Important Disclaimer SEC Provides New Guidance on Shareholder Proposals Related to Risk and CEO Succession November 17, 2009 On October 27, 2009, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14E (the SLB), which sets forth new guidance on whether shareholder proposals relating to risk or CEO succession planning may be excluded from proxy statements under Securities Exchange Act Rule 14a-8(i)(7) as matters "relating to a company's ordinary business operations." The SLB raises the bar for companies seeking to exclude shareholder proposals related to these matters, and likely will lead to an increase in the frequency of shareholder proposals relating to risk assessment and CEO succession planning. Risk-Related Proposals Under prior interpretive guidance set forth in Staff Legal Bulletin No. 14C with respect to environmental or public health shareholder proposals, shareholder proposals relating to risk evaluation could be excluded from a company's proxy statement if the Staff concluded that the proposal and supporting statement, viewed as a whole, involved an "internal assessment of the risks or liabilities that the company faces as a result of its operations. . . ." Under the SEC's new guidance, the Staff will focus on whether the subject matter of a risk-evaluation-related shareholder proposal "transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote." If this is the case, the proposal will generally not be excludable from a company's proxy statement under Rule 14a-8(i)(7) "as long as a sufficient nexus exists between the nature of the proposal and the company." Proposals implicating risk assessment still would be excludable under the ordinary business-exclusion policy set forth in Exchange Act Release No. 40018 (May 21, 1998). However, the ordinary business exclusion is relatively narrow, permitting the exclusion of shareholder proposals that either (1) relate to tasks "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" or (2) seek to "micro-manage" 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." Accordingly, under the Staff's revised approach, the ability of a company to exclude a risk-assessment-related shareholder proposal will be more constrained. CEO Succession Planning Proposals In the 1998 release, the SEC stated that "management of workforce, such as the hiring, promotion, and termination of employees" related to ordinary business matters. The Staff noted in the SLB that it previously viewed CEO succession planning proposals as falling within the area of hiring and promotion of employees, and that such proposals—with features including development of criteria for the CEO position itself, identification and development of internal candidates, and formal assessment of candidates—generally would be excludable from proxy statements on that basis. The SLB takes a different position. The Staff now considers CEO succession proposals to raise significant policy issues that generally will not be excludable from proxy statements under Rule 14a-8(i)(7). Companies contemplating exclusion of CEO succession planning proposals from their proxy statements should note, however, that the SLB's guidance only addresses the presumption set forth in the first factor of the 1998 release's analysis, discussed above, for exclusion under Rule 14a-8(i)(7). As a result, companies still will be able to invoke the second factor of the 1998 release if the nature of the particular CEO succession planning proposal seeks to "micro-manage" the succession planning process. Notice to the SEC regarding Shareholder Proposals The SLB encourages companies and shareholder proponents to call or email the Staff prior to submitting correspondence in connection with no-action requests, and to provide dates of the proposed submission of such correspondence, so that the Staff can review the correspondence in advance. Potential Implications Relating to Climate Risk Although the SLB applies to a host of risk-related issues (such as those pertaining to the environment, climate change, human rights, subprime lending, and health), the Staff's revised guidance appears to be, at least in part, a reflection of increased shareholder engagement on issues relating to the environment and climate risk. This past proxy season saw a total of 68 shareholder proposals related to the impact of corporate operations on the environment and public health, a marked increase from 27 such proposals just three years earlier. Moreover, institutional-shareholder support of climate-related shareholder proposals also has increased in recent years, with 6 of the 28 climate-related resolutions that went to a vote in 2009 receiving the approval of at least 30 percent of votes cast. One such proposal (regarding the adoption of greenhouse gas reduction goals by an Idaho utility) was approved, with a vote of 51.2 percent of votes cast. Proxy advisory firms, most notably RiskMetrics Group and Proxy Governance, Inc., also have been supportive of these proposals. In 2009, RiskMetrics and Proxy Governance supported approximately 75 and 53.6 percent, respectively, of such proposals that were submitted to a shareholder vote, although another advisory firm, Glass Lewis & Co., opposed all such proposals in 2009. RiskMetrics recently has increased its capacity to research climate and environmental risks through its acquisition of KLD Research & Analytics, Inc. For more information on the implications of Staff Legal Bulletin No. 14E for your company, please contact Warren de Wied, Robert G. O'Connor, Gavin McCraley, or any member of your Wilson Sonsini Goodrich & Rosati team. |