Issue link: https://digital.shearman.com/i/1019978
Shearman & Sterling LLP Shareholder Proposals 2018 – Was 14I Really a Game Changer? | 65 THE 2018 PROXY SEASON Prior to SLB 14I, the SEC staff took an active role in determining whether the subject matter of a proposal relates to a significant policy issue. While the SEC staff has not demarcated the boundaries of what is a significant policy issue (employing a "we know it when we see it" approach), past experience indicates that the SEC staff considered a number of factors, including the degree of public attention given to an issue, press and other media coverage and recent legislative or regulatory activity, which were adopted to support arguments used by companies and proponents. As a result, there is a well-developed body of specific issues, that has evolved on a proposal-by-proposal basis, that the SEC staff considers to be significant policy issues. In SLB 14I, the SEC staff indicated that it wanted to consider the During the 2018 proxy season (through June 30, 2018), 21 no-action letters 1 were decided on the "ordinary business" and/or "economic relevance" exceptions as the basis for exclusion, with 11 no-action letters 2 resulting in exclusion of the proposal in question. The following is a summary of our observations on these letters: perspective of a company's board as to whether the subject of a proposal transcends the ordinary business operations of a company, in the case of the "ordinary business" exclusion, or is significantly related to a company's business, in the case of the "economic relevance" exclusion. The SEC staff has admittedly struggled with these determinations over the years and in SLB 14I, it referred to these decisions as "difficult judgment calls." In SLB 14I, the SEC staff indicated that it believes a company's board is "well situated to analyze, determine and explain whether a particular issue is sufficiently significant." To that end, it indicated that going forward, when a company relies on either Rule 14a-8(i)(7) or 14a-8(i)(5) in a no-action relief request, the SEC staff would expect to see a discussion of the specific processes employed by the board to assess whether the issue transcends its ordinary business operations or if the issue is significantly related to its business. For "economic relevance" exclusions, the SEC staff indicated that going forward, proponents must demonstrate that the subject matter of the proposal was sufficiently related to a significant effect on a company's business and that the "mere possibility" of reputational or economic harm would not preclude no-action relief. Notably, the SEC staff emphasized that there is a presumption that substantive governance matters will be significant to almost all companies, which likely forecloses the possibility of using the "economic relevance" exclusion for corporate governance proposals. Virtually all of the companies involved discussed the proposal with the board or a board committee and disclosed the process and analysis performed by the board with respect to the policy issues raised by the subject of the proposal Exclusion under (i)(5) economic relevance/5% test is viable again, but not easy, and successful requests citing both (i)(5) and (i)(7) were mostly granted under (i)(7) Despite the stated intention in SLB 14I, the SEC staff has not really deferred to the determination of the board on policy issues, particularly in areas where the SEC staff historically has taken a consistent position on social policy issues, like political contributions and lobbying The SEC staff gave more weight to significant shareholder support in a prior shareholder vote on the same social policy issue than to any analysis and determination by the board The micro-management prong of (i)(7) as a basis for exclusion is alive and well 1 Apple Inc., SEC No-Action Letter (Dec. 21, 2017) (incoming letter Oct. 9, 2017); Apple Inc., SEC No-Action Letter (Dec. 21, 2017) (incoming letter Nov. 20, 2017); AmerisourceBergen Corp., SEC No-Action Letter (Jan. 11, 2018); Allergan plc, SEC No-Action Letter (Feb. 7, 2018); Dunkin' Brands Group, Inc., SEC No-Action Letter (Feb. 22, 2018); JPMorgan Chase & Co., SEC No-Action Letter (Feb. 28, 2018); Eli Lilly and Company, SEC No-Action Letter (Mar. 2, 2018); Citigroup Inc., SEC No-Action Letter (Mar. 6, 2018); Citigroup Inc., SEC No-Action Letter (Mar. 7, 2018); Goldman Sachs Group, SEC No-Action Letter (Mar. 12, 2018); Entergy, SEC No-Action Letter (Mar. 14, 2018); American Airlines Group Inc., SEC No-Action Letter (Mar. 23, 2018); JPMorgan Chase & Co. SEC No-Action Letter (Mar. 29, 2018); Alliant Energy Corporation, SEC No-Action Letter (Mar. 30, 2018); JPMorgan Chase & Co. SEC No-Action Letter (Mar. 30, 2018) (incoming letter Jan. 12, 2018, discussing report on risks with corporate lending); JPMorgan Chase & Co. SEC No-Action Letter (Mar. 30, 2018) (incoming letter Jan. 12, 2018, discussing human rights); NextEra Energy, Inc., SEC No-Action Letter (Mar. 30, 2018); Amazon.com, Inc., SEC No-Action Letter (Apr. 10, 2018); RH, SEC No-Action Letter (May 11, 2018); Red Hat, Inc., SEC No-Action Letter (June 12, 2018); Nike, Inc., SEC No-Action Letter (June 22, 2018). 2 See Apple Inc., SEC No-Action Letter (Dec. 21, 2017) (incoming letter Oct. 9, 2017); Allergan plc, SEC No-Action Letter (Feb. 7, 2018); Dunkin' Brands Group, Inc., SEC No-Action Letter (Feb. 22, 2018); JPMorgan Chase & Co., SEC No-Action Letter (Feb. 28, 2018); JPMorgan Chase & Co. SEC No-Action Letter (Mar. 30, 2018) (incoming letter Jan. 12, 2018, discussing report on risks with corporate lending); JPMorgan Chase & Co. SEC No-Action Letter (Mar. 30, 2018) (incoming letter Jan. 12, 2018, discussing human rights); Amazon.com, Inc., SEC No-Action Letter (Apr. 10, 2018); American Airlines Group Inc., SEC No-Action Letter (Mar. 23, 2018); RH, SEC No-Action Letter (May 11, 2018); Red Hat, Inc., SEC No-Action Letter (June 12, 2018); Nike, Inc., SEC No-Action Letter (June 22, 2018).