SEC staff issues new SLB re shareholder proposals

By Cydney Posner

The SEC has posted a new staff legal bulletin regarding Rule 14a-8 shareholder proposals, SLB 14E. The bulletin addresses the application of Rule 14a-8(i)(7) to proposals relating to risk and to proposals focusing on CEO succession planning, reversing prior staff positions that permitted exclusion of these proposals. As a result, more shareholder proposals relating to risk-related social policies and financial risk may find their way into company proxy statements. The bulletin also provides information regarding notification of the staff when proponents or companies will be submitting correspondence in connection with a no-action request.

Proposals related to risk

The staff have developed a new framework for the analysis of proposals related to environmental, financial or health risks under Rule 14a-8(i)(7). Under the prior analysis, the staff looked at whether the proposal and supporting statement as a whole related to the company's engagement in an internal evaluation of risk, which the staff viewed as matter relating to a company's ordinary business operations, or to minimizing or eliminating operations that may adversely affect the environment or the public's health, which the staff viewed as a matter of policy. To the extent the proposal involved an internal assessment, the staff permitted exclusion of the proposal, and to the extent it was a policy-related proposal, the company was not permitted to exclude it. However, companies increasingly sought to exclude proposals on the basis that, no matter what the subjects, they required an evaluation of risk, and the line between the two types of proposals became increasingly unclear. In addition, the staff have increasingly recognized the significance of adequate risk management and oversight. In essence, the staff now views the prior analysis as one elevating form over substance.

Under the new analysis, the staff will instead focus on whether the underlying subject matter that gives rise to the risk evaluation involves a matter of ordinary business to the company. Where the proposal's underlying subject matter raises policy issues of sufficient significance to be appropriate for a shareholder vote, the proposal generally will not be excludable under Rule 14a-8(i)(7) as long as a sufficient nexus exists between the nature of the proposal and the company. Conversely, where the subject matter involves an ordinary business matter, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed, the proposal generally will be excludable under Rule 14a-8(i)(7). In making this determination, the staff will generally apply the same standards applied to other types of proposals under Rule 14a-8(i)(7), such as those requesting preparation of a report, formation of a committee or inclusion of disclosure in an SEC document. The staff also specifically notes that there is "widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation. In light of this recognition, a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote."

Proposals related to CEO succession

The staff has recently seen an increased incidence of proposals that the subject company adopt and disclose detailed CEO succession planning policies, including requirements that the board develop criteria for the CEO position, identify and develop internal candidates, and use a formal assessment process to evaluate candidates. Previously, the staff permitted exclusion of these proposals on the basis that they related to the termination, hiring or promotion of employees, which has historically been viewed as an ordinary business matter

. However, the SEC has also historically allowed that some proposals relating to ordinary business matters may involve significant policy issues and thus transcend day-to-day business matters. Because CEO succession planning is a key board function that is important to governance of the corporation, the staff have now concluded that CEO succession planning is one of those matters that transcends ordinary business. As a result, the staff will now take the position that companies generally may not rely on Rule 14a-8(i)(7) to exclude proposals that focus on CEO succession planning.

Submission of correspondence

If companies or shareholder proponents intend to submit correspondence in connection with a no-action request, they are encouraged to contact the staff, providing expected dates of submission, so that the staff can review the correspondence prior to issuing no-action responses. Companies and shareholder proponents can either call the staff at (202) 551-3500 or e-mail them at shareholderproposals@sec.gov to provide notice. If shareholder proponents intend to reply to companies' no-action requests, they should try to send their replies as soon as possible after the submission of the no-action requests.