Energy and Commodities Outlook 2022

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With proxy season in full swing, the U.S. Security and Exchange Commission’s new view of shareholder proposals could significantly bolster environmental, social and governance (ESG) causes that shareholders want to promote.

SEC’s newer approach to reviewing shareholder proposals will make it harder for companies to block shareholder initiatives, including ones to reduce carbon emissions and promote social responsibility.

It is important for businesses to understand this SEC policy shift, even as they continue to learn about the proposed climate disclosure rule, which we discussed (Scope 3 emissions and for Scope 1 and 2 emissions) last month.

Earlier policy discouraged activism

SEC rule 14a-8 (17 C.F.R. § 240.14a-8) relates to shareholder proposals. Under rule 14a-8, a company must include shareholder proposals on its proxy statement for consideration at annual and special meetings. Under certain circumstances, however, rule 14a-8 provides that a company may exclude a shareholder proposal from the proxy statement. Two common exclusions that companies rely on to exclude shareholder proposals are the ordinary business exclusion in section 240.14a-8(i)(7) and the economic relevance exclusion in section 240.14a-8(i)(5).

Under the Trump administration, the SEC issued a series of bulletins relating to the interpretation of the ordinary business and economic relevance exclusions. The guidance in the bulletins effectively imposed restrictions on shareholder proposals aimed at influencing corporate strategies related to broad social issues like climate change and corporate responsibility. The SEC at the time said the restrictions were intended to safeguard against shareholder micromanagement and ensure that proposals were economically relevant to the company’s business. Therefore, the SEC focused on the nexus between the policy issue raised in the proposal and the company.

Overall, these interpretations of the ordinary business and economic relevance exclusions complicated shareholder efforts to advance proposals related to ESG issues, including climate change. The interpretations also effectively shut down shareholder proposals related to emissions targets, which were seen as too prescriptive (i.e., micromanagement).

Updated SEC policy reverses exclusions, hits definitions

On November 3, 2021, the SEC issued a legal bulletin (November Bulletin) that rescinded the Trump-era policies on the ordinary business and economic relevance exclusions summarized above.

Ordinary course exclusion and micromanagement

Regarding the ordinary business exclusion, the November Bulletin said the prior policy put “undue emphasis … on evaluating the significance of a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy.” According to the SEC, this led to inconsistencies in the agency’s exclusion determinations.

The November Bulletin thus provides that the SEC’s policy on the ordinary business exclusion will focus on the social policy significance of the issues in the shareholder proposal. Staff have been instructed to consider whether the shareholder proposal raises issues associated with broad social impact. If yes, the SEC may no longer readily dismiss the shareholder proposal under the ordinary course exclusion.

Key takeaways
  • Policies that thwarted shareholder ESG proposals reversed
  • New policies protecting socially responsible initiatives are being implemented
  • Broad-scope issues like climate change may be included alongside core business activity
  • Concept of shareholder micromanagement narrowed
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