupled with the SLB 14L guidance, may make it more difficult for companies to exclude shareholder proposals requesting that companies set targets for greenhouse gas emissions, which may trigger public reporting requirements for Scope 3 emissions.
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