Securities Law Advisory | SEC Publishes New Guidance on the “Economic Relevance” and “Ordinary Business” Shareholder Proposal Exclusions and Updated Shareholder Proposal Procedure Recommendations

On February 12, 2025, the staff of the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance published Staff Legal Bulletin No. 14M (CF) (SLB 14M), providing updated guidance for companies seeking to exclude shareholder proposals from proxy statements on the basis of the “economic relevance” and “ordinary business” exclusions.

Under the new guidance, shareholder proposals can once again be excluded under the “economic relevance” exclusion if they relate to operations accounting for less than 5% of the company’s assets, sales, and earnings, regardless of other factors. Additionally, the “ordinary business” exclusion will now be applied using a company-specific approach with a focus on the nexus between a company’s business and a given shareholder proposal.

SLB 14M also broadens the definition and application of “micromanagement” as a basis for exclusion, allowing additional metrics companies can apply to argue for excludability, and provides the SEC staff’s current view on certain procedures related to shareholder proposals and no-action letter requests.

Rescission of SLB 14L

In November 2021, the staff published Staff Legal Bulletin No. 14L (SLB 14L), which, among other things, drastically limited the application of exclusions related to economic relevance and ordinary business. SLB 14L was accompanied by the SEC’s tightening of standards related to the submission of no-action requests, which led to a significant decline in successful no-action requests and a surge in shareholder proposals.

SLB 14M rescinds SLB 14L. In some instances, the staff has already begun to depart from the themes of SLB 14L in practice, allowing for the exclusion of an increasing number of shareholder proposals in recognition of the spike in shareholder proposals as a result of SLB 14L. SLB 14M formalizes this approach and largely reinstates the traditional administration of shareholder proposals and no-action letter requests.

“Economic Relevance” Exclusion

Under the “economic relevance” exclusion, set forth in Rule 14a-8(i)(5), a company 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.”¹

A company’s successful exclusion of a proposal under this rule often hinges on whether the proposal is “otherwise significantly related to the company’s business.” Substantive corporate governance matters are generally considered significantly related. However, when a proposal’s significance is not apparent, it may be excludable unless the proponent demonstrates that it is “otherwise significantly related to the company’s business.”²

In considering this standard, the staff weighs the “total mix” of information on the company. SLB 14M restates prior SEC guidance that proponents can demonstrate the significance, for example, where a proposal (1) has a significant impact on other segments of the company; or (2) subjects the company to a significant contingent liability.³ However, social or ethical issues raised by the proponent must have a significant effect on the company’s business, rather than the possibility of reputation or economic harm.

“Ordinary Business” Exclusion

Under the “ordinary business” exclusion, set forth in Rule 14a-8(i)(7), a company may exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” SLB 14L applied a blanket approach to this exclusion, focusing on whether a proposal raised issues with a “broad societal impact, such that they transcend the ordinary business of the company.” SLB 14M reinstates the approach used before SLB 14L, which applies a company-specific analysis, implemented via the “nexus” standard, which considers the nexus between a proposal’s subject matter and the company’s business. No-action requests and shareholder proposals will be assessed on a case-by-case basis.

Micromanagement

The “ordinary business” exclusion as set forth in SLB 14M reinstates previous guidance regarding the exclusion of shareholder proposals that are found to “micromanage” a company. The current guidance returns the focus to the prescriptiveness of a proposal, as opposed to its granularity or the degree to which it inappropriately limited the discretion of the board. Examples of ways the staff may apply this exclusion include:

• Proposals effectively requiring the company to adopt a specific method for implementing a complex policy may be excludable.
• If a proposal calls for a study or report, the staff will consider the underlying substance of the matters.
• Proposals relating to senior executive and/or director compensation may still be deemed to micromanage a company and thus be excludable.
• Proposals involving intricate detail, or that seek to impose specific time frames or methods for implementing complex policies, may be excludable.

Application to previously submitted no-action requests

We note that many companies have already submitted no-action requests before this guidance was issued. SLB 14M will be applied to no-action requests in the current season, including those already submitted. Given the more permissive nature of the current guidance regarding the “ordinary business” exclusion, there is likely no need to resubmit any requests already submitted unless a company wishes to raise new legal arguments. The staff will consider the guidance in place at the time it issues a response.

If a company believes that a new no-action request may now be viable due to the publication of SLB 14M but the deadline to submit a request has passed, the staff will consider the publication of SLB 14M to be “good cause” within the meaning of Rule 14a-8(j) if it relates to legal arguments made by the new request, allowing for the company to submit a request later than 80 days before the company files its proxy statement.

Shareholder Proposal and No-Action Letter Procedural Updates and Recommendations

The staff confirmed that the use of graphics or images is permissible in shareholder proposals but would be excludable if the total number of words in a proposal (including words in graphics or images) exceeds 500. SLB 14M also states that the SEC acknowledges the potential abuse regarding the graphics and images policy in shareholder proposals, and that such graphics may be excludable under other provisions of Rule 14a-8, such as making the proposal materially false or misleading or rendering the proposal inherently vague or indefinite under Rule 14a-8(i)(3).

A board analysis is no longer encouraged in no-action requests. Prior SEC staff guidance recommended that companies include a discussion of their board’s analysis of the policy issue raised and its significance to the company with no-action requests. The staff no longer expect such analysis in a no-action request; however, companies may continue to submit a board analysis if it determines it would assist the staff in considering the no-action request.

SEC staff provide suggested language for a proponent to prove the requisite ownership of shares under Rule 14a-8(b). SLB 14M provides proponents with formulaic language to meet the Rule 14a-8(b) requirement but reminds companies that such formulation is neither mandatory nor the exclusive means to demonstrate the requisite ownership under Rule 14a-8(b).

SLB 14M recommends that proponents and companies follow certain best practices related to shareholder proposal email correspondence. The staff acknowledges that proponents and companies frequently use email communications for correspondence related to shareholder proposals. The staff encourages companies to provide an email address for proponents to submit shareholder proposals, upon request by a proponent, and to acknowledge receipt of email communications if the proponent requests such acknowledgment. If companies use email to deliver deficiency notices to proponents, companies are encouraged to request receipt and confirmation, since the burden is on the sender to prove timely notice of delivery in any dispute.

Furthermore, since the SEC has not adopted proposed amendments to Rule 14a-8(i)(10), Rule 14a-8(i)(11), and Rule 14a-8(i)(12), the SEC’s operative rules and staff guidance apply to all no-action results and related correspondence.

Endnotes

1. See Release No. 34-19135 (Oct. 14, 1982).
2. See Release No. 34-39093 (Sept. 18, 1997).
3. See Release No. 34-19135 (Oct. 14, 1982).

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