A Shift in the Shareholder Proposal Review Process: Understanding New SEC Staff Legal Bulletin No. 14M

On February 12, 2025, the U.S. Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14M (SLB 14M), marking a significant shift in the regulatory landscape concerning the review of shareholder proposals under Rule 14a-8 of the Securities Exchange Act of 1934. This bulletin rescinds the previous Staff Legal Bulletin No. 14L (SLB 14L), which made it more difficult to exclude shareholder proposals based on “economic relevance” grounds under Rule 14a-8(i)(5) and “ordinary business” grounds under Rule 14a-8(i)(7). The staff’s new guidance reinstates a more flexible, company-specific analysis, ultimately providing public companies with greater latitude to exclude certain proposals from their proxy statements.

SLB 14L, issued in November 2021, imposed strict standards for excluding shareholder proposals, particularly those related to social or ethical issues. This led to a notable increase in the number of proposals submitted, as companies found it more challenging to exclude those proposals. SLB 14M is an effort to reverse this trend, restoring the previous framework that allows for a nuanced, case-by-case evaluation of proposals based on their relevance to a company's specific operations and circumstances.

Expanded Exclusions

Under Rule 14a-8(i)(5), the “economic relevance” exclusion permits companies to exclude proposals that pertain to operations accounting for less than 5% of the company's total assets, net earnings, and gross sales, provided they are not otherwise significantly related to the company's business. SLB 14M clarifies that proposals raising social or ethical concerns may be excludable if they do not significantly affect the company’s business. If a proponent wishes to present a social or ethical issue, it must be tied to a significant effect on the company’s business. The mere possibility of reputational or economic harm alone will not be sufficient. This marks a departure from SLB 14L, which suggested that such proposals could not be excluded solely based on their economic irrelevance. The significance of a proposal will be evaluated in light of the total mix of information about the company, allowing companies to argue for exclusion based on the specific context of their operations, rather than being bound by a broader societal impact criterion.

Similarly, SLB 14M strengthens the “ordinary business” exclusion under Rule 14a-8(i)(7), which allows companies to exclude proposals that deal with ordinary business operations. In applying this exclusion, the staff will use two criteria.

The first criterion is whether the matter is so fundamental to management’s ability to run the company on a day-to-day basis that it could not practicably be subject to shareholder oversight. While the SEC has indicated in the past that proposals relating to such matters but focusing on a significant policy issue generally are not excludable, SLB 14M indicates that the staff will instead now take a company-specific approach in evaluating significance. It is not sufficient that a policy issue is universally significant to be included.

The second criterion is whether a proposal micromanages a company’s operations or addresses matters fundamental to management’s daily responsibilities. To address this criterion, the SEC resurrected part of Staff Legal Bulletin 14K, which had earlier been rescinded. Under that guidance, a proposal framed as a request that the company consider, discuss the feasibility of, or evaluate the potential for a particular issue generally would not be viewed as micromanaging matters of a complex nature. However, a proposal that seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue would be viewed as micromanaging and would be excludable on that basis. This is a more expansive view of micromanagement.

Further Procedural Updates

In addition to clarifying substantive exclusions, SLB 14M addresses procedural matters related to shareholder proposals. It reiterates that companies are not required to send multiple deficiency notices for proof of ownership issues, simplifying the process for both companies and proponents. Furthermore, the bulletin encourages the use of email for proposal submissions and acknowledges the importance of confirming receipt to establish a clear communication trail.

Implications for Public Companies

The implications of SLB 14M are significant for public companies navigating the current proxy season in that it restores a more permissive environment for excluding shareholder proposals, lending companies more power to control and streamline company management. The SEC staff has noted that company no-action requests now need not include a board analysis regarding a specific proposal exclusion and its significance to the company. Instead, the SEC will use the new rules as a framework to assess the proposal exclusion, regardless of supplemental evidence provided by the company. Additionally, companies that have previously submitted no-action requests can now reassess their positions in light of the new guidance. The SEC staff has indicated that they will consider the publication of SLB 14M as “good cause” for companies to submit late no-action requests if they are based on the new legal arguments presented in the bulletin.