Rule 14a-8(i)(7) — former Rule 14a-8(c)(7)

Question 9(7): Management functions: If the proposal deals with a matter relating to the company's ordinary business operations.

§ 20.01 Background of the Exclusion

This exclusion permits a company to omit a proposal if it deals with a matter relating to the ordinary business operations of the company. This exclusion has been — and probably will continue to be — the most controversial of the bases.[fn1]

[fn1] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

§ 20.01[A] History of the Exclusion

In 1954, the SEC adopted a provision to allow companies to exclude proposals that were "a recommendation or request with respect to the conduct of the ordinary business operations of the issuer." In adopting the exclusion, the SEC sought to incorporate the state law presumption that management should maintain control over day-to-day business decisions into the federal proxy rules.[fn2]

In 1976, as an increasing number of activists began to use shareholder proposals as a way to draw public attention to social issues, the SEC proposed two alternatives to the exclusion. Under one alternative, the SEC proposed narrowing this provision to allow omission of only those proposals dealing with routine, day-to-day business matters. Under the second alternative, the SEC proposed the adoption of a new provision covering matters that a board was not required to act upon pursuant to state law or the company's governing instruments. The SEC also requested comments on whether it should eliminate the exclusion altogether.[fn3]

After receiving numerous negative comments, the SEC decided not to adopt any of the alternatives. Instead, the SEC decided to change the way it interpreted the exclusion so that proposals having significant policy implications for the company would not be excludable. As an example, it noted that although the staff once considered a proposal on the construction of a nuclear power plant to be "ordinary business," it now recognized that the significant "economic and safety considerations inherent in such a resolution removed it from the category of ordinary business." Since the SEC appeared to draw a line between business matters that are "mundane in nature" and matters involving "substantial policy or other considerations," the analysis under this exclusion came to be interpreted as a two-pronged test. The two-part test allowed companies to exclude proposals if they (i) involved "business matters that are mundane in nature" and (ii) did not involve "any substantial policy or other considerations."[fn4]

In 1983, while retaining the basic approach under the ordinary business provision, the SEC reversed a long-standing staff interpretation. The SEC staff had taken the position that a proposal either requesting that a company prepare and disseminate a report to shareholders or recommending that a special board committee be appointed to study an issue was not excludable as ordinary business, even if the subject matter of the report or committee inquiry pertained to ordinary business matters. The SEC recognized that this position had elevated form over substance and directed the staff to consider the underlying subject of proposal when applying this exclusion.[fn5]

[fn2] Exchange Act Release No. 4979, 1954 SEC LEXIS 38 (Jan. 6, 1954).

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

[fn4] Exchange Act Release No. 12,599, 1976 SEC LEXIS 326 (Nov. 22, 1976).

[fn5] Exchange Act Release No. 20,091, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

§ 20.01[A][1] The Cracker Barrel Saga

This exclusion came under fire in 1991 as a result of the SEC staff's controversial decision to allow the omission of a proposal submitted to Cracker Barrel Old Country Store. Before the Cracker Barrel letter, the staff considered employment-related proposals on a case-by-case basis, although it allowed exclusion of many of them.

In drawing that line, the staff evaluated whether the proposal implicated a significant policy issue. Under this analysis, companies were permitted to omit proposals on topics such as workplace practices, hiring and firing, health benefits and employee training and motivation. However, the staff was less consistent in applying the standard to equal employment proposals.[fn6]

In 1991, Cracker Barrel Old Country Store issued a press release announcing a policy of not employing gay and lesbian workers and subsequently fired some workers based on this policy. Although the company eventually issued a public apology in response to consumer pressure, the fired workers were not reinstated or compensated. The workers had no claim under fair employment statutes, which did not cover discrimination on the basis of sexual orientation.

The New York City Employees' Retirement System (NYCERS) filed a shareholder proposal at Cracker Barrel asking the board to implement a non-discrimination policy based on sexual orientation. Cracker Barrel, relying on the Wal-Mart letter, sought no-action relief. NYCERS distinguished Wal-Mart on the ground that it involved detailed reports regarding employment practices.

The SEC staff allowed Cracker Barrel to exclude the proposal. In its letter granting relief, the staff reversed its prior decisions regarding employment-related proposals and announced a bright-line rule that all such proposals were excludable except to the extent they dealt with senior executive compensation. The staff explained that it was difficult to determine whether employment-related proposals involved a significant policy issue.[fn7] On appeal, the full Commission affirmed the staff's decision without comment, despite the fact that the issue was moot, Cracker Barrel having already held its annual meeting.[fn8]

NYCERS sued the SEC in federal district court in New York, arguing that the SEC had violated the Administrative Procedure Act (APA) by promulgating a new rule without complying with required rulemaking procedures and that the new rule was arbitrary and capricious. The SEC responded that it had not promulgated a rule, and that the Cracker Barrel ruling was not arbitrary and capricious because it comported with the legislative purpose of the shareholder proposal rule. The SEC also claimed that because NYCERS had an alternative remedy — it could have sued Cracker Barrel to enjoin the meeting — it was precluded from suing the SEC. The district court held that the SEC had in fact promulgated a rule in violation of the APA and enjoined the SEC from issuing any further no-action letters based on its new position until it had conducted rulemaking with appropriate notice and opportunity for comment.[fn9]

The U.S. Court of Appeals for the Second Circuit reversed the district court's order, holding that the Cracker Barrel decision was an interpretive rule, which is not subject to the APA's notice and comment requirements. The court reasoned that the letter had no legal effect, since it was non-binding.[fn10]

Criticism of the SEC's new policy continued unabated even after the SEC's victory in the court of appeals. At least one SEC Commissioner, Steven Wallman, attacked the SEC's position, forming a task force to prepare a report on the status of the shareholder proposal process. As would be expected, shareholders and companies felt very differently about the decision: In a Congressionally-mandated survey, 91% of companies preferred the rule allowing exclusion of employment-related proposals, while 86% of shareholders thought such proposals should be included. Secretary of Labor Robert Reich urged the SEC to reconsider its position to the extent it permitted exclusion of proposals dealing with global labor standards.

In 1997, on the heels of the Wallman report and Congressional study, the SEC proposed a comprehensive set of changes to Rule 14a-8. As part of this initiative, the SEC proposed to reverse its Cracker Barrel position, explaining that "the relative importance of certain social issues relating to employment matters has re-emerged as a consistent topic of widespread public debate."[fn11] Commentators, with the exception of the corporate community, supported this about-face. In 1998, the SEC adopted the proposed change and reversed the Cracker Barrel position. It stated that the staff would return to the case-by-case approach inquiring whether proposals implicated a significant policy issue. The SEC conceded that decision-making under this approach would be somewhat subjective.[fn12]

[fn6] See AT&T Corp., 1988 SEC No-Act. LEXIS 1703 (Dec. 21, 1988) (requiring inclusion of proposal asking for elimination of affirmative action program); Capital Cities/ABC, 1991 SEC No-Act. LEXIS 422 (Mar. 7, 1991) (staff had required inclusion of proposal asking the company to disclose equal employment opportunity data and describe affirmative action program; on appeal, the full Commission reversed and allowed exclusion, reasoning that the proposal involved detailed information about the company's workforce and employment practices); Dayton Hudson Corporation, 1991 SEC No-Act. LEXIS 428 (Mar. 8, 1991) (requiring inclusion of proposal requesting that the company make progress reports to shareholders on its equal employment efforts and efforts to purchase from minority-owned vendors); Wal-Mart Stores, Inc., 1991 SEC No-Act. LEXIS 572 (Apr. 10, 1991) (permitting exclusion of proposal seeking report on racial and gender composition of the company's workforce, affirmative action program and other similar programs).

[fn7] Cracker Barrel Old Country Stores, Inc., 1992 SEC No-Act. LEXIS 984 (Oct. 13, 1992).

[fn8] Phillip R. Stanton, "Recent Development: SEC Reverses Cracker Barrel No-Action Letter," 77 Wn. U.L.Q. 979 (Fall 1979).

[fn9] NYCERS v. SEC, 843 F. Supp. 858 (S.D.N.Y. 1994).

[fn10] NYCERS v. SEC, 45 F.3d 7 (2d Cir. 1995).

[fn11] Exchange Act Release No. 39,093, 1997 SEC LEXIS 1962 (Sept. 28, 1997).

[fn12] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 20.01[B] Purpose of the Exclusion

This exclusion attempts to conform Rule 14a-8 to state corporate laws that grant the company's board authority to manage the company's business and affairs. The exclusion seeks to preserve the board's delegation to management of the power over day-to-day matters and recognizes that under most states' laws, the opportunity for shareholder participation in corporate decisionmaking is generally limited to fundamental changes such as extraordinary transactions.[fn13]

The ordinary business exclusion also is rooted in the belief that management has special expertise and is more qualified than shareholders to make most business decisions. However, when a company faces decisions involving important policy issues, that balance shifts since it is less likely that management has more expertise than shareholders. Accordingly, this exclusion recognizes that management's expertise does not justify prohibiting shareholders from raising policy issues with other shareholders.[fn14] The SEC recently explained the two considerations underlying the exclusion:

The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. Certain tasks are so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight. Examples include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers. However, proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.

The second consideration relates to the degree to which the proposal seeks to "micro-manage" the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment. This consideration may come into play in a number of circumstances, such as where the proposal involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.[fn15]

[fn13] Id.

[fn14] Id.

[fn15] Id.

§ 20.01[C] Overlap with Other Exclusions

This exclusion overlaps with several other substantive bases, most commonly the improper subject exclusion in Rule 14a-8(i)(1), since subjects that are not proper for shareholder action may be entrusted to the board and/or management under state law and thus relate to ordinary business operations; Rule 14a-8(i)(2)'s violation of law exclusion, on the same reasoning as the improper subject basis; and the dividend exclusion in Rule 14a-8(i)(13), because certain proposals dealing with specific dividend payments may be omitted under both exclusions.

§ 20.02 Application of the Exclusion

§ 20.02[A] Identifying the Key Issues

The SEC staff's analysis of proposals under this exclusion involves a two-pronged test, which was first articulated in 1976.[fn16] First, the SEC staff analyzes whether the proposal's subject involves issues that should be solely subject to the board's discretion. However, proposals relating to matters that implicate or focus on significant social policy issues generally are not excludable because they tend to fall outside the scope of management's expertise. The second prong relates to the degree to which the proposal seeks to micromanage the company and whether the matters are so complex that shareholders are not qualified to make an informed decision due to their lack of business expertise and knowledge of the company.

As reflected by the controversy involving the exclusion, the SEC staff has always struggled to interpret the provision. At times, there have been few reliable guidelines for predicting what is "ordinary business." Much of the ebb and flow of reliable guidance revolves around whether a particular issue involves a significant policy issue, which changes over time. As a result, even though the staff's practice may be clear, its rationale has not always been apparent, due at least in part to the lack of an objective methodology for determining when a particular issue transcends ordinary business and involves a significant policy issue.

The staff identifies significant policy issues on a case-by-case basis by reviewing the parties' arguments, looking to arguments made in (and in response to) prior letters and by conducting its own research. The staff is not easily persuaded to reverse its position on an issue, so companies and proponents must make a strong case if they seek to have the staff overturn prior decisions.

[fn16] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

require the company to violate an existing legal obligation;
impose vague or general objectives without providing a specific means of implementation; or
require action by third parties over which the company has no control.

In each of these circumstances, the SEC staff has allowed exclusion under this provision. However, the staff often permits proponents to cure the defects in their proposals by making them operate prospectively.

§ 20.02[B] Creation of Federal Common Law

Under the laws of most states, decisions regarding matters of ordinary business normally are reserved for management. The policy underpinning these laws is to limit the persons who resolve day-to-day issues to management. It is clearly impractical — and in some cases, impossible — for shareholders to address these issues, both because obtaining a shareholder vote takes a significant amount of time and because many shareholders do not have the requisite business expertise and intimate knowledge of the company.

However, these state laws give limited, if any, guidance in determining what constitutes ordinary business. In the SEC's words, state law "is rarely conclusive as to what is or is not ordinary business, and the staff generally has had to make its own determination as to whether a proposal involves an activity relating to the issuer's ordinary business."[fn17]

As a result, the staff, through the no-action process, has developed a body of federal common law addressing this question. Perhaps reflective of the dearth of state law authority, there normally is some uncertainty over how the staff will decide a particular issue.

[fn17] Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Dec. 2, 1982).

§ 20.02[C] Definition of "Significant Policy Issue"

In determining whether a subject involves a significant policy issue, the staff will rely on the company's arguments as well as its own investigation. Although the SEC staff has not articulated the mix of factors it takes into account, it appears to consider the extent to which the issue has attracted attention from the media, which presumably reflects the degree of public concern over the issue, as well as legislative and/or regulatory initiatives undertaken in relation to the issue.[fn18]

If a proposal relates to the steps that a company is taking or should take with respect to a policy, the staff normally allows a company to exclude the proposal. In such proposals, the proponent appears to seek involvement in the micro-management of a company's business. This is more akin to the day-to-day operations of the business.

The distinction is an attempt to strike a balance between the ability of shareholders to vote on corporate policy issues and management's responsibility to implement policies. The decisions sometimes appear contradictory due to the myriad formulations of proposals on a given issue. Like the staff's application, the limited case decisions in this area are somewhat inconsistent. This probably is because the courts face the same challenges as the staff: difficult subjective determinations amid a paucity of state case law applying the relevant statutes.[fn19]

[fn18] See infra § 20.02[D].

[fn19] See supra § 20.01[A].

§ 20.02[D] Reversals of Position

The SEC has changed its position about how to apply this provision a number of times, sometimes under pressure from companies, investors, judicial decisions and, most recently, from Congress itself. After much debate, the latest change was the SEC's 1998 reversal of its 1991 Cracker Barrel position. In this change, as discussed above, the SEC abandoned the bright-line test for employment-related proposals and returned to the two-pronged test it applies to all other proposals under this exclusion.

However, in most cases, the most important factor leading the SEC staff to change its position on whether an issue is a "significant policy issue" is the staff's evolving assessment of social and political conditions. The staff's ability to reverse course inevitably creates uncertainty for both companies and proponents.

Critics have faulted the SEC staff for its periodic reversals under the ordinary business exclusion and have called for the elimination of the ordinary business exclusion on the ground that the staff does not apply objective, predictable factors in administering the exclusion.[fn20] In fact, the SEC acknowledged when it reversed Cracker Barrel in 1998 that the staff would face the same kinds of difficult questions that had led it to make inconsistent decisions in the past and would be required "to make difficult judgments about interpretations of proposals, the motives of those submitting them, and the policies to which they relate."[fn21]

Reversals of staff positions involving what constitutes a "significant policy issue" receive more publicity than any other issue regarding the shareholder proposal rule. The following are examples of prominent staff position changes:

plant closings;
executive compensation;
manufacture of tobacco products;
construction of nuclear power plants; and
affirmative action and equal employment policies.

[fn20] Richard Y. Roberts, "Shareholder Proposal Reform — a Search for Objectivity in Rule 14a-8," 22 Sec. Reg. L.J. 235 (1994); Kevin W. Waite, Note, "The Ordinary Business Operations Exception to the Shareholder Proposal Rule: A Return to Predictability," 64 Fordham L. Rev. 1253 (1995).

[fn21] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 20.03 Common Types of Proposals

§ 20.03[A] Accounting Matters

Over the years, shareholders have occasionally submitted proposals regarding accounting matters, particularly if a company had been subject to investigation for accounting irregularities. Recently, the SEC has adopted new regulations regarding the responsibilities of the board's audit committee and auditor independence, which led to renewed interest in proposals on these topics during the 2001 proxy season. The staff generally allows companies to exclude proposals relating to accounting matters because it believes that "choice of accounting methods" is ordinary business.

EXAMPLES:

In SONICblue Incorporated,[fn24] the company was permitted to exclude a proposal asking that the board have the auditor selected annually by shareholder vote. The company argued that the selection of auditors is a routine decision for management that involves many factors and is best left to the company's management. The company also fretted that if the proposal was implemented, any qualified auditing firm could place its name on the company's shareholder ballot for approval by the shareholders and that this would conflict with management's selection process. The proponent responded that under the SEC's new auditor independence rules, the selection of the company's auditor should not be left entirely up to management. The proponent argued that the selection process was not too complex for the average shareholder because it was necessary to select from only a few firms, compared with the hundreds of potential director candidates.

[fn23] 2001 SEC No-Act. LEXIS 254 (Feb. 27, 2001).

[fn24] 2001 SEC No-Act. LEXIS 432 (Mar. 23, 2001).

§ 20.03[B] Banking

As highly regulated entities, banks often receive proposals involving policy issues. In particular, proponents seek to ensure that banks fairly lend to lower income communities and refrain from predatory lending. In a different vein, some proposals focus on the risks of a bank's lending practices, including whether a company's financial statements adequately reflect the risks of subprime lending or lending in Third World countries.

The staff generally finds that these types of proposals involve significant policy matters; however, proposals relating to credit, lending and underwriting standards may be considered ordinary business unless the proponent links the requested change in standards to an established significant policy issue such as the environment or human rights. At smaller community banks, dissidents have been quite active during the past few years and they have used shareholder proposals as a tool to pressure management to consider selling a bank.

EXAMPLES:

In Conseco, Inc.,[fn25] the company successfully excluded a proposal requesting that the company establish a committee of outside directors to develop and enforce policies to ensure "that accounting methods and financial statements adequately reflect the risks of subprime lending and . . . employees do not engage in predatory lending practices" and prepare a report to shareholders. The company argued that not only did the proposal relate to accounting methods, it also related to credit, lending or underwriting policies, all of which had previously been found by the staff to involve ordinary business. The proponent argued that the proposal did not relate to how the company complied with its legal obligations, and that it did involve significant policy issues. In its response, the staff noted that the proposal appeared to involve "accounting methods and the presentation of financial statements in reports to shareholders."
In Associates First Capital Corp.,[fn26] the proponent successfully defended against a no-action challenge to a proposal asking the company to establish a committee of outside directors to develop and enforce policies to ensure "that accounting methods and financial statements adequately reflect the risks of subprime lending and . . . employees do not engage in predatory lending practices" and prepare a report to shareholders. The company argued that the proposal related to the conduct of an "ordinary business" program designed to ensure compliance with applicable governmental statutes and regulations relating to its consumer lending activities. The proponent argued that subprime lending was a significant policy issue and cited Congressional testimony on the issue that specifically involved the company, who he stated was the country's largest subprime lender. Although this proposal was substantially identical to the proposal discussed above at Conseco, the disparate outcomes are likely attributable to the differing arguments made by the companies and the fact that the SEC staff appears to have found the accounting argument made by Conseco to be more compelling than the legal compliance argument.
In Merrill Lynch & Co.,[fn27] the proposal recommended that the board prepare a report reviewing the company's underwriting, lending and investing criteria with a view to incorporating criteria related to a transaction's effect on the environment, human rights and the company's reputation. The proponents claimed such a review was necessary in light of the company's participation in a debt offering used to fund construction of the controversial Three Gorges Dam in China. In unsuccessfully seeking exclusion, the company contended that a financial services company's underwriting, lending and investment criteria are quintessential ordinary business matters. The proponent responded that the relationship between the criteria and the high-profile Three Gorges Dam, with all of its environmental and human rights implications, made the ordinary business exclusion inapplicable. The proponent also noted that the SEC staff had required inclusion of a similar proposal the prior year at Morgan Stanley Dean Witter.

[fn25] 2000 SEC No-Act. LEXIS 596 (Apr. 18, 2000).

[fn26] 2000 SEC No-Act. LEXIS 314 (Mar. 13, 2000).

[fn27] 2000 SEC No-Act. LEXIS 240 (Feb. 25, 2000).

§ 20.03[C] Compensation

Before 1992, the SEC staff permitted the omission under the ordinary business exclusion of virtually all proposals concerning executive compensation. In a 1992 press release, in conjunction with the issuance of several no-action letters, the Commission reversed this position, stating that executive compensation proposals would no longer be excludable under the ordinary business exclusion because the SEC staff believed that executive compensation had become a significant policy issue.

The SEC signaled its new position in a series of no-action letters, two of which were Eastman Kodak[fn28] and International Business Machines Corp.[fn29] In these letters, the staff noted "the widespread public debate concerning executive and director compensation policies and practices, and the increasing recognition of these issues. . . ." The staff issued the Cracker Barrel letter shortly thereafter, but made clear that its position in Cracker Barrel did not affect its new compensation position.

[fn28] 1992 SEC No-Act. LEXIS 217 (Feb. 13, 1992).

[fn29] 1992 SEC No-Act. LEXIS 222 (Feb. 13, 1992).

§ 20.03[C][1] Senior Executive Compensation

Consistent with its executive compensation policy, the staff consistently allows proponents to include proposals concerning senior executive compensation.

EXAMPLES:

In Boeing Company,[fn30] the company was required to include a proposal asking the compensation committee to incorporate measures of "human capital" in establishing and administering standards for use in awarding performance-based executive compensation. The company argued that the proposal employed the term "executive" in an overly inclusive manner that was not limited to directors, the CEO, and other senior executives and was thus too broad in scope. The proponent responded that the proposal related to executive compensation policy and was not targeted at specific executives.
In Halliburton Company,[fn31] the proponent defeated a no-action challenge to a proposal asking the board to establish a performance-based senior executive compensation system for the five most highly paid members of management, and requesting that the company's compensation committee report contain information specified in the proposal. The company briefly argued that the proposal was a "challenge to the form and presentation of the Compensation Committee Report on Executive Compensation." The proponent argued that while the proposal did call for "enhanced disclosure," it did not request a different form of presentation of the information and therefore did not relate to the company's ordinary business operations.
In Baltimore Gas & Electric,[fn32] the company was required to include a proposal urging that total compensation for executive officers be capped at no more than 20 times the pay of the average employee. The company argued that the proposal fell squarely within the company's ordinary business because the appropriate compensation for officers is a quintessential ordinary business function. The proponent did not submit a rebuttal.

[fn30] 2002 SEC No-Act. LEXIS 200 (Feb. 18, 2002).

[fn31] 2001 SEC No-Act. LEXIS 135 (Jan. 30, 2001).

[fn32] 1992 SEC No-Act. LEXIS 215 (Feb. 13, 1992).

§ 20.03[C][2] Director Compensation

Consistent with its executive compensation position, the SEC staff normally requires companies to include proposals relating to director compensation.

EXAMPLES:

In International Business Machines Corporation,[fn33] the SEC staff required inclusion of a proposal asking that the board rescind the company's retirement plan for non-employee directors. The company cited a similar 1992 no-action letter in its arguments for exclusion. The proponent did not submit a rebuttal. In its response, the staff noted that "in view of the widespread public debate concerning executive and director compensation policies and practices, and the increasing recognition that these issues raise significant policy issues, it is the Division's view that proposals relating to director compensation no longer can be considered matters relating to a registrant's ordinary business."

[fn33] 1993 SEC No-Act. LEXIS 4 (Jan. 4, 1993).

§ 20.03[C][3] Golden Parachutes

In January 1990, in the Transamerica letter discussed below, the SEC staff reversed its position on proposals seeking to limit golden parachute payments and began to require companies to include this type of proposal. The staff began to distinguish golden parachute payments from ordinary compensation after the Internal Revenue Service issued interpretative guidance under the Internal Revenue Code regarding the circumstances under which payments are considered "contingent" upon a change in ownership or control.

In addition, the staff recognized the growing debate in this area that made golden parachutes a significant policy issue.

EXAMPLE:

In Transamerica Corp.,[fn34] the company was required to include a proposal recommending that the board adopt a policy prohibiting the company from making compensation payments to its directors, officers or employees contingent on a merger or acquisition. The company argued that the practice of using golden parachute arrangements was routine in the corporate community and was a necessary recruiting tool. The company argued that it was impractical for stockholders to assess the value of such a program. The proponent did not submit a rebuttal. In its response, the SEC staff stated that "proposals addressing compensation payments made to executives or employees in connection with a change in the ownership or effective control of a corporation or an extraordinary event closely associated with a change in ownership or control (often referred to as `gold parachute' arrangements) could not be excluded in reliance on (c)(7)."

[fn34] 1990 SEC No-Act. LEXIS 46 (Jan. 10, 1990).

§ 20.03[C][4] Definition of "Executive Compensation"

Over time, the distinction between "senior executive" and "executive" compensation has become less relevant. Although the SEC staff's 1992 reversal concerned "senior executive compensation," in practice the two concepts have been conflated.

As incentive compensation increasingly is available to rank and file employees, it is difficult for the staff to determine if a proposal relates to executive compensation or is a general compensatory matter. In close cases, the arguments offered by the parties and the tone of a supporting statement might be persuasive to the staff.

In some cases, if a proposal appears to relate to executive compensation, but contains language that could be interpreted as referring to general compensation, the SEC staff gives the proponent an opportunity to revise the proposal to clarify that it relates solely to executive compensation. When the staff affords this opportunity, it generally gives the proponent seven calendar days to submit a revised proposal to the company. However, sometimes the staff abides by the position that a proposal may be excluded without an opportunity to cure even if only one portion of the proposal implicates ordinary business.

EXAMPLES:

In El Paso Energy Corporation,[fn35] the company received two proposals, one relating to the company's impending cancellation of its restricted stock grant program, and the other addressing limitations on salary or bonus increases. The company argued that the program in the first proposal applied to both executive and lower-level employees and that, because of the broad scope of the restricted stock program, the proposal on it related to normal business operations. The company pointed out that the proponent only included the words "executive" and "manager" in the proposal to try to avoid exclusion. With respect to the proposal in the second letter, the company noted that the proposal included the words "any corporate officer," which it interpreted to mean any person within the company who held managerial responsibility. The proponent did not submit a rebuttal in either case. The staff stated that it was unclear whether the proposals dealt solely with executive compensation, so it gave the proponent an opportunity to revise the proposal to clarify that it did.
In Cincinnati Bell Inc.,[fn36] the company was required to include a proposal requiring that the grant of the combined value of bonus and stock options to "executives" be equal to the percentage of their annual salary which is equal to the percentage increase in the price of the company's stock during the previous year, provided the proponent recast the proposal as precatory. The company argued that because the proposal was vague and did not specifically identify the executives covered by the proposal, it could be interpreted as relating to general compensation and was therefore excludable. The proponent's rebuttal did not address the specific exclusion. The staff stated that it was unclear whether the proposal dealt solely with executive compensation, so it gave the proponent an opportunity to revise the proposal.

[fn35] 2001 SEC No-Act. LEXIS 337 (Mar. 9, 2001), and 2001 SEC No-Act. LEXIS 334 (Mar. 8, 2001).

[fn36] 2000 SEC No-Act. LEXIS 151 (Feb. 9, 2000).

§ 20.03[C][5] General Compensation

When the SEC changed its position on executive compensation proposals in 1992, it made clear that it still expected the staff to allow companies to exclude proposals relating to general compensation and fringe benefit issues. For example, proposals requesting reports on policies to implement wage adjustments are considered ordinary business and are excludable.

EXAMPLES:

In Nortel Networks Corporation,[fn36.1] the company was allowed to exclude a proposal that sought to modify the company's employee stock option program to allow terminated employees to retain their stock options until expiration. The company argued that the company's stock option program was part of its general compensation matters because the proposal related to a broad-based compensation plan under which grants of options had been made to thousands of the employees.
In United Technologies Corporation,[fn37] the company successfully excluded a proposal recommending that the board take the necessary steps to change the date of retirement to the date of termination when calculating eligibility for cost-of-living adjustments for the company's pension plans. The company argued that the topic of conduct and maintenance of retirement plans have long fallen within normal business operations. The company further contended that it had made voluntary cost of living adjustments as recently as 1999, arguably negating the need for the proposal in the first place. The proponent did not submit a rebuttal.
In United Postal Service, Inc.,[fn38] the company was permitted to exclude a proposal urging the board to require equitable pay for persons hired as air drivers before a certain date. The company argued that the proposal related to the compensation of a single group of non-executive employees without taking into account the fair market wage and skills required for the group it was targeting. The proponent did not submit a rebuttal.
In E.I. du Pont de Nemours and Company,[fn39] the SEC staff permitted exclusion of a proposal providing that no one at a particular company location should receive a bonus unless all employees at the site received a bonus. The company argued that the proposal did not specify whether it applied to all of the company's employees and thus could be excluded because it related to general compensation matters. The proponent did not submit a rebuttal.

In recent years, the SEC staff has allowed companies to exclude proposals relating to disclosure or shareholder approval of stock option plans, if the proposals did not restrict their application to options granted to senior executives, on the reasoning that such proposals implicate general compensation. The SEC staff has rejected proponents' arguments that stock options are different from non-executive cash compensation and employee benefits because stock options may dilute the holdings of existing shareholders and in effect change a company's capital structure.[fn40]

In Staff Legal Bulletin No. 14A,[fn40.1] issued after the 2002 proxy season, the SEC staff reversed course, stating that proposals, like the one submitted to Adobe, that "seek[] to obtain shareholder approval of all such equity compensation plans that potentially would result in material dilution to existing shareholders" would not be excludable pursuant to Rule 14a-8(i)(7). However, companies would still be able to exclude proposals that do not reference dilution in reliance on that exclusion.

[fn36.1] 2002 SEC No-Act. LEXIS 260 (Feb. 28, 2002).

[fn37] 2001 SEC No-Act. LEXIS 250 (Feb. 20, 2001).

[fn38] 2001 SEC No-Act. LEXIS 347 (Mar. 6, 2001).

[fn39] 2001 SEC No-Act. LEXIS 376 (Mar. 15, 2001).

[fn40] See, e.g., Adobe Systems, Inc., 2002 SEC No-Act. LEXIS 115 (Feb. 1, 2002) (allowing company to omit proposal asking for shareholder approval of all equity compensation plans "other than those that would not result in material potential dilution").

[fn40.1] Division of Corporation Finance, Staff Legal Bulletin No. 14A, issued July 12, 2002 (available on www.sec.gov/interps/legal/cfslb14a.htm).

§ 20.03[C][6] Employee Benefits

As a subset of general compensation, proposals that relate to employee benefits generally are excludable. However, sometimes proponents are able to include employee benefit proposals if they raise significant policy issues: for example, the SEC staff recently required inclusion of proposals relating to cash-balance pension plan conversions, recognizing that the corporate trend to replace traditional pension plans with these types of plans stirred a public debate.

The SEC staff first ruled on this issue in a 2000 letter denying no-action relief to International Business Machines Corporation, which had sought to exclude a proposal mandating that all employees, regardless of age, receive the same long-promised retirement medical insurance and pension choice as employees who are within five years of retirement, and that the portable cash-balance plan provide a monthly annuity equal to that expected under the old pension plan or a lump sum that is actuarially equivalent.[fn41] (The company's and proponents' arguments are summarized below.)

After issuing the response to IBM's request, the staff noted that its position was based not so much on the significant social and corporate policy issues implicated by the proposal, but instead on the widespread public debate that it generated.[fn42] However, the staff allowed the same company to omit a later proposal requesting the preparation of a report on the potential impact on the company of various pension-related proposals under consideration by Congress, including those affecting cash balance pension plan conversions. (The company's and proponent's arguments are summarized below.) In its response, the staff pointed out that the proposal "appears directed at involving IBM in the political or legislative process relating to an aspect of IBM's operations." Based on this statement, it appears that the distinguishing factor was that the staff viewed the later proposal as related more to a company's involvement in the political, legal or legislative process, which the staff views as ordinary business, compared to the hotly debated issue of cash balance plan conversions.

EXAMPLES:

In Boeing Company,[fn42.1] the company was permitted to exclude a proposal that requested that the board prepare a report on the pension liability of the company's Supplemental Executive Retirement Plan ("SERP") and all other qualified pension plans. The company argued that the proposal made no distinction between senior executives and regular executives, who were also covered by the SERP.
In BB&T Corporation,[fn42.2] the SEC staff granted a no-action request with respect to a proposal asking that the company discontinue charging fees to the accounts of its employees' and retirees' 401(k) plans for those who have elected to participate in its common stock fund. The company argued that decisions regarding the structure and operation of 401(k) plans, including decisions relating to administrative issues, are matters of ordinary business operations.
In International Business Machines Corporation,[fn43] the company was required to include a proposal requesting that the company adopt a policy to provide all employees with the same retirement medical insurance and pension choices and require the provision of a monthly annuity from the portable cash-balance plan equal to that expected under the prior pension plan, or a lump-sum equivalent. The proponents were several hundred employees, retirees and co-sponsors. The company relied on the precedent in the area of employee retirement benefits, while the proponents argued that the proposal raised significant social policy issues involving age discrimination. In support of this argument, the proponents stated that the IRS, the Department of Labor and the Equal Employment Opportunity Commission were "investigating the legality or lack of legality" of the company's cash-balance conversion plan. The proponent also noted that the company's plan had received a great deal of national media attention.
In International Business Machines Corporation,[fn44] the company successfully sought to exclude a proposal recommending that the company establish a committee of outside directors to prepare a report on the potential impact on the company of pension-related proposals being considered by national policy makers, including legislative proposals affecting cash-balance pension plan conversions and related issues. Even though the company disagreed that there was a "national controversy" over these plans, the company noted that the proposal would immerse the company, against its will, in the political and legislative process involving cash-balance pension plans. In addition, the company argued that the design and administration of its benefit plans are part of its ordinary business operations. The proponent responded that the company's plan had already received a great deal of attention from legislators and agencies and this type of plan involved a significant policy issue.

[fn41] 2000 SEC No-Act. LEXIS 165 (Feb. 16, 2000).

[fn42] See § X.L. of the Division of Corporation Finance's "Current Issues and Rulemaking Projects," dated July 25, 2000 (available at www.sec.gov/rules/othrindx.htm).

[fn42.1] 2002 SEC No-Act. LEXIS 259 (Feb. 17, 2002).

[fn42.2] 2002 SEC No-Act. LEXIS 152 (Jan. 29, 2002).

[fn43] 2000 SEC No-Act. LEXIS 165 (Feb. 16, 2000).

[fn44] 2000 SEC No-Act. LEXIS 285 (Mar. 2, 2000).

[45] [Reserved.]

§ 20.03[C][7] Repricing of Stock Options

During the late 1990s, many companies decided to award stock options to rank and file employees as an alternative to paying high salaries. Due to the volatile stock market, some of these companies engaged in significant — and sometimes repeated — option repricings; repricing involves lowering the exercise price of options already awarded, or cancelling options and replacing them with options bearing a lower exercise price. Institutional investors, most notably the State of Wisconsin Investment Board, became concerned about the dilutive effect of such repricings and submitted proposals to express their dissatisfaction. Although the SEC staff initially allowed these proposals to be excluded, it quickly changed its position and allowed the inclusion of proposals that focused on repricing options.

EXAMPLE:

In General Datacomm Industries, Inc.,[fn46] the proponent defeated a no-action challenge to a binding proposal requiring shareholder approval of any stock option repricing. The company noted that the proposal was virtually identical to one that the staff had allowed to be excluded earlier in the year (Shiva Corporation (March 10, 1998)). The proponent responded that the repricing of stock options concerned an "important matter of corporate governance" on which shareholders were entitled to vote and that repricing represented manipulation of the company's equity structure due to the dilutive effect on shareholders. In its response, the SEC staff explained that due to "the widespread public debate concerning option repricing and the increasing recognition that this issue raises significant policy issues, it is our view that proposals relating to option repricing no longer can be considered matters relating to a registrant's ordinary business."

[fn46] 1998 SEC No-Act. LEXIS 1037 (Dec. 9, 1998).

§ 20.03[C][8] Expensing of Stock Options

On appeal, in December of 2002 the Commission reversed the SEC staff's mid-July 2002 position taken in a no-action letter that allowed National Semiconductor Corporation to exclude a shareholder proposal regarding the board establishing a policy and practice of expensing the costs of future stock options issued to executives (2002 SEC No-Act. Lexis 651 (July 19, 2002)). The staff's response had indicated that the proposal was excludable as "ordinary business" under Rule 14a-8(i)(7) - because it was a "choice of accounting methods." This staff response was consistent its responses to six previously filed requests.

Specifically, the Commission's December 6th appeal response stated:

"After further consideration of the issues by the Division, as directed by the Commission, the Division does not concur in National Semiconductor's view that the United Brotherhood of Carpenters Pension Fund's proposal relates to ordinary business matters and, in the future, we will not treat shareholder proposals requesting the expensing of stock options as relating to ordinary business matters. The Division notes, however, that National Semiconductor relied in good faith on the Division's position with respect to the proxy materials in connection with its 2002 annual meeting of shareholders, which was held on October 18, 2002." National Semiconductor (available Dec. 6, 2002).

As a result of the overturn on appeal, over a hundred proposals recently submitted to companies on option expensing will have to be placed on the ballot for a shareholder vote - unless other grounds for exclusion can be found.

According to Kerry Tomasevich and Art Meyers of Palmer & Dodge, in light of the appeal, there are at least five possible approaches that companies can take regarding these types of shareholder proposals:

Agree to expense stock options - and moot the need to include the proposal in the proxy statement;
Take no position on the proposal and simply include it without comment in the proxy statement;
Provide disclosure in the proxy statement "opposing" the shareholder proposal by agreeing to the concept - but attempt to defer any adoption until the FASB issues a uniform procedure to be followed by all companies;
Provide disclosure in the proxy statement "opposing" the shareholder proposal by adhering to the position that the company is not required to adopt FAS 123 and currently complies with APB 25 - including the requirement to include the FAS 123 pro forma information in the financial footnotes; or
Possibly, if the company releases quarterly statements showing the pro-forma effect of option expensing, seek no-action relief from the SEC staff under Rule 14a-10 on the grounds that the proposal has been substantially implemented.

§ 20.03[D] Corporate Governance

Typically, companies have had limited success in attempting to exclude corporate governance proposals as ordinary business, since the staff generally finds that significant policy issues are involved. For example, the SEC staff consistently requires companies to include proposals asking companies to increase and report on the representation of women and ethnic minorities on their boards or seeking the formation of a special committee of the board to develop a particular code of corporate conduct.

EXAMPLES:

In Sprint Corporation,[fn47] the proponent defeated a no-action challenge to a proposal urging the board to prepare a description of the board's role in the development and monitoring of the company's long-term strategic plan. The company argued that there is no difference between the board's preparing an annual strategic plan report (which the SEC staff historically has allowed to be excluded) and the proposal that seeks a description of the board's role in developing and monitoring a long-term strategic plan. The company also argued that the proposal did not involve a significant social issue because the proposal merely related to business practices and procedures. In his rebuttal, the proponent cited the line of no-action letters that supported the inclusion of proposals regarding strategic planning.
In Equus II Incorporated,[fn48] the SEC staff required the company to include a proposal requesting that the board hire a proxy advisory firm, chosen by shareholder vote, to give voting advice to the shareholders. The company argued that the proposal would permit a firm over which the company would have no oversight to give advice to shareholders on matters of the company's ordinary business operations. The company believed that this could undermine the board's relationship with shareholders and its ability to manage the business and affairs of the company. The proponent argued that because the proposal related solely to the ability of shareholders to hire a proxy advisory firm and did not affect the company's ability to do the same, it did not involve the company's ordinary business operations.
In Thermo Electron Corporation,[fn49] the company successfully excluded a proposal recommending that the board present "every decision and other actions" of the board to an "assembly" of shareholders and permit the "assembly" to request cancellations or modifications. The company argued that the result of the proposal would be to set up a separate parallel board made up of shareholders to make the everyday decisions of the company and this would impair the power of the current board. The company further argued that the creation of such a board would be a direct hindrance to the company's ability to conduct its ordinary business operations. The proponent did not submit a rebuttal.
In Quality Systems, Inc.,[fn50] the company was required to include a proposal asking the company to amend its bylaws to require an independent board of directors. The company argued that "by requiring that the Independent Directors meet in an executive session separate from the other directors at the end of each Board meeting without proper committee designation . . . the proposals deal with matters relating to, and are in contravention of, the ordinary management functions of the full Board." The proponent replied that the proposal clearly raised important policy matters because the issue of the independence and/or governance practices of the board of a public company could not be considered "mundane in nature," particularly in situations such as the company's, where significant corporate governance problems existed. In addition, the proponent contended that this subject raised significant policy issues because of continuing public debate.

[fn47] 2002 SEC No-Act. LEXIS 119 (Jan. 24, 2002).

[fn48] 2001 SEC No-Act. LEXIS 345 (Mar. 6, 2001).

[fn49] 2001 SEC No-Act. LEXIS 463 (Apr. 2, 2001).

[fn50] 1999 SEC No-Act. LEXIS 558 (June 9, 1999).

§ 20.03[E] Energy

Since the Three Mile Island accident in 1979, numerous proposals regarding energy issues have been submitted, most commonly to utilities and to oil and gas companies. The SEC staff normally allows proponents to include proposals that ask companies to report on their energy activities, particularly if the proposal raises environmental concerns.

EXAMPLE:

In Xcel Energy Inc.,[fn51] the SEC staff denied no-action relief on a proposal requesting that the board implement policies requiring the company to obtain power supplies from sources that do not have undue adverse impacts on the Pimicikamak Cree Nation and other indigenous peoples. The company argued that, because it was an electric power provider, decisions regarding the purchase of power related to the company business operations. The proponent responded that the company failed to show that the proposal did not relate to a significant social policy issue, since environmental issues normally receive special consideration by the SEC. The company responded that the proposal did not truly relate to broad social and economic issues, only a narrow issue involving one of the company's suppliers and a native people.

[fn51] 2001 SEC No-Act. LEXIS 153 (Feb. 5, 2001).

§ 20.03[F] Environment

Proposals relating to environmental issues are one of the most common types of corporate responsibility proposals submitted each proxy season. The types of environmental proposals vary, from more general proposals that ask for "moral" corporate policies to ones that ask companies to report on their production or emission of a particular chemical. The SEC staff generally allows proponents to include environmental proposals as involving a significant policy issue. However, if a proposal appears to focus primarily on legal compliance or risk management, or seeks to micromanage the company's business, exclusion will be allowed.

Numerous SEC rules and regulations, including Section 14, Regulation S-K, and the Williams Act, require companies to disclose information regarding environmental liabilities and other related information.[fn52] In addition, generally accepted accounting standards require disclosure of certain environmental information in a company's financial statements. As a result of environmental legislation, companies also are required to provide disclosure of their environmental oblligations outside their SEC filings. These sources of disclosure assist proponents to find companies that they can target as environmental "underperformers."

In Staff Legal Bulletin No. 14C, the SEC clarified that companies can exclude proposals about environmental or public health issues as dealing with ordinary business matters not involving "significant social policy issues" under Rule 14a-8(i)(7) only if they focused on the internal assessment of risks or liabilities a company faces due to the environmental or public health impact of its operations. If the proposal focused on the company minimizing or eliminating operations that may adversely affect the environment or the public's health, the Staff did not allow exclusion. [fn52.1]

EXAMPLES:

In Exxon Mobil Corporation,[fn53] the SEC staff denied no-action relief on a proposal asking the company to adopt a policy of promoting renewable energy sources, develop plans to help bring bioenergy and other renewable energy sources into the company's energy mix and advise shareholders on its efforts. The staff rejected the company's argument that the proposal related to the company's development and marketing of its products or services. The proponents responded that the proposal involved significant policy issues because the use and availability of fossil fuels were topics of public debate and political attention.
In Duke Energy Corporation,[fn54] the company was permitted to exclude a proposal recommending that the board take the necessary steps to reduce nitrogen oxide emissions from the coal-fired plants operated by the company in North Carolina. The company stated that the specifics of pollution control regarding the amount of singular chemicals used and emitted by power plants is important, but was not something to be decided by stockholders at an annual meeting. The company also argued that the proposal could be seen as an attempt to micromanage the company, and stated that the merits of the proposal would best be decided by scientists and engineers. The proponent did not submit a rebuttal.
In Potlatch Corporation,[fn55] the SEC staff permitted exclusion of a proposal requesting that the board report on the status of the issues raised in a World Resources Institute paper as they affect the company, including a description of the company's liability projection methodology and an assessment of other major environmental risks. The company argued that the proposal requested the reporting of the company's financial risks, "which is a matter best addressed by the management of the company." The proponent did not submit a rebuttal.
In Willamette Industries, Inc.,[fn56] the SEC staff granted no-action relief with respect to a proposal asking the board to create an independent committee to prepare a report on the company's environmental problems and efforts to resolve them, including an estimate of worst-case financial exposure due to environmental issues for the next ten years. The company argued that compliance with federal, state and local environmental laws and regulations was a matter that related to ordinary business operations. The company also contended that the proposal was an attempt to micromanage the company and would interfere with day-to-day operations. The proponent did not submit a rebuttal.

Over the last decade, the most common environmental proposal has asked companies to adopt the CERES Principles, a set of guidelines issued by the Coalition for Environmentally Responsible Economies. During the 1980s, after the Exxon Valdez oil spill, proponents began to submit proposals to pressure Fortune 500 companies to adopt the Valdez Principles, which later became known as the CERES Principles. The CERES Principles are voluntary environmental codes that asks companies to disclose information beyond what they are required to provide by law, as well as to go beyond mere compliance with the minimum environmental standards set by federal, state and local governments. Some of the principles' disclosure provisions caused controversy because they potentially exposed companies to increased risk of liability and costs beyond that imposed by federal and state law. To assuage some of these concerns, the principles were revised along with a disclaimer of legal liability for participating companies.[fn57]

EXAMPLE:

In R.R. Donnelley & Sons Company,[fn58] the company was required to include a proposal asking the company to adopt the CERES Principles. The company argued that the manner in which it integrates enrivonmental principles into its operations is ordinary business, and that shareholders do not possess the information necessary to make decisions about such integration. The proponent contended simply that the staff had recently found the ordinary business exclusion to be inapplicable to environmental proposals.

[fn52] For example, see Item 101(c)(xii) of Regulation S-K.

[fn52.1] See Division of Corporation Finance, Staff Legal Bulletin No. 14C (June 28, 2005) (available at http://www.sec.gov/interps/legal/cfslb14c.htm).

[fn53] 2000 SEC No-Act. LEXIS 481 (Mar. 23, 2000).

[fn54] 2001 SEC No-Act. LEXIS 231 (Feb. 16, 2001).

[fn55] 2001 SEC No-Act. LEXIS 216 (Feb. 13, 2001).

[fn56] 2001 SEC No-Act. LEXIS 439 (Mar. 20, 2001).

[fn57] Elizabeth Glass Getman & Andrew E. Skoback, "Symposium: Environmental Law and Business in the 21st Century: Environmental Activism and the Ethical Investor," 22 Iowa J. Corp. L. 465 (1997).

[fn58] 1993 SEC No-Act. LEXIS 78 (Jan. 26, 1993).

§ 20.03[G] Workplace Practices and Equal Employment

In the 1970s, shareholders affiliated with religious groups began to submit proposals asking companies to report on equal employment opportunity and affirmative action policies. Proponents have submitted proposals regarding the "glass ceiling," gender pay equity and sexual orientation non-discrimination policies, among others. Since the SEC reversed its controversial Cracker Barrel position in 1998, the excludability of equal employment proposals is considered on a facts and circumstances basis and the staff generally requires inclusion.

Since the mid-1980s, the New York City Comptroller's Office has urged companies operating in Northern Ireland to adopt the MacBride principles, which are designed to combat religious discrimination in the workplace. Although these proposals were among those theoretically affected by the staff's former Cracker Barrel policy, most companies that received them did not try to exclude them due to the New York pension funds' willingness to litigate. Since the Cracker Barrel reversal, the staff consistently has required companies to include proposals regarding the MacBride Principles.

On the other hand, general employment practices normally are considered by the staff to be part of a company's ordinary business and are thus excluded under this exclusion. It is unclear whether proposals on high-performance workplace practices, such as the W.R. Grace proposal discussed below, would be considered excludable following the SEC's reversal of its Cracker Barrel position. To avoid this issue, proponents have submitted proposals to Delta Air Lines, United Technologies and AT&T, among others, linking executive compensation to implementation of certain workplace practices. The staff tries to determine whether the workplace practices component or the executive compensation component of these dominates.

EXAMPLES:

In The Boeing Company,[fn59] the company was permitted to exclude a proposal requesting that the board rescind the decision to make specified benefits available to same-sex domestic partners of employees and refrain from adopting any similar change in policy without first securing shareholder consent. The company argued that the decision to grant benefits fell squarely within the company's normal business operations. Citing the staff's position after the SEC's reversal of its Cracker Barrel position, the proponent argued that the company's employment practices were a significant social issue. In addition, the proponent contended, the proposal was appropriate for shareholders because it "transcended the day-to-day business matters" of the company and the proposal was not detailed enough to be considered micromanagement.
In PPG Industries, Inc.,[fn60] the company was required to include a proposal urging 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 the five principles set forth in the proposal. The company argued that the proposal related to the company's management of its workforce, which fell under ordinary business. In addition, the company argued that it would be impractical for the shareholders to vote on such a proposal because they did not have the detailed knowledge required to come to a responsible decision on the subject in the timeframe of a shareholder vote. The proponent argued that the proposal related to human rights, which is a significant social policy issue.
In Louisiana-Pacific Corp.,[fn61] the SEC staff denied no-action relief on a proposal asking the company's board to adopt executive compensation policies that place a priority on achieving continuous improvement in productivity, quality and service through employee involvement in decisionmaking, employee compensation linked to performance and a strong commitment to training. The company argued that the "true purpose of the Proposal is not to change executive compensation but to force management to adopt the proponent's management concepts by making executive compensation contingent on their adoption." The company contended that adopting the proposal would significantly impact its ordinary business. The proponent responded that his proposal sought to establish specific performance criteria that would link the pay of the CEO and senior officers to the factors that create long-term value.
In W.R. Grace & Co.,[fn62] the SEC staff granted no-action relief with respect to a proposal requesting that the board commit the company to the goal of creating a "high-performance" workplace based on policies of workplace democracy and meaningful worker participation and prepare a report on implementation of the proposal. The company argued that the proposal related to employee training and motivation, general compensation issues, management of the workplace, employee supervision and similar matters, all of which related to ordinary business. The proponent argued that the proposal pertained to a major policy issue and pointed out that the issue of "high performance" workplaces was an issue of interest to the Department of Labor. The company replied that the proposal was not necessarily related to a significant policy issue just because the DOL had addressed it and stated that "governmental agencies prepare reports on a wide variety of topics ranging from urgent matters of important national policy to mundane matters of little significance."
In TRW Inc.,[fn63] the proponent successfully included a proposal that related to the implementation of the MacBride Principles. The company argued that "a primary theme of the Proposals is to require proponents to discriminate in favor of religious groups that are underrepresented in the work force. Affirmative action is not sanctioned by the Northern Ireland law and such `reverse discrimination' would be illegal." The company also argued point by point how the MacBride Principles violate Northern Ireland law. The proponent did not submit a rebuttal.

[fn59] 2001 SEC No-Act. LEXIS 172 (Feb. 7, 2001).

[fn60] 2001 SEC No-Act. LEXIS 124 (Jan. 22, 2001).

[fn61] 1996 SEC No-Act. LEXIS 274 (Feb. 29, 1996).

[fn62] 1996 SEC No-Act. LEXIS 275 (Feb. 29, 1996).

[fn63] 1986 SEC No-Act. LEXIS 1661 (Jan. 28, 1986).

§ 20.03[H] Allegedly Harmful Products

Proponents frequently target companies that make products that they feel are detrimental to public health or the environment. Companies in the tobacco, food, pharmaceutical and defense industries often receive proposals asking that they cease production of — or modify — their products. Retailers may also be asked to stop selling particular products or to change the way they promote them.

EXAMPLE:

In Wal-Mart Stores, Inc.,[fn64] the SEC staff granted no-action relief with respect to a proposal requesting that the board adopt a policy to refuse to sell handguns and ammunition, and that the company return its inventories of these products to their manufacturers. The company stated that the proposal would take away the power of the board to deal with day-to-day merchandising decisions, and that the proposal would micromanage the company in an area which "shareholders, as a group, would not be in a position to make an informed judgment." The proponent did not submit a rebuttal.

[fn64] 2001 SEC No-Act. LEXIS 330 (Mar. 9, 2001).

§ 20.03[H][1] Tobacco

Tobacco continues to be one of the corporate responsibility issues most frequently raised in proposals. Having experienced limited success in influencing companies in the tobacco industry, proponents have tried to exert pressure by focusing on companies that are not tobacco manufacturers themselves but do business with these manufacturers.

Before 1990, the SEC staff permitted all tobacco-related proposals to be excluded as relating to ordinary business operations. In Phillip Morris Companies Inc.,[fn65] the staff reversed its position and required the inclusion of a proposal that asked the company to create a special committee to report on the impact of its product promotional activities on minors. In its response, the staff stated that its prior position allowing exclusion "failed to reflect adequately the growing significance of the social and public policy issues attendant to operations involving the manufacture and distribution of tobacco related products."

Since that time, the staff tends to analyze how to treat tobacco proposals based on the type of company that receives them. The staff generally allows non-tobacco manufacturing companies to exclude proposals that relate to tobacco matters, presumably on the theory that their indirect involvement in the tobacco business makes that issue insignificant for those companies. The same proposals are likely includable, however, when submitted to companies that manufacture tobacco products.

As a result of this distinction, the SEC staff has addressed whether a company is in the tobacco business on a number of occasions. Although the determination is often straightforward — as in the case of a retailer or media company — in a few cases it is unclear whether the company is sufficiently involved in the tobacco business to warrant exclusion of a proposal. Although the SEC staff has not articulated its reasoning, it likely looks to the strength of the relationship between the company's products or services and the production of tobacco products.

EXAMPLES:

In R.J. Reynolds Tobacco Holdings, Inc.,[fn65.1] the company was required to include a proposal asking the company to put additional information in the packaging of its tobacco products. The company argued that the disclosure of various matters on its packaging was already highly regulated and the subject of thousands of lawsuits and that the proposal would interfere significantly with the company's litigation strategy in these cases.
In Gannett Co. Inc.,[fn66] the company was permitted to exclude a proposal seeking the preparation of a report on the company's policies and practices regarding tobacco advertising. The company contended that the proposal implicated the company's ordinary business operations because the company did not manufacture cigarettes and its advertising policies were routine matters for a large media company.
In H.B. Fuller Co.,[fn67] the SEC staff required the company to include a proposal requesting that the company prepare a report to shareholders regarding its sale of adhesives to the tobacco industry. The company argued that it was not directly involved with the sale of tobacco products. The proponent did not submit a rebuttal.

[fn65] 1990 SEC No-Act. LEXIS 333 (Feb. 22, 1990).

[fn65.1] 2002 SEC No-Act. LEXIS 308 (Mar. 7, 2002).

[fn66] 1993 SEC No-Act. LEXIS 484 (Mar. 18, 1993).

[fn67] 1997 SEC No.-Act. LEXIS 164 (Jan. 28, 1997).

§ 20.03[H][2] Food and Pharmaceutical Products

Food and drug manufacturers occasionally receive proposals that ask them to modify or cease production or distribution of a product. The SEC staff generally allows these proposals to be excluded absent significant public concern and attention from the media and policymakers. For example, many food companies recently have been targeted in a broad campaign to halt the production and use of genetically-engineered agricultural products.

In the past, the SEC staff permitted exclusion of a proposal submitted to Borden regarding the use of food irradiation processes and irradiated ingredients (discussed below). It is not clear whether that exclusion reflected the application of a general rule regarding manufacturing processes or the failure of the proponent to submit a rebuttal explaining why food irradiation was a significant policy issue.

In the context of genetically modified foods, the staff has recently required inclusion of proposals submitted to food producers. And unlike its approach to the tobacco issue, the SEC staff does not appear to distinguish between companies that are in the business of producing a product and companies that merely use the products in their manufacturing processes or sell the products in retail stores. In other words, proponents need not show a close relationship between the company and the production of the product at issue to avoid exclusion.

EXAMPLES:

In Kroger Co.,[fn68] a proponent successfully defended against a no-action challenge to a proposal requesting that the board adopt a policy concerning genetically engineered products. The company argued that the proposal involved its decisions to sell particular products, which related to its ordinary business operations. The company also contended that the issue of genetically modified foods was a minor one for a retailer like the company, as compared with a company in the business of food production. The proponent argued that genetic engineering of food products was a significant policy issue, as evidenced by media attention and public concern.
In PepsiCo, Inc.,[fn69] the company was required to include a proposal that the board adopt a policy of removing genetically engineered crops, organisms, or products thereof from all products sold or manufactured by the company, where feasible, until long-term testing has shown they are not harmful. The company argued that the issue of genetically modified foods implicated its ordinary business operations because it involves the company's choice of processes or supplies used in its foods. The proponent replied that the existence of regulatory initiatives, the high level of public concern, and the large amount of attention paid to the issue by the media (especially the business press) showed that the subject was a significant policy issue.
In Borden, Inc.,[fn70] the SEC staff granted no-action relief with respect to a proposal asking the company to report on its use of food irradiation processes and irradiated food supplies. The company urged that selections of raw materials and ingredients for its products are at the heart of its ordinary business operations. The proponent did not submit a rebuttal. In granting relief, the staff agreed with the company that the proposal involved the company's choice of processes and supplies used in its products.

[fn68] 2000 SEC No-Act. LEXIS 547 (Apr. 12, 2000).

[fn69] 2000 SEC No-Act. LEXIS 73 (Jan. 24, 2000).

[fn70] 1990 SEC No-Act. LEXIS 60 (Jan. 16, 1990).

§ 20.03[I] Military Production

Defense contractors routinely receive proposals regarding their development and production of weapons. These proposals ask the contractors to develop ethical criteria for the acceptance of military contracts or to report on sales or offset agreements. Such proposals are generally deemed to involve a significant policy issue.

EXAMPLES:

In Lockheed Martin Corporation,[fn71] the SEC staff required the company to include a proposal requesting that the company "disclose all significant promises (including technology transfers) made to foreign governments or foreign firms in connection with military sales, intended to offset their U.S. dollar cost of weapons purchased by foreign nations." The company argued that as a major technology development company, it would be forced to disclose proprietary information that was key to the company's ability to do business. In addition, the company stated the contracts affected by the proposal contained clauses prohibiting such disclosure. The proponent did not submit a rebuttal.
In General Electric Company,[fn72] the proponent successfully included a proposal that requested that the company develop and report on criteria for military contracting. The company argued that the proposal related to "generic business issues" and not just military issues. The company noted that the frequent use of the word "military" in the proposal did not justify exclusion, and explained how some of the cited programs did not relate to military contracting. The proponent argued that the proposal solely related to the company's military operations and explicitly showed, paragraph by paragraph, how each military reference in the proposal was genuine.

[fn71] 2001 SEC No-Act. LEXIS 137 (Jan. 31, 2001).

[fn72] 1998 SEC No-Act. LEXIS 161 (Feb. 9, 1998).

§ 20.03[J] Shareholder Matters

The SEC staff consistently allows companies to exclude proposals seeking benefits for shareholders such as dividend reinvestment plans or stock buybacks. Proposals relating to the location or conduct of shareholders' meetings are generally deemed related to a company's ordinary business operations.

EXAMPLES:

Shareholder benefits

In Citigroup Inc.,[fn72.1] the SEC staff permitted exclusion of a proposal requesting that the board adopt a resolution establishing a dividend reinvestment plan. The company briefly argued that the staff had repeatedly agreed that a proposal to institute a dividend reinvestment program was a matter relating to ordinary business. The proponent did not submit a rebuttal.
In Astronics Corporation,[fn72.2] the company successfully excluded a proposal asking that the company redeem all outstanding Class B shares and convert them to common stock on a one-for-one basis. The company argued that redemption of stock was an ordinary business decision and that the inclusion of the proposal could lead to second-guessing of the board regarding decisions over day-to-day operations. The company also pointed out that the phrasing of a proposal as precatory rather than mandatory did not change this analysis. The proponent's rebuttal did not address the exclusion.

Location and conduct of annual meeting

In Verizon Communications Inc.,[fn72.3] the company was allowed to exclude a proposal that sought to limit the location of the company's annual meetings. The company argued that determining the appropriate location for the company's annual meeting was a matter of ordinary business because it involves an assessment of the availability of the directors, appropriate management and staff resources to support the meeting at the location, the availability of adequate facilities, the associated costs, and the location's accessibility to shareholders.
In AmSouth Bancorporation,[fn72.4] the SEC staff permitted exclusion of a proposal requesting that the floor of the company's annual meeting be opened to questions and comments from shareholders for thirty minutes prior to adjournment. In its response, the SEC staff noted that the proposal related to the company's ordinary business operations because it involved a specific amount of time allocated for shareholder discussion, during the course of an annual meeting, of board answers to shareholder questions posed at the meeting.
In Niagara Mohawk Holdings, Inc.,[fn73] the company was permitted to exclude a proposal that related to setting aside a discussion room for all shareholders at the company's annual meeting. The company argued that the planning of the company's annual meeting fell "squarely within" ordinary business. The proponent did not submit a rebuttal.
In The Gillette Company,[fn74] the SEC staff granted no-action relief with respect to a proposal recommending that the board provide information to shareholders attending the company's annual meeting and present measures for open discussion. The company noted that in the proponent's original cover letter submitted with the proposal, the proponent acknowledged that "this resolution is of concern to all shareholders and relates to the ordinary conduct of business as stated in rule 14a-8." The company argued that while the proponent's revised cover letter did not include any references to the company's ordinary business, the content of the revised proposal remained nearly identical to that of the original, proving that the goal of the proposal remained the same. The proponent's rebuttal did not address the specific exclusion.

[fn72.1] 2001 SEC No-Act. LEXIS 201 (Feb. 7, 2001).

[fn72.2] 2001 SEC No-Act. LEXIS 343 (Mar. 2, 2001).

[fn72.3] 2002 SEC No-Act. LEXIS 250 (Feb. 25, 2002).

[fn72.4] 2002 SEC No-Act. LEXIS 24 (Jan. 15, 2002).

[fn73] 2001 SEC No-Act. LEXIS 339 (Mar. 5, 2001).

[fn74] 2001 SEC No-Act. LEXIS 156 (Feb. 2, 2001).

§ 20.03[K] Operational Matters

The SEC staff generally allows companies to exclude proposals regarding day-to-day operations unless significant policy issues related to daily operational matters are implicated. For example, for the past decade, the staff has allowed the inclusion of proposals regarding plant closings after it recognized that they generated significant controversy. However, the staff distinguishes proposals that involve specific decisions about the closing or relocation of a particular plant or facility from those dealing with the general policy issue of plant closings. The former are includable, while the latter are not. In the 2002 proxy season, following the collapse of Enron and increased scrutiny regarding the role of securities analysts, the SEC staff held that proposals asking financial services firms to adopt codes of conduct regarding analyst independence were not barred by the ordinary business exclusion.

EXAMPLES:

In J.P. Morgan Chase & Co.,[fn75] the SEC staff denied a no-action challenge to a proposal asking the company to implement and enforce a code of conduct governing the independence of the company's securities analysts. In its response, the SEC staff noted the widespread public debate concerning analyst independence and the increasing recognition that the issue raises significant policy considerations.
In UAL Corporation,[fn76] the company was permitted to exclude a proposal asking that the company discontinue the practice of code share flights. The company argued that the decision to engage in code share flights is part of management's day-to-day operations.
In Washington Mutual, Inc.,[fn76.1] the SEC staff allowed the company to exclude a proposal requesting a report on the company's real estate investments. The company argued that the proposal sought only a report on an insignificant part of the company's business that does not address any broad or fundamental corporate policy regarding the environment. The proponent responded that the proposal addressed larger policy considerations about the use and development of the company's resources and noted that the requested report did not suggest any specific implementation steps.
In Allstate Corporation,[fn76.2] the SEC staff permitted the company to exclude a proposal asking that the company cease all operations in Mississippi. The company argued that it is the nation's largest publicly held personal lines insurer with thousands of employees and that they were in the best position to determine whether to operate in a particular state.
In Merck & Co., Inc.,[fn77] the company successfully excluded a proposal that sought to reduce the costs of prescription drugs by having the company scrutinize its research and development efforts, dismantle those with substandard performance and dismiss senior officers directly responsible for that performance. The company argued that the protection and management of assets and supervision of employees are fundamental to its conduct of ordinary business operations. The proponent's rebuttal did not address the exclusion.
In Wal-Mart Stores, Inc.,[fn80] the SEC staff permitted exclusion of a proposal relating to the implementation of annual "customer meetings." The company argued that the proponent's goal was to dictate the company's relationship with its customers and stated that "decisions concerning customer relations are handled by members of Wal-Mart's senior management whose entire focus is on customer relations and customer concerns, and whose decisions in matters of customer relations are based on complex considerations that are outside the purview or the experience of Wal-Mart's shareholders." The proponent did not submit a rebuttal.
In AOL Time Warner Inc.,[fn81] the company was permitted to exclude a proposal recommending that the board change the company's name. The company argued that a name change was a matter best left to senior management because it was "impracticable for stockholders to decide how to solve such problems at annual stockholders meetings." In addition, the company stated that the determination of the company's name was central to the company, its reputation, and its public image, thus making it central to the company's ordinary business operations. The proponent did not submit a rebuttal.

[fn75] 2002 SEC No-Act. LEXIS 129 (Jan. 21, 2002).

[fn76] 2002 SEC No-Act. LEXIS 91 (Jan. 28, 2002).

[fn76.1] 2002 SEC No-Act. LEXIS 270 (Mar. 6, 2002).

[fn76.2] 2002 SEC No-Act. LEXIS 203 (Feb. 19, 2002).

[fn77] 2001 SEC No-Act. LEXIS 204 (Feb. 9, 2001).

[78] [Reserved.]

[79] [Reserved.]

[fn80] 2001 SEC No-Act. LEXIS 435 (Mar. 27, 2001).

[fn81] 2001 SEC No-Act. LEXIS 431 (Mar. 20, 2001).

§ 20.03[L] Political Issues and Charitable Contributions

The SEC normally requires companies to include proposals that relate to the involvement of companies in politics, including campaign contributions, unless the company is subject to a high degree of government regulation. During the past few years, proponents have requested disclosure of so-called "soft money" contributions to political parties and the right to have shareholders approve political contributions over a specified amount.

Similarly, the staff generally requires inclusion of proposals concerning a company's charitable contributions policy. However, the staff treats proposals regarding contributions to specific charities or categories of charities as relating to ordinary business operations, even though they often implicate high-profile social issues such as abortion.

EXAMPLES:

In Aetna Inc.,[fn81.1] the company was allowed to exclude a proposal regarding the company's philanthropic contributions to organizations that promote "larger government or more government regulation." The company argued that corporate charitable giving is a widely recognized and accepted business activity engaged in on a regular basis by most major public companies and that decisions concerning the allocation of charitable contributions are made in the ordinary course of business.
In UST Inc.,[fn81.2] the proponent prevailed in a no-action challenge to a proposal asking that the company disclose each financial or in-kind contribution or grant it made to any charitable, educational, religious, not-for-profit, or tax-exempt entity. The company acknowledged that the staff generally finds that proposals relating to charitable contributions are beyond a company's ordinary business operations but argued that the real purpose of the proposal was to obtain a list of any charitable contributions or grants made by the company to particular types of charitable organizations that advocate the company's political positions before Congress and state legislatures. The proponents argued that the proposal did not identify specific recipients who should be granted contributions and that their motive was irrelevant.
In Bank of America Corporation,[fn82] the proponent successfully included a proposal that requested that the board adopt a policy that the company not make or solicit any political contributions. The company argued that the banking world is laden with legislation, and that interaction — be it vocal or financial — with legislators was key to the company's success. The proponent did not submit a rebuttal.

[fn81.1] 2002 SEC No-Act. LEXIS 291 (Feb. 23, 2002).

[fn81.2] 2002 SEC No-Act. LEXIS 241 (Feb. 26, 2002).

[fn82] 2000 SEC No-Act. LEXIS 434 (Mar. 10, 2000).

§ 20.03[M] Human Rights

Since the early 1970s, proponents have used proposals to target companies' business practices in other countries in an effort to influence how workers in those countries are treated. For example, some of these proposals request reports from companies to ensure that neither they nor their suppliers use slave, convict, or child labor or otherwise fail to protect the human rights of their employees or employees of their suppliers.

The earliest example of this kind of activism was the longstanding campaign to publicize apartheid in South Africa by targeting companies that did business there. Beginning in the late 1970s, proposals requested that companies adopt the Sullivan Principles, a voluntary code of conduct for U.S. companies investing in South Africa, to promote social justice and eliminate apartheid. Companies that adopted the Sullivan Principles were required to provide nonsegregated workplaces, ensure equal employment practices, and provide equal pay, as well as to develop training programs for the advancement of non-whites. In addition, they had to seek to improve the quality of employee lives outside the workplace and exert efforts to eliminate certain laws. Companies had to report annually to Rev. Leon Sullivan on their progress in implementing the principles. The Sullivan Principles were successful in part as a result of numerous shareholder proposals calling for their adoption.[fn83]

Today, human rights concerns are raised about other countries, such as China, Burma/Myanmar, Nigeria, the republics of the former Soviet Union and Mexico; other proposals are country-neutral and seek to impose general standards. In general, human rights issues — as opposed to ordinary workplace practices — are considered significant policy issues, even when they are linked to matters, such as supplier relationships, that are otherwise ordinary business matters.

The line between human rights and general workplace practices is somewhat difficult to discern; for example, proponents view the payment of a living wage to foreign workers as a human rights issue, while companies urge that it is more akin to the general wage and benefit matters that have historically been deemed excludable by the SEC staff. This tension was illustrated by the SEC staff's response to a proposal submitted to Wal-Mart regarding human rights and its foreign suppliers, which is discussed below.

EXAMPLES:

In Kmart Corporation,[fn84] the SEC staff required the company to include a proposal asking the company to amend its buying policy and standard purchase contracts to implement the principles defined by the International Labor Organization, as well as to monitor adherence and report annually on the policy. The company argued that the proposal related to the company's relationship with its vendors and suppliers, both of which the company considered central to its ordinary business operations and that implementation of the proposal would interfere with the company's existing policy. The proponent argued that proposals relating to "sweatshops" were includable because they pertained to important social policy issues.
In Wal-Mart Stores, Inc.,[fn85] the company was permitted to exclude a proposal asking it to report on the actions it takes to ensure it does not purchase from companies that use forced, convict or child labor or that do not comply with laws protecting employees' rights. The proposal asked that the report contain, among other things, a discussion of policies to ensure that employees of the company's suppliers are paid a living wage. The company argued that the mention of wages meant the proposal dealt with ordinary employment issues, not significant policy issues. The proponent responded that the living wage component was merely one element of a proposal that in its entirety addressed human rights, an unambiguously significant policy issue. In granting relief, the SEC staff noted that "although the proposal appears to address matters outside the scope of ordinary business, paragraph 3 of the description of matters to be included in the report [the living wage element] relates to ordinary business operations." The SEC denied a request for reconsideration.[fn86]
In American Eagle Outfitters, Inc.,[fn87] the SEC staff denied no-action relief on a proposal asking the company to commit itself to the implementation of human rights standards and to adopt a program to monitor compliance with those standards. The company argued that the proposal would force the company to modify its existing contractual relationships with many of its suppliers, and stated that the modification could have a negative effect on its relationship with its suppliers. The company also argued that its relationship with its suppliers was at the heart of its normal business operations. The proponent argued that the proposal related to a question of significant social policy.

[fn83] See Heidi S. Bloomfield, "`Sweating' the International Garment Industry: a Critique of the Presidential Task Force's Workplace Codes of Conduct and Monitoring System," 22 Hastings Int'l & Comp. L. Rev. 567, 587-88 (1999) (recounting history of and describing Sullivan Principles); Valerie A. Zondorak, "A New Face in Corporate Environmental Responsibility: the Valdez Principles," 18 B.C. Envtl. Aff. L. Rev. 457, 474-79 (1991) (same).

[fn84] 2001 SEC No-Act. LEXIS 392 (Mar. 16, 2001).

[fn85] 1999 SEC No-Act. LEXIS 329 (Mar. 15, 1999).

[fn86] 2000 SEC No-Act. LEXIS 950 (Sept. 27, 2000).

[fn87] 2001 SEC No-Act. LEXIS 430 (Mar. 20, 2001).

§ 20.03[N] Business Combinations and Financial Performance

The SEC staff consistently allows companies to exclude proposals that require a company to take specific measures to improve financial performance. For example, companies are permitted to exclude proposals requesting implementation of plans to meet specified earning levels or to hire a consulting firm to advise the board on the company's poor financial performance. Similarly, the staff generally allows companies to exclude proposals about whether they should hire an investment banker to consider their strategic alternatives if the proposals do not confine their discussions to extraordinary transactions.

EXAMPLES:

In The Bureau of National Affairs, Inc.,[fn88] the company successfully excluded a proposal asking the board to retain an independent advisor to assess and calculate the company's "market value," and to fix the price of the company's stock during the next stock plan offering period at the value assessed by the independent advisor. The company argued that the proposal would give the power to fix the market value of the company's stock to a third party instead of the board, which would violate the company's certificate of incorporation, bylaws, and "Statement of Objectives." The company also argued that the selection of share value was a complex decision that was closely tied to the board's long-term goals and other financial policies. The proponent's rebuttal did not specifically address this exclusion.
In Second Bancorp Incorporated,[fn89] the SEC staff granted no-action relief with respect to a proposal seeking annual evaluation of the impact on shareholder value of continuing the operations of the bank as an independent entity. The company argued that the proposal was not intended to effectuate an extraordinary transaction, and that the valuation study required by the proposal encompassed an assessment of the continued, ordinary operations of the company. The proponent did not submit a rebuttal.
In Fab Industries, Inc.,[fn90] the proponent successfully defended against a challenge to a proposal asking the company to hire an independent outside expert to prepare a study concerning the sale, liquidation or other course of action of the company, and to report the results to stockholders. The company argued that this proposal was similar to proposals that sought the hiring of an investment banker, which had been deemed excludable by the SEC staff. The proponent did not submit a rebuttal. In its response, the staff noted that the proposal appeared to focus on possible extraordinary business transactions.

[fn88] 2001 SEC No-Act. LEXIS 286 (Mar. 1, 2001).

[fn89] 2001 SEC No-Act. LEXIS 235 (Feb. 16, 2001).

[fn90] 2000 SEC No-Act. LEXIS 427 (Mar. 23, 2000).

§ 20.03[O] Issues Related to the Independent Auditor

Following the collapse of Enron and proliferating accounting scandals at U.S. companies, a number of shareholder proposals focused on the selection, ratification and role of the independent auditor. The SEC staff determined that proposals dealing with the provision of non-audit services to audit clients implicate a significant policy issue, and thus are not excludable, while proposals addressing the mechanism of auditor selection are excludable as involving ordinary business operations.

EXAMPLE:

Included

In Motorola, Inc.,[fn91] the SEC staff denied no-action relief with respect to a proposal requesting that the board of directors adopt a policy stating "that the public accounting firm retained by our Company to provide audit services, or any affiliated company, should not also be retained to provide non-audit-services to our Company." The staff stated that the issue raised significant policy considerations. See also Walt Disney Company[fn92] (same proposal and result), Ameren Corporation[fn93] (same), and Duke Energy Corporation[fn94] (same).

EXAMPLES:

Excluded

In Fleetwood Enterprises, Inc.,[fn95] the company successfully sought to exclude a proposal asking that the independent auditor be selected annually by shareholder vote. In its response, the SEC staff noted that the proposal related to "ordinary business matters (i.e., the method of selecting independent auditors)."
In ConAgra Foods, Inc.,[fn96] the SEC staff allowed exclusion of a proposal asking the company to hire a new auditing firm every four years. In its response, the SEC staff characterized the proposal as dealing with "the method of selecting independent auditors."

[fn91] 2002 SEC No-Act. LEXIS 34 (Jan. 16, 2002).

[fn92] 2002 SEC No-Act. LEXIS 849 (Dec. 18, 2001).

[fn93] 2002 SEC No-Act. LEXIS 14 (Jan. 14, 2002).

[fn94] 2002 SEC No-Act. LEXIS 296 (Mar. 1, 2002).

[fn95] 2002 SEC No-Act. LEXIS 570 (Apr. 24, 2002).

[fn96] 2002 SEC No-Act. LEXIS 602 (June 14, 2002).

§ 20.04 Practice Pointers

Company Practice Pointers

Argue micromanagement or complex business matters. If a proposal seeks to micromanage a company, the staff is apt to allow exclusion, so a company should provide details how a proposal involves the company's day-to-day operations. Similarly, a company should argue, if possible, that a proposal addresses issues that are so central to management's ability to run the company that they would not practically be subject to shareholder oversight because shareholders are not in a position to make an informed judgment.

Cite precedent. The ability of a company to cite to prior no-action letters directly on point is probably more important under this exclusion than any other. Loose analogies from fact patterns that are not closely related are not persuasive in this context because the staff is sensitive to the perception of inconsistency, unless it consciously — and after much deliberation — decides to reverse a position.

Proponent Practice Pointers

Stress social and political policy implications. Since the staff relies heavily on the input from a proponent about the policy implications of its proposal, proponents should take advantage of the opportunity and explain why a proposal is important from a policy perspective. The proponent should emphasize media scrutiny, other indicia of public concern and any legislative or regulatory initiatives relating to the issue. A proponent should also stress that the proposal's subject is gaining momentum with the public.

Cite precedent. Like companies, a proponent should analogize between his proposal and prior proposals that were challenged and included. Letters regarding very similar proposals can be quite persuasive to the staff under this exclusion.

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