New SEC Guidance Impacts Shareholder Resolutions on Business Risk

December 8, 2009
by MEREDITH DuBARRY HUSTON
Client Alert Newsletter December 2009

Publicly traded companies may increasingly be faced with responding to shareholder resolutions addressing exposure to business risks related to climate change, water scarcity, or other environmental issues following the October 27, 2009, release of a U.S. Securities and Exchange Commission ("SEC") staff guidance document. Under previous guidance, the SEC granted companies' no-action requests on shareholder proposals when proposals related to a companies' evaluation of risks. The SEC viewed such shareholder proposals as outside of the purview of shareholder involvement because evaluation of risk is an ordinary business operation.

Citing a marked increase in corporate requests to exclude shareholder proposals related to an evaluation of risk, the SEC has revised its prior guidance. The SEC noted that its prior analytical framework "may have resulted in the unwarranted exclusion of proposals that relate to the evaluation of risk but that focus on significant policy issues." Going forward, the SEC will evaluate shareholder proposals based on their underlying subject matter and, where 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 SEC will decline to grant a company's no-action request.

Shareholder advocates suggest that the revised guidance will allow shareholders to require companies to address proposals regarding the potential risks created by greenhouse gas emissions, climate change and related legislation. Companies arguing that such proposals should be excluded now show that the underlying subject matter of the proposal involves an ordinary business risk. The revised guidance may be particularly important as federal lawmakers move toward the regulation of greenhouse gas emissions, regulations which will likely have either positive or negative impacts on corporate bottom lines in major segments of the economy.