In a move that could considerably alter the landscape of corporate governance, the U.S.Securities and Exchange Commission (SEC) has issued new guidance that may make it easier for public companies to exclude shareholder proposals from their proxy statements.The SEC’s Division of Corporation Finance released Staff Legal Bulletin (“SLB”) 14M on February 12, 2025, providing clarifications on the “economic relevance” and “ordinary business” bases for exclusion under Rule 14a-8. This guidance effectively reverts to the standards that were in place during the first Trump management, signaling a notable shift in the SEC’s approach to shareholder proposals.

The issuance of SLB 14M marks a departure from the more recent approach outlined in the now-rescinded SLB 14L. The new bulletin emphasizes a “case-by-case” analysis, requiring a focus on a company’s specific circumstances when evaluating shareholder proposals that raise crucial policy issues. This contrasts sharply wiht SLB 14L, which had been criticized for prioritizing issues with broad societal impact over their direct relevance to the company in question. The practical affect of SLB 14L was to make it more challenging for companies to exclude shareholder proposals, particularly those related to environmental and social topics.

The key changes introduced by SLB 14M can be summarized as follows:

• Reinstatement of previous guidance on “economic relevance” and “ordinary business” tests under Rule 14a-8, aligning with the approach during the first Trump administration.
• Guidance on the inclusion of board analyses in no-action requests.
• Frequently Asked Questions (FAQs) addressing the application of the new guidance for the current proxy season.
• Additional guidance on other aspects of Rule 14a-8.

Economic Relevance: Rule 14a-8(i)(5)

Rule 14a-8(i)(5), concerning “economic relevance,” allows a company to exclude a shareholder proposal if it “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business” (emphasis added).

SLB 14M reverts to the pre-SLB 14L standard, clarifying that weather a matter is “or else significantly related to a company’s business” depends on the company’s specific circumstances. What is significant to one company may not be to another. However, the Staff generally considers substantive governance matters to be significantly related to almost all companies.

If a proposal’s significance isn’t instantly apparent, the proponent must demonstrate its impact, showing it “may have a significant impact on other segments of the issuer’s business or subject the issuer to significant contingent liabilities.” Social or ethical issues can be raised, but they must be tied to a significant effect on the company’s business, considering the “total mix” of details about the issuer.SLB 14M also specifies that the Corporation Finance (Corp Fin) division will not refer to its analysis under the “ordinary business” rule (Rule 14a-8(i)(7)) when evaluating arguments under the “economic relevance” rule (Rule 14a-8(i)(5)).

Ordinary Business: Rule 14a-8(i)(7)

Rule 14a-8(i)(7), the “ordinary business” exclusion, permits a company to exclude proposals dealing with matters relating to its ordinary business operations. The SEC’s policy underlying this exclusion rests on two key considerations: the significance of the proposal’s subject matter and the degree to which the proposal “micromanages” the company.

Subject Matter

Proposals related to a company’s “ordinary” business operations are generally excludable, unless they “raise…policy issues so significant that it would be appropriate for a shareholder vote” and thus “would transcend the day-to-day business matters.” SLB 14M reaffirms a company-specific approach in evaluating significance, considering “factors such as the nature of the proposal and the circumstances of the company to which it is indeed directed,” rather than focusing solely on broad societal impact. A policy issue significant to one company may not be significant to another.

Micromanagement

Rule 14a-8(i)(7) also allows companies to exclude proposals that “micromanage” the company. This analysis focuses on the manner by which a proposal seeks to address a subject and may apply “where the proposal involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”

SEC’s New shareholder Proposal Guidance: A Game Changer for Corporate governance?

The SEC’s recent shift in policy regarding shareholder proposals has sent ripples through the corporate world. Is this a necessary recalibration or a step backward for investor rights?

To understand the implications, consider this exchange:

Editor: The SEC’s new Staff Legal Bulletin 14M has significantly altered the landscape for shareholder proposals. Can you explain the core changes introduced by this bulletin and how they impact companies and shareholders?

Expert: Absolutely. SLB 14M represents a significant departure from the previous approach outlined in SLB 14L. The key change is a reinstatement of stricter standards for excluding shareholder proposals under Rule 14a-8, especially regarding the “economic relevance” and “ordinary business” tests. This means companies now have more leeway to exclude proposals deemed less directly relevant to their core operations. For shareholders, this might reduce the impact of proposals focused on broader social or environmental concerns, unless a strong link to the company’s financial performance can be established. This ultimately shifts the balance slightly in favor of the company’s board in managing these types of proposals.

The bulletin frequently mentions “economic relevance.”

Editor: How does the SEC define this concept, and what does this mean for companies evaluating shareholder proposals?

Expert: SLB 14M clarifies that the “economic relevance” test (Rule 14a-8(i)(5)) considers whether a proposal relates to operations accounting for less than 5% of a company’s total assets, net earnings, and gross sales and is not otherwise significantly related to the company’s business. The emphasis here is on the “significantly related” clause. The bulletin emphasizes a case-by-case analysis, recognizing that significance varies between companies. For instance, what might be a minor concern for a large multinational might be crucial for a smaller, niche player. Though, the SEC generally categorizes substantive governance issues as significantly related to almost all companies.To exclude a proposal on economic relevance grounds,companies must demonstrate convincingly that the issue does not impact,or has immaterial impact on,their financial performance.

The “ordinary business” exclusion is another key area affected.

Editor: How does SLB 14M revise this standard, and what practical implications does it hold for companies?

Expert: The “ordinary business” exclusion (Rule 14a-8(i)(7)) allows companies to exclude proposals dealing with their ordinary business operations. SLB 14M clarifies that this hinges on two factors: the significance of the proposal’s subject matter, and whether the proposal functions as micromanagement. The significance is assessed on a company-specific basis,considering the proposal’s nature and the company’s circumstances. It emphasizes the importance of assessing whether the issue raises significant policy concerns that go beyond day-to-day operations. A proposal might be considered micromanagement if it contains excessive detail, imposes rigid timeframes, or seeks to dictate operational specifics. This shift brings a more nuanced assessment, moving away from a broad societal impact evaluation which may leave the assessment open to subjective interpretation.

So, what steps should companies take?

editor: What are some key practical steps companies should take to assess shareholder proposals under the new guidance?

Expert: Companies should:

• Conduct a thorough assessment: Evaluate each proposal for both “economic relevance” and “ordinary business” grounds for exclusion.
• Document their reasoning: Maintain detailed records of the analysis process, clearly explaining why a proposal falls under an exclusionary provision.
• Seek legal counsel: Consult with legal professionals specializing in securities law to ensure compliance and avoid potential challenges.
• Prioritize clear dialog: Engaging with shareholders proactively, even those whose proposals are ultimately excluded, is critical in preserving positive investor relations.

To sum up:

Editor: How would you summarize the overall impact of SLB 14M on the future governance of public companies?

Expert: SLB 14M represents a notable shift — a return to a more company-centric approach to evaluating shareholder proposals. While it strengthens the ability of some companies to manage the volume of proposals, it’s likely to increase legal challenges resulting from disagreements on the application of these exclusions. It is significant to note and emphasizes proactive engagement with shareholders and thorough due diligence in evaluating proposals, ensuring alignment with the revised standards.The long-term impact will depend on how these new rules are applied and interpreted in practice. The dialog between companies and shareholders will likely continue to shape the evolution of corporate governance in the coming years.