SEC Issues New Guidance on "No-Action" Requests Relating to Risk and CEO Succession

On October 27th the SEC issued a Staff Legal Bulletin providing guidance for companies and shareholders on risk and succession planning.

Shareholder Proposals Related to Risk

In the past, the SEC had determined that shareholder proposals relating to the evaluation of risk could be excluded from a company's proxy materials because the SEC believed the matter was related to a company's ordinary day-to-day business operations.

In their bulletin issued yesterday, the SEC stated, "we have become increasingly cognizant that the adequacy of risk management and oversight can have major consequences for a company and its shareholders. Accordingly, we have reexamined the analysis that we have used for risk proposals, and upon reexamination, we believe that there is a more appropriate framework to apply for analyzing these proposals.

...Rather than focusing on whether a proposal and supporting statement relate to the company engaging in an evaluation of risk, we will instead focus on the subject matter to which the risk pertains or that gives rise to the risk.

...In 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.

...In addition, we note that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation. In light of this recognition, a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote."

Shareholder Proposals Related to CEO Succession Planning

In the past the SEC has allowed Companies to exclude proposals relating to CEO succession planning because the proposals related to the termination, hiring or promotion of employees. Similar to the change in policy relating to risk, the Commission feels that this issue transcends the Company's day-to-day operations and will take the view that a Company may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession.

In their bulletin the SEC stated, "One of the board's key functions is to provide for succession planning so that the company is not adversely affected due to a vacancy in leadership. Recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce. As such, we have reviewed our position on CEO succession planning proposals and have determined to modify our treatment of such proposals."

To read the SEC's bulletin click here.

To read a legal alert on the matter issued by Gibson, Dunn & Crutcher click here.