November 3, 2021
Today the Securities and Exchange Commission issued a Staff Legal Bulletin that will reduce costs and uncertainties associated with filing of shareholder proposals, allowing proponents of proposals that address important environmental, social and governance issues to file proposals under a clear set of rules as established by the Commission.
During the last four years, through informal staff rulings and Staff legal bulletins 14 I, J and K the interpretive guidance from the Staff had grown increasingly burdensome, laying down numerous problematic new interpretive hurdles to successfully filing proposals. Director of the Shareholder Rights Group, Sanford Lewis noted that the Staff interpretations over the last four years increasingly deviated from the rules as articulated by the Commission.
For example, prior Staff interpretations expanded the concept of micromanagement to effectively preclude advisory proposals asking a company to adopt a particular strategy, such as establishing greenhouse gas reduction targets aligned with net zero or the Paris Agreement.1 The new Staff Legal Bulletin 14 L restores the prior position expounded by the Commission which is based on whether the proposal is overly granular in its requests for action. In particular, the new Bulletin noted the climate change proposals that were excluded under the prior interpretation.
The new Staff interpretation swept away complicated rules about determining whether a proposal is significant to a company, and replaced them with requirements under the ordinary business rule and relevance rules that look to whether the proposal addresses an issue of significant societal impact. If a proposal addresses such an impact, it likely transcends ordinary business and is relevant to the company as “otherwise significantly related to the company’s business.”
In sweeping away the Staff legal bulletins of recent years, the new bulletin also eliminated the need for companies to submit board opinions to support an ordinary business or relevance challenge, and eliminated additional tests regarding whether a proposal is “significant to a company.”
We congratulate the Commission and staff for the new bulletin which will empower shareholders to pursue ESG proposals at their companies. ESG issues affect long-term value as well as posing externalities that may otherwise affect portfolio values. The new Staff Legal Bulletin is a laudable move by the SEC that should reduce costs and uncertainties for shareholder proponents as well as companies.
1 The climate proposals that were allowed to be excluded in the prior administration involved advisory proposals asking a company to develop greenhouse gas targets aligned with particular external policy or scientifically designated goals, e.g. net zero by or alignment with the Paris agreement temperature goals. e.g., PayPal Holdings Inc. (March 6, 2018), Deere & Company (December 27, 2017), Apple Inc. (December 21, 2017), Verizon Communications Inc. (March 6, 2018), Apple Inc. (December 5, 2016), Amazon.com, Inc. (March 6, 2018). The staff decisions asserted that the proposals were "probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment."