SEC Staff Begins Taking Steps to Reform Shareholder Proposals: Guidance Contemplates New Board of Director Involvement in the “Ordinary Business” and “Economic Relevance” Exclusions and Suggests the Staff Would Give the Board’s Conclusion a Degree of Deference; Also Establishes Procedural Requirements for Proponents to Designate Representatives and Allows Shareholders and Issuers to Use Images in Proposals

Sullivan & Cromwell LLP - November 3, 2017
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On Wednesday, the staff of the Division of Corporation Finance of the Securities and Exchange Commission issued new guidance on the shareholder proposal process:

  • For the Rule 14a-8(i)(7) “ordinary business” exclusion, the guidance states that the SEC staff will expect no-action requests to include a discussion of the company board’s conclusion that the underlying issue is not sufficiently significant to the company’s business to transcend ordinary business matters and suggests that the staff will give a degree of deference to a conclusion that is “well-informed and well-reasoned.”
  • For the Rule 14a-8(i)(5) “economic relevance” exclusion, the guidance expands the availability of the exclusion, clarifies that the burden is on the proponent to show that the proposal is significantly related to the company’s business, states that the SEC staff will expect a similar discussion of the company board’s analysis of the proposal’s significance and also suggests that the staff will give a degree of deference to the board’s conclusion.
  • The guidance confirms that shareholders may submit proposals through a representative but states that the SEC staff will now expect the proponent to identify its representative by name and confirm the representative’s authority to act at a specified shareholder meeting and on a specified proposal.
  • The guidance clarifies that shareholders and issuers may use graphics in their proposals, so long as the graphics otherwise comply with Rule 14a-8. The size of the graphics appears to be unlimited so long as the issuer’s graphics and proponent’s graphics are given equal prominence.