by: Sanford Lewis, General Counsel, Shareholder Rights Group
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Evaluation of SEC staff no action decisions on shareholder proposals from November 1, 2023 to May 1, 2024 demonstrates that the SEC has supported company requests for exclusion of proposals roughly 68% of the time. Companies sharply increased the number of requests filed with the SEC during the same period, with these two developments combining to produce a surge of exclusions.
The no action process is an informal review process through which the SEC Staff advises companies and their investors on whether the SEC Staff would likely recommend enforcement action if a company fails to include a submitted shareholder proposal on its annual proxy statement. The Staff "grants" the company's request if it finds some basis to agree with the company's arguments that the proposal is excludable under one of the elements of SEC Rule 14a-8, the shareholder proposal rule. It "denies" the request if it is unable to concur with the company's arguments. All told, this year the SEC Staff has nearly doubled the number of exclusions supported compared with 2023. The Staff marginally increased the proportion of the requests, but the large increase in exclusions is largely a result of an increase in the number of no action requests filed by companies. 259 no action decisions (granted, denied or withdrawn) were issued as of May 1, 2024. This compared with only 167 decisions at this point last year.
Withdrawals have continued at a similar rate of 22% of requests. So far this year, 56 challenged proposals have been withdrawn - compared with 32 withdrawn last year at this time. Of the remaining shareholder proposals after withdrawals, the staff has granted no action requests for 139 proposals, compared with 76 proposals at this time last year. As a percentage of non-withdrawn proposals, 68% of exclusion requests were granted contrasted with 56% of exclusion requests last year.
We note that this year's exclusion rates are on par with the average exclusion rate in the prior administration, from 2017-2020 which was 69%.
*up to May 1, 2023/2024
Numerous climate proposals excluded as micromanagement
Climate-focused proposals on which the no action request was granted included those seeking a breakdown of greenhouse gas emissions by product category sold by companies like Walmart and Tractor Supply. In addition, proposals at Wells Fargo, Bank of America and Goldman Sachs, among other banks, sought disclosure of the proportion of sector emissions attributable to clients not aligned with a credible Net Zero pathway.
The proponents asserted that the disclosures sought by these climate related proposals would shed light on material shortcomings of the companies’ climate transition plans, of concern and interest to a significant portion of mainstream investors. Yet in each instance the SEC found that the proposal was too granular in its request, attempting to micromanage company activities.
Social proposals also excluded
A proposal at Delta Airlines Inc. sought disclosure of expenditures by companies to dissuade employees from joining or supporting unions (“union suppression”). The proposal included a request for disclosure of both internal and external expenditures made for union suppression, and details including “disclosure of the for-hire entities' identities, fees, hours, remits and work performed in relation to employee unionization and collective bargaining efforts, as well as other services they are hired to perform for the Company.” The Staff found some basis to agree with the company that the proposal attempted to micromanage.
The focus on micromanagement as a source of proposal exclusion also extended to proposals on paying employees a living wage. The Staff allowed exclusion of a proposal based on micromanagement of a proposal addressing living wage at Amazon. That proposal asked for an assessment of the extent to which the Company is complying with international human rights standards and assessing systemic risks stemming from growing income inequality and asked for the number of Amazon workers paid less than a living wage, broken down by full-time employees, part-time employees, and contingent workers with additional analytics on how much the aggregate compensation falls short of living wage. In contrast, proposals that asked the board to exercise its fiduciary duty to provide employees with a living wage were not found excludable under the ordinary business rule. In those proposals filed at Walmart and Target, the proponent addressed an important issue of societal impact and importance to diversified investors -- the impact on the whole economy due to failure to pay employees a living wage, placing additional burden on taxpayer funded social support programs.
A Telling Omission in No Action Requests: NO Challenges on Relevance
The no action process this year is also notable for the requests that are not being filed by companies. There has been a repetitive and misleading narrative by company and trade association representatives that shareholder proposals are no longer required to be relevant to the companies receiving them. This is false – Rule 14a-8(i)(5) provides that a proposal can be excluded if it is irrelevant - when it neither addresses an issue affecting 5% of the company’s assets or profits, or is not "otherwise significantly related to the company's business operations." Despite the politicized claims regarding irrelevance, issuers are not filing challenges to proposals on this basis.
What conclusions can be drawn from the exclusions in 2024?
To the issuers and other market participants that have been critical of shareholder proposals, it should demonstrate that the SEC staff takes feedback from the market in its exclusion decision-making, and that the process remains a functional system for screening proposals.
However, many of the proponents whose proposals were excluded had provided evidence that the proposal targeted a material issue for the receiving companies; exclusion of proposals often represents a serious setback for investors seeking to voice or vote upon critical matters of risk management or governance. Companies wishing to remain dynamic and responsive to their investors should consider the critical feedback and monitoring of potentially costly strategic shortcomings that is lost when a shareholder proposal is excluded.