Apple’s First Bite at Ordinary Business Exclusion Turns Sour

Apple made a splash last month when it became the first issuer to rely on the SEC staff’s new interpretation of the ordinary business exclusion for shareholder proposals. Last week the company became the first recipient of a resounding rejection by the staff of that request under Staff Legal Bulletin No. 14I.

Jing Zhao, a frequent proponent of proxy proposals, submitted a request calling on Apple to establish a Human Rights Committee to review and assess Apple’s policy and practices on human rights. The proposal called for the board to take steps such as adopting human rights principles; designating outside independent human rights experts to serve as advisors; soliciting public input on human rights issues; and issuing periodic reports to shareholders and the public on the committee’s activities, findings, and recommendations. The proposal’s supporting statement also expressed concern about whether Apple’s operations in China sufficiently promote human rights by offering products designed to “help internet users evade censorship” by the Chinese government.

Apple relied on the ordinary business provision and new Staff Legal Bulletin No. 14I as a substantive basis for excluding the human rights proposal. The staff legal bulletin, issued on Nov. 1, 2017, focuses in relevant part on the question of policy issues that are sufficiently significant to transcend ordinary business and would be appropriate for a shareholder vote.

According to the staff, the question of “whether the significant policy exception applies depends, in part, on the connection between the significant policy issue and the company’s business operations.” The staff added that “[t]hese determinations often raise difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine,” given that the board knows the company’s business and “is well situated to analyze, determine and explain whether a particular issue is sufficiently significant.”

The staff explained that it expects no-action requests under this provision to include a discussion reflecting the board’s analysis of the policy issue under consideration raised and its significance. The explanation should include a discussion of the specific processes employed by the board to reach its conclusions, advised the staff.

According to Apple, the proposal fell within the ordinary business exclusion because "human rights are an integral component of the Company’s business operations,” and the observance of human rights standards “factors into every decision made by management in the day-to-day operations of the Company.” Apple asserted that its board and management were committed to upholding and promoting human rights, and that the company regularly conducts in-depth reviews of its policies, practices, and operations, including the impact of product offerings in China on human rights.

With regard to its board process, Apple asserted that management regularly updated the board on the company’s business operations, including its human rights goals. The company stated that the board had already considered the issues raised by the proposal when it engaged in its strategic review and planning deliberations. According to Apple’s general counsel, the company’s board concluded that the proposal, “even if submitted to shareholders and approved, would not call for the Company to consider facts, issues or policies that the Company does not regularly consider in the course of its day-to-day operations.”

The Corporation Finance staff was not receptive to Apple’s arguments. The result turned on the staff’s view of whether the human rights proposals were sufficiently significant to transcend Apple’s ordinary business. Despite the statement in SLB 14I that the board is generally in a better position to make such determinations, the staff concluded that the proposal could not be excluded.

In reaching this conclusion, the staff found the board processes as discussed to be insufficient, observing that "the board’s analysis does not explain why this particular proposal would not raise a significant issue for the Company.” In addition, the staff found Apple’s own statement that “the Board and management firmly believe that human rights are an integral component of the Company’s business operations” to be a significant indicator that the proposal represented a sufficient policy matter for shareholder consideration.