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At SEC, Ordinary Business Gets Unusual

The SEC calls it “ordinary business.” But lately, it hasn’t felt too usual.

On Oct. 16, the SEC Division of Corporation Finance, aka CorpFin, issued unofficial guidance in the form of a staff bulletin primarily addressing the ordinary business exception for shareholder proposals. The exception allows public companies to reject proposals that deal with “ordinary business problems,” which, as Rule 14a-8 clarifies, are within the exclusive domain of management and boards of directors.

In many cases, determining whether something qualifies as an “ordinary business problem” is very easy; at the margins, however, it’s a maddening task. You couldn’t blame the SEC—which has to make those calls in response to no-action-letter requests—from throwing up its hands at the endeavor. That’s just what it appeared to do in September, when it declared that (a) for some no-action requests, it would respond orally instead of in writing; and (b) for others, it wouldn’t respond at all. Some interpreted the SEC’s declaration as a Homer-Simpson-backing-into-the-hedges kind of move.

Which made it somewhat surprising when the SEC reemerged a month later, brushed some leaves from its shoulders, and issued Staff Legal Bulletin (SLB) 14K. Regardless, the bulletin offers up yet more (non-binding) insight into what, exactly, “ordinary business” is. One test is the “significance” of the issues at hand in shareholder proposals. The SEC has said that proposals go beyond ordinary business when they “transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”

Great, but it leaves the basic question unanswered: what makes an issue “so significant” that its ripe for a shareholder vote? That’s the rub: The new bulletin clarifies there is no universal standard of significance. Instead, significance should be evaluated relative to the situation at each individual company. What qualifies as significant at Company X may not qualify at Company Y. Therefore, the Staff would prefer to have a board’s analysis of whether the policy issue raised by the proposal is significant in relation to the company: “We also found the analysis helpful even in instances where we granted relief under Rule 14a-8(i)(7) but did not explicitly reference the board’s analysis in our response letter.”

Even that instruction, while helpful, still doesn’t explain how to demonstrate significance or lack thereof. SLB 14K encourages companies to show whether a policy issue in a shareholder proposal has already been addressed by the company and whether the differences in the new proposal make it significant. “In other words,” SLB 14K says, “have the company’s prior actions diminished the significance of the policy issue to such an extent that the proposal does not present a policy issue that is significant to the company?”

The SEC has also elaborated on “micromanagement” as grounds for excluding a proposal under the ordinary business exception. In effect, that boils down to the level of specificity prescribed by the proposal, per the new bulletin. A proposal asking for a report on if and how a company plans to reduce its total contribution to climate change to align its operations and investments with the Paris Climate Agreement probably could not be excluded as micromanagement; a proposal calling on a company to report annually on short-, medium- and long-term greenhouse gas targets pegged to align the company with the greenhouse gas reduction goals established by the Paris Climate Agreement probably could.

Of course, that’s a fine line. The harder, real-life calls are now, once again, being addressed delicately by the SEC.

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