Monday, November 4, 2019
Micromanagement through Shareholder Proposals
I approached with some curiosity the Securities and Exchange Commission's recent shareholder proposal guidance in Staff Legal Bulletin No. 14J ("SLB 14J"). My interest in this topic stems from my past life as a full-time lawyer in private practice. During that time, I both wrote shareholder proposals and wrote no-action letters to the Securities and Exchange Commission ("SEC") to keep shareholder proposals out of corporate proxy statements.
In SLB 14J, the SEC clarifies its application of the "ordinary business" exception to the inclusion of a shareholder proposal under Rule 14a-8. Specifically, "[t]he Commission has stated that the policy underlying the 'ordinary business' exception rests on two central considerations. The first relates to the proposal’s subject matter; the second relates to the degree to which the proposal 'micromanages' the company." I want to share the SEC's guidance with you on the latter.
The idea of shareholders micromanaging most public firms is almost laughable. Yet, certain shareholder proposals do get somewhat specific in their direction of the firm and its resources.
In considering arguments for exclusion based on micromanagement, . . . we look to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. [A] proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages. . . .
This makes some sense to me, yet this guidance may not be as easy to apply as the SEC may think. Here is the SEC's example of an excludable proposal:
For example, this past season we agreed that a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius” was excludable on the basis of micromanagement. In our view, the proposal micromanaged the company by prescribing the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.
I am note sure how I feel about the characterization of this proposal as excludable. Is the described proposal about reporting or about "prescribing the method for addressing the reduction of addressing reduction of greenhouse gas emissions"? Well, maybe a little of each . . . . What do you think?
During my time in active, full-time law practice, the format and content of Rule 14a-8 changed a number of times. It appears that the SEC may be poised to make another change--one more fundamental than enhanced guidance. According to one recent report, the SEC may announce as early as tomorrow "changes . . . to make it harder for shareholders to file proposals, and harder for proposals to be eligible for re-filing in subsequent years." Stay tuned for that possible announcement.
[Note: All footnote references in the quotations used in this post have been omitted.]
Nice points, Brett. Thanks for noting them here. Certainly, this is an example of boundary setting in securities regulation.
I want to think about this some more, but the SEC's position is about more than disclosure, imv. It also narrows one of the few shareholder rights out there in the public company context: access to the proxy process to gauge shareholder support for matters of importance to the firm outside the ordinary course of its business operations. I am all for allowing the board to manage the corporation. But the type of line-drawing going on here does not seem to make sense to me as a matter of investor protection, market integrity maintenance, or capital formation encouragement, policy objectives of securities regulation . . . .
Posted by: joanheminway | Nov 5, 2019 7:54:51 PM
That climate change proposal is an example of an emerging mini-trend of allowing exclusion of such proposals. In talking with persons on both the investor and company side in the area, it seems pretty clear that climate change-related disclosure is most likely to have an impact the more it focuses on specific targets and how well a company is meeting such targets. But that is precisely the kind of proposal that most risks being excluded. This approach from the SEC is thus in serious tension with growing efforts to use securities disclosure to prod companies to do more to address climate change.
Posted by: Brett McDonnell | Nov 5, 2019 9:53:27 AM