SEC Rule 14a-8: Should the SEC Narrow the Grounds on Which Registered Issuers May Exclude Shareholder Proposals?

BY: Joseph Brav, RBFL Student Editor

SEC Rule 14a-8[i] requires corporations to include eligible shareholders’ proposals in their proxy materials to be voted on at the next shareholder meeting. However, 14a-8 has various exceptions that corporations can rely on to exclude shareholder proposals. 14a-8’s most controversial exception is known as the “ordinary business exception,” which allows corporations to exclude proposals that relate to the company’s ordinary business operations. This exception is meant to allow firms’ executives to run the company operations without interference from shareholders. In 1976, the SEC qualified this exception by announcing[ii] that firms must include shareholder proposals that implicates a significant social issue, but in 1998[iii], the SEC announced that even a proposal that implicates a significant social issue is excludible if it seeks to “micro-manage” the company.

Unfortunately, the ordinary business exception is not applied consistently by the SEC or courts because there is no way to determine whether a proposal pertains to daily business operations or raises a significant social issue. Furthermore, the SEC and courts have held that if the “form” of a proposal does not relate to ordinary business activities, the proposal can still be excludible if its “substance” seeks to influence ordinary business activities. Additionally, it is unclear how to separate activities that are “ordinary business” from those that are not, and while interpreters have pointed to media coverage and congressional attention as measures of an issue’s significance, no standard has been set forth that establishes when a social issue is significant enough to prevent a firm from excluding a shareholder proposal under the ordinary business exception.

Trinity Wall Street v. Wal-Mart Stores, Inc.[iv] is a recent Third Circuit case that highlights the issues with the ordinary business exception. The majority held that a shareholder proposal that implicates a significant social policy is nonetheless excludible if the social issue does not “transcend” the firm’s ordinary business operations—but the SEC’s interpretation of the ordinary business exception does not include this transcendence element. Furthermore, the concurrence held that the plaintiff’s proposal was excludible because it did not focus specifically on gun sales to raise a significant social issue, while the majority found that the proposal was excludible because it pertained to the sale of specific products. The SEC announced its preference for the concurring opinion, showing that the SEC and Third Circuit interpret the ordinary business exception differently, which is significant because the Third Circuit includes Delaware.

            To address these problems, the SEC should eliminate the significant social issue caveat because it defies definition. To counteract the effect this would have on expanding firms’ ability to exclude shareholder proposals, the SEC or Congress should also eliminate the distinction between form and substance—companies should be required to include shareholder proposals that, by their form, seek to influence management’s treatment of ordinary business operations so long as they do not subvert managerial control and directly dictate the performance of certain daily business activities.

[i] 17 C.F.R. § 240.14a-8 (2023).

[ii] Reilly S. Steel, The Underground Rulification of the Ordinary Business Operations Exclusion, 116 Colum. L. Rev. 1547, 1559 (2016).

[iii] Id. at 1561.

[iv] Trinity Wall Street v. Wal-Mart Stores, Inc., 792 F.3d 323, 323 (3rd Cir. 2015).


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