SEC Limits Ability of Companies to Exclude Shareholder Proposals Relating to Equity Compensation Plans

On July 12, the SEC’s Division of Corporation Finance announced a new approach for determining whether shareholder proposals relating to equity compensation plans may be excluded from a company’s proxy statement.

Rule 14a-8 provides a mechanism for shareholders to include proposals in company proxy materials. Companies may exclude shareholder proposals if they deal with matters relating to “ordinary business operations.” Applying this test, the SEC previously determined that companies could not, in reliance on the “ordinary business” exception, exclude proposals that concerned only senior executive and director compensation, but could exclude proposals that related to general employee compensation.

In light of widespread public debate about equity compensation, which the Division of Corporation Finance suggests takes proposals on some plans outside “ordinary business operations” and into the realm of (unexcludable) social policy issues, the Division’s new interpretation of Rule 14a-8 is as follows:

• Proposals that focus on compensation plans that compensate only senior executives and directors. Consistent with past practice, companies may not rely on the “ordinary business” exception to exclude these proposals from their proxy materials.
• Proposals that focus on all other equity compensation plans. Companies may not rely on the “ordinary business” exception to exclude proposals that seek to require shareholder approval of equity compensation plans that potentially would result in material dilution to existing shareholders. However, companies may exclude proposals that seek to require shareholder approval of equity compensation plans without regard to their potential dilutive effect.

The SEC’s Staff Legal Bulletin does not require that any particular level of dilution be specified in the shareholder proposal. It may be that a shareholder could just request that any plan or plans that are “materially dilutive,” individually or in the aggregate, be submitted for approval. There is no safe harbor definition of “immaterial dilution.” The Staff Legal Bulletin applies to all public companies, whether or not listed or quoted on the NYSE or on Nasdaq.