SEC's Division of Corporate Finance revises guidelines for shareholder proposals covering climate risks
On October 27, 2009, the SEC’s Division of Corporate Finance revised its guidelines regarding the grounds on which a public company can exclude from its proxy materials shareholder proposals relating to environmental, financial or health risks, including those seeking disclosure of climate-related risks. Issued as part of Staff Legal Bulletin No. 14E (CF) (“SLB 14E”), the revised guidance seeks to address the Division’s concern that the existing analytical framework may have led to the “unwarranted exclusion” of proposals related to an evaluation of risk – formerly seen as an aspect of ordinary business operations and therefore excludable under Rule 14a-8(i)(7) – but which focus on “significant policy issues.”
Going forward, the Division will examine the “nexus” between the nature of the proposal and the company and whether the proposal’s underlying subject matter “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.” Where the nexus is sufficient and the proposal raises such policy issues, the proposal generally will not be excludable under Rule 14a-8(i)(7). The Division also highlighted the board of directors’ oversight of corporate risk management, noting that a proposal focusing on the board’s role in overseeing a company’s management of risk may also “transcend the day-to-day business matters” and raise significant policy issues meriting a shareholder vote.
Rule 14a-8 under the Securities Exchange Act of 1934 permits shareholders to submit proposals for inclusion in a public company’s proxy statement, and also describes categories of proposals that a company may exclude from its proxy statement. Rule 14a-8(i)(7), for example, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” Under the prior guidelines, established in Staff Legal Bulletin No. 14C (CF) (June 28, 2005), where a proposal focused on a company undertaking an internal assessment of risks and liabilities arising from its operations, the Division permitted the company to exclude the proposal under Rule 14a-8(i)(7) as relating to an evaluation of risk, which the Division viewed as relating to the company’s ordinary business operations. Companies were not permitted to exclude proposals, on the other hand, focused on minimizing or eliminating operations that could adversely affect the environment or the public’s health.
Shareholder and environmental activists have hailed the new guidelines as a victory. Mindy Lubber, president of Ceres, a coalition of institutional investors and environmentalists, praised the guidelines for “strik[ing] the right balance of ensuring that resolutions about critical matters reach company shareowners, without opening the floodgates to proposals of more questionable significance.” Ceres and the Ceres-coordinated Investor Network on Climate Risk (“INCR”) have actively campaigned for the guideline change announced in SLB 14E; in a June 14, 2006 letter to then-SEC Chairman Christopher Cox, for example, INCR renewed earlier requests by INCR investors that SEC staff revise its interpretation of Rule 14a-8’s “ordinary business” exclusion to require inclusion of proposals seeking disclosure of financial risks due to climate change.
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