It isn’t easy to wade through securities law, particularly the constantly shifting advice from the SEC. Staff Legal Bulletins (SLBs) also become of great importance in this context, as they provide advisory and clarifications regarding a range of topics, such as shareholder proposals, policy relevance, or compliance with the rules of the Securities Exchange Act of 1934.
Recent changes, including the Staff Legal Bulletin 14L, present new issues of concern for public companies in approaching proposals on ESG factors. To overcome these issues, the SEC has adapted its approach through bulletins such as the SLB 14L, which overrules past practices or rules and offers new parameters when considering the relevance and management of shareholder proposals.
It is hoped that this updated guidance will offer better black-and-white for business entities while paying more attention to nominal and policy concerns of the public interest. These changes are fundamental for organizations that are in a position to adapt to new changes in regulations.
If you want to know how to keep up and remain compliant, read on. I will review the most recent Staff Legal Bulletins, discuss what they mean, and discuss how corporations should respond to the changes afoot. Keep the small print from passing you by, as it could change your business strategies.
Explanation of Staff Legal Bulletins
Staff Legal Bulletins (SLBs) are notices given by the U.S. Securities Exchange Commission (SEC) containing views of the commission on federal securities laws.
These Staff Legal Bulletins assist in enhancing shareholders’ comprehension of some regs and the ways they have to be introduced and enforced, with a focus on the prescriptions for shareholder proposals, voting, and disclosure.
SLBs are not legal codes or statutes; however, they have considerable authority because they report the current thinking of the SEC staff on a wide range of legal and procedural issues. Such Staff Legal Bulletins are helpful to companies, investors, and legal professionals to be aware of the legal compliance specific to securities regulation.
Choices of Staff Legal Bulletins in Securities Law
Staff Legal Bulletins are essential because they serve as a refresher for the law as is practiced in fora and help overcome any deficits on the part of the reader to understand the law in written form.
They give interpretive advice on how the requirements of specific SEC rules apply in the context of the firm, help avoid misinterpretation of requirements, and provide consistency in applying regulations in different cases. For instance, it is customary to find SLBs that describe how firms respond to shareholder initiatives under Rule 14a-8 of the Securities Exchange Act of 1934.
With the help of the suggestions given in these bulletins, the respective companies will be able to handle and evade specific legal issues and litigations with the shareholders and the SEC.
Major Staff Legal Bulletins
SLB 14 is one of the Staff Legal Bulletins that seek to offer interpretations on the rules that relate to shareholders’ proposals under Rule 14a-8 of the SEC.
Implemented in 2001 and updated over time (SLB 14A to SLB 14L), the guidelines provide rules on procedural and substance matters regarding shareholder proposals, specifically how firms can prevent specific proposals from being included in proxy materials.
SLB 14 has thus significantly contributed to the governance of shareholder communications with companies, shaping how proposals on governance and social and environmental issues are dealt with.
Brief introduction of Staff Legal Bulletin 18
Staff Legal Bulletin No. 18, or SLB 18, which the SEC published in September 2017, gives a guide on whether the commission considers a proposal for shareholders to be a case of micro-managing the management’s affairs.
In analyzing the proposals and recommendations in the context of SLB 18, the focus has been made to evaluate the recommendations concerned not only within the financial perspective of stakeholders of the company but also from the perspective of social responsibility and ethical implications.
To the extent that this bulletin represented a shift in the SEC’s approach to ESG-related proposals, it is one that urged companies to do so more thoughtfully in the future.
Main changes to Staff Legal Bulletin 14L
In November 2021, the Staff Legal Bulletin 14L (SLB 14L) modified the SEC’s approach to assessing shareholder proposals under Rule 14a-8. This Staff Legal Bulletin has done what the earlier bulletins (SLB 14I, 14J, and 14K) also did: reverse what it had said before concerning exclusion claims on the grounds of ordinary business activities and economic congruency.
SLB 14L brought back a more comprehensive contemplation of the policy issues and focused on the proposals with considerable social, environmental, and governance implications. This shift is in line with the SEC’s effort to ensure that proposals that shareholders bring with the intention of making changes to a corporation’s activities that have public policy implications cannot be ‘gaggle rules’ easily.
Rescinded Bulletins 14I, 14J, and 14K
SLB 14L effectively rescinded three earlier Staff Legal Bulletins: SLB 14I, SLB 14J and SLB 14K. These bulletins made it possible for companies to shut out shareholder proposals when the companies could point out that such proposals related to routine business or were economically insignificant.
SLB 14L withdrew these bulletins and changed towards a company-specific approach to some of these exclusions, whilst the proposals’ evaluation had to take into account the issues of a general policy rather than concentrating on specific tendencies of the company.
This change will enhance the chances of having proposals on matters to do with ESG issues included in the proxy materials, thus minimizing the possibility of companies rejecting them.
Changes in the Evaluation of Policy Issues
Perhaps the most fundamental implementation by SLB 14L is how the SEC determines the relevance of policy matters arising from the proponent shareholders’ proposals. According to the new mandates, the likelihood of the SEC deeming that a proposal is significant and, therefore, covered by the rule would be higher if the matter concerns the public.
However, it may not relate to the company’s business line. It thus makes climate change proposals, human rights, and other social issues qualify as significant, therefore limiting the grounds under which companies can ignore them.
Now let us consider the new guidelines on economic relevance exclusion, which was advanced as follows:
SLB 14L also modifies and changes exclusion criteria for proposals regarding economic relevance. Earlier, another prejudicial criterion was that specific proposals could be disqualified because of their negligible impact on organizational economics.
However, SLB 14L is different because it incorporates some broader social implications of the proposal into the equation. This implies that while going through the administrative procedures, a proposal that does not have a significant economic component may be vital if it addresses an important public policy question.
This change is well captured by the new policies sought by the SEC concerning corporations’ social and environmental impacts.
Micromanagement Arguments in Staff Legal Bulletins
SLB 14L also deals with the issue of micromanagement arguments by companies, which aim at the exclusion of the shareholder’s proposals. For the same reason, in earlier Staff Legal Bulletins, the SEC permitted business firms to exclude any proposal that was held to constitute micromanagement of their affairs.
However, SLB 14L constrains the application of this exclusion by pointing to the fact that proposals cannot be excluded simply because they include difficult questions. However, the analysis that the SEC uses today concerns whether the proposal sets out exact instructions that govern the company’s everyday processes or whether it plays a role in defining a policy issue.
This change is beneficial, given that micromanagement becomes an excuse used by companies to block proposals, especially those regarding ESG issues.
Public Company Implications
Some modifications proposed in the SLB 14L have significant consequences for public companies, particularly regarding shareholders’ proposals. Firms will require paying much attention to the essential factors of the proposal, mainly where the proposal covers social, environmental, and governance factors.
The new guidance makes it easier for the proposals to be incorporated into the proxy statements, and hence, more shareholders are likely to make their votes on the matters. Companies must also prepare for dialog about these issues because they will likely be most active in the next proxy season.
Specialization on Environmental and Social factors
Apostilled in the SLB 14L, there is a reconsideration of the emphasis on environmental and social problems associated with the increasing role of ESG factors in the management of companies.
The rule change means that public companies must take these putative matters more seriously when considering share holder resolutions, and they will not be able to exclude them with such ease when the SEC has given its stamp of approval.
This shift may result in companies being forced to reconsider such trends as sustainability, social responsibility, and corporate governance, as they all directly relate to shareholders and regulating authorities.
A Study of SEC Guidance for Compliance
To survive the many changes brought in by SLB 14L, companies will have no option but to adopt good practices in compliance with SEC rules. These include understanding new SEC guidelines, interfacing with shareholders on major policy issues, and having proxy statements portraying the company’s stewardship of ESG principles.
Companies also need to carry out periodic check-ups on their shareholder proposal processes to ensure compliance with the current standards set by the SEC.
Conclusion
Staff Legal Bulletins (SLBs) are essential tools through which companies and investors receive direction on federal securities law applications. It provides direction on shareholder proposals, voting, and other essential aspects.
The relatively recent updates, such as those made in SLB 14L, have been influenced by the shift in the focus of SEC on ESG issues. Companies must embrace these changes since, as will be seen later, the new rules narrow down the reasons a company can exclude a shareholder’s proposal, especially those concerning significant policy issues.
The current development in SLBs, particularly the newer rules in SLB 14L, is a sign of a relative opening in assessing shareholder proposals. Companies incorporated in the public domain will feel a new detection and interaction on issues surrounding ESG concerns.
This means that best compliance standards will have to be implemented, and shareholders’ contacts will have to be kept as friendly as possible. The more ESG considerations emerge as material, the fewer challenges the business that prepares to address these issues will face with the SEC’s modified framework.
(FAQs)
In what ways does Staff Legal Bulletin 14L deviate from previous bulletins?
SLB 14L cancels the previous bulletins, 14I, 14J, and 14K, and aims to go further back and deal with more general issues on policy regarding shareholder proposals. It centers on ESG issues, making it difficult for firms to shun such a proposal.
What issues should companies address after implementing SLB 14L?
Thus, attention is focused on familiarizing companies with the new rules, especially those concerning ESG issues. Approaches to shareholder relations on these matters will, therefore, require a shift in implementing more transparent and proactive strategies to manage the new expectations from the SEC.
What are the notable changes in Staff Legal Bulletin 18?
This document, Staff Legal Bulletin 18, reviews developments concerning some of the rules of this Regulation S and notably updates one concerning the exclusion of shareholder proposals. It highlights that there ought to be good communication and documentation, especially when firms wish to disqualify bids under a specific process.
