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24 December 2018
On the heels of the release of SLB 14J, Corp Fin has posted a couple of new no-action letters that shed some more light on the "ordinary business" exclusion of Rule 14a-8(i)(7). As you may recall, in SLB 14J, the staff addressed the nature of the board analysis the staff would find most "helpful" in evaluating a no-action request to exclude a shareholder proposal under Rule 14a-8(i)(7), as well as "micromanagement" as a basis for exclusion under that same Rule. Most impressive is that, in the response letters, the staff actually includes a sentence or two that provides some insight into the staff's reasoning. If you recall, a request for more clarity from the staff was one of the comments raised at the SEC's proxy roundtable, and the staff appears to have heard. (See this PubCo post.) Both of the letters were submitted in connection with proposals to Walgreens Boots Alliance.
Under Rule 14a-8(i)(7), a company is permitted to exclude a proposal that "deals with a matter relating to the company's ordinary business operations." That's because the resolution of these types of matters is considered to be more properly the province of management and the board of directors than of the shareholders. In an earlier staff legal bulletin, SLB 14I, the staff explained that the ordinary business exception is based on "two central considerations": the extent to which the proposal "micromanages" the company as well as the "subject matter" of the proposal.
Generally, proposals may be excluded under Rule 14a-8(i)(7) if they "raise matters that are 'so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,'" unless, that is, the "significant policy exception" applies. That exception would preclude exclusion of the proposal if the proposal focuses on policy issues that are so significant that "they transcend ordinary business and would be appropriate for a shareholder vote. Whether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company's business operations." SLB 14I advised that whether a policy issue is sufficiently significant to fall under the exception
"often raise[s] difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine. A board of directors, acting as steward with fiduciary duties to a company's shareholders, generally has significant duties of loyalty and care in overseeing management and the strategic direction of the company. A board acting in this capacity and with the knowledge of the company's business and the implications for a particular proposal on that company's business is well situated to analyze, determine and explain whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote."
As noted above, SLB 14I introduced a new element into the no-action request: in light of the difficult judgment calls involved, the staff "would expect a company's no-action request to include a discussion that reflects the board's analysis of the particular policy issue raised and its significance. That explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned." (See this PubCo post.)
In this past proxy season, a number of companies submitted no-action requests that, consistent with SLB 14I, included a discussion of the board's analysis, but, for the most part, without successfully persuading the staff to agree with a request for exclusion of the proposal. As a result, there was some question about the value of providing the analysis.
In SLB 14J, the staff offered guidance on ways to provide board analyses that might be more "helpful." In that guidance, the staff advised that board discussions were not as "helpful" where they did not describe the specific factors considered by the board, but were instead just conclusory or simply described the processes followed by the board—apparently notwithstanding SLB 14I's advocacy of analyses that "detailed the specific processes employed by the board." In contrast, the discussions that the staff "found most helpful focused on the board's analysis and the specific substantive factors the board considered in arriving at its conclusion [emphasis added]." In addition, the staff indicated that, although the "absence of a board analysis will not create a presumption against exclusion… without having the benefit of the board's views on the matters raised, the staff may find it difficult in some instances to agree that a proposal may be excluded. This is especially the case where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident and that the board may be well-positioned to consider and evaluate. Likewise, the presence of a board analysis will not create a presumption of exclusion." As discussed in this Pubco post, SLB 14J then outlined the types of "specific substantive factors" that the staff expected to see discussed "in sufficient detail" in a "well-developed discussion," including factors such as the extent to which the proposal relates to the company's core business activities, and quantitative data, including financial statement impact, that illustrate whether or not a matter is significant to the company.
In the first letter, proponent Mercy Investment Services had submitted a proposal requesting that the board provide a report to shareholders describing the corporate governance changes the company had implemented since 2012 to more effectively monitor and manage financial and reputational risks related to the opioid crisis. Among other things, the company contended that, because the underlying subject matter of the requested report related directly to the determination of the particular products the company should or should not offer, the proposal was excludable as ordinary business. Decisions regarding the sale of pharmaceutical products is complex, the company maintained, and, if the company failed "to offer an entire category of lawful, FDA-approved and highly regulated products (such as opioids) that meet the clinical needs of patients who use them as directed by their physicians," the company could lose those patients and Medicare plans or be denied preferred status within those plans. In addition, the company pointed out the staff's distinction between a manufacturer's production and sale of a particular product, which may implicate significant policy considerations because of the nexus between the manufacturer's operations and the proposal, and a retailer's sale of a product, which, according to the company, the staff has indicated does not have such a nexus or implicate significant policy considerations. That is, even if the proposal focuses on a significant social policy issue, the company contended, there still must be "a sufficient connection between such policy issue and the company's operations," which was not present in this instance.
The proponent contended that the proposal did not seek to control the company's decisions about product purchases and sales, but instead is focused on prior actions taken and "on corporate governance reforms, with the goal of better informing shareholders about Walgreens' management of risks associated with selling these powerful drugs." Most importantly, the proponent said, the opioid abuse epidemic is a significant social policy issue for the company that transcended ordinary business, making exclusion inappropriate. In addition, as a distributor in addition to a retailer, the company had a sufficient nexus to that significant policy issue, especially in light of potential liabilities related to sale and distribution of opioids. Interestingly, notwithstanding the staff's position in the SLBs regarding the value of a board analysis—perhaps because of the past failure of these analyses to favorably impact the staff's determinations and the timing of the initial no-action request relative to the date of issuance of the new guidance under SLB 14J—the company did not provide a board analysis.
Nevertheless, the absence of a board (or other) analysis of the significance of its opioid dispensing and prior distributing operations was the key factor cited by the staff in denying relief. The staff advised that it was
"unable to conclude that this particular proposal is not sufficiently significant to the Company's business operations such that exclusion would be appropriate. The information presented includes neither a board analysis nor other analysis addressing the significance of the particular proposal to the Company's business operations. Specifically, the Company discussion does not review the significance of its dispensing (or prior distribution activity) of opioid products. As explained in Staff Legal Bulletin No. 14J (October 23, 2018), 'without having the benefit of the board's views on the matters raised, the staff may find it difficult in some instances to agree that a proposal may be excluded,' which is 'especially the case where the significance of a particular issue to a particular company and its shareholders may depend on factors that are not self-evident and that the board may be well-positioned to consider and evaluate.'"
As explained in SLB 14J, one of the central considerations of the "ordinary business" exception is the extent to which the proposal seeks to "micromanage" the company "by 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." Under this prong of the exclusion, the staff does not look at the subject matter, but rather "only to the degree to which a proposal seeks to micromanage." Excessive micromanagement could arise "where the proposal involves intricate detail, or seeks to impose specific timeframes or methods for implementing complex policies."
In applying that framework, the staff has agreed to the exclusion of a proposal to "generate a plan to reach net-zero greenhouse gas emissions by the year 2030, which sought to impose specific timeframes or methods for implementing complex policies." Similarly, the staff has also granted no-action relief for the exclusion of a proposal seeking an intricately detailed study or report, including where the "substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies." The new SLB emphasizes, however, that "the staff's concurrence with a company's micromanagement argument does not necessarily mean that the subject matter raised by the proposal is improper for shareholder consideration. Rather, in that case, it is the manner in which a proposal seeks to address an issue that results in exclusion on micromanagement grounds."
In the second letter, the company had received a proposal requesting that shareholder approval be required prior to effectiveness of any new open market share repurchase programs or stock buybacks adopted by the board.
The company argued for exclusion as "micromanagement" under Rule 14a-8(i)7), contending that the proposal required "shareholder approval of each and every stock repurchase, including those made on a frequent, individualized basis (such as those made in connection with general employee compensation matters)." As a result, the effect was the same as if the terms were specified, which was a matter of the company's ordinary business. In addition, the company argued, the proposal sought to micromanage the company because "stock repurchase decisions involve substantial complexity and require consideration of numerous financial and other factors. Stockholders, as a group, would not be in a position to make an informed judgment on those matters in consideration of specific repurchase proposals that the Proposal would require." In addition, the company contended that the proposal was not a matter of basic policy: a proposal advocating a basic policy might seek shareholder approval "regarding generally whether a company should have stock repurchase programs. The Proposal, however, goes far beyond that matter of 'basic policy'; the Proposal, as described above, would subject every stock repurchase, and the terms thereof, to stockholder approval. Such a practice is not basic policy but micromanagement of the Company's business decisions."
The proponent, Myra Young, argued that the proposal related to a significant issue of public policy because of the current controversy regarding stock buybacks. Moreover, she maintained that the proposal did not involve micromanagement because it did not contain specific terms of any stock repurchase: the proposal was not to approve the terms of each buyback but rather "to request that 'new programs' involving 'open market share repurchase programs or stock buybacks' be approved by shareholders. A program of stock buybacks can obviously include more than one incidence of share buyback."
In response, the staff granted relief, agreeing that the company could exclude the proposal under the micromanagement prong of Rule 14a-8(i)(7): "In our view, the Proposal micromanages the Company. In particular, we note that the Proposal would make each new share repurchase program and each and every stock buyback dependent on shareholder approval. Accordingly, we will not recommend enforcement action to the Commission if the Company omits the Proposal from its proxy materials in reliance on rule 14a-8(i)(7)."
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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