Climate Change Proposals Stumble Over SEC’s “Ordinary Business” Exclusion


SEC HQs 2Two shareholder proposals on climate change failed to clear the Exchange Act Rule 14a-8(1)(7) “ordinary business” exclusion hurdle earlier this month. The SEC’s Corporation Finance staff allowed Deere & Co. and Apple Inc. to exclude proposals calling on the companies to develop feasible plans for achieving net zero greenhouse gas emissions by 2030. Sanford J. Lewis, a Massachusetts-based attorney and consultant on sustainable and socially responsible investing, submitted both proposals on behalf of Jantz Management LLC.

The staff allowed the companies to exclude the proposals under the “ordinary business” provision. According to the staff, “the proposal seeks to micromanage 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.”

Lewis argued that the proposals did not amount to “micro-management” of the companies. He cited Staff Legal Bulletin 14E, which states that “[i]n those cases in which a proposal's underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote, the proposal generally will not be excludable under Rule 14a-8(i)(7) as long as a sufficient nexus exists between the nature of the proposal and the company.” According to Lewis, there was a significant nexus between the proposal and Deere because the company’s large-scale, energy-intensive operations annually produced 1.5 million metric tons of carbon dioxide emissions. In the Apple case, the nexus existed because the company was a large consumer of energy and a large generator of GHG emissions. Lewis noted that Apple's company website "documents that climate change is a large policy problem that it must confront."

Apple argued that the proposal was an attempt to micromanage the company because it sought to impose a specific timeframe to implement complex policies to satisfy quantitative targets. Lewis countered that the proposal provided a "broad brush" approach that did not impinge on management prerogatives. In the Deere case, Lewis argued that the mere fact that stockholders as a group were asked to vote on a proposal that was a substitute for an operational plan developed by management did not necessarily equal micromanagement, as such an approach would effectively negate any shareholder proposal.

Though Lewis’ arguments apparently fell on deaf ears, as with many no-action letter questions, it is too early to determine if the staff position on these climate change proposals represents a trend. It should be noted that the SEC has been on record since its Rule 14a-8 rulemaking in 1998 that proposals are not automatically excludable as ordinary business because of their level of complexity or because they seek excessive detail. The Commission recognized that “some proposals may intrude unduly on a company's ‘ordinary business’ operations by virtue of the level of detail that they seek,” but stated that the staff will review each request “on a case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed.”

Deere & Co. (Dec. 5, 2016); Apple Inc. (Dec. 5, 2016).