“Ordinary Business” Exclusions
The “ordinary business” argument is the most common substantive reason cited in “no action” requests and rulings on shareholder resolutions. Of the 223 excluded proposals for 2008 meetings tracked by RiskMetrics Group, 65 were omitted on “ordinary business” grounds. That total exceeds the 38 exclusions in 2008 under Rule 14a-8 (i)(10) because the company had “substantially implemented” the proposal, which is the second-most common reason for omission. The number of (i)(7) exclusions has increased in recent years. Fifty-seven proposals were omitted on “ordinary business” grounds for 2007 meetings, up from 48 in 2006, and 44 in 2005, according to RiskMetrics data.

The “ordinary business” provision has been controversial since it was first adopted in 1954. Over the years, the SEC has expanded the topics--such as executive compensation and “significant social policy issues”--that are exempt from the rule. In Staff Bulletin 14-C in 2005, the commission sought to clarify its approach to proposals on environmental or public health issues. “To the extent that a proposal and supporting statement focus on the company engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations that may adversely affect the environment or the public's health, [the proposal may be excluded] as relating to an evaluation of risk,” the bulletin stated. “To the extent that a proposal and supporting statement focus on the company minimizing or eliminating operations that may adversely affect the environment or the public's health,” the proposal may not excluded . . .”

In their letter, the investors criticize Bulletin 14-C and note that the SEC has taken that approach and applied it beyond environmental and health proposals to address any resolution that relates to risk evaluation.

Fund officials, such as attorney Rob McGarrah of the AFL-CIO Office of Investment, describe the “ordinary business” rule as a “thicket,” and say it can be difficult to craft a new proposal that will survive a “no action” request.

The rule also is a challenge for the SEC staff to interpret. Lynn, the former chief counsel for the Corporation Finance Division, said, (i)(7) “is a quagmire for the SEC and always has been.” Lynn said the staff members try to issue consistent rulings based on staff bulletins and past “no action” decisions.

In advance of the 2009 proxy season, the SEC has assigned a 22-member task force to review Rule 14a-8 omission requests. The agency typically receives 300 to 450 “no action” challenges each year; many are submitted in late December, leaving the staff with limited time to respond before proxy statement deadlines. Some requests are reviewed by as many as four lawyers, agency officials say. While SEC attorneys often produce lengthy internal memos on the merits of specific "no action" requests, that analysis is rarely made public because a typical ruling is a one-page memo that simply states whether the staff concurs with an issuer's arguments for exclusion.

After a ruling, companies and shareholders may submit a request for reconsideration, which are reviewed by a senior staff member. A party may also ask the commissioners to review a matter of “substantial importance” if the issues are “novel” and “highly complex,” but those requests are rarely granted.

Labor officials have complained about inconsistent rulings. In 2007, the SEC allowed several rail companies to exclude a Teamsters’ proposal that sought information on “efforts to both safeguard the security of [company] operations and minimize material financial risk arising from a terrorist attack and/or other homeland security incidents.” The union revised the proposal last season and eliminated any discussion of financial risk. That resolution survived challenges by three rail firms.

However, Union Pacific argued that the proposal also dealt with “other homeland security incidents” (such as thunderstorms, tornadoes, and other natural disasters that require the attention of the Federal Emergency Management Agency, which is part of the Department of Homeland Security) and thus related to ordinary business. The union countered that the proposal was about terrorist attacks and not natural disasters. In February, the staff determined that the Union Pacific proposal was excludable under (i)(7) but did not explain the basis of its decision.

Investors also were puzzled by staff rulings last season on proposals filed by the AFL-CIO and religious groups that urged firms to adopt universal healthcare reform principles. While the staff rejected several challenges from non-healthcare firms, the agency allowed CVS Caremark to exclude a similar proposal (which also sought a report on how the company was implementing the principles) on “ordinary business” grounds.

At the same time, companies have complained about the time and expense required to respond to shareholder proposals. During roundtables on the federal proxy rules in May 2007, several corporate officials and law professors urged the SEC to impose new limits on non-binding proposals or allow companies to adopt their own rules on those resolutions. The SEC, in a July 2007 draft rule on proxy access, discussed how a company could adopt a bylaw to limit the scope of future shareholder proposals. However, it doesn’t appear that any companies have taken such an approach, presumably out of concern that activist shareholders would object.

Litigation
The (i)(7) rule also has been the subject of recent litigation. Apache used the “ordinary business” argument to challenge a New York City proposal that urged the Houston-based oil producer to implement equal employment opportunity polices based on 10 principles prohibiting discrimination based on “sexual orientation and gender identity.” After the SEC granted a “no action” request, both the company and the city filed suit.

In April, U.S. District Judge Gray Miller in Texas upheld the exclusion of the proposal, noting that four of the principles related to Apache’s marketing, sales, and charitable contributions, and went beyond the social policy issue (ending employment discrimination) underlying the resolution. The judge also concluded that the proposal “seeks to micromanage the company to an unacceptable degree” and said investors are not in position to make informed judgments about certain sales and purchases.

Another lawsuit arose over a novel proposal filed by Harvard University law professor Lucian Bebchuk at Electronic Arts (EA) to allow large shareholders to propose bylaw resolutions that otherwise could be excluded under the federal proxy rules. Bebchuk's resolution asked the board to amend the company’s governing documents to limit its discretion to exclude bylaw proposals from shareholder groups that have held more than a 5 percent stake for at least one year. EA’s lawyers argued that the proposal sought “to create an end run around Rule 14a-8,” related to ordinary business, and was “vague and misleading.”

Bebchuk filed suit before the SEC decided EA’s exclusion request. In November, a New York federal judge ruled for the company, but Bebchuk said he plans to appeal to the U.S. Court of Appeals for the Second Circuit. That same court ruled against the SEC in 2006 over its decision to allow American International Group to omit a proxy access proposal under a different provision of Rule 14a-8.

2009 Requests
It appears quite likely that the SEC will receive a large number of (i)(7) “no action” submissions in the coming weeks. The SEC staff has granted a request by Whole Foods Market to exclude a CEO succession planning resolution from the Laborers. The union asked the agency to reconsider, arguing that investors “have the right to request that the board inform shareholders of the manner in which it is fulfilling one of its key functions, that of succession planning.” The SEC rejected that request on Dec. 15.

SunTrust Banks raised “ordinary business” as one of several arguments to exclude a new labor proposal that seeks additional executive compensation limits than those required by the Treasury Department’s Troubled Asset Relief Program (TARP). In a Nov. 21 letter, the Atlanta-based banking company asserted that the proposal relates to “ordinary business” because it seeks to regulate capital raising activities and compensation for its general workforce. As of Dec. 18, the staff had not released a ruling.