We have the latest from this season’s battle in the courts over shareholder proposals. While two other courts recently have denied a preliminary injunction against exclusion, the US District Court for the District of Massachusetts went the other way last week and granted the motion for an injunction filed by the New York Common Retirement Fund – and also denied the company’s motion to dismiss – to force the company to keep a shareholder proposal in its proxy. This lawsuit was filed back in March – here’s the SEC’s response to the company’s Rule 14a-8(j) notice. Hat tip to Cooley’s Reid Hooper for his keen insights!
Judge Leo Sorokin issued this 30-page order in granting the injunction, in which he found (among other things):
- The ordinary business exclusion basis was dispositive; the two other grounds for exclusion – ((i)(1), improper under state law and (i)(3), violation of proxy rules for materially false and misleading statements) – were inapplicable to the case.
- Because the proposal centers on a “sufficiently significant social policy issue” (i.e. deforestation), it falls outside the ordinary business exclusion. The judge invoked statements from the SEC staff in Staff Legal Bulletin 14H where the SEC staff expressly noted that the two-part test adopted by the Third Circuit in Trinity Wall Street v. Wal-Mart Stores in 2015 for applying the (i)(7) ordinary business exclusion differs from the SEC’s statements on the ordinary business exclusion and SEC staff practice – and found that there’s no requirement that a shareholder proposal be completely “divorced” from day-to-day operations to avoid exclusion under Rule 14a-8(i)(7).
And that if a proposal focuses on a sufficiently significant social policy issue, it can’t be excluded – even if it touches upon ordinary business matters – and the “nitty gritty of [a company’s] core business”.
In this case, the proposal highlights systemic economic and environmental risks tied to deforestation, which elevated it beyond routine ordinary business concerns. And linking the issue to the company’s private-label supply chain – an ordinary business area – doesn’t change the proposal’s core focus on deforestation risk. - The court also ruled the proposal did not micromanage the company because there wasn’t sufficient “intricate detail” about the company’s daily business decisions implicated and the proposal left to the company’s discretion how to assess the alleged deforestation risks.
- The open-ended and less prescriptive nature of the proposal distinguished it from the no-action letter precedent cited by the company.
- Staff Legal Bulletin 14M encourages a company-specific approach in evaluating the relative significance of policy issues since a policy issue that is significant to one company may not be significant to another – here, the court provided that the proposal at issue positioned the significant policy concern of deforestation in relation to company-specific issues.
Authored by
Broc Romanek