The Securities and Exchange Commission is altering its process for reviewing whether a shareholder proposal should be excluded from a company's proxy statement.
In a legal bulletin issued Wednesday, the SEC's division of corporation finance rescinded its last three legal bulletins related to Exchange Act Rule 14a-8, which concerns shareholder proposals. Wednesday's bulletin also outlined changes in the division's views on what constitutes "ordinary business" and "economic relevance" when it determines whether a shareholder proposal should be excluded.
Specifically, SEC staff indicated that proposals "squarely raising human capital management issues with a broad societal impact" and proposals that request "companies adopt timeframes or targets to address climate change" are no longer likely excludable.
"We have found that focusing on the significance of a policy issue to a particular company has drawn the staff into factual considerations that do not advance the policy objectives behind the ordinary business exception," the SEC bulletin said. "We have also concluded that such analysis did not yield consistent, predictable results."
Proposals that the staff previously viewed as excludable because "they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable," the SEC noted, singling out human capital management issues.
In the past, the SEC staff has excluded proposals that requested companies adopt time frames or targets to address climate change on micromanagement grounds. Going forward, the SEC said it "would not concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals."
On "economic relevance," the shareholder proposals that raise issues of broad social or ethical concern related to the company's business may not be excluded, even if the relevant business falls below the economic thresholds. The "economic relevance" exception permits a company to exclude a proposal that "relates to operations which account for less than 5% of the company's total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business," the SEC noted.
Shareholders can file proposals prior to a company's annual meeting. If the proposal makes it onto the company's proxy statement, it gets voted on. If a company thinks a proposal is out of bounds or has already been addressed, it can file a no-action letter with the SEC, requesting permission not to include the proposal in its proxy statement.
Amy Borrus, executive director of the Council of Institutional Investors, said in an email that the bulletin "likely means more shareholder proposals on environmental and social topics will come to a vote at annual shareholder meetings next year."
The SEC's two Republican commissioners, Hester M. Peirce and Elad L. Roisman, criticized the bulletin in a statement and said it "furthers the recent trend of erasing previous commissions' and staffs' work and replacing it with the current commission's flavor-of-the-day regulatory approach."