Opinion ID: 2814625
Heading Depth: 2
Heading Rank: 5

Heading: SEC Interpretive Releases on the “Ordinary

Text: Business” Exclusion The ordinary business exclusion has been called the “most perplexing” of all the 14a-8 bars. See Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, 50 Rutgers L. Rev. 33, 94 (1997). This stems from the opaque term “ordinary business,” which is neither self-defining nor consistent in its meaning across different corporate contexts. Neither the courts nor Congress have offered a corrective. Rather, and “[f]rom the beginning, Rule 14a-8 jurisprudence—both in quality and quantity—has rested almost exclusively with the [SEC] . . . .” Palmiter at 880. In both its role as umpire and rule-maker, the SEC has provided various iterations of formal interpretive guidance.9 Because they inform our analysis, we discuss each in turn. Hazen, supra at §10.8[1][A][2] (noting that Commission review is appropriate only where it involves “matters of substantial importance and where the issues are novel or highly complex”). 9 Each of the SEC’s interpretive releases was adopted after notice and comment and thus merits our deference. As the Supreme Court has explained, “[j]ust as we defer to an agency’s reasonable interpretation of the statute when it issues regulations in the first instance, . . . the agency is entitled to further deference when it adopts a reasonable interpretation of the regulations it has put in force.” Fed. Express v. Holowecki, 552 U.S. 389, 397 (2008); see also Dep’t of Labor v. E. Associated Coal Corp., 54 F.3d 141, 147 (3d Cir. 1995) (“We accord greater deference to an 31
The Commission’s initial frustration with the ordinary business exclusion was management’s reliance on it to omit proposals “that involve matters of considerable importance to the issuer [i.e., the company] and its security holders.” Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 9,343, 1976 WL 160410, at  (July 7, 1976) (“1976 Proposing Release”). It proposed two modifications to address this concern. The first was a textual alteration to clarify that a proposal is excludable “only if it deals with a ‘routine, day-to-day matter relating to the conduct of the ordinary business operations of the issuer.’” Id. at . (The rule’s then-extant language provided that a proposal was excludable if it consisted of a “recommendation or request that [] management take action on a matter relating to the conduct of the ordinary business operations of the issuer.” Id. at  (internal quotation marks omitted).) The second was a new standard to distinguish “routine” (excludable) from “important” matters (not excludable). See id. at . In the SEC’s view, management teams generally handle “mundane matters” while boards of directors are responsible for high level decision-making. It thus proposed the following standard: “Will it be necessary for the board of directors . . . to act on the matter involved in the proposal?” Id. If the answer was no, the proposal dealt with a routine business matter and was thus excludable. See id.
Commenters attacked the textual modification and new standard as unworkable. As to the new language, the administrative agency’s interpretation of its own regulations than to its interpretation of a statute.”) (citations omitted). 32 criticism was that many routine, day-to-day business matters “would necessarily deal with ordinary business matters of a complex nature that shareholders, as a group, would not be qualified to make an informed judgment on, due to their lack of business expertise and their lack of intimate knowledge of the issuer’s business.” Adoption of Amendments Relating to Proposals by Security Holders, Release No. 12, 999, 1976 WL 160347, at  (Nov. 22, 1976) (“1976 Adopting Release”). It also “would be difficult to administer because of the subjective judgments that necessarily would be required in interpreting it.” Id. Regarding the new standard, the Commission relented to the criticism that “board practices relating to the delegation of authority to management personnel vary greatly, and there would, therefore, be no consistency in applying such a standard.” Id. at ; see also id. (“The potential lack of consistency of the proposed standard is a fatal drawback, in the Commission’s view. And, since no other reasonable standard for making the requisite distinctions is readily apparent, the Commission believes that the provision would be difficult, if not impossible, to administer on a satisfactory basis.”). It thus opted for a tweak of the text of the exclusion and offered fresh interpretive guidance. For the former, it deleted any reference to management; the exclusion thus read, much like it does now, that a proposal is excludable if it “deals with a matter relating to the conduct of the ordinary business operations of the issuer.” Id. Regarding the new guidance, the SEC maintained that the exclusion should be “interpreted somewhat more flexibly than in the past” and reaffirmed that the term “ordinary business operations” has been wrongly interpreted to “include certain matters which have significant policy, economic or other implications inherent in them. For instance, a proposal that a utility company not construct a nuclear power plant has in the past been [wrongly] 33 considered” to be excludable. Id. Therefore, “proposals of that nature, as well as others that have major implications, will in the future be considered beyond the realm of an issuer’s ordinary business operations.” Id.
The SEC took a fresh look at the ordinary business exclusion in 1982 in reviewing the staff’s then-prevailing view on proposals that ask a company to (1) prepare a report to shareholders or (2) recommend that a special committee be formed to examine a particular area of its business. See 1982 Proposing Release, 1982 WL 600869, at . The staff asserted that, as a category, such proposals were not excludable even if the subject matter of the report or examination involved an ordinary business matter because, in its view, a company doesn’t disseminate reports to shareholders or establish special committees as part of its ordinary business operations. See id. The SEC agreed to address the objection launched by commenters that the staff’s “interpretation [] rais[es] form over substance.” Id. It thus proposed for consideration “whether it would be more appropriate to consider in each instance whether the type of information sought by the proposal involves the ordinary business operations of the issuer and to disregard whether a proposal requests the preparation and distribution of a report or the formation of a special committee.” Id.
After notice and comment, the Commission formalized its adoption of the proposed “significant change in the staff’s interpretation” of the exclusion. Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to 34 Proposals by Security Holders, Release No. 20,091, 1983 WL 33272, at  (Aug. 16, 1983) (“1983 Adopting Release”) (“Because [the staff’s] interpretation raises form over substance and renders the provisions of [the ordinary business exclusion] largely a nullity, the Commission has determined to adopt the interpretive change set forth in the Proposing Release.”). It thus directed the staff to “consider whether the subject matter of a special report or the committee involves a matter of ordinary business; where it does, the proposal will be excludable.” Id.
The SEC revisited the ordinary business exclusion in the late 1990s to tackle proposals “relating simultaneously to both an ‘ordinary business’ matter and a significant social policy issue.” Amendments to Rules on Shareholder Proposals, Release No. 39,093, 1997 WL 578696, at  (Sept. 18, 1997) (the “1997 Proposing Release”). The interpretive snag was that the “fairly straightforward mission” of the rule was ill-suited to address contemporary social issues and “provided no guidance” on how to treat proposals raising such issues. Id. This difficulty showed itself when the staff allowed a company (Cracker Barrel Old Country Stores) to exclude a proposal that asked it to “prohibit discrimination on the basis of sexual orientation.” New York City Emps.’ Ret. Sys. v. S.E.C., 45 F.3d 7, 9 (2d Cir. 1995). In handling the proposal, the staff espoused the view, which the Commissioners of the SEC deemed untenable, that employment-related proposals—regardless whether they raise a social issue—are categorically excludable. See Cracker Barrel Old Country Store, Inc., SEC No-Action Letter, 1992 WL 289095, at  (Oct. 13, 1992) (“[T]he Division has determined that the fact that a shareholder proposal concerning a company’s employment policies and practices for the general workforce is tied to a social issue will no 35 longer be viewed as removing the proposal from the realm of ordinary business operations of the registrant. Rather, determinations with respect to any such proposals are governed by the employment-based nature of the proposal.”). To end this practice, the SEC declared that “employmentrelated proposals focusing on significant social policy issues could not automatically be excluded under the ‘ordinary business’ exclusion.” 1997 Proposing Release, 1997 WL 578686, at . And going forward, “the ‘bright line’ approach for employment-related proposals established by the Cracker Barrel position would be replaced by a case-by-case analysis that prevailed previously.” Id. In a final note of guidance, the Commission summarized the two considerations that guide how to apply the ordinary business exclusion. “The first relates to the subject matter of the proposal. Certain tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” Id. at . According to the SEC, examples of this “include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers.” Id. Yet “proposals relating to such matters but focusing on significant social policy issues generally would not be considered to be excludable, because such issues typically fall outside the scope of management’s prerogative.” Id. “The second consideration relates to the degree to which the proposal seeks to ‘micro manage’ the company by probing too deeply into ‘matters of a complex nature that shareholders, as a group, would not be qualified to make an informed judgment on, due to their lack of business expertise and lack of intimate knowledge of the (company’s) business.’” Id. It comes into play where “the proposal seeks intricate detail, or seeks to 36 impose specific time-frames or methods for implementing complex policies.” Id.
Yet again the SEC declined to modify the language of the rule, perhaps afraid to unleash unintended consequences. Although “the legal term-of-art ‘ordinary business’ might be confusing to some shareholders and companies,” it posited, the risk that practitioners “might misconstrue [a] revision[] as signaling an interpretive change” was too great to ignore. Amendments to Rules on Shareholder Proposals, Release No. 23, 200, 1998 WL 254809, at  (May 21, 1998) (“1998 Adopting Release”); see also id. (“Indeed, since the meaning of the phrase ‘ordinary business’ has been developed by the courts over the years through costly litigation and essentially has become a term-of-art in the proxy area, we recognize the possibility that the adoption of a new term could inject needless costs and other inefficiencies into the shareholder proposal process.”). It elected simply to reverse the staff’s 1992 Cracker Barrel no-action letter, thus “return[ing] to a case-by-case analytical approach,” id. at , and commented that [w]hile we acknowledge that there is no bright-line test to determine when employment-related shareholder proposals raising social issues fall within the scope of the “ordinary business” exclusion, the staff will make reasoned distinctions in deciding whether to furnish “no-action” relief. Although a few of the distinctions made in those cases may be somewhat tenuous, we believe that on the whole the benefit to shareholders and companies in providing guidance and informal resolutions will 37 outweigh the problematic aspects of the few decisions in the middle ground. Id. It also reaffirmed that the term “ordinary business” continues to “refer[] to matters that are not necessarily ‘ordinary’ in the common meaning of the word” and “is rooted in the corporate law concept providing management with flexibility in directing certain core matters involving the company’s business and operations.” Id. at  (emphasis added). With that background, we move to the merits of Wal- Mart’s appeal.