On October 23, 2018, the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission issued Staff Legal Bulletin No. 14J (available here) (“SLB No. 14J”), which provides the Division’s latest views on the scope and application of the “economic relevance” exception (Rule 14a-8(i)(5)) and the “ordinary business” exception (Rule 14a-8(i)(7)) to shareholder proposals submitted under Rule 14a-8.  SLB No. 14J is a follow up to the Division’s Staff Legal Bulletin No. 14I (available here) (“SLB No. 14I”) issued in November 2017.  SLB No. 14I  included the Division’s then current views on the economic relevance exception and the ordinary business exception and noted that evaluating whether a proposal raises an issue that is “otherwise significantly related” to a company’s business, in the case of the economic relevance exception, or transcends ordinary business matters, in the case of the ordinary business exception, often raises difficult judgment calls that the Division believes the board of directors of a company is best suited to analyze. Therefore, to assist the Division with its review of these types of no-action requests, SLB No. 14I invited companies to include in their requests a discussion reflecting the board’s analysis of the particular issue raised by the proposal and its significance to the company.

SLB No. 14J, among other things, updates the Division’s guidance based upon its reviews of the board analyses received in no action requests relying on the economic relevance exception and the ordinary business exception.  The staff of the Division notes that “[t]he discussions we found most helpful focused on the board’s analysis and the specific substantive factors the board considered in arriving at its conclusion.”  The staff provided the following non-exclusive list of substantive factors that a board might consider in connection with the economic relevance exception and the ordinary business exception:

  • The extent to which the proposal relates to the company’s core business activities.
  • Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
  • Whether the company has already addressed the issue in some manner, including the differences – or the delta – between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company.
  • The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
  • Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
  • Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.

SLB No. 14J also addresses the application of the ordinary business exception to shareholder proposals that touch on executive and director compensation matters noting, among other things, that proposals that seek to micromanage executive and director compensation practices may be excludable.