Rule 14a-8(i)(5) — former Rule 14a-8(c)(5)

Question 9(5): Relevance: If the proposal 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.

§ 18.01 Background of the Exclusion

This exclusion permits a company to exclude a proposal if it relates to operations that account for less than 5% of the total assets of the company and for less than 5% of the company's net earnings and gross sales, and is not otherwise significantly related to the company's business. The last part of this exclusion means that a proposal may not be excluded, even if it fails to reach one of the specified 5% thresholds, if it otherwise bears a significant relationship to the company's business.

§ 18.01[A] History of the Exclusion

In 1952, the SEC adopted this exclusion's predecessor, former Rule 14a-8(c)(2), that allowed exclusion of proposals submitted "primarily for the purpose of promoting general, economic, political, racial, religious, social, or similar causes."[fn1] In 1972, the SEC decided not to consider the proponent's motive by removing the reference to "purpose," and clarified that the exclusion would apply even if the subject of the proposal was "other than a social, political, or economic cause."[fn2]

In 1976, the SEC eliminated reference to any specific "causes" because they were "superfluous and unnecessary." This was not meant to change the exclusion's substance. Under a new provision, Rule 14a-8(c)(5), this exclusion now permitted companies to omit proposals pertaining to matters "not significantly related to the issuer's business or . . . not within the control of the issuer."[fn3]

The SEC indicated that proposals that did not bear a significant economic relation to a company's business could be omitted. The SEC stated that "there are circumstances in which economic data may indicate a valid basis for omitting a proposal," but emphasized that "the significance of a particular matter to an issuer's present or future business depends on the issuer's individual circumstances, and that there is no specific quantitative standard that is applicable in all instances."[fn4]

Before 1983, the staff rarely — if ever — allowed the exclusion of proposals relating to general social or ethical concerns. However, the new wave of concern regarding social responsibility began to influence the SEC, so it sought a new approach to the formulation of this exclusion.

In 1983, the SEC added a quantitative test in an attempt to establish a more objective standard. The SEC noted that many commentators had objected to a proposed 1% test because it failed to consider various factors that may have a significant impact on a company, particularly if the company had a large sales volume. The new numerical test allowed companies to exclude proposals that related to operations amounting to less than 5% of gross assets, earnings and sales. However, the new test did not dictate a purely economic analysis because, even if the proposal failed the 5% test, it still would have to be included in the company's proxy materials if it was "otherwise significantly related to the issuer's business."[fn5]

Specifically, the SEC made clear that a "proponent could provide information that indicates that, while a particular corporate policy involves an arguably economically insignificant portion of an issuer's business, the policy may have a significant impact on other segments of the issuer's business or subject the issuer to significant contingent liabilities."[fn6]

In 1997, the SEC proposed to substitute a purely economic test in place of the current provision.[fn7] After receiving significant negative comment, the SEC decided not to adopt the proposal. However, the SEC did renumber Rule 14a-8(c)(5) as Rule 14a-8(i)(5) and made stylistic changes to the provision's wording in 1998.[fn8]

[fn1] Exchange Act Release No. 4775, 1952 SEC LEXIS 121 (Dec. 11, 1952).

[fn2] Exchange Act Release No. 9784, 1972 SEC LEXIS 155 (Sept. 22, 1972).

[fn3] Exchange Act Release No. 12,598, 1976 SEC LEXIS 1290 (July 7, 1976).

[fn4] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

[fn5] Exchange Act Release No. 20,091, 1982 SEC LEXIS (Dec. 2, 1982).

[fn6] Exchange Act Release No. 19,135, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

[fn7] Exchange Act Release No. 30,093, 1997 SEC LEXIS 1962 (Sept. 28, 1997).

[fn8] Exchange Act No. 40,018, 1998 SEC Release LEXIS 1001 (May 21, 1998).

§ 18.01[B] Purpose of the Exclusion

The purpose of this exclusion is to ensure that proposals have a significant nexus to a company's business. Reflecting Rule 14a-8's overall purpose to facilitate shareholder communication about shareholder matters, this exclusion was adopted to allow companies to omit proposals that are submitted primarily to further nonshareholder interests.

§ 18.01[C] Overlap with Other Exclusions

This exclusion often overlaps with Rule 14a-8(i)(7), which allows exclusion of a proposal that relates to a company's ordinary business operations, even though a reading of the two provisions would seem to indicate that they involve two very different concepts. However, the practical analytical distinction between the two is so narrow that they appear to almost be the same exclusion. In fact, during the period in the mid-1990s when the SEC staff declined to address (i)(7) due to its controversial Cracker Barrel position, many companies turned to the relevance exclusion as a basis for excluding proposals that might have been considered to involve the companies' ordinary business.

The relevance basis allows the exclusion of proposals whose subjects concern operations accounting for less than 5% of the company's business and are "not otherwise significantly related" to the company's business. As mentioned above, in determining whether a proposal's topic is significantly related to the company's business despite falling below the 5% threshold, the SEC staff looks at, among other things, whether the subject could have a significant impact on the company's business or subject the company to significant contingent liabilities.[fn9] The SEC has also stated that proposals related to "ethical issues" may be significantly related to a company's business "when viewed from a standpoint other than a purely economic one."[fn10]

The staff is more likely to consider a proposal to be "otherwise significantly related to a company's business" if the subject is controversial and has garnered public attention. This is unsurprising, since high-profile, controversial aspects of a company's operations — such as the use by suppliers of low-wage "sweatshop" labor — are more likely to cause reputational harm to the company. Controversial matters may also, depending on the potential for generating litigation or government intervention (or both), be more likely to create large contingent liabilities; environmental and tobacco-related matters are examples of this relationship.

The SEC staff has taken a similar approach in determining whether a proposal is excludable under Rule 14a-8(i)(7)'s ordinary business exclusion.[fn11] Under that exclusion, a proposal may not be omitted if it raises a sufficiently significant social policy issue. In evaluating whether a proposal raises such an issue, the SEC staff has focused on the amount of public attention the issue has received, including the extent of media coverage and legislative or regulatory initiatives around the issue. Accordingly, the same facts will often support a finding that a proposal's subject is both significantly related to the company's business and raises a significant policy issue for purposes of ordinary business exlusion.

[fn9] Exchange Act Release No. 19,135, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

[fn10] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 508-09 (1982).

[fn11] See infra Chapter 20.

§ 18.02 Application of the Exclusion

§ 18.02[A] Identifying the Key Issues

For quite some time, the subjective nature of the catch-all phrase "not otherwise significantly related" has subsumed the numerical portion of the exclusion and substantially limited its application. As a result, the bulk of the debate over this exclusion has focused on the strength of the nexus of the proposal to the company's business under the catch-all phrase and specifically on the degree to which the nexus must be economic.

It is often difficult to determine the extent to which one aspect of a company's operations affects others. For example, proponents sometimes argue that adverse publicity or other harm from part of a company's foreign operations — in Burma or China, for example — threaten to damage other segments of the company's business. Such a connection can be hard to prove or disprove. Similarly, it is often not clear how to analyze whether a proposal pertaining to shareholder rights, such as one dealing with cumulative voting or board independence, is significantly related to a company's business.

§ 18.02[B] Review of Both Proposal and Supporting Statement

In interpreting the "otherwise significantly related" clause, the staff makes its determinations from both the face of proposals and the related supporting statements. The staff can decide that a proposal is significantly related to a company's business from a review of the supporting statement, even though the proposal itself does not make the relationship clear.

§ 18.02[C] Proponent's Burden to Show "Significant Relationship"

As with all of the exclusions under Rule 14a-8, the burden of proof is on the company to show that the exclusion applies. However, unlike the other bases, the proponent may be required to show that its proposal is "otherwise significantly related." In other words, it may be incumbent on the proponent, as the person most knowledgeable about the subject matter of the proposal, to explain the way in which the proposal has both a significant and identifiable relationship to the company's business. Although the rule does not explicitly provide for such burden-shifting, it occurs in practice when a proponent seeks to show supplementally that a proposal's subject is significantly related to the company's business.

For several reasons, this is an important departure from the normal procedures in the no-action process. First, the proponent has the more challenging burden to overcome because the "otherwise significantly related" test is the heart of this exclusion. Second, a proponent has to submit arguments to the SEC staff to successfully defend against a no-action challenge. This can be particularly challenging for proponents not familiar with the SEC's submission process and those who are not able to draft persuasive legal arguments.

EXAMPLE:

In American Home Products Corporation,[fn12] the company was required to include a proposal requesting that the board adopt a policy of not marketing or distributing genetically-engineered agricultural products until long-term testing has shown that they are not harmful to humans, animals and the environment. The company argued that it had not made any sales or earnings from genetically engineered agricultural products and noted that the proponent had inadvertently grouped the company with some of its competitors that did. The proponent argued that the company's failure to successfully commercialize its genetically engineered "traits" had thus far prevented this aspect of its business from being economically significant. In addition, the proponent listed a number of policy reasons to include the proposal, such as the controversial nature of creating genetically engineered crops; the disfavor visited by Wall Street on companies that engage in such activities; and the concerns in this area felt by the American public, many members of Congress and numerous governments around the world.

[fn12] 2000 SEC No-Act. LEXIS 340 (Mar. 7, 2000).

§ 18.02[D] "Significant Relationship" Can Be Shown Supplementally

If a "significant relationship" is not apparent from the face of a proposal, the SEC staff permits the proponent to demonstrate its significance supplementally. The proponent provides this information in correspondence with the staff, and a copy to the company. In the absence of a prescribed deadline for proponent submissions, the staff uses a reasonableness test that depends in part on when the company has to mail its proxy materials.

To meet its burden, the proponent should provide supplemental information that is relevant to showing a "significant relationship." For example, the SEC has noted that a proponent can provide information that indicates that "a particular corporate policy, which arguably affects an economically insignificant portion of the company's business, may have a significant impact on other segments of the company's business or may subject the company to significant contingent liabilities."[fn13]

[fn13] Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Oct. 14, 1982).

§ 18.03 Application of Numerical Tests

The application of the numerical 5% test is straightforward. A company needs to collect three types of data relating to the proposal's subject matter: assets, net earnings and gross sales, all as of the end of the company's latest fiscal year end. Then, using those numbers as the numerator and the same total numbers from the audited financial statements from its latest annual report to shareholders, the company can determine if the proposal relates to operations which account for less than 5% of the company's totals for those three categories.

The real challenge for companies applying the 5% tests is gathering the three types of data for relatively obscure subject matters. Most companies are not able to easily calculate the extent to which their operations relate to a narrow issue. For example, a company may not have a financial database that breaks out assets, earnings and sales by specific locations (e.g., Myanmar) or by particular social issues (e.g., business with entities that use nuclear power).

However, as a practical matter, the SEC staff rarely relies on the numerical test. Instead, it relies on the catch-all provision to require the inclusion of a proposal absent extraordinary circumstances. These extraordinary circumstances can involve matters with which the company has absolutely no connection, either because it no longer is in the related line of business or never was in that line of business at all.

EXAMPLES:

In Lucent Technologies,[fn14] the proposal related to the company forgiving and refunding certain lease payments to residential customers who had leased "obsolete" telephone equipment from the company for a minimum of five years. The company argued that its consumer leasing business had accounted for less than 1% of its total assets and less than 3% of its net earnings and 1% of its gross sales in the prior year. Perhaps most relevant, the company noted that it recently sold substantially all of the assets of its consumer leasing business. In its response permitting exclusion, the SEC staff noted the company's representation that the amount of revenue, earnings and assets attributable to the company's consumer leases of telephone equipment was less than 5% and the proposal was not otherwise significantly related to the company's business. The proponent submitted a rebuttal that addressed the other six bases for exclusion that the company raised but did not address this exclusion.
In J.P. Morgan & Co., Inc.,[fn15] the company successfully excluded a proposal mandating that the company discontinue banking services with Swiss entities until all claims made by victims of the Holocaust and their heirs are settled and total restitution is made. The company argued that its operations relating to Swiss entities fell short of the 5% thresholds and that there were no significant relationships between the proposal and the company's business activities. The proponent did not submit a rebuttal.
In Minnesota Mining and Manufacturing Corporation,[fn16] the proposal requested that the board prepare a report concerning NAFTA's anticipated effect on the company's competitive strategies and long-term shareholder values. The company contended that it was unclear whether the proposal related to its business at all since the proposal focused on the possible move of manufacturing operations from the U.S. to Mexico and the loss of jobs within the U.S. In other words, the job losses at issue were entirely speculative and thus could not be quantified for purposes of the 5% tests. The company asserted that it predicted a net increase of jobs within the U.S. as a result of NAFTA. In granting no-action relief, the SEC staff noted that the proposal related to operations that accounted for less than 5% of the company's total assets, net earnings and gross sales. The proponent did not submit a rebuttal.

[fn14] 2000 SEC No-Act. LEXIS 956 (Nov. 21, 2000).

[fn15] 1999 SEC No-Act. LEXIS 155 (Feb. 5, 1999).

[fn16] 1994 SEC No-Act. LEXIS 144 (Jan. 31, 1994).

§ 18.04 Interpretation of "Otherwise Significantly Related to the Company's Business"

The SEC staff has interpreted the exclusion's catch-all provision to permit proponents to include proposals that raise important social, ethical or political issues, even if they do not satisfy the 5% test. Based on this interpretation, the SEC's staff has allowed inclusion of many social, ethical and political proposals based on a belief that the proposals raised matters that "otherwise were significant to the company's business," notwithstanding their apparent lack of economic importance.

§ 18.04[A] SEC's Examples Illustrating Meaning of Catch-All Phrase

In 1982, when the exclusion was proposed to be revised, the SEC offered a number of specific examples of proposals that are significantly related to a company's business. It stated that "proposals dealing with cumulative voting rights or the ratification of auditors in a sense might not be economically significant to an issuer's business but they nevertheless have a significance to security holders that would preclude their being omitted under this provision. And proposals relating to ethical issues such as political contributions also may be significant to the issuer's business when viewed from a standpoint other than a purely economic one."[fn17]

In addition, the SEC cited three no-action letters that it believed exemplified this concept:

Long Island Lighting Company[fn18] (cease further development, planning and construction of nuclear power plants);
Owens-Illinois Inc.[fn19] (liquidate the company's assets that are located in the Republic of South Africa); and
American Home Products Corporation[fn20] (change the company's marketing and distribution of infant formula products).

[fn17] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 508-09 (1982) (proposing release).

[fn18] 1980 SEC No-Act. LEXIS 2384 (Feb. 11, 1980).

[fn19] 1980 SEC No-Act. LEXIS 2892 (Feb. 15, 1980).

[fn20] 1978 SEC No-Act. LEXIS 634 (Feb. 13, 1978).

§ 18.04[B] SEC's Interpretation Supported by Case Law

Although the language of this exclusion suggests an objective numerical test, the court's decision in Lovenheim v. Iroquois Brands, Ltd.,[fn21] made clear that the exclusion contains a subjective element. Indeed, this decision essentially eliminated the numerical test for all practical purposes with the observation that a proposal could be omitted if it was "ethically significant in the abstract but had no meaningful relationship to the company's business."

[fn21] 618 F. Supp. 554 (D.D.C. 1985).

§ 18.04[C] "Otherwise Significantly Related" Even if Minor Economic Interest

The fact that a proposal concerns a minor segment of the company's business does not prevent inclusion if the SEC staff determines that the proposal is otherwise significantly related to the company's business. Numerous companies have failed to obtain no-action relief despite very limited economic interests in the subjects of the proposals.

EXAMPLES:

In Storage Technology Corporation,[fn22] the proposal requested that the company obtain shareholder approval for any expenditure exceeding $500,000 that is clearly not required in the normal course of its business. The company unsuccessfully argued that the proposal's expenditure threshold of $500,000 paled in comparison to the company's total assets of $1.7 billion, revenues of $2.1 billion and net income of $232 million: the $500,000 constituted 0.02% of revenues, 0.22% of earnings and 0.03% of total assets. The company argued that in addition to bringing the company's ongoing operations to a virtual standstill if it had to wait for stockholder approval on relatively insignificant transactions, it would cost the company a great deal of time, effort and money to prepare and distribute proxy statements each time an action covered by the proposal were to be taken and that shareholders would be inundated with proxy statements. In his rebuttal, the proponent did not clearly address this exclusion.
In Exxon Mobil Corporation,[fn23] the SEC staff denied no-action relief with respect to a proposal asking the board to prepare a report on the potential environmental damage that would result from the company proceeding with plans to drill for oil and gas in the 1002 Area of the Arctic National Wildlife Refuge. The company noted that no drilling was permitted in the 1002 Area of the Arctic National Wildlife Refuge (with one limited exception) and that the company had no assets, sales or earnings related to this area. The proponent did not submit a rebuttal.
In AT&T Corp.,[fn24] the company successfully excluded a proposal that requested the board to phase out all sales to Israel and Israeli businesses in light of alleged mistreatment of Palestinians. The company argued that its assets, sales and revenues in Israel amounted to less than 1% of its total income. The company acknowledged that it sold to distributors who might resell their products in Israel, but that most of the income relating to the less than 1% amount was generated by calls originating in the U.S. to Israel. The proponent argued that the issue had significant political and social ramifications and urged the staff to take a similar position on Israel as it had with South Africa. In its response, the staff noted among other things that "the policy issue raised by the proposal, Israel's treatment of Palestinians, is not significant, and in fact is not related, to the company's business."

[fn22] 1999 SEC No-Act. LEXIS 341 (Mar. 18, 1999).

[fn23] 2000 SEC No-Act. LEXIS 453 (Mar. 23, 2000).

[fn24] 1992 SEC No-Act. LEXIS 88 (Jan. 30, 1992).

§ 18.04[D] Some Nexus Must Exist

A company normally may exclude a proposal whose subject has no relationship at all to its business even if the subject is controversial or a matter in which the public is keenly interested. Although the SEC staff has not articulated its reasoning, such proposals do not implicate the concerns over reputational harm and contingent liabilities raised when a proposal relates to a segment of a company's business, however small.

EXAMPLES:

In Eli Lilly and Company,[fn25] the SEC staff permitted exclusion of a proposal that directed the board to help expose the practice of obtaining human fetuses for research. The company argued — and the SEC staff noted in its response — that the act of obtaining human fetuses for research had no relationship to the company's business. The proponent did not submit a rebuttal.
In Citicorp,[fn26] the company successfully excluded a proposal that asked the company to evaluate existing tobacco-related litigation to determine if the company should seek compensation for the funds it expended for tobacco-caused healthcare costs and to prepare a report to shareholders. Since the company was a financial services firm, the company argued that it was not in the healthcare or tobacco businesses and that there was no identifiable nexus other than the existence of the company's own employee health plans. The proponent did not submit a rebuttal.

[fn25] 2000 SEC No-Act. LEXIS 93 (Feb. 2, 2000).

[fn26] 1995 SEC No-Act. LEXIS 141 (Jan. 13, 1995).

§ 18.05 Common Types of Proposals

§ 18.05[A] Foreign Operations

A number of proposals challenged under this exclusion relate to foreign operations, most likely because the assets and earnings of many U.S. companies' domestic operations dwarf those of their foreign operations. The content of these proposals varies from prohibiting sales or services to other countries to modifying the way that a company operates in a particular country. Proponents tend to defeat no-action requests by arguing that the company's activities abroad (or those of its suppliers) could tarnish its reputation and thus affect the company's business more broadly, as suggested by the SEC in its 1982 release.[fn27]

EXAMPLES:

In PPG Industries, Inc.,[fn28] the proposal urged the board to adopt, implement and enforce a workplace code of conduct based upon the International Labor Organization's conventions on workplace human rights, including five specific principles set forth in the proposal. The supporting statement focused on operations in China. The company argued that its China operations accounted for less than 1% of its assets, earnings and gross sales. The proponent responded that the company did business in Malaysia, where the State Department's annual human rights report indicated that local law did not come up to the ILO standards. The proponent argued that involvement in human rights abuses overseas could have a damaging effect on the company's reputation and its brand. The SEC staff did not grant no-action relief.
In 3Com Corporation,[fn29] the proponent prevailed in a no-action challenge to a proposal that requested that the board implement and/or increase activity on principles "defined by the International Labor Organization, the United Nations Covenants on Economic, Social and Cultural Rights, and Civil, and Political Rights. The proposal, supporting statement and proponent's rebuttal all focused on China. The company argued that its operations in China amounted to approximately 1.6% of its total operations. The proponent noted that China represented the world's largest population and it had the largest market potential for U.S. corporations. The proponent argued that China's size and importance in international trade, together with 3Com's role as a strategic technology and business partner to the Chinese government and state corporations, made any business involvement in China significant to 3Com's business.
In BellSouth Corp.,[fn30] the company successfully excluded a proposal asking the company to adopt policies to ensure that it does not deal in goods or services produced by forced or slave labor in China. The company argued that although the issues raised in the proposal are valid issues for public debate, given the fact that major pieces of equipment used by the company in China to provide telecommunications services are not purchased in China, the proposal did not have the requisite "meaningful relationship" to its business. The proponent responded by stating that it believed that the company used equipment produced in China.
In Motorola, Inc.,[fn31] the proposal requested that the board establish a policy to prohibit the sale of products or provision of services to any settlement located in the Palestinian occupied territories in Israel. The company argued that the assets and profits from its Israel-based subsidiaries were not greater than 5% and that these subsidiaries were not significant to its business. The company noted that its withdrawal from these territories would have little effect on the social and political situation there. The proponent did not submit a rebuttal, and the SEC staff allowed the company to exclude the proposal.
In W.R. Grace Co.,[fn32] the proponent successfully argued for inclusion of a proposal that asked the board to institute an environmental and human rights policy for its Mexican assembly operations. The company argued that its operations in that part of Mexico constituted less than 1% of its profits and assets, and that these operations were not otherwise significantly related as they could easily be relocated to a company facility at a nearby Texas site. The proponent simply noted that the company's Maquiladora operations raised significant policy issues.

[fn27] See Exchange Act Release No. 19,135, 26 SEC Dock. 494 (1982) ("While a particular corporate policy involves an arguably economically insignificant portion of an issuer's business, the policy may have a significant impact on other segments of the issuer's business. . . .").

[fn28] 2001 SEC No-Act. LEXIS 124 (Jan. 22, 2001).

[fn29] 2000 SEC No-Act. LEXIS 802 (Aug. 15, 2000).

[fn30] 1998 SEC No-Act. LEXIS 254 (Feb. 19, 1998).

[fn31] 1995 SEC No-Act. LEXIS 310 (Feb. 21, 1995).

[fn32] 1994 SEC No-Act. LEXIS 321 (Mar. 12, 1994).

§ 18.05[A][1] Myanmar/Burma

Companies have challenged numerous proposals asking companies to report on their operations in Myanmar (formerly known as Burma) or to stop doing business there in order to avoid supporting a repressive military regime. Proponents often argue that operations in Myanmar/Burma are significantly related to a company's business, despite failing to reach the 5% threshold, because domestic protests and boycotts resulting from operations there could harm the company's reputation or cause economic harm to the company's other operations. The staff normally allows such a proposal to be excluded only if the proponent fails to respond or if the arguments regarding public reaction are totally unsupported.

EXAMPLES:

In Halliburton Company,[fn33] the proposal urged the board to create a committee of independent directors to prepare a report describing its projects in Burma, with an emphasis on the steps that have been and are being taken to assure that Halliburton is not involved in and does not appear to benefit from the use of forced labor or other human rights abuses. The company argued that its operations in Burma were well under the 5% threshold, and that a majority of the revenue from the region was generated by a company that it no longer owned. The proponent successfully argued that, contrary to the company's argument, Burma was significant to the company's business, and that the company had not prepared a full report of its recent actions in Burma nor provided details about an incident involving the company's subsidiary.
In Atlantic Richfield Company[fn34] and Halliburton Company,[fn35] the companies obtained no-action relief with respect to proposals requesting comprehensive reports on each respective company's operations in Burma. In each of these letters, the companies demonstrated that operations in Myanmar comprised less than 5% of assets, earnings and sales, and that their operations in Myanmar were not otherwise significantly related to their businesses. ARCO argued that it only held two exploration licenses for oil drilling in Myanmar and that most of the money budgeted to be spent on the drilling would not be spent in Myanmar; only de minimis office overhead and acquisition costs would be spent there. Halliburton argued that it only had a one-room facility with one employee in Myanmar. In both cases, the proponent did not submit a rebuttal.
In Unocal Corporation,[fn36] the proponent successfully defended against a no-action challenge to a proposal asking the board to examine the company's Statement of Principles and create a new policy relating to investment in countries with a history of serious human rights violations. The company argued that although cloaked in a valid request to investigate human rights violations abroad, the purpose of the proposal was to specifically target its operation in Myanmar with the eventual goal of a withdrawal from that country. The company noted that the assets from its Myanmar operations were less than .02% of the company's total assets. The proponent did not submit a rebuttal.

[fn33] 2001 SEC No-Act. LEXIS 296 (Feb. 26, 2001).

[fn34] 1997 SEC No-Act. LEXIS 210 (Jan. 6, 1995).

[fn35] 1995 SEC No-Act. LEXIS 128 (Jan. 18, 1995).

[fn36] 1995 SEC No-Act. LEXIS 283 (Feb. 21, 1995).

§ 18.05[B] Company's Products and Services

The SEC staff normally requires companies to include proposals that relate to the company's manufacture of products or provision of services if the products or services are controversial in nature and may damage the company's brand name or create a risk of large contingent liabilities. However, as with proposals dealing with human rights, the link between the proposal's subject and the company's business is usually not apparent on the face of the proposal. Accordingly, the proponent should be prepared to show that relationship supplementally; failure to do so may result in exclusion.

EXAMPLES:

In Sysco Corporation,[fn37] the proposal requested that the board adopt a policy of removing genetically engineered crops, organisms or products thereof from all products sold under the company's brand names or private labels as quickly as feasible, until long-term safety testing shows that they are not harmful to humans, animals and the environment, with the interim step of labeling and identifying these products and providing a report to shareholders. The company noted that the proposal only had relevance to its manufacturing activities related to its produce and steak-cutting businesses, which accounted for approximately 1% of the company's total assets and approximately 1% of its net earnings and gross sales. The proponent did not submit a rebuttal. The SEC staff denied no-action relief.
In Occidental Petroleum Corporation,[fn38] the proponent defeated no-action challenges to two proposals asking the board to hire an independent firm to prepare a risk analysis report on the long-term impact on profitability and stock price due to the U'wa tribe's threat of mass suicide if the company drilled on U'wa territory. The company argued that its operations in the geographic area at issue generated no net income in 1998, and that the ethical significance of a threat by a local group does not make a project significant to the overall operations of a company. The proponent countered in the 1999 letter that the U'Wa's threat had, among other things, generated substantial media attention, spurred the filing of a complaint against the Colombian government, and led environmental organizations to take out a full-page advertisement in the New York Times. The proponent also pointed out that although the company received no current income from the U'Wa's region, it had stressed the economic importance of the site in meetings with shareholders and thus did not believe the subject was irrelevant to its business.
In Merrill Lynch & Co.,[fn39] the SEC declined to grant no-action relief with respect to a proposal requesting that the board issue a report reviewing the company's underwriting, investing and lending criteria with a view to incorporating criteria related to a transaction's impact on the environment, human rights and risk to the company's reputation. The supporting statement made clear that the proponent objected to the company's involvement as an underwriter of debt issued by a borrower that intended to use the net proceeds indirectly to finance construction projects in China, including the building of the controversial Three Gorges Dam. The proponent argued that the proposal was economically significant to the company because it was a request to reformulate its underwriting criteria.

[fn37] 2000 SEC No-Act. LEXIS 841 (Aug. 30, 2000).

[fn38] 2000 SEC No-Act. LEXIS 394 (Mar. 6, 2000) and 1999 SEC No-Act. LEXIS 152 (Feb. 9, 1999).

[fn39] 2000 SEC No-Act. LEXIS 240 (Feb. 25, 2000).

§ 18.05[C] Equal Employment Opportunity/Discrimination

The SEC staff normally requires companies to include proposals that relate to equal employment opportunity and employment discrimination. Following the example of South Africa proposals from the 1970s and 1980s, these proposals often address the MacBride Principles, which deal with equal employment opportunity in Northern Ireland.

EXAMPLES:

In Toys "R" Us, Inc.,[fn40] the company unsuccessfully sought to exclude a proposal asking the board to implement and/ or increase activity on each of the nine MacBride Principles. The company argued that the proposal did not relate to a matter that would have any substantial impact on the business of selling children's toys, apparel and accessories, and to the extent that there was any relation to its business, it was not significant enough as a policy issue to justify its consideration by stockholders. The proponent, while conceding that the company's Northern Ireland division accounted for less than 5% of the company's business, argued that the implementation of the MacBride principles would help to end religious discrimination, which was a major cause of conflict in the region. The proponent also argued that the company's implementation of the proposal could lead other companies to follow suit, thus greatly improving the quality of life in Northern Ireland.
In TJX Companies, Inc.,[fn41] the SEC staff denied no-action relief on a proposal requesting that the board implement and/ or increase activity on each of the nine MacBride Principles. The company argued that its only operation in Northern Ireland was one retail store. The proponent argued that although the company's Ireland division accounted for less than 5% of the company's business, the proposal was significant because, despite the company's self-imposed equal opportunity employment program, it was still not hiring enough Protestants and therefore engaged in discrimination.

[fn40] 1999 SEC No-Act. LEXIS 447 (Apr. 8, 1999).

[fn41] 1999 SEC No-Act. LEXIS 444 (Apr. 1, 1999).

§ 18.05[D] Political Contributions

The SEC staff normally finds that proposals relating to political contributions are significantly related to companies' businesses. Proposals concerning political contributions were identified in a 1982 SEC release as a type of proposal that "may be significant to the issuer's business when viewed from a standpoint other than a purely economic one."[fn42]

EXAMPLES:

In Advest Group, Inc.,[fn43] the proponent successfully defended against a no-action challenge to a proposal which recommended that the company disclose its policies for granting and denying donation requests, along with a list of donees. The company argued that the level of its business implicated by the proposal was far less than 5% any way it was calculated. The proponent did not submit a rebuttal.
In Cintas Corporation,[fn44] the SEC staff denied the company's request to exclude a proposal requesting that the company establish political contribution guidelines and make annual reports on all such contributions. The company argued that the data in question comprised far less than 5% of its business. The proponent did not submit a rebuttal.

[fn42] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 508-09 (1982).

[fn43] 1997 SEC No-Act. LEXIS 897 (Sept. 23, 1997).

[fn44] 1997 SEC No-Act. LEXIS 773 (July 28, 1997).

§ 18.05[E] Environmental

Generally, proposals concerning environmental matters are found to be significantly related to companies' businesses, most likely because damage to the environment may harm a company's reputation and may lead to significant liabilities.[fn45] Occasionally, the staff will allow the exclusion of a proposal that is obviously unrelated, such as a 1970s proposal that requested that employees at a nuclear power facility receive rainjackets as a precaution in the event of a leak.

EXAMPLES:

In Exxon Mobil Corporation,[fn46] the company was required to include a proposal asking the board to prepare a report on the environmental damage that could result from the company proceeding with plans to drill for oil and gas in the 1002 Area of the Arctic National Wildlife Refuge. The company noted that no drilling was permitted in the 1002 Area of the Arctic National Wildlife Refuge (with one limited exception) and that the company had no assets, sales or earnings related to this area. The proponent countered that the proposal related to "potential" drilling so the company's current plans and operations in the area were not dispositive.
In Exxon Mobil Corporation,[fn47] the proposal requested that the company adopt a policy to promote renewable energy sources, develop plans to help bring bioenergy and other renewable energy sources into the company's energy mix and advise shareholders regularly on its efforts. The company noted that its assets attributable to these energy sources comprised only a minute fraction of the company's total assets and contributed an insignificant amount of net earnings and gross sales. The company noted that while it had previously explored the economic and practical viability of alternative energy sources, it had made the business decision not to pursue such renewable energy sources. The proponent argued that its proposal raised a significant social policy issue. The SEC staff declined to grant no-action relief.
In Coca-Cola Company,[fn48] the company unsuccessfully sought to exclude a proposal that required the company, and any entities in which it had an ownership interest, to promote the retention and development of bottle deposit systems and laws and to cease any efforts to replace existing deposit and return systems with one-way containers in developing countries. The company argued that it had less than 1% of its total assets, net earnings and gross sales from controlled bottlers in nations meeting the per capita income level specified in the proposal. In addition, it noted that even if all the controlled bottlers without regard to per capita income were considered, the assets, net earnings and gross sales of this group would still fall below the 5% threshold. The proponent argued, while not specifically addressing the exclusion, that in many countries, the company owned a major share of the country's bottling and beverage industries, whose waste may have constituted 10%-20% of all discarded trash in the country.

[fn45] See Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Oct. 14, 1982) (stating that "a particular corporate policy, which arguably affects an economically insignificant portion of the company's business, may have a significant impact on other segments of the company's business or may subject the company to significant contingent liabilities.")

[fn46] 2000 SEC No-Act. LEXIS 453 (Mar. 23, 2000).

[fn47] 2000 SEC No-Act. LEXIS 481 (Mar. 23, 2000).

[fn48] 2000 SEC No-Act. LEXIS 122 (Feb. 2, 2000).

§ 18.05[F] Executive Compensation

The SEC staff usually deems proposals regarding executive compensation and related matters to be significantly related to a company's business. Executive compensation is likely viewed as sufficiently significant to shareholders to preclude exclusion.[fn49]

EXAMPLES:

In Union Electric Company,[fn50] the SEC staff denied no-action relief with respect to a proposal requiring shareholder approval of all bonuses over $30,000 awarded to executive officers. The company briefly argued that the proposal's subject related to less than 5% of the company's net earnings. The proponent did not submit a rebuttal.
In Bristol-Myers Squibb Company,[fn51] the proposal requested that the board withdraw a non-employee director retirement plan so that it was unavailable to current and future nonemployee directors. The company unsuccessfully argued that the proposal related to operations that amounted to less than 5% of its business. The proponent's rebuttal did not address this specific exclusion, but did point out that a competitor of the company agreed in the prior year to include an identical proposal, which was approved by its shareholders.

[fn49] See Exchange Act Release No. 19,135, 26 SEC Dock. 494, 508-09 (1982) (proposals dealing with certain issues "might not be significant to an issuer's business but they nevertheless have a significance to security holders. . . .").

[fn50] 1997 SEC No-Act. LEXIS 119 (Jan. 22, 1997).

[fn51] 1995 SEC No-Act. LEXIS 215 (Jan. 27, 1995).

§ 18.05[G] Employee Related Matters

In contrast to proposals dealing with global labor standards and equal employment opportunity, proposals concerning routine employee matters, such as employee wages and benefits, are normally found to be excludable as not significantly related to a company's business. Such proposals do not generally involve matters that could affect a company's overall operations or subject the company to significant liabilities.[fn52]

EXAMPLES:

In American Home Products Corporation,[fn53] the company successfully excluded a proposal that requested the preparation of a special report regarding certain expansions or relocations of workers or jobs, comparative housing costs and wage levels in the area of the new job site, and the alternatives considered to address the problem of affordable housing. The company briefly argued that the proposal related to an insignificant portion of the company's business and that the proponent had failed to provide evidence of any connection between the company's business and the need for affordable housing. The proponent did not submit a rebuttal.
In General Electric Co.,[fn54] the SEC staff granted no-action relief on a proposal asking that the company prepare a report regarding the effects of temporary expansions and relocations on housing affordability in certain geographic regions. The company noted that in the supporting statement, the proponent revealed that the true aim of the proposal was to get the company to "exert considerable influence" and to press for affordable housing for its employees; in other words, to get the company to use its resources to lobby local governments for affordable housing. The company also argued that the proposal related to less that 5% of the company's business. The proponent did not submit a rebuttal.

[fn52] See Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Oct. 14, 1982) (stating that "a particular corporate policy, which arguably affects an economically insignificant portion of the company's business, may have a significant impact on other segments of the company's business or may subject the company to significant contingent liabilities.")

[fn53] 1991 SEC No-Act. LEXIS 225 (Feb. 11, 1991).

[fn54] 1990 SEC No-Act. LEXIS 184 (Jan. 31, 1990).

§ 18.05[H] Business Operations

The SEC staff normally allows companies to exclude proposals that relate to a company's day-to-day operations, such as decisions regarding individual policies, branches, products or stores, because they are not significantly related to a company's overall business.

EXAMPLE:

In Peoples Energy Corporation,[fn55] the company was allowed to exclude a proposal seeking the elimination of two of the company's customer service branches in order to reduce operating expenses. The company argued that the amount of revenue, earnings and assets attributable to these two offices was less than 5% and was not otherwise significantly related to the company's business. The proponent did not submit a rebuttal.

[fn55] 1994 SEC No-Act. LEXIS 790 (Nov. 25, 1994).

§ 18.05[I] Investment Activities

Generally, the SEC staff requires inclusion of proposals that relate to investment activities only if they involve significant public policy matters, such as investing in tobacco companies. Although the SEC staff has not explained its reasoning, it is possible that such investments are seen as riskier, thus exposing the investor to greater volatility and risk of loss. Investment in risky and controversial enterprises could also damage a company's reputation, although such a connection may be somewhat attenuated.

EXAMPLES:

In Lincoln National Corporation,[fn56] the proponent defeated the company's request to exclude a proposal requesting that the board initiate a policy mandating no further purchases of tobacco equities and that the company divest itself of all tobacco stocks. The company argued that the value of the securities in question was less than 1% of the company's assets. The proponent argued that the proposal raised a significant policy issue.
In Aon Corporation,[fn57] the SEC staff denied a no-action request with respect to a proposal asking the board to adopt a policy mandating no further purchases of tobacco equities and to divest itself of all tobacco stocks. The company argued that its tobacco investments totaled less than 5% of its total assets. The proponent argued that the company did not prove that its investments in tobacco stocks totaled less than 5% of its assets. In addition, the proponent argued that this was a significant policy issue.

[fn56] 1999 SEC No-Act. LEXIS 351 (Mar. 24, 1999).

[fn57] 1997 SEC No-Act. LEXIS 464 (Mar. 6, 1997).

§ 18.05[J] Shareholder Matters

The SEC staff normally requires inclusion of proposals that relate to shareholder rights if they "have a significance to security holders that would preclude their being omitted under [the relevance exclusion]."[fn58]

EXAMPLES:

In General Mills Inc.,[fn59] the company unsuccessfully sought to exclude a proposal requesting that the company refrain from making any charitable contributions and that money allocated for that purpose be distributed to shareholders. The company stated that its contributions were less than 5% and that this proposal merely sought to discuss moral and social issues that had no impact on the company's business. The proponent did not submit a rebuttal.
In Bristol-Myers Squibb Company,[fn60] the company was allowed to exclude a proposal asking the company to lower the fees charged under the company's Dividend Reinvestment Plan. The company briefly argued that the proposal related to less than 5% of the company's business and that its DRIP had no significant relation to its business. The proponent did not submit a rebuttal.

[fn58] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 508-09 (1982).

[fn59] 1998 SEC No-Act. LEXIS 662 (June 25, 1998).

[fn60] 1995 SEC No-Act. LEXIS 164 (Jan. 27, 1995).

§ 18.05[K] Board Matters

Board governance and related matters are generally viewed as significantly related to a company's business. As a practical matter, the staff rarely allows exclusion of these proposals. For example, the staff has allowed perennial gadfly Evelyn Davis to include proposals that ask that certain companies coordinate the dates for their annual stockholders' meetings so that she may be able to attend them without facing a scheduling conflict.

EXAMPLE:

In Bangor Hydro-Electric Company,[fn61] the proposal required the company to prepare a report discussing political contributions by the company, its directors, and certain employees. The SEC rejected the company's argument that its own respective political contributions totalled several thousand dollars, which clearly accounted for less than 5% of the relevant financial indicators. Moreover, the company contended that to the extent that the proposal applied to political contributions made by directors and certain employees, it did not relate to the company's operations because these contributions were made directly by directors and employees, not by the company. The proponent did not submit a rebuttal.

[fn61] 2000 SEC No-Act. LEXIS 418 (Mar. 13, 2000).

§ 18.05[L] Anti-Takeover Matters

The SEC staff almost without exception characterizes proposals relating to the removal of anti-takeover devices and related matters as significantly related to the company's business.

EXAMPLE:

In Walt Disney Company,[fn62] the SEC denied no-action relief on a proposal requesting that the board refrain from adopting any future shareholder rights plan without prior stockholder approval. Although the company acknowledged that "questions of this type may be appropriate in certain circumstances," the company argued that they were purely hypothetical in the company's case because it had not announced that it had proposed to adopt a rights plan nor were there other reasonable grounds for belief that the proposed action was in contemplation. The proponent's rebuttal failed to address the exclusion.

[fn62] 1998 SEC No-Act. LEXIS 965 (Nov. 2, 1998).

§ 18.06 Practice Pointers

Company Practice Pointers

Focus on other exclusions. Companies have had limited success convincing the SEC staff to permit omission of proposals under this exclusion, even if the proposal's subject matter does not involve the company's core business. Because of the open-ended nature of the "otherwise significantly related" catch-all provision, companies can expect to have difficulty successfully excluding a proposal under this exclusion, at least so long as the proponent has drafted the proposal skillfully. As a result, it may be useful to focus on other bases for exclusion unless there is a very strong argument under this exclusion.

Do the two-step. To exclude a proposal, a company should prepare its incoming request by clearly making these two arguments in this order:

Show that the economic relationship between the proposal's subject matter and the company is small by calculating the ratios of assets, net income and gross sales; and
Demonstrate clearly that the limited operational activity does not foster or encourage the subject matter at all; for example, a company's limited operations in a country do not foster alleged human rights violations. The proponent then has the burden to overcome this demonstration.

Proponent Practice Pointers

Rebut the company's request. Even if a proposal does not meet the 5% test, it may still be includable if the proponent can demonstrate, from the face of the proposal or supporting statement (or even supplementally), that the proposal's subject matter has a significant relationship to the company's business. Since the staff tends to favor proponents under this exclusion, proponents can increase the likelihood of a staff rejection by rebutting the company's arguments in a timely letter to the staff.

Make supplemental arguments. Companies often attempt to exclude social proposals under this exclusion on the theory that they do not involve matters that are significant to their business. However, some companies have been discouraged by the broad interpretation of the "otherwise significantly related" test by the SEC staff — and the difficulty of collecting the data for the numerical test — and do not bother to assert this exclusion in their no-action request. Proponents can further discourage reliance on this exclusion by making supplemental arguments on the relationship between the proposal and the company's business in its transmittal letter when it first submits the proposal to the company.

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