Today is Part 2 of our 4-part series on what ESG professionals and CSOs need to know about proxies and shareholder proposals in advance of the 2024 proxy season.
Limitations on Shareholder Proposals
SEC rules on proxies and shareholder proposals provide some limitations. Public companies can exclude shareholder proposals from proxy statements based on arguments including ordinary business, economic relevance, substantial implementation, duplication and resubmission:
- Ordinary business: Companies may exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” One aspect of ordinary business is whether the proposal constitutes “micromanagement” – when a proposal probes “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.”
- Economic relevance: Companies may exclude a shareholder proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” Importantly, the SEC recently determined that proposals raising issues of broad social or ethical concern of the company’s business may not be excluded, even if these economic thresholds are not met.
- Substantial implementation: Companies may exclude a shareholder proposal that the company has already “substantially implemented.” This avoids having to consider matters which have already been acted upon. For example, companies that already disclose DEI metrics may be allowed to exclude a proposal to conduct a DEI audit to determine the company’s racial diversity status.
- Duplication: Companies may exclude a shareholder proposal that “substantially duplicates” another proposal previously submitted by another proponent that will be included in the company’s proxy materials for the same annual meeting. This is intended to avoid having to consider two or more substantially identical proposals.
- Resubmission: Companies may exclude a shareholder proposal that addresses “substantially the same subject matter” as a proposal previously included in proxy materials within the past five years – as long as the matter was voted on at least once in the last three years and the vote did not meet certain thresholds.
A company seeking to exclude a shareholder proposal must set forth its reasons in a request for a “no-action” letter submitted to the SEC’s Division of Corporation Finance no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission. The purpose of this letter is to seek assurance from the SEC’s staff that they will not recommend an enforcement action against the company if it omits a proposal based on one of these exclusions (“no-action relief”).
A relatively uncommon approach was tested by ExxonMobil to stop shareholders from filing climate-related proposals that ask the company to set targets to reduce greenhouse gas emissions related to the use of oil and gas. The company sued Arjuna Capital and Dutch activist investor Follow This, claiming that the two groups’ constant filing of climate proposals is an attempt to use the proposal process to “micromanage” their business, which is against SEC rules. I’ll give updates on this in another blog.
Finally, because state corporate statutes provide shareholders with only limited authority, most shareholder proposals are advisory – they recommend, but don’t require, the board to take the desired action. Boards have discretion to decide whether or not to implement the proposal, even if the majority of shareholders support it. This is frequently the case with ESG matters.
More detailed information and member resources on proxies and shareholder proposals are available at TheCorporateCounsel.net (membership required). If you aren’t a member, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
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