Environmental Update

Shareholder Proposals on Environmental Risks May Now Be Harder to Exclude

December 3, 2009

In the 2010 proxy season, companies may see a rise in the number of environmental, climate change and other social policy-related shareholder proposals submitted as a result of new SEC guidance.  This is because climate change issues in particular are subject to increasing public and SEC scrutiny, but also because the SEC recently issued Staff Legal Bulletin 14E (“SLB 14E”), which rejects a previous SEC position used by companies to exclude certain of these proposals from their proxy statements.  As a result, companies may need to either negotiate withdrawals or include these proposals in their proxy statements. 

 

The SEC’s proxy rules allow a company to exclude shareholder proposals that address matters relating to the company’s “ordinary business operations” (Rule 14a-8(i)(7)).  In 2005, the SEC staff  (the “Staff”) indicated that Rule 14a-8(i)(7) permitted a company to exclude proposals that focus on an internal assessment of the risks and liabilities the company faced relating to the environment or public health.

 

In SLB 14E, issued on October 27, 2009, the Staff explicitly rejected its earlier guidance.  Now, a determination that a proposal would require an evaluation of risk is no longer dispositive.  Instead, the Staff will analyze whether the underlying subject matter to which the risk pertains or that gives rise to the risk involves an ordinary business matter or a significant policy issue.  If the underlying subject matter raises policy issues “so significant that it would be appropriate for a shareholder vote”, the Staff will not permit exclusion “as long as a sufficient nexus exists between the nature of the proposal and the company”.

  • The SEC’s determination of whether there is a “significant” policy issue and a “sufficient nexus” will be on a case-by-case basis, consistent with the approach it applies to other types of proposals.  The SEC will consider factors such as the nature of the proposal and the circumstances of the relevant company.
  • The Staff has noted that the board’s role in overseeing a company’s risk management is a significant policy matter with respect to corporate governance and suggested that proposals relating to the board’s role may be appropriate for a shareholder vote.

Note that the SEC’s long-standing position that a company may exclude proposals seeking to micro-manage the company—those proposals probing deeply into complex matters that shareholders, as a group, are not in a position to make an informed judgment about—is left untouched by SLB 14E.  As a result, companies should be able to continue to argue that shareholder votes as to items which are particularly specific or detailed—perhaps a requirement to voluntarily reach a specific level of greenhouse gas reductions or to use particular environmentally-friendly technologies or types of renewable energy—should continue to be excludable.

 

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© 2009 Davis Polk & Wardwell