KMK Law Corporate & Securities Blog

On October 16, 2019, the Division issued a bulletin providing guidance on certain issues arising under Exchange Act Rule 14a-8.  The bulletin addressed the “ordinary business” exception under Rule 14a-8(i)(7), which allows a company to exclude from its proxy statement certain proposals that “deal[ ] with a matter relating to the company’s ordinary business operations.” The applicability of the exception is based on (1) the subject matter of the proposal and (2) the degree to which the proposal involves the “micromanagement” of the company. A bulletin is not a rule, regulation or statement of the SEC and merely represents the view of the Division.

Regarding the first consideration of determining the applicability of this exception, the Division clarified its approach to provide that the focus should be on whether the proposal deals with a matter relating to the company’s ordinary operations or addresses a policy issue that goes beyond ordinary operations.  The Division will take a company-specific approach in determining the significance of a particular issue to a company, as opposed to classifying certain issues as universally significant. As such, documentation of a board of directors’ analysis and discussion of an issue’s significance will assist the Division in determining that a proposal may be excluded, including discussion of the factors outlined in SLB No. 14J, including the following:

• Whether the company has already addressed the issue in some manner, including the differences between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the difference presents a significant policy issue for the company; and
• Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results, and how the company’s subsequent actions, intervening events or other objective indicia of shareholder engagement on the issue bear on the significance of the underlying issue to the company.

Under the second consideration, the Division will review the proposal to see whether it seeks extensive detail or imposes a specific strategy, process or outcome, which would serve to bypass the judgment of management and the board and would support a determination that the proposal involves micromanaging. To support an assertion that a proposal should be excluded due to micromanagement, a company should include an analysis regarding “how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.”

The bulletin issued by the Division can be found here.