SEC as Arbiter: To Exclude or Not to Exclude Shareholder Resolutions, That Is the Question

Values-Aligned Investing
July 14, 2022

Every year, US shareholders file 400 to 500 resolutions that ask companies to address environmental and social (E&S) issues.1 If a company believes the shareholder resolution does not comply with procedural requirements or otherwise fits within an exception of Rule 14a-8 under the Securities Exchange Act of 1934, it requests a no-action letter2 from the US Securities and Exchange Commission (SEC), copying the filing shareholder.

As a result of recent changes to its policies, the SEC has permitted companies to exclude resolutions from their proxy statements only 19% of the time3 this season, compared with 43% to 54% over the past four years, according to research firm Sustainable Investments Institute.4

The SEC has historically permitted exclusion of shareholder resolutions because, for example, the resolution:

  • Deals with a matter relating to the company’s ordinary business operations (the “ordinary business” exception),5
  • Is relevant to less than 5% of the company’s total assets, or net earnings and gross sales, and is not otherwise significantly related to the company’s business (the “economic relevance” exception),6
  • Contains materially false or misleading statements in proxy soliciting materials prohibited under Rule 14a-9,7 or
  • Has been substantially implemented by the company.8

The rules leave a lot of room for interpretation. When the SEC publicly responds to a company’s request, it gives a short explanation, adding to our understanding of the rules. In the mid-2010s, the SEC took an expansive view of the “ordinary business” exception and excluded many resolutions on that basis.

Last fall, the SEC reversed course and published a Staff Legal Bulletin9 explaining a narrower approach to interpreting the ordinary business exception. The Commission announced that it will focus less on the nexus between an issue and the specific company and more on whether the resolution “raises issues with broad societal impact” such that they transcend the ordinary business of the company.10 The bulletin also clarified that resolutions can promote specific timelines or methods as long as resolutions do not “inappropriately limit discretion of the board or management.” This new staff guidance fits into a longer history of evolving and changing SEC interpretations that over decades might be described as a pendulum.

The new bulletin has opened opportunities for shareholders to present new resolutions to companies. Examples include:

  • Resolutions submitted to Citigroup Inc., JPMorgan Chase & Co., and Morgan Stanley asked each bank to produce audited reports ensuring their financing does not add to new fossil-fuel supplies. All three companies requested no-action letters from the SEC, but the SEC denied the requests.11 Previously, these resolutions would likely have been excluded.
  • A resolution submitted to CVS Health Corporation asked the company to adopt and publicly disclose a policy that all employees accrue some amount of paid sick leave as a standard employee benefit after working at CVS Health Corporation for a reasonable probation period. The company requested a no-action letter from the SEC, but the SEC denied the request.12 This resolution had been excluded via a no-action letter the previous year.

However, the SEC still agrees with companies’ arguments about ordinary business in certain instances:

  • A resolution submitted to American Express asked the company to disclose its employee-training materials or alternatively commission an audit of those materials’ impacts on civil rights and nondiscrimination. After the company requested a no-action letter, the SEC agreed that the company could exclude the resolution because it micromanaged by “probing too deeply into matters of a complex nature by seeking disclosure of intricate details regarding the company’s employment and training practices.”13
  • A resolution submitted to Goldman Sachs asked the company to commission and publish a study on the external costs created by underwriting multiclass equity offerings. The SEC agreed with the company’s request for a no-action letter, stating that the resolution “relates to, and does not transcend, ordinary business matters” and accordingly, appeared to determine that no issues were raised with a broad societal impact.14

E&S resolutions have continued to gain support from shareholders each year. In the period from July 1, 2020, through June 30, 2021, the average support rose to a record 34% of shares, and 36 resolutions passed with majority support (considering independent shares only, the support is even higher; large ownership stakes held by insiders at companies such as, Facebook, and Berkshire Hathaway likely prevented 19 additional resolutions from passing, according to Morningstar).15 In 2022, we are seeing a record number of E&S resolutions filed with companies—52916—including many new resolutions made possible by the SEC’s change in stance.

Multiple variables influence which resolutions ultimately land on proxy ballots, including SEC decisions and the rising support from institutional investors that can embolden advocates. With current trends, it may be reasonable to expect more resolutions that are even more ambitious next proxy season.

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2 If the SEC agrees with arguments presented by the company, the SEC may issue a no-action letter saying that it will not recommend enforcement action against the company if the company excludes the shareholder resolution from its proxy statement (which prevents a shareholder vote). For background on no-action letters, see “No Action Letters,” US Securities and Exchange Commission, Glossary.

3 This figure applies only to resolutions that companies sought to exclude.

4 Saijel Kishan, Mathieu Benhamou, and Jeff Green, “Investors Crank Up Pressure on Companies with Record Climate, Race Proxy Proposals,” Bloomberg, April 25, 2022.

5 Rule 14a-8(i)(7).

6 Rule 14a-8(i)(5).

7 Rule 14a-8(i)(3).

8 Rule 14a-8(i)10).

9 US Securities and Exchange Commission, “Shareholder Proposals: Staff Legal Bulletin No. 14L (CF),” November 3, 2021.

10 According to interviews with attorney Sanford Lewis conducted by the author, certain individuals in the SEC hold significant influence in shaping SEC responses to no-action letters. These include the Director of the Division of Corporate Finance, which is an appointed position.

11 For the SEC’s responses to these requests, see: (Citigroup Inc., March 7, 2022); (JPMorgan Chase & Co., March 25, 2022); and (Morgan Stanley, March 25, 2022).

12 See “CVS Health–Paid Sick Leave (2021),” Trillium Asset Management, September 9, 2021.

13 SEC response to American Express request for no-action letter, March 11, 2022.

14 SEC response to Goldman Sachs request for no-action letter, March 8, 2022.

15 Jackie Cook and Lauren Solberg, “The 2021 Proxy Voting Season in 7 Charts,” Morningstar Commentary, August 5, 2021.

16 As You Sow, “Proxy Preview 2022,” Press release, March 17, 2022.

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