Vol. 116 No. 6
Note
THE UNDERGROUND RULIFICATION OF THE ORDINARY BUSINESS OPERATIONS EXCLUSION

THE UNDERGROUND RULIFICATION OF THE ORDINARY BUSINESS OPERATIONS EXCLUSION

Reilly S. Steel*

In its landmark Cracker Barrel no-action letter, the SEC staff an­nounced a bright-line rule permitting exclusion of any shareholder pro­posal pertaining to a company’s management of its general workforce, even if focused on a significant social policy issue such as employment discrimination, under the “ordinary business operations” exclusion. The SEC reversed Cracker Barrel in 1998, returning to a case-specific approach to determining whether proposals fall under the exclusion. This Note examines 250 no-action letters from the 2015 proxy season and finds evidence indicating that the staff has, contrary to official SEC policy, returned to a rule-like approach to the ordinary business opera­tions exclusion. Normatively, this de facto rulemaking by the staff is problematic when evaluated according to the rules’ democratic legiti­macy, transparency, or inclusivity. To address these concerns, this Note proposes two solutions. First, the SEC should recast the ordinary busi­ness operations exclusion as a “catalog” and create mechanisms to en­sure that there is adequate public participation in updates to that cata­log. Second, the SEC should replace the social policy exception’s “signifi­cance” requirement with a numerical cap on proposals and a standard rooted in corporations’ purpose clauses, which would allow for some pri­vate ordering. These changes would enhance the exclusion’s democratic legitimacy, shine light on the opaque process through which the staff de­termines excludability, and remove the staff from its uneasy role as so­cial policy censor.

The author’s dataset is available here.

* J.D. Candidate 2017, Columbia Law School.

Introduction

In early January 1991, restaurant chain Cracker Barrel Old Country Store adopted an explicitly discriminatory employment policy targeting employees “whose sexual preferences fail to demonstrate normal hetero­sexual values.” 1 John Howard, The Cracker Barrel Restaurants, in Understanding and Managing Diversity: Readings, Cases, and Exercises 166, 167 (Carol P. Harvey & M. June Allard eds., 2015). Individual restaurant managers subsequently began con­ducting one-on-one interviews with employees and firing those suspected of having lesbian, gay, or bisexual sexual orientations. 2 See id. In one official ter­mination notice, the employee’s manager explained, “This employee is being terminated due to violation of company policy. The employee is gay.” 3 Id.

The following year, Cracker Barrel shareholders submitted a resolu­tion under the federal shareholder proposal rule requesting that the board implement nondiscriminatory employment practices regarding sexual orientation. 4 See id. at 169; see also Cracker Barrel Old Country Store, Inc., SEC No-Action Letter, 1992 WL 289095, at *2 (Oct. 13, 1993). Agreeing with the company’s request to exclude the proposal from its proxy statement, the staff of the Securities and Exchange Commission (SEC) issued a sweeping proclamation stating that it would view any shareholder proposal pertaining to a company’s management of its “general workforce,” even if focused on significant so­cial policy issues, as excludable for relating to the company’s “ordinary business operations.” 5 Cracker Barrel Old Country Store, Inc., supra note 4, at *1; see also infra section I.C.4. Although the SEC later reversed course on this bright-line rule, 6 See infra section I.C.5. the Cracker Barrel opinion has continuing significance today in light of recent decisions that similarly rely on categorical rules to exclude proposals 7 See infra Part II. —a return to Cracker Barrel.

Under Exchange Act Rule 14a-8, a public corporation must include in its an­nual proxy statement qualifying proposals from shareholders who meet certain procedural and minimum-ownership requirements. 8 17 C.F.R. § 240.14a-8 (2016). But if one of several substantive bases for exclusion applies, management may omit that proposal. 9 Id. § 240.14a-8(i). One of the substantive bases that corporations most frequently use is the ordinary business operations exclusion (Rule 14a-8(i)(7) or (i)(7)), 10 See infra Appendix at Figure A.1. which allows a company to exclude any proposal that “deals with a matter relating to the company’s ordinary business operations.” 11 17 C.F.R. § 240.14a-8(i)(7). This exclusion has long been the object of criticism—not only by scholars but also by practitioners, federal appellate judges, Congress, and SEC Commissioners and Chairpersons from both parties. 12 See, e.g., Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 351 (3d Cir. 2015) (criticizing the “hard-to-define” exclusion); Oversight of the SEC’s Division of Corporation Finance: Hearing Before the Subcomm. on Capital Mkts. & Gov’t Sponsored Enters. of the H. Comm. on Fin. Servs., 113th Cong. 11–12 (2014) (statements of Reps. Scott Garrett & Carolyn B. Maloney, Members, H. Comm. on Fin. Servs.) (criticizing the SEC’s administration of the exclusion); Thomas M. Clusserath, The Amended Stockholder Proposal Rule: A Decade Later, 40 Notre Dame L. Rev. 13, 39 (1964) (same); H. Rodgin Cohen & Glen T. Schleyer, Shareholder vs. Director Control over Social Policy Matters: Conflicting Trends in Corporate Governance, 26 Notre Dame J.L. Ethics & Pub. Pol’y 81, 121–22 (2012) (same); Alan R. Palmiter, The Shareholder Proposal Rule: A Failed Experiment in Merit Regulation, 45 Ala. L. Rev. 879, 918 (1994) (proposing elimination of the exclusion); Mary L. Schapiro, Letter to the Editor, Shareholders Should Have a Soapbox, Wall St. J., Mar. 9, 1993, at A19 (criticizing the “case-by-case decision making that shifts with the political and corporate governance views of the staff and individual commissioners”); Bevis Longstreth, Comm’r, Sec. & Exch. Comm’n, The SEC and Shareholder Proposals: Simplification in Regulation 10 (Dec. 11, 1981), http://www.
sec.gov/news/speech/1981/121181longstreth.pdf [http://perma.cc/6JBL-EZCP] (criticizing the power given to the staff to “decide complex issues of law, fact and policy without any real possibility of outside, objective appellate review”); Harvey L. Pitt, Chairman, Sec. & Exch. Comm’n, Remarks Before the Council of Institutional Investors’ Fall Conference (Sept. 23, 2002), http://www.sec.gov/news/speech/spch582.htm [http://perma.cc/7THG-CXQP] (ex­pressing hope that the SEC would eliminate the exclusion).

One problem with the exclusion stems from the tension between its design as an open-ended standard 13 See Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 559–60 (1992) (defining rules and standards); infra section I.C (describing the exclu­sion’s design). and the SEC staff’s role in defining its contours. While standards frequently become more rule-like through precedent, the precedent that has “rulified” the ordinary business opera­tions exclusion consists almost entirely of nonbinding, informal SEC staff opinions called “no-action letters.” 14 See infra section I.A (explaining the role of no-action letters); infra section II.B (presenting evidence of the exclusion’s “rulification” through no-action letters). Unlike the judicial opinions that comprise the common law in other contexts, no-action letters typically contain minimal explanation of the staff’s reasoning, and appellate re­view is difficult to obtain. 15 See infra section I.A. This has created profound confusion about the exclusion’s scope, as the divergent opinions related to the recent Third Circuit case Trinity Wall Street v. Wal-Mart Stores, Inc. 16 792 F.3d 323. illustrate. Trinity resulted in three significantly different views of the exclusion: first, the narrow view of its reach championed by the district court and amici law professors; second, the expansive court of appeals majority opinion, which drew a rule-like test out of a series of no-action letters; and third, the middle-ground approach of the SEC staff and concurring judge, who agreed with the majority’s judgment but rested their opinions on a more nimble, standard-like analytical framework. 17 See infra section II.A. Meanwhile, despite the Third Circuit’s appeal for “fresh interpretive guidance” from the SEC, 18 Trinity, 792 F.3d at 351. the full Commission has not weighed in since 1998. 19 See infra section I.C. In short, the exclu­sion is in a state of chaos. 20 Cf. Palmiter, supra note 12, at 882 (contending in the early 1990s that the share­holder proposal rule was “in chaos”).

This Note seeks to contribute to the literature by examining the ordinary business operations exclusion in light of its shifting place in the rules–standards continuum and documenting the exclusion’s “rulifica­tion” 21 Professor Frederick Schauer brought attention to the “rulification” phenomenon in Frederick Schauer, The Tyranny of Choice and the Rulification of Standards, 14 J. Contemp. Legal Issues 803 (2005) [hereinafter Schauer, Rulification], although others had previously used the term, see, e.g., Mark D. Rosen, Multiple Authoritative Interpreters of Quasi-Constitutional Federal Law: Of Tribal Courts and the Indian Civil Rights Act, 69 Fordham L. Rev. 479, 491 (2000). through an empirical analysis of all Rule 14a-8 no-action letters issued to Fortune 500 companies during the 2015 proxy season. 22 See infra section II.B. It finds that of those proposals on which the SEC staff offered an opinion as to Rule 14a-8(i)(7) excludability, the staff placed 86% of those proposals into a specific category such as “employee policy,” and the category into which the staff placed a proposal was perfectly predictive of whether the staff would find the proposal excludable. 23 See infra section II.B.2. After examining this trend, the Note argues that although some rulification of the exclusion may be desirable, this particular form of staff rulemaking is problematic. Specifi­cally, the rulemaking is neither transparent nor democratically legiti­mate, creating inefficiencies and raising concerns about regulatory cap­ture. 24 See infra section II.C. These problems fit within a broader pattern of agency avoidance of rulemaking procedures. See Connor Raso, Agency Avoidance of Rulemaking Procedures, 67 Admin. L. Rev. 65, 85–93 (2015); cf. Robert A. Anthony, Interpretive Rules, Policy Statements, Guidances, Manuals, and the Like—Should Federal Agencies Use Them to Bind the Public?, 41 Duke L.J. 1311, 1363–65 (1992) (noting the tendency of agency staff to treat informal guidance documents as rules, effectively binding private par­ties); Kristen E. Hickman, Coloring Outside the Lines: Examining Treasury’s (Lack Of) Compliance with Administrative Procedure Act Rulemaking Requirements, 82 Notre Dame L. Rev. 1727, 1759–73 (2007) (criticizing the Treasury Department’s use of interpre­tive rules to circumvent notice and comment); James T. Hamilton & Christopher H. Schroeder, Strategic Regulators and the Choice of Rulemaking Procedures: The Selection of Formal vs. Informal Rules in Regulating Hazardous Waste, Law & Contemp. Probs., Spring 1994, at 111, 120–22 (examining EPA policymaking through guidance documents and interpretive rules). This Note presents a case study of one type of such avoidance by an agency of vital importance: the SEC. Although the optimal regulatory regime may vary by agency, the economic significance of the SEC and recent developments related to Rule 14a-8, see infra section II.A, make an SEC-focused study valuable in its own right. Additionally, the rules have produced erroneous results, including the unwarranted exclusion of proposals that focus on significant social policy issues, which is reminiscent of Cracker Barrel and conflicts with the most recent test for analyzing social policy proposals that the SEC adopted after notice and comment. 25 See infra section II.C.

Two changes to Rule 14a-8 would help to address these issues. 26 See infra Part III. First, the SEC should recast the ordinary business operations exclusion as a “catalog,” which would provide clearer guidance to those interpreting the exclusion, and create mechanisms to ensure that updates to the cata­log adhere to notice-and-comment procedures. 27 See infra section III.A. A “catalog” is an alternative type of legal directive, distinct from rules and standards. As Professors Gideon Parchomovsky and Alex Stein define the term, a catalog contains a list of enumerated items with a general provision empowering the decisionmaker to proscribe (or permit) other similar items. Gideon Parchomovsky & Alex Stein, Catalogs, 115 Colum. L. Rev. 165, 168 (2015); see also infra section III.A.1. Second, the SEC should replace the “significance” requirement of the social policy exception with a numerical limit on proposals and a new exclusion that tracks corporate-charter purpose clauses, taking the staff out of its awkward role as social policy censor. 28 See infra section III.B. Although the corporate-purpose clause no longer occupies the prominent place in corporate law that it once did, a slight revitalization in this narrow context would be desirable despite the difficulties that might arise. 29 See infra section III.B.

Part I of this Note explains the regulatory framework governing the shareholder proposal rule and the ordinary business operations exclu­sion. Part II discusses recent confusion over the exclusion’s scope, chronicles its rulification through an empirical study of SEC no-action letters, and identifies problems with this rulification. Part III offers solutions to the problems described in Part II.

I. The Regulatory Framework Governing Shareholder Proposals and the Ordinary Business Operations Exclusion

This Part provides an overview of the regulatory framework govern­ing shareholder proposals and the ordinary business operations exclu­sion. Section I.A discusses shareholder proposals generally, including the no-action letter process. Section I.B, recognizing the influence of administrative interpretations of Rule 14a-8, discusses the weight courts have accorded these authorities when determining the exclusion’s scope. Finally, section I.C delves into the ordinary business operations exclusion itself, tracing its history and the SEC’s interpretation of its scope.

A. Rule 14a-8 and the No-Action Letter Process

Acting under the authority of section 14(a) of the Securities Exchange Act of 1934 (’34 Act), 30 15 U.S.C. § 78n(a) (2012). Congress appears to have enacted section 14(a) for the purpose of both preventing abuse of the proxy system by management and giving shareholders a greater voice in corporate decisionmaking. See Patrick J. Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 Ga. L. Rev. 97, 146 (1988) (examining Rule 14a-8’s legislative history); cf. J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (noting that congressional belief in the importance of “fair corporate suffrage” animated the passage of section 14(a) (internal quotation marks omitted) (quoting H.R. Rep. No. 73-1383, at 13 (1934))). But see Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129, 1174–84 (1993) (noting dissent­ing views). the SEC promulgated the predecessor to Rule 14a-8 31 The SEC originally promulgated the rule as Rule X-14A-7. See Solicitation of Proxies Under the Act, Exchange Act Release No. 34–3347, 7 Fed. Reg. 10,655, 10,656 (Dec. 22, 1942) (codified at 17 C.F.R. pt. 240). in 1942 to, in the words of one commentator, “catalyze what many hoped would be a functional ‘corporate democ­racy.’” 32 Palmiter, supra note 12, at 879 (quoting Report of the SEC, Proposal to Safeguard Investors in Unregistered Securities, H.R. Doc. No. 79-672, at 18 (1946)); see also Ryan, supra note 30, at 112–13 (discussing Rule 14a-8’s history). In its current form, the rule requires public corporations to in­clude in their annual proxy statements, at company expense, qualifying proposals by shareholders who satisfy the rule’s eligibility and procedural requirements. 33 See 17 C.F.R. § 240.14a-8 (2016) (outlining the rule); id. § 240.14a-8(b)(1) (requiring the proponent to continuously hold at least $2,000, or 1%, of the company’s voting stock for at least one year before the proposal’s submission date). Although state law does not restrict shareholders’ freedom to propose precatory resolu­tions at shareholder meetings, see, e.g., Auer v. Dressel, 118 N.E.2d 590, 593 (N.Y. 1954) (according shareholders the power to pass precatory resolutions even when they could not directly effect change); Palmiter, supra note 12, at 894 (noting that state law “uniformly” permits advisory resolutions), this freedom is now largely moot in public corporations, in which voting is largely by proxy, see Ryan, supra note 30, at 105, and proxy contests cost millions of dollars, see Palmiter, supra note 12, at 896 n.71. However, a company may omit a proposal if one of thir­teen substantive bases for exclusion applies. 34 See 17 C.F.R. § 240.14a-8(i). These substantive exclu­sions prohibit a range of proposals, such as proposals containing false or misleading statements, proposals motivated by the proponent’s personal grievance, and proposals relating to the company’s ordinary business operations. 35 See id. If a company wishes to omit a proposal from its proxy state­ment, it must, no later than eighty days before it files its proxy materials with the SEC, send its reasons for omitting the proposal to both the SEC and the shareholder proponent. 36 Id. § 240.14a-8(j)(1). The company bears the burden of showing its entitlement to exclude the proposal. 37 Id. § 240.14a-8(g).

Virtually every company that wishes to omit a proposal requests a no-action letter (NAL) concurrently with its required submission to the SEC. 38 Donna M. Nagy, Judicial Reliance on Regulatory Interpretations in SEC No-Action Letters: Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921, 939 (1998) [hereinafter Nagy, NALs]. An NAL is an informal SEC staff opinion that “describe[s] the re­quest, analyze[s] the particular facts and circumstances involved, dis­cuss[es] applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester.” 39 No-Action Letters, U.S. Sec. & Exch. Comm’n, http://www.sec.gov/answers/
noaction.htm [http://perma.cc/Q2P6-TUNU] (last updated Sept. 21, 2012). Strangely, the term “no-action letter” refers to the staff response regardless of whether it is favorable to the requester. Nagy, NALs, supra note 38, at 937. NALs are usually issued after multiple rounds of brief-like submissions from the com­pany and shareholder. Id. at 939. These let­ters are typically very short—often only two paragraphs—and contain little explanation of the staff’s reasoning. 40 See, e.g., Wal-Mart Stores, Inc., SEC No-Action Letter, 2014 WL 409085, at *1 (Mar. 20, 2014). The end result has no legal effect—it simply informs the company of whether the staff will recom­mend enforcement if the company omits the proposal. 41 See, e.g., Bank of America Corp., SEC No-Action Letter, 2015 WL 81899, at *2 (Mar. 17, 2015) (noting NALs’ lack of legal effect).

Because NALs are not legally binding, 42 See, e.g., Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 427 n.19 (D.C. Cir. 1992); Nagy, NALs, supra note 38, at 923–24, 942–43. it is not technically possible to “appeal” any “judgment.” Nevertheless, there are two ways to obtain review of the staff’s position. First, an aggrieved party may seek a declara­tory judgment in a federal district court as to whether the company may omit the proposal from its proxy statement. 43 See, e.g., Trinity Wall St. v. Wal-Mart Stores, Inc., 75 F. Supp. 3d 617, 628 (D. Del. 2014) (holding that the shareholder plaintiff could bring an action for declaratory judg­ment), rev’d on other grounds, 792 F.3d 323 (3d Cir. 2015); see also Roosevelt, 958 F.2d at 425 (same). Although it is unclear when exactly a company has standing to bring such an action, 44 Compare EMC Corp. v. Chevedden, 4 F. Supp. 3d 330, 342 (D. Mass. 2014) (dis­missing an action by a company for lack of standing), Chipotle Mexican Grill, Inc. v. Chevedden, No. 14-cv-0018-WJM-KMT, 2014 WL 1004529, at *3 (D. Colo. Mar. 14, 2014) (same), and Omnicom Grp., Inc. v. Chevedden, No. 14 Civ. 0386(LLS), 2014 WL 969801, at *1–2 (S.D.N.Y. Mar. 11, 2014) (same), with Waste Connections, Inc. v. Chevedden, 554 F. App’x 334, 334–36 (5th Cir. 2014) (per curiam) (finding the company plaintiff had standing). courts have agreed that shareholder proponents have this remedy available once a company states its intention to omit a proposal. 45 See, e.g., Roosevelt, 958 F.2d at 425; Trinity, 75 F. Supp. 3d at 628. Second, a party may seek review of the staff position by the full Commission, although the Commission rarely grants such requests. 46 See Nagy, NALs, supra note 38, at 943–44; see also Courtney Bartkus, Comment, Appealing No-Action Responses Under Rule 14a-8: Informal Procedures of the SEC and the Availability of Meaningful Review, 93 U. Denv. L. Rev. Online 199, 208 (2016),http://static1.1.sqspcdn.com/static/f/276323/26976608/1460932207277/Courtney+Bartkus_14a8.pdf [http://perma.cc/8BGD-A5DQ]. Courts have generally held that direct judicial review of no-action letters is unavailable. 47 See, e.g., Kixmiller v. SEC, 492 F.2d 641, 643–44 (D.C. Cir. 1974); Nagy, NALs, supra note 38, at 945. There is a decades-old circuit split over whether Commission reviews of NALs are subject to judicial review. Compare Med. Comm. for Human Rights v. SEC, 432 F.2d 659, 672–73 (D.C. Cir. 1970) (answering in the affirmative), with Amalgamated Clothing & Textile Workers Union v. SEC, 15 F.3d 254, 258 (2d Cir. 1994) (answering in the negative).

Despite the parties’ rights to bring an action in federal court, though, the NAL is usually the end of the matter. Perhaps due to the high cost of litigation and relatively limited benefit from a victory in court, 48 See Jeffrey L. Kochian et al., How to Handle Shareholder Proposals, Practical Law, 2013 WL 4864187 (on file with the Columbia Law Review) (last visited Sept. 5, 2016) (noting that companies rarely initiate litigation due to the “potential expense,” “[t]iming concerns,” and “potential for negative precedent”). parties rarely litigate disputes over excludability. 49 A search of Westlaw covering the past ten years (2005 to 2014) revealed only ten reported district court decisions citing Rule 14a-8 out of hundreds of NALs issued every year. Westlaw, http://1.next.westlaw.com (search “17 C.F.R. 240.14a-8”; then follow “citing references” hyperlink; then filter by “cases”; then filter by all dates ranging from January 1, 2005 to December 31, 2014; then filter by jurisdiction “district court”) (last visited July 31, 2016). In the 2015 proxy season, for example, there were over 200 staff excludability determinations, 50 Infra Appendix at Figure A.1. yet there appears to have been only one action litigated in a federal district court. 51 A Westlaw search of decisions citing Rule 14a-8 returned only one judicial opin­ion originating out of the 2015 proxy season. Westlaw, supra note 49 (search “17 C.F.R. 240.14a-8”; then follow “citing references” hyperlink; then filter by “cases”; then filter by all dates after “August 1, 2014”; then filter by jurisdiction “district court”); see also Ashford Inc. v. Unite Here, No. 3:15-cv-0262-M, 2015 WL 11121019 (N.D. Tex. May 12, 2015). The staff response thus becomes a “de facto adjudication.” 52 Harold S. Bloomenthal & Samuel Wolff, The Exclusion Process, 3E Sec. & Fed. Corp. L.  Rep. (West) § 24:70.50 (last updated 2016); see also Keith F. Higgins, Dir., Div. of Corp. Fin., U.S. Sec. & Exch. Comm’n, Rule 14a-8: Conflicting Proposals, Conflicting Views (Feb. 10, 2015), http://www.sec.gov/news/speech/rule-14a-8-conflicting-proposals-conflicting-views-.html [http://perma.cc/36MF-MY8U] (acknowledging the Division’s role as an “informal arbitrator”). But see SEC Staff Legal Bulletin No. 14 (July 13, 2001), http://www.sec.gov/interps/legal/cfslb14.htm [http://perma.cc/LK4Q] (claiming that the staff is not an “arbiter”).

NALs also exert enormous influence on third parties’ interpreta­tions of the ordinary business operations exclusion. 53 See Nagy, NALs, supra note 38, at 953–54 (claiming that practitioners “treat the regulatory interpretations in no-action letters on par with SEC rules, orders, and releases”). Many practitioners rely on NALs as a source of “de facto law” when advising their clients, 54 Id. at 924–25. and courts have often utilized NALs to discern the exclusion’s scope. 55 See, e.g., Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 342–43 (3d Cir. 2015); Austin v. Consol. Edison Co. of N.Y., 788 F. Supp. 192, 195 (S.D.N.Y. 1992). Indeed, both the Commission and staff explicitly encourage third-party reliance on NALs. 56 See 17 C.F.R. § 240.14a-8(j)(2)(ii) (2016) (requesting that companies’ no-action requests refer to prior NALs as “authority”); Monthly Publication of List of Significant Letters Issued by the Division of Corporation Finance, Securities Act Release No. 33–5691, Exchange Act Release No. 34–12222, Trust Indenture Act Release No. 39–430, 41 Fed. Reg. 13,682, 13,682 (1976) (announcing the monthly publication of a list of “significant” NALs). Accordingly, scholars have remarked that NALs have created a “common law” governing the meaning of the various Rule 14a-8 exclusions. 57 See, e.g., Fisch, supra note 30, at 1151.

B. Judicial Deference to Administrative Interpretations of Rule 14a-8

Official Commission-approved interpretive releases, staff-issued NALs, and staff legal bulletins play an important role in both judi­cial and third-party interpretations of the shareholder proposal rule. 58 See Nagy, NALs, supra note 38, at 929–33, 946–66 (discussing the role of official Commission interpretations and NALs); David M. Lynn et al., Morrison & Foerster LLP, New Staff Legal Bulletin and Proxy Voting Guidelines Released Ahead of the 2016 Proxy Season, Client Alert (Dec. 4, 2015), http://www.mofo.com/~/media/Files/ClientAlert/2015/12/151204ProxySeason.pdf [http://perma.cc/BHH6-GMWA] (advising clients on the impact of a staff legal bulletin); supra notes 53–57 and accompanying text (noting NALs’ influence). In order to properly situate the various views of the ordinary business opera­tions exclusion, this section discusses the weight that courts have ac­corded these administrative interpretations.

1. Official Commission Interpretations. — Among the various admin­istrative interpretations of Rule 14a-8(i)(7), official Commission inter­pretations have carried the greatest weight with courts. 59 See infra notes 63–77 and accompanying text (discussing the differing weights accorded to official Commission interpretations and informal staff opinions); cf. Nagy, NALs, supra note 38, at 929–33 (discussing the statutory authority underscoring official Commission interpretations). Of these Commission interpretations, the “adopting releases” accompanying the amendments to Rule 14a-8 in 1976, 1983, and 1998, which the Commission adopted by majority vote pursuant to the APA’s notice-and-comment procedures, 60 5 U.S.C. § 553 (2012). The APA requires administrative agencies, before promul­gating a rule or amending an existing rule, to provide notice of the proposal and solicit public comment. Id. have been the most influential. 61 See infra section I.C (discussing the history of the ordinary business operations exclusion). These adopting releases, first published in the Federal Register, contain detailed explanations of the Commission’s interpretation of the exclusion and have effected fairly sig­nificant changes to the exclusion’s scope. 62 See infra section I.C. Courts have been inconsistent about whether these adopting releases are “legislative rules,” which are reviewable under an “arbitrary and capricious” standard, 63 AFL–CIO v. Donovan, 757 F.2d 330, 340–42 (D.C. Cir. 1985) (discussing the standard of review for legislative rules). or “interpre­tive rules,” 64 Compare N.Y.C. Emps.’ Ret. Sys. v. SEC (NYCERS), 45 F.3d 7, 13 (2d Cir. 1995) (reasoning that the “significant policy” exception in an interpretive release was a “legisla­tive rule”), with Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 337 n.9 (3d Cir. 2015) (according the various releases deference under Auer v. Robbins), and Am. Fed’n of State, Cty. & Mun. Emps. v. AIG (AFSCME), 462 F.3d 121, 126 (2d Cir. 2005) (same). which are “controlling unless plainly erroneous or incon­sistent with the regulation” under Auer v. Robbins. 65 519 U.S. 452, 461–62 (1997) (internal quotation marks omitted) (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359 (1989)). Regardless, both of these standards of review are highly deferential. 66 See Auer, 519 U.S. at 461–62; Trinity, 792 F.3d at 337 n.9; AFSCME, 462 F.3d at 126. But cf. Bus. Roundtable v. SEC, 647 F.3d 1144, 1148–49 (D.C. Cir. 2011) (holding that the SEC acted arbitrarily and capriciously by promulgating its “proxy access” rule without adequately considering the economic consequences).

2. Informal Staff Opinions. — In the Rule 14a-8 context, informal SEC staff opinions come in two varieties: NALs and staff legal bulle­tins (SLBs). Both have been influential on third-party interpretations of the ordinary business operations exclusion. 67 See supra note 58 and accompanying text.

Courts have sometimes struggled to determine the proper weight to accord NALs, 68 See, e.g., Austin v. Consol. Edison Co. of N.Y., 788 F. Supp. 192, 195 (S.D.N.Y. 1992) (conflating NALs with official Commission interpretations). but the emerging consensus indicates that the “persuasive authority” approach of Skidmore v. Swift & Co. 69 323 U.S. 134 (1944); see also infra note 71 and accompanying text. is appropriate. 70 See, e.g., Trinity, 792 F.3d at 342 n.11 (granting a body of NALs “careful consideration”); S&D Trading Acad., LLC v. AAFIS Inc., 336 F. App’x 443, 448 (5th Cir. 2009) (according NALs “persuasive authority”); Gryl ex rel. Shire Pharm. Grp. PLC v. Shire Pharm. Grp. PLC, 298 F.3d 136, 145 (2d Cir. 2002) (entitling NALs “no deference beyond whatever persuasive value they might have”); Apache Corp. v. Chevedden, 696 F. Supp. 2d 723, 735 (S.D. Tex. 2010) (holding NALs are nonbinding but constitute persua­sive authority); Peck v. Pac. CMA, Inc., No. 05-cv-00569-WYD-PAC, 2007 WL 1630703, at *8 (D. Colo. June 1, 2007) (holding that NALs “do not change substantive law and are not binding on courts” but “may be treated as persuasive”); Hall v. Tyco Int’l Ltd., 223 F.R.D. 219, 248 (M.D.N.C. 2004) (giving weight to a consistent line of NALs); cf. United States v. Mead Corp., 533 U.S. 218, 224 (2001) (according Skidmore weight to short tariff letters that, although sometimes “set[ting] out a rationale in some detail,” usually “contain[ed] little or no reasoning”); Christensen v. Harris County, 529 U.S. 576, 587 (2000) (holding that Skidmore provides the appropriate framework for agency interpretations in formats such as opinion letters, policy statements, agency manuals, and enforcement guidelines); Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 427 n.19 (D.C. Cir. 1992) (hold­ing that NALs do not receive Chevron deference); Atl. Tele-Network v. Prosser, 151 F. Supp. 2d 633, 640 (D.V.I. 2000) (noting that NALs “generally are entitled to less deference than other agency pronouncements”). But cf. Lapidus v. Hecht, No. C 98-3130 MMC, 2002 WL 1034042, at *5 (N.D. Cal. May 17, 2002) (citing an NAL as authority for substantive law). Under Skidmore, certain regulatory interpretations by agencies are “‘entitled to respect’ . . . but only to the extent that those interpretations have the ‘power to persuade.’” 71 Christensen, 529 U.S. at 587 (quoting Skidmore, 323 U.S. at 140). As Professor Donna Nagy has argued, this means that a body of NALs could be persuasive according to (1) whether the SEC rule is ambiguous, (2) the quality of the NALs’ reasoning, (3) whether the full Commission has reviewed and approved the NALs, (4) whether there is consistent application of the interpretation in the NALs, (5) whether there is staff expertise, and (6) whether there are reliance interests. 72 Nagy, NALs, supra note 38, at 1003–13. However, the staff-expertise factor is unlikely to contribute significantly to the persuasiveness of NALs that interpret the ordinary business operations exclusion. 73 Id. at 1010–11. SEC staff attorneys are experts in securi­ties law, not business operations or social policy. 74 See id. Moreover, the reliance factor is only relevant when the Commission initiates an enforcement action—as opposed to a private action between a company and a share­holder—because it is the SEC, not the company or shareholder, that has instilled reliance through its NALs. 75 See id. at 1012–13. Thus, given that Rule 14a-8 NALs generally contain little explanation of their reasoning and that the Commission rarely reviews and approves them, 76 See supra section I.A. the only factors likely to contribute to the persuasiveness of Rule 14a-8(i)(7) NALs are the exclu­sion’s ambiguity and, for certain interpretations of the exclusion of which a consistent application appears in the NALs, the consistency of that interpretation. Even then, however, the majority of the Skidmore factors militate against giving the NALs much weight.

The emerging judicial consensus for SLBs, like NALs, suggests that Skidmore’s “persuasive authority” approach is appropriate. 77 See, e.g., Allen v. Admin. Review Bd., 514 F.3d 468, 478 (5th Cir. 2008) (noting that SEC staff accounting bulletins do not carry force of law); Ganino v. Citizens Utils. Co., 228 F.3d 154, 163–64 (2d Cir. 2000) (holding that SEC staff accounting bulletins do not carry “force of law” but may serve as “persuasive guidance”); In re Trade Partners, Inc. Inv’r Litig., No. 1:07-md-1846, 2009 WL 440904, at *3 (W.D. Mich. Feb. 23, 2009) (holding that an SLB “is not binding on the court” but may be “helpful and persuasive”); see also Oceana Capitol Grp. Ltd. v. Red Giant Entm’t, Inc., 150 F. Supp. 3d 1219, 1224 (D. Nev. 2015) (adopting the Trade Partners approach). Although some courts have cited SLBs for legal propositions without referencing their nonbinding nature, these oversights do not appear to reflect conscious decisions about the weight of SLBs. See, e.g., Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 346–47 (3d Cir. 2015) (quoting an SLB for substantive law without noting that the SLB was not a Commission interpretation); Express Scripts Holding Co. v. Chevedden, No. 4:13-CV-2520-JAR, 2014 WL 631538, at *3 n.2, *5 n.5 (E.D. Mo. Feb. 18, 2014) (citing SLBs as SEC guidance without noting that they are staff opinions). SLBs, like NALs, are informal SEC staff opinions—not official Commission pro­nouncements—and lack binding legal effect. 78 See SEC Staff Legal Bulletin No. 14H (CF) (Oct. 22, 2015), http://www.sec.gov/
interps/legal/cfslb14h.htm [http://perma.cc/N3GK-YXQM] [hereinafter SLB 14H] (noting that the bulletin is “not a rule, regulation or statement of the [SEC]” and that “the Commission has neither approved nor disapproved its con­tent”); Staff Legal Bulletins, U.S. Sec. & Exch. Comm’n, http://www.sec.gov/interps/legal.shtml [http://
perma.cc/85EW-NET2] (last visited July 27, 2016) (noting that “[SLBs] are not legally binding”). Indeed, each SLB con­tains a disclaimer to this effect. 79 See, e.g., SLB 14H, supra note 78. Regarding the precise weight to accord SLBs under Skidmore, many of the considerations relevant to NALs should apply to SLBs as well. 80 See supra notes 71–75 and accompanying text (discussing the application of Skidmore to NALs). Perhaps the biggest difference is that SLBs tend to exhibit much greater depth of reasoning than NALs, suggesting that the former may generally carry greater weight according to the quality-of-reasoning factor. 81 Compare SLB 14H, supra note 78 (explaining the staff’s interpretation of Rule 14a-8(i)(7)), with Wal-Mart Stores, Inc., supra note 40, at *1 (concluding that a proposal was excludable under Rule 14a-8(i)(7) with little explanation).

C. The History and Scope of the Ordinary Business Operations Exclusion

Rule 14a-8(i)(7) allows a corporation to exclude any proposal that “deals with a matter relating to the company’s ordinary business opera­tions.” 82 17 C.F.R. § 240.14a-8(i)(7) (2016). This section examines the exclusion’s scope according to the SEC’s adopting releases, which courts grant considerable deference. 83 See supra section I.B.1 (discussing the weight given by courts to SEC adopting releases).

1. The Genesis of the Ordinary Business Operations Exclusion. — In the shareholder proposal rule’s first iteration in 1942, the only substantive limitation on proposals’ content was that a proposal must be “a proper subject for action by the security holders.” 84 Solicitation of Proxies Under the Act, Exchange Act Release No. 34–3347, 7 Fed. Reg. 10,655, 10,656 (Dec. 22, 1942) (codified at 17 C.F.R. pt. 240). Over time, the substantive bases for exclusion grew to thirteen, with the SEC introducing the ordi­nary business operations exclusion in 1954. 85 See 17 C.F.R. § 240.14a-8(i)(7); Solicitation of Proxies, Exchange Act Release No. 34–4979, 19 Fed. Reg. 246, 246 (Jan. 14, 1954) (codified at 17 C.F.R. pt. 240).

The original impetus behind the ordinary business operations exclu­sion is somewhat mysterious, 86 See Solicitation of Proxies, 19 Fed. Reg. at 246 (briefly mentioning the exclusion); cf. Solicitation of Proxies: Notice of Proposed Rule Making, Exchange Act Release No. 34–4950, 18 Fed. Reg. 6646, 6647 (proposed Oct. 20, 1953) (codified at 17 C.F.R. pt. 240) (char­acterizing the exclusion’s purpose as “reliev[ing] the management of the necessity of including in its proxy material security holder proposals which relate to matters falling within the province of the management”). although there are clues in congressional records. In a congressional hearing held shortly after the exclusion’s introduction, the presiding SEC Chairman testified, in reference to the new exclusion, that “[d]ay-to-day operation of a business is generally a function of management under State law, and in this area shareholder participation even by way of advisory resolutions does not seem necessary under section 14 [of the ’34 Act] for the protection of investors gener­ally.” 87 Securities Exchange Act Amendments: Hearing on S. 2846 Before the Subcomm. on Sec., Ins. & Banking of the S. Comm. on Banking & Currency, 83d Cong. 118 (1954) (statement of Ralph H. Demmler, Chairman, Securities and Exchange Commission). Chairman J. Sinclair Armstrong echoed a similar sentiment three years later, characteriz­ing the exclusion’s policy as “confin[ing] the solution of ordinary business problems to the board of directors and plac[ing] such problems beyond the competence and direction of the shareholders.” Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Exchange Act Release No. 34–19135, Public Utility Holding Company Act Release No. 35–2266, 47 Fed. Reg. 47,420, 47,428 n.45 (Oct. 26, 1982) (codified at 17 C.F.R. pt. 240) (internal quotation marks omitted) (quoting Hearing on SEC Enforcement Problems Before the Subcomm. on Sec. of the S. Comm. on Banking & Currency, 85th Cong. 118 (1957) (statement of J. Sinclair Armstrong, Chairman, Securities and Exchange Commission)). It thus appears that the SEC originally promulgated the exclusion to preserve state law’s distinction between management and shareholder functions but went beyond state law by permitting companies to omit proposals even when framed in precatory terms. 88 Cf. supra note 33 (citing a case and articles noting that state law permits precatory resolutions at shareholder meetings). This understanding comports with the text of the 1954 version of the exclusion, which pro­vided that a company may omit any proposal that “consists of a recommendation or request that the management take action with respect to a matter relating to the conduct of the ordinary business operations of the issuer.” 89 Solicitation of Proxies, 19 Fed. Reg. at 247 (emphasis added). Past scholarly work has sometimes focused on the state-law origin of the exclusion without fully acknowledg­ing the extent to which the SEC intended, from the start, for the exclusion to diverge from state law. See, e.g., Palmiter, supra note 12, at 890–92.

2. The 1976 Amendments: Origin of the Significant Social Policy Exception. — Responding to a growth in proposals focused on corporate social re­sponsibility, 90 See Donald E. Schwartz, The Public Interest Proxy Contest: Reflections on Campaign GM, 69 Mich. L. Rev. 419, 421–23, 427 (1971) (describing social activists’ use of Rule 14a-8). the Commission, through amendments to Rule 14a-8 adopted in 1976, created an exception to the exclusion for proposals that focus on “significant policy” issues. 91 Adoption of Amendments Relating to Proposals by Security Holders, Exchange Act Release No. 34–12,999, Public Utility Company Act Release No. 35–19,771, 41 Fed. Reg. 52,994, 52,998 (Dec. 3, 1976) (codified at 17 C.F.R. pt. 240). The “significant policy” exception appears in the amendments’ adopting release, not the text of the rule itself. See id. For a thorough discussion of the 1976 amendments, see Kevin W. Waite, Note, The Ordinary Business Operations Exception to the Shareholder Proposal Rule: A Return to Predictability, 64 Fordham L. Rev. 1253, 1262–64 (1995). Explaining that the term “ordinary business operations” should be interpreted “more flexibly than in the past,” the adopting release clarified that the exclusion does not permit omission of proposals with “significant policy, economic or other implica­tions inherent in them.” 92 Adoption of Amendments Relating to Proposals by Security Holders, 41 Fed. Reg. at 52, 998. For example, a proposal urging a utility com­pany not to construct a proposed nuclear power plant would no longer be excludable under the SEC’s new interpretation. 93 See id. The change did not eviscerate the exclusion entirely, though, as companies could still omit proposals involving “mundane” business matters without “any substantial policy or other considerations.” 94 Id.

3. The 1983 Amendments: “Substance over Form.” — The next major modification to the ordinary business operations exclusion came in 1983. 95 Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Exchange Act Release No. 34–20091, 48 Fed. Reg. 38,218, 38,220–21 (Aug. 23, 1983) (codified at 17 C.F.R. pt. 240). Prior to the amendments, the staff had interpreted the exclusion as inapplicable to proposals requesting that the board issue a report or form a special committee, regardless of the subject matter of that report or special committee. 96 Id. at 38,221. The adopting release changed this practice by directing the staff to “consider whether the subject matter of the special report or the committee involves a matter of ordinary business,” 97 Id. and subsequent NALs followed suit. 98 See, e.g., Newport Pharm. Int’l Inc., SEC No-Action Letter, 1984 WL 45581, at *1, *5 (Aug. 10, 1984).

4. The Cracker Barrel No-Action Letter. — In 1992, the staff issued a sweeping NAL, which the Commission later affirmed, 99 See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,108 (May 28, 1998) (codified at 17 C.F.R. pt. 240) (citing Letter from Jonathan G. Katz, Sec’y, U.S. Sec. & Exch. Comm’n, to Sue Ellen Dodell, Deputy Counsel, Office of the Comptroller, City of N.Y. (Jan. 15, 1993)). that created a bright-line rule providing for exclusion of all proposals relating to em­ployment issues, regardless of whether the proposal focuses on signifi­cant social policy issues. 100 Cracker Barrel Old Country Store, Inc., supra note 4, at *1. The shareholder proposal requested that the company’s board implement nondiscriminatory hiring practices regarding sexual orientation. Id. Departing from its theoretical “addressee only” position on NALs, 101 Nagy, NALs, supra note 38, at 942. the staff made clear its intention for Cracker Barrel to apply to third parties by announcing that it would apply the Cracker Barrel rule to other no-action requests as well. 102 See Cracker Barrel Old Country Store, Inc., supra note 4, at *1 (“[T]he 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 longer be viewed as removing the proposal from the realm of ordinary business operations of the registrant.”). Although courts subsequently held that Cracker Barrel was nonbinding and did not require their deference, 103 See, e.g., Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 890 (S.D.N.Y. 1993). the letter nevertheless had far-reaching practical effects. 104 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, 67 n.184, 68–69 (1997) (discussing post–Cracker Barrel developments).

5. The 1998 Amendments: Retreat from Cracker Barrel. — Just five years after Cracker Barrel, the Commission reconsidered its application of the ordinary business operations exclusion to proposals “relating simultane­ously to both an ‘ordinary business matter’ and a significant social policy issue.” 105 Amendments to Rules of Shareholder Proposals, Exchange Act Release No. 34–39093, 62 Fed. Reg. 50,682, 50,688 (proposed Sept. 26, 1997) (codified at 17 C.F.R. pt. 240). Following notice and comment, the Commission reversed course on Cracker Barrel in an adopting release accompanying 1998 amendments to Rule 14a-8, returning to its earlier “case-by-case” in­quiry. 106 Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,108 (May 28, 1998) (codified at 17 C.F.R. pt. 240). Because this release is the latest word from the Commission on the ordinary business operations exclusion, it is the most authoritative statement by the SEC about the exclusion’s scope. 107 See supra section I.B.1 (discussing the weight of official Commission interpretations).

In the release, the Commission announced a two-part test to deter­mine whether a proposal is excludable. 108 See Amendments to Rules on Shareholder Proposals, 63 Fed. Reg. at 29,108. First, if the subject matter of the proposal relates to ordinary business matters, then the proposal is excludable, unless the “significant social policy” exception applies. 109 Id. Ordinary business matters are those matters involving tasks “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,” such as “management of the workforce, . . . decisions on production quality and quantity, and the retention of suppliers.” 110 Id. The significant social policy exception applies if the proposal neverthe­less “focus[es] on sufficiently significant social policy issues (e.g., signifi­cant discrimination matters).” 111 Id.

Second, if a proposal “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which share­holders, as a group, would not be in a position to make an informed judgment,” then the proposal is excludable, irrespective of whether it also raises significant social policy issues. 112 Id. Examples include proposals that “involve[] intricate detail, or seek[] to impose specific time-frames or methods for implementing complex policies.” 113 Id. This step of the in­quiry appears to be a codification of one of the holdings of Roosevelt v. E.I. Du Pont de Nemours & Co., a D.C. Circuit opinion permitting exclu­sion of a proposal that requested an acceleration of the company’s timeline for phase-out of atmosphere-damaging chlorofluorocarbons (CFCs). 114 See Amendments to Rules of Shareholder Proposals, Exchange Act Release No. 34–39093, 62 Fed. Reg. 50,682, 50,689 n.79 (proposed Sept. 26, 1997) (codified at 17 C.F.R. pt. 240); see also Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 427 (D.C. Cir. 1992) (R.B. Ginsburg, J.). In Roosevelt, management had already planned to phase out its CFC production, and the proponent’s timeline differed from manage­ment’s by only one year. 115 See Roosevelt, 958 F.2d at 427–28. Although a proposal to immediately halt all CFC production may raise “significant policy” issues, the court found that the proposal’s focus on such a small difference in timing rendered it excludable under the ordinary business operations exclusion. 116 Id.

II. The Rulification of the Ordinary Business Operations Exclusion

Part I laid out the regulatory framework governing shareholder pro­posals and the ordinary business operations exclusion. This Part explores the exclusion’s “rulification,” which has occurred primarily through SEC no-action letters. Section II.A discusses the conflict created by the recent Third Circuit case Trinity Wall Street v. Wal-Mart Stores, Inc. 117 792 F.3d 323 (3d Cir. 2015). and the SEC staff’s subsequent response. Section II.B explains the rulification theory and, drawing on evidence from the 2015 proxy season, empirically tests this theory. Section II.C concludes by arguing that this rulification has been problematic.

A. Trinity and Its Aftermath

The saga surrounding the recent Third Circuit case Trinity Wall Street v. Wal-Mart Stores, Inc. illustrates some of the problems related to inter­pretation of the ordinary business operations exclusion. In Trinity, share­holder Trinity Wall Street submitted a proposal to Wal-Mart requesting that the board provide for oversight concerning the creation of policies and standards that determine whether the company should sell a prod­uct that (1) “especially endangers public safety and well-being,” (2) “has the substantial potential to impair the reputation of the Company,” or (3) “would reasonably be considered offensive to the family and commu­nity values integral to the Company’s promotion of its brand.” 118 Wal-Mart Stores, Inc., supra note 40, at *7–8. The pro­posal specified that this oversight was intended to cover policies and standards related to whether “the company should sell guns equipped with magazines holding more than ten rounds of ammunition,” referenc­ing concerns about the use of such weapons in mass killings like those in Newtown and Columbine. 119 Id. at *8. Essentially, Trinity wanted Wal-Mart to stop selling assault rifles, although it framed the proposal in terms of board oversight. 120 See id. (contending Wal-Mart’s sale of “guns equipped with high capacity magazines . . . facilitate[s] mass killings” but insisting that the proposal focuses on “Board-level oversight”).

After the SEC staff issued a no-action letter indicating that Wal-Mart could omit the proposal in reliance on the ordinary business operations exclusion, 121 Id. at *1. The staff explained its reasoning only by noting that “the proposal re­lates to the products and services offered for sale by the company,” and “[p]roposals con­cerning the sale of particular products and services are generally excludable under rule 14a-8(i)(7).” Id. Trinity brought an action in federal court seeking a declara­tory judgment that Wal-Mart must include the proposal. 122 See Trinity, 792 F.3d at 331. The district court (and amici law professors) agreed with Trinity on two alternative grounds: first, that the proposal, being couched in terms of board over­sight, did not relate to Wal-Mart’s ordinary business operations; and se­cond, that the proposal raised significant social policy issues. 123 See Trinity Wall St. v. Wal-Mart Stores, Inc., 75 F. Supp. 3d 617, 630–31 (D. Del. 2014), rev’d, 792 F.3d 323; Brief of Amici Curiae Corporate and Securities Law Professors at 6–16, Trinity, 792 F.3d 323 (No. 14-4764), 2015 WL 740873. But the Third Circuit reversed, holding that framing the proposal in terms of board oversight did not remove it from the exclusion’s reach, and even though the proposal raised significant policy issues, those issues did not “transcend” Wal-Mart’s ordinary business operations. 124 Trinity, 792 F.3d at 351. In the majority’s view, a proposal must both raise significant social policy issues and trans­cend the company’s day-to-day business operations in order to qualify for the social policy exception. 125 See id. at 346. A proposal that pertains to the “nitty-gritty” of the company’s “core business”—in Wal-Mart’s case, selling consumer products—would fail the second part of this two-part test. 126 Id. at 347. Notably, the majority derived its test from a staff legal bulletin, 127 See id. at 346 (quoting SEC Staff Legal Bulletin No. 14E (CF) (Oct. 27, 2009), http://www.sec.gov/interps/legal/cfslb14e.htm [http://perma.cc/MX7P-9ETB]). not a Commission-approved release, and supported its position by reference to a series of NALs that, in the majority’s view, suggested a more-or-less bright-line rule rendering all proposals relating to “the sale of particular products or services” excludable. 128 Id. at 347 (internal quotation marks omitted) (quoting Rite Aid Corp., SEC No-Action Letter, 2015 WL 364996, at *1 (Mar. 24, 2015)); see also id. at 347–51.

Judge Patty Shwartz, concurring in the judgment, disagreed with the majority’s analytical approach to the social policy exception. 129 See id. at 352–54 (Shwartz, J., concurring in the judgment). By separating the significance and transcendence requirements into a two-part test, the majority was deviating from the SEC’s approach as ex­pressed in its adopting releases and from the purposes underlying sec­tion 14 of the ’34 Act. 130 See id. Instead, Judge Shwartz found Trinity’s proposal excludable because it did not focus on a significant social policy issue. 131 See id. at 354. Even if Wal-Mart’s sales of guns might qualify as a sufficiently significant issue, the proposal was framed so broadly—covering many different products—that, “as a whole,” it did not “focus” on that issue. 132 Id. The SEC staff, perhaps somewhat strangely in light of its position that only federal courts can adjudicate excludability disputes, 133 See, e.g., Adobe Systems Inc., SEC No-Action Letter, 2015 WL 9002919, at *1 (Jan. 4, 2016) (“Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”). announced its preference for Judge Shwartz’s approach over the majority’s in a subsequent SLB. 134 See SLB 14H, supra note 78.

Trinity thus presents three different views on the ordinary business op­erations exclusion: first, the district court’s opinion; 135 See supra note 123 and accompanying text. second, the Third Circuit majority’s opinion; 136 See supra notes 124–128 and accompanying text and third, Judge Shwartz’s and the SEC staff’s opinion. 137 See supra notes 129–134 and accompanying text. This means that parties could face different legal standards depending on whether they seek no-action relief from the SEC or a declaratory judgment in the Third Circuit (where Delaware is located 138 See Third Circuit District Courts, U.S. Court of Appeals for the Third Circuit, http://www.ca3.uscourts.gov/third-circuit-district-courts [http://perma.cc/VDE6-VQUE] (last visited July 27, 2016). Delaware is the state of incorporation for the majority of Fortune 500 companies. Lewis S. Black, Jr., Why Corporations Choose Delaware 1 (2007), http://
corp.delaware.gov/pdfs/whycorporations_english.pdf [http://perma.cc/9MCT-2RXB]. )—with uncertainty about which approach other circuits will follow.

B. Informal SEC Staff Opinions as De Facto Rulemaking

In addition to creating confusion about the scope of the ordinary business operations exclusion, the Trinity saga raises troubling issues re­garding the SEC staff’s role in creating the substantive law that governs the exclusion. First, the Third Circuit majority’s reliance on no-action letters and staff legal bulletins 139 See supra notes 127–128 and accompanying text. —even when those opinions arguably conflict with the Commission’s position 140 See supra note 130 and accompanying text. —suggests that the staff’s inter­pretations impact the law as much as the interpretations that the full Commission, whose members were appointed by the President on advice and consent of the Senate, 141 See 15 U.S.C. § 78(d)(a) (2012). has adopted after notice and comment. Second, the majority’s extraction of a bright-line rule from a series of NALs suggests that the ordinary business operations exclusion has under­gone what some scholars have called “rulification,” 142 See Schauer, Rulification, supra note 21, at 805–08; see also Michael Coenen, Rules Against Rulification, 124 Yale L.J. 644, 653–58 (2014); Sydney Foster, Should Courts Give Stare Decisis Effect to Statutory Interpretation Methodology?, 96 Geo. L.J. 1863, 1904 (2008); Rosen, supra note 21, at 491; Mark Tushnet, The First Amendment and Political Risk, 4 J. Legal Analysis 103, 106 (2012). with the staff’s subsequent SLB constituting a “rule against rulification” directed at courts. 143 See infra notes 175–176 and accompanying text. Together, these two insights imply that the SEC staff has substi­tuted itself for the Commission as principal rulemaker for the ordinary business operations exclusion. This section will explain the rulification theory and present empirical evidence through an analysis of SEC no-action letters.

1. The Rulification Theory. — Scholars have frequently divided le­gal directives into two categories: rules and standards. 144 See, e.g., Larry Alexander & Emily Sherwin, The Rule of Rules: Morality, Rules, and the Dilemmas of Law 28–30 (2001); H.L.A. Hart, The Concept of Law 124–41 (3d ed. 2012); Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and in Life 17–37 (1991) [hereinafter Schauer, Playing by the Rules]; Kaplow, supra note 13, at 559–60; Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 Harv. L. Rev. 1685, 1777 (1976); Russell B. Korobkin, Behavioral Analysis and Legal Form: Rules vs. Standard Revisited, 79 Or. L. Rev. 23, 25–30 (2000); Parchomovsky & Stein, supra note 27, at 172–81; Pierre Schlag, Rules and Standards, 33 UCLA L. Rev. 379, 400–01 (1985); Kathleen M. Sullivan, Foreword: The Justices of Rules and Standards, 106 Harv. L. Rev. 22, 57–62 (1992); Cass R. Sunstein, Problems with Rules, 83 Calif. L. Rev. 953, 961–65 (1995); cf. Colin S. Diver, The Optimal Precision of Administrative Rules, 93 Yale L.J. 65, 72–74 (1983) (framing the rules–standards binary in terms of precision). According to one popular account, rules are directives whose legal content is deter­mined ex ante, while standards’ legal content is determined ex post. 145 See Kaplow, supra note 13, at 559–60. However, legal directives do not always fit perfectly into the rules–standards dichotomy—rather, they exist as part of a continuum, usually lying somewhere between the “pure” versions at either end. 146 See id. at 561–62. And within this continuum, there is a strong tendency for standards to drift toward rules—a phenomenon some scholars have called “rulification.” 147 See supra note 142 (citing examples); cf. Kaplow, supra note 13, at 577–79, 608–18 (noting that precedent can render standards more like rules). For example, while the Sherman Act suggests a broad standard prohibiting contracts, combinations, and conspira­cies “in restraint of trade or commerce,” the Supreme Court has created “per se rules” prohibiting “price fixing, tying arrangements, and resale price maintenance.” Schauer, Rulification, supra note 21, at 806–07. Rulification, which can take place at either the higher or lower court level, 148 See Coenen, supra note 142, at 656 n.29. may occur even without formal acknowledgement of the rules’ existence by a decisionmaker—instead, a rule can exist so long as deci­sionmakers behave as if it exists. 149 See Schauer, Playing by the Rules, supra note 144, at 64, 71.

The ordinary business operations exclusion, being an open-ended standard, 150 See supra note 13 and accompanying text. seems ripe for rulification. 151 Cf. Coenen, supra note 142, at 654 (“[C]ommon law adjudication stands ready to convert an open-ended pronouncement into a far more specific patchwork of rules.”). As in Trinity, decisionmakers could easily infer, based on precedent (and perhaps giving weight to a body of NALs based on the Skidmore ambiguity and consistency fac­tors 152 See supra section I.B.2 (explaining the Skidmore factors’ relevance to NALs). ), that certain categories of proposals—such as proposals relating to a retailer’s sale of particular products—are per se excludable (or per se not excludable). 153 See Trinity Wall St. v. Wal-Mart Stores, Inc., 792 F.3d 323, 347 (3d Cir. 2015) (inferring a bright-line rule from a series of NALs); supra note 128 and accompanying text. One would expect NALs to be the primary source of these rules, given the dearth of judicial opinions as to the exclusion’s scope. 154 See supra notes 48–51 and accompanying text. The next subsection empirically tests this theory that the exclusion has become “rulified.”

2. Evidence from the 2015 Proxy Season. — An examination of no-ac­tion letters from the 2015 proxy season supports the rulification hypothe­sis described above. Although the SEC staff rarely explains its reasoning in detail, the language that does appear shows that the staff places most proposals into specific categories, 155 See infra notes 162–163 and accompanying text. and the category into which a pro­posal is placed is predictive of whether the staff will determine that the company may exclude the proposal. 156 See infra note 165 and accompanying text. These insights constitute strong evidence that the staff has been relying on categorical rules to determine whether proposals are excludable under the ordinary business opera­tions exclusion.

The dataset consists of all shareholder proposals made under Rule 14a-8 to Fortune 500 companies during the 2015 proxy season. 157 Initial data were obtained from FactSet’s “Shark Repellent” database. Shark Repellent, FactSet, http://sharkrepellent.net (select “Proxy”; filter “Meeting Date” by 10/1/14–9/30/15; select “Annual Meeting”; exclude “Non US Companies”; select “Fortune 500” index; select “Shareholder” under “Proxy Proposal Brought By”; select “Yes” under “Rule 14a-8”; select “Include” under “Proposals not in the Proxy”; select appropriate data items in “User Columnar Reports”) (on file with the Columbia Law Review) (last visited Oct. 16, 2015) [hereinafter Dataset]. After filtering these data by “no-action letter sought” in Excel and excluding one proposal that did not receive a staff response, see Division of Corporate Finance: 2015 No-Action Letters Issued Under Exchange Act Rule 14a-8, U.S. Sec. & Exch. Comm’n, http://www.sec.gov/divisions/
corpfin/cf-noaction/2015_14a-8.shtml [http://perma.cc/KZ5K-4U28] (last modified Jan. 11, 2016) (reporting “no response” for a proposal made to Wal-Mart Stores, Inc.), the author obtained all 250 SEC responses to no-action requests from Westlaw and the SEC website and manually coded them according to proposal type, bases for exclusion sought, the result of the request, and the staff-created category. Coding of staff-created categories directly tracked the staff’s language in its NALs. For example, if the staff opined that a pro­posal was excludable because “the proposal relates to the nature, presentation and con­tent of programming and film production,” the proposal was coded as fitting the “news, television, or film programming” category. The author’s coding is available at Fortune 500 Shareholder Proposal No-Action Letters (2015 Proxy Season), Columbia Law Review, https://live-columbia-law-review.pantheonsite.io/?attachment_id=1513 (on file with the Columbia Law Review) (last visited Sept. 30, 2016). Out of a total of 587 proposals, companies sought NALs for 250 proposals. 158 Dataset, supra note 157. This figure excludes one proposal for which the staff recorded no response. See supra note 157. Of those 250, companies sought exclusion based on (i)(7) for 87 pro­posals. 159 Infra Figure 1. Of those 87 proposals, proponents withdrew 25 proposals be­fore the SEC staff could issue a response on the merits, with 19 proposals withdrawn because management implemented the proponents’ requests or showed willingness to negotiate with the proponents. 160 Infra Figure 1. Out of the remaining 62 proposals, the staff determined that 19 were not excluda­ble (i.e., no-action relief was denied), 38 were excludable under (i)(7), and 5 were excludable on other grounds. 161 Infra Figure 1.

Figure 1: Rule 14a-8 No-Action Request Results, Exclusion Based on (i)(7) Sought, 2015 Proxy Season (Fortune 500)

1

The relevant subset of data that may provide evidence of rulification thus consists of the 57 NALs in which the SEC staff made a determination as to excludability under (i)(7). Of the 38 proposals (67%) that the staff determined were excludable, the staff placed 35 proposals (92% of excludable proposals) into a specific category, such as “employee policy” (12 proposals) or “news, television, or film programming” (3 pro­posals). 162 Infra Figure 2; infra Table 1. Of the 19 proposals (33%) that the staff determined were not excludable, it placed 14 proposals (74% of nonexcludable proposals) into a specific category, such as “climate change” (4 proposals) or “sen­ior executive compensation” (4 proposals). 163 Infra Figure 3; infra Table 1. Of all 57 proposals, the staff placed 49 proposals (86%) into a specific category. 164 Infra Table 1. Intracategory staff determinations as to excludability were uniform—that is, for any given category, the staff made the same determination as to all proposals within that category. 165 Infra Table 1. The category into which the staff placed a pro­posal was thus 100% predictive of whether the staff found the proposal excludable. 166 Granted, for 11 of the 49 categorized proposals, that proposal was the only pro­posal in its category, and one might question the probative value of these single-proposal categories. However, the single-proposal categories did not appear out of thin air. In previ­ous years, the staff had frequently used similar—and often identical—language to the language that it used in 2015. See infra note 169 and accompanying text. For example, the staff has categorized “Advertising of Products and Services” proposals along similar lines for well over a decade. See infra notes 215–216 and accompanying text.

Figure 2: SEC Staff Categorization in Rule 14a-8 No-Action Letters, Exclusion Based on (i)(7) Permitted, 2015 Proxy Season (Fortune 500)

2

Figure 3: SEC Staff Categorization in Rule 14a-8 No-Action Letters, Exclusion Based on (i)(7) Denied, 2015 Proxy Season (Fortune 500)

 

3

Table 1: SEC Staff Determinations as to Rule 14a-8(i)(7) Excludability by Staff-Imposed Category, 2015 Proxy Season (Fortune 500)

Staff-Imposed Category Count Proportion Determined Excludable by Staff
N/A—No Category Specified 8 37.5%
Advertising of Products or Services 1 100%
Affect the Conduct of Ongoing Litigation 1 100%
Charitable Contributions to Specific Organization 2 100%
Disclosure of Ordinary Business Matters 1 100%
Employee Policy 12 100%
General Adherence to Ethical Business Practices 2 100%
General Employee Compensation 4 100%
Legal Compliance 1 100%
Management of Expenses 1 100%
Monitoring of Preliminary Voting Results 1 100%
News, Television, or Film Programming 3 100%
Product Development 1 100%
Products and Services 3 100%
Tax Expenses and Sources of Financing 1 100%
Use of Customer Information to Make Pricing Determinations 1 100%
Climate Change 4 0%
Extraordinary Business Transaction 1 0%
Fundamental Business Strategy (Pricing) 2 0%
Human Rights 1 0%
Political Activities 2 0%
Senior Executive Compensation 4 0%
Sum of Categorized Determinations 49 71.4%

 

The high rate at which the SEC staff places proposals into specific categories, 167 See supra Figures 2, 3. combined with the fact that placement into a specific cate­gory predicts whether the staff will determine that a proposal is excluda­ble, 168 See supra note 165 and accompanying text. constitutes strong evidence that the staff frequently relies on rules to determine whether to exclude a proposal under Rule 14a-8(i)(7). In­deed, the staff uses nearly identical language, year after year, to identify many of the categories into which it places proposals. 169 See, e.g., Comcast Corp., SEC No-Action Letter, 2015 WL 274205, at *1 (Mar. 24, 2015) (permitting exclusion of a proposal as relating to “the nature, presentation and content of programming and film production”); CBS Corp., SEC No-Action Letter, 2013 WL 287990, at *1 (Mar. 22, 2013) (permitting exclusion of a proposal as relating to “the nature, presentation, and content of television programming”); General Electric Co., SEC No-Action Letter, 2009 WL 4024868, at *1 (Dec. 10, 2009) (permitting exclusion of a pro­posal as relating to “the nature, presentation and content of television programming”); The Walt Disney Co., SEC No-Action Letter, 2006 WL 3436486, at *1 (Nov. 22, 2006) (per­mitting exclusion of a proposal as relating to “the nature, presentation and content of programming and film production”).

It might be tempting to downplay the significance of these results because of the possibility that the staff may only be relying on “rules of thumb”—soft rules that provide helpful guidance but may be overridden by external exceptions or the inapplicability of the rules’ background justifications. 170 Cf. Schauer, Playing by the Rules, supra note 144, at 104–11 (defining rules of thumb). After all, the staff often states only that proposals in a specified category are “generally” excludable. 171 E.g., The Walt Disney Co., SEC No-Action Letter, 2015 WL 7179994, at *1 (Nov. 23, 2015) [hereinafter 2015 Walt Disney Co. NAL] (“Proposals concerning the sale of particular products and services are generally excludable under Rule 14a-8(i)(7).”). The reference to “gen­eral” excludability implies that exceptions exist. But even if the evidence establishes only rules of thumb, the existence of rules of thumb would still significantly impact the exclusion’s operation. First, rules of thumb still carry normative force for decisionmakers because they raise the confidence level required to make a decision inconsistent with the rule and thereby deviate from presently practiced norms. 172 See Schauer, Playing by the Rules, supra note 144, at 108–11. Confronted with a rule of thumb, a decisionmaker may find it easier to simply follow the rule—even when there is a plausible exception. Accordingly, one would expect presumptive excludability to effectively shift the burden of persua­sion onto the proponent, with presumptive nonexcludability effectively increasing the company’s burden of persuasion. Second, as exemplified by Trinity, these rules may guide courts and market participants regard­less of their effect on the staff’s judgment. 173 See supra note 128 and accompanying text (noting the majority’s reliance on NALs). The possibility of judicial and market-participant reliance on such “apparent” rules would be equally troublesome if the staff were not itself following the rules—for then the staff and other parties would be operating according to differ­ent principles, creating confusion as to which law governs. 174 Cf. Bert I. Huang, Shallow Signals, 126 Harv. L. Rev. 2227, 2244–47, 2249–50 (2013) (describing the effect of “quiet exceptions” that are difficult to observe).

One might also object that the most recent SLB, which emphasizes the importance of a case-by-case inquiry (a “rule against rulification”), 175 See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,108 (May 28, 1998) (codified at 17 C.F.R. pt. 240) (announcing that the staff will use a “case-by-case analytical approach” to the exclusion); SLB 14H, supra note 78 (noting that the staff will “continue to apply Rule 14a-8(i)(7) as articulated by the Commission” and citing the 1998 release adopting return to case-by-case analysis of social policy proposals); cf. Coenen, supra note 142, at 658–60 (describing “rules against rulification”). discounts the continued relevance of any prior rulifica­tion. But this objection would be misguided, given that the bulletin does not purport to signal any sort of paradigm shift for staff interpretation of (i)(7). 176 See SLB 14H, supra note 78 (indicating that the staff “intends to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the [staff’s] prior application of the exclusion”). If anything, the SLB appears to be a rule against rulification directed at courts—the SLB’s section on the exclusion was a direct response to Trinity and explicitly condoned current and past staff practice. See id. Moreover, staff interpretations in NALs issued after the bulle­tin’s release suggest that the staff will continue to utilize rules in their application of the exclusion. 177 See, e.g., Viacom, Inc., SEC No-Action Letter, 2015 WL 6774394, at *1 (Dec. 18, 2015) (permitting the exclusion of a proposal as relating to “the nature, presentation and content of advertising”); 2015 Walt Disney Co. NAL, supra note 171, at *1 (permitting the exclusion of a proposal as relating to “the sale of particular products and services”).

C. A Suboptimal Rulification?

Rulification is not necessarily undesirable. 178 See Schauer, Rulification, supra note 21, at 809–13 (discussing the benefits of rulification). In some cases, rulifica­tion may lower enforcement costs, provide certainty and consistency, and promote more accurate results. 179 See, e.g., Kaplow, supra note 13, at 562–63 (discussing the efficiency benefits of rules); Schauer, Rulification, supra note 21, at 809–10 (explaining why a decisionmaker might voluntarily constrain her choices to promote more accurate results). Moreover, when lower and intermedi­ate courts rulify standards, there may be additional benefits resulting from experimentation and transparency. 180 See Coenen, supra note 142, at 680–93. But the rulification of the ordinary business operations exclusion has been problematic. It lacks demo­cratic legitimacy and transparency, and the resulting rules have often been overinclusive when measured against their background justifica­tions. These problems can be divided into three types: rulemaking proce­dure, rule format, and rule overinclusivity.

1. Rulemaking-Procedure Defects. — The first major class of defects in the exclusion’s rulification relates to the procedures through which the SEC staff “promulgates” these rules. These defects are apparent if we view (i)(7) rulemaking through either of two models: administrative rule­making or common law rulemaking.

Under the administrative model, the democratic legitimacy of rules depends in part on public participation in rulemaking, 181 See, e.g., Gillian E. Metzger, Administrative Constitutionalism, 91 Tex. L. Rev. 1897, 1901 (2013); Mark Seidenfeld, A Civic Republican Justification for the Bureaucratic State, 105 Harv. L. Rev. 1511, 1559–62, 1576 (1992). as reflected in the APA’s notice-and-comment requirements. 182 See 5 U.S.C. § 553 (2012). In the (i)(7) context, however, the staff issues NALs and SLBs without significant public partici­pation, 183 See supra section I.A (describing the staff’s procedures in connection with issuing NALs); cf. Staff Legal Bulletins, U.S. Sec. & Exch. Comm’n, http://www.sec.gov/
interps/legal.shtml [http://perma.cc/85EW-NET2] (last visited July 27, 2016) (describing the function of SLBs as “summariz[ing] the Commission staff’s views regarding various aspects of the federal securities laws and SEC regulations”). undermining the rules’ legitimacy. Even if the staff-created rules governing (i)(7) are legally exempt from notice-and-comment re­quirements, 184 NYCERS, 45 F.3d 7, 12 (2d Cir. 1995) (ruling that an NAL, being an “interpretive rule,” was exempt from notice-and-comment requirements). the rules’ practical ability to fix the rights and obligations of companies and shareholders 185 See supra section II.B (discussing the exclusion’s rulification). is nevertheless troubling as a matter of policy 186 See Note, The SEC and “No-Action” Decisions Under Proxy Rule 14a-8: The Case for Direct Judicial Review, 84 Harv. L. Rev. 835, 845–48 (1971) [hereinafter Case for Review] (criticizing the SEC’s use of NALs as a lawmaking tool); cf. Anthony, supra note 24, at 1359–63 (criticizing the use of guidance documents by agencies to effectively bind the public); Lisa Schultz Bressman, Beyond Accountability: Arbitrariness and Legitimacy in the Administrative State, 78 N.Y.U. L. Rev. 461, 541–44 (2003) (announcing a general preference for notice-and-comment rulemaking).
Granted, given the “ossification” of rulemaking procedures, it may sometimes be desirable to circumvent notice-and-comment procedures. See Raso, supra note 24, at 107–11 (evaluating the costs and benefits of avoiding rulemaking procedures). Indeed, in light of the costs imposed by judicial oversight of SEC rulemaking, see Bus. Roundtable v. SEC, 647 F.3d 1144, 1148–49 (D.C. Cir. 2011) (striking down an SEC rule on the basis of inade­quate cost–benefit analysis); Donna M. Nagy, The Costs of Mandatory Cost–Benefit Analysis in SEC Rulemaking, 57 Ariz. L. Rev. 129, 149–51 (2015) [hereinafter Nagy, CBA] (describ­ing the “SEC paralysis” resulting from onerous cost–benefit oversight), perhaps some use of informal staff opinions in place of notice-and-comment rulemaking may be desirable. But in the Rule 14a-8 context, in which loss of public input into agency decisionmaking could lead to loss of public input into another type of decisionmaking (corporate deci­sionmaking), circumvention of notice and comment could create a pernicious negative feedback loop. —a problem exacerbated by the staff’s insulation from electoral accountability. 187 Cf. Seidenfeld, supra note 181, at 1559–60 (arguing that accountability concerns call for public participation in administrative rulemaking). Moreover, this lack of accountability increases the risk of regulatory capture, 188 Cf. Nagy, CBA, supra note 186, at 156–57 (discussing the risk of agency capture in the SEC). the phenomenon whereby an agency promotes the interests of the industry it is designed to regulate rather than the interests of the public. 189 See George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. & Mgmt. Sci. 3, 3–4 (1971) (outlining the regulatory-capture theory). Indeed, given the association between staff use of rules and staff determination that a proposal is excludable, it appears that the staff has utilized the rules to companies’ benefit more frequently than to proponents’ benefit. 190 Of the 49 proposals to which the staff assigned a category, the staff determined that 35 proposals (71%) were excludable. Supra Table 1. By contrast, out of the 8 pro­posals to which the staff did not assign a category, the staff determined that only 3 pro­posals (38%) were excludable. Supra Table 1. Granted, the significance of the latter result is limited by a small sample size.

Under the common law model, one expects the judicial system that develops the law to have multiple layers of review: lower courts and appellate courts. Appellate courts benefit the development of the com­mon law by both providing for review of individual decisions and allow­ing for more thoughtful and centralized development of the law. 191 See Victor Eugene Flango, State Supreme Court Opinions as Law Development, 11 J. App. Prac. & Process 105, 105, 108–17 (2010); cf. Palsgraf v. Long Island R.R., 162 N.E. 99, 99–101 (N.Y. 1928) (developing tort law by clarifying the proximate cause requirement). But in the Rule 14a-8 context, there is little meaningful review of NALs. First, intra-SEC review is limited. Although SEC regulations allow for Commis­sion review of NALs, that review is wholly discretionary, 192 See 17 C.F.R. § 202.1(d) (2016). and the Commission rarely grants requests for review. 193 See Nagy, NALs, supra note 38, at 944; Bartkus, supra note 46, at 208. Moreover, even when the Commission does grant review, it characterizes its opinions as “infor­mal,” 194 17 C.F.R. § 202.1(d). and the opinions do not thoroughly explain the Commission’s rea­soning. 195 See Nagy, NALs, supra note 38, at 944. Second, the impact of judicial intervention is nominal. Even when courts are occasionally willing to depart from the staff’s interpretation, such judicial departures have limited effect on the (i)(7) “common law” because of the staff’s apparent view that it is not bound by courts’ interpretations of the exclusion. 196 See SLB 14H, supra note 78 (announcing the staff’s intention to not follow a Third Circuit opinion). Furthermore, alt­hough companies might have enough resources to bring direct actions, many shareholders lack the finances and motivation to take their dis­putes to court, 197 See Case for Review, supra note 186, at 855. particularly in light of collective-action and free-rider problems. 198 See Palmiter, supra note 12, at 895–900. This undermines Rule 14a-8 as a medium for shareholder communication without regard to shareholders’ financial standing. 199 See Case for Review, supra note 186, at 855. Of course, if staff interpretations were consistently correct, one might find the lack of review less troubling—but given the staff’s periodic changes in its interpretation of the exclusion, 200 See, e.g., J. Robert Brown, Jr., The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors, 2 Harv. Bus. L. Rev. 501, 511 (2012); Schapiro, supra note 12, at A19 (criticizing the staff’s decisionmaking for “shift[ing] with the political and corporate governance views of the staff and individual commissioners”). it seems unlikely that the staff has finally settled on “the” correct interpretation.

The SEC’s current approach to social policy proposals is problematic under both of these models. First, as an agency focused on protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, 201 See What We Do, U.S. Sec. & Exch. Comm’n, http://www.sec.gov/
about/whatwedo.shtml [http://perma.cc/8VZ8-CDPC] (last modi­fied June 10, 2013). the SEC is not well situated to determine whether a social policy issue is “sufficiently significant” to merit shareholders’ atten­tion. 202 See supra notes 73–74 and accompanying text (noting this lack of expertise in social policy). Second, individual staff members’ personal political beliefs seem bound to subconsciously, if not consciously, color their determinations, notwithstanding the staff’s attempts to look to objective measures of significance. 203 Cf. Schauer, Playing by the Rules, supra note 144, at 209–10 (noting the potential effect of social, political, and moral beliefs on rule interpretation). Additionally, the Commissioners’ political views may influence staff practice. See Brown, supra note 200, at 510–11; Schapiro, supra note 12, at A19. When objective measures do not provide a clear answer, there is little else on which to rely. Third, even if the staff can objectively look to external measures of significance, the measure that the SEC has chosen—congressional interest—is itself difficult to determine and prone to create error. 204 See Palmiter, supra note 12, at 882 n.13. Congressional interest could range anywhere from one representative introducing a bill that never makes it out of committee to unanimous congressional recognition of a social policy is­sue’s importance, making it difficult for the SEC to draw the line as to what level of congressional interest is sufficient. Finally, the staff’s ten­dency to create de facto rules regarding which social policy issues qualify for the social policy exception makes it difficult to adapt to changing public perception of those issues’ significance. 205 See supra section II.B.2 (presenting evidence of the exclusion’s rulification). Ultimately, this entrenchment may trigger a “doctrinal feedback” loop in which NAL-created customs become legally binding in spite of changing circumstances. 206 Cf. James Gibson, Doctrinal Feedback and (Un)Reasonable Care, 94 Va. L. Rev. 1641, 1644–45, 1653–61 (2008) (examining the cyclical transformation of excessive-medical-treatment practices into legally binding customs as a result of doctors’ aversion to medical malpractice liability).

2. Rule-Format Defects. — The second meaningful defect results from the format in which the rules appear. Simply put, NALs contain only nominal explanation of the staff’s reasoning, 207 See, e.g., supra note 177 (citing NALs making conclusory determinations as to excludability). which makes it difficult to discern the rules’ content and imposes information externalities. 208 Cf. Huang, supra note 174, at 2239–40 (explaining how individualized regulatory rulings may create “shallow signals” and noting that “[p]artial revelation might worsen the risk of misunderstanding”). The confusion surrounding Trinity aptly illustrates the problem: The dis­trict court, Third Circuit majority, and SEC staff all pointed to prior staff practice as support for their interpretations of Rule 14a-8(i)(7), yet three different interpretations of the exclusion emerged. 209 See supra section II.A. To the extent that transparency is an important attribute of administrative rules, 210 See generally Diver, supra note 144, at 67 (discussing the role of transparency in effective rulemaking). the Rule 14a-8 rulemaking system falls flat.

3. Rule-Overinclusivity Defects. — The third noteworthy defect relates to the rules’ overinclusivity as measured against their justifications. 211 See generally Sunstein, supra note 144, at 992–93 (discussing the recurring “overinclusivity” problem that attends highly generalized rules). Specifically, the rules have resulted in the unfounded exclusion of pro­posals that focus on significant social policy issues, in direct conflict with the SEC’s position in the 1998 adopting release. 212 See supra section I.C.5. For example, the staff recently permitted (i)(7) exclusion of a proposal by FedEx shareholders that requested a report on steps the company was taking to distance itself from the Washington Redskins football team, whose stadium is called “FedExField.” 213 See FedEx Corp., SEC No-Action Letter, 2015 WL 3453723, at *1 (July 21, 2015). Notwithstanding substantial outcry (including from the White House) about the racist undertones of the Redskins’ name, 214 See, e.g., Jonathan O’Connell, Obama Administration Rebuffs D.C.’s Efforts to Bring Back the Redskins, Wash. Post: Digger (July 1, 2015), http://www.
washingtonpost.com/news/digger/wp/2015/07/01/obama-administration-rebuffs-d-c-s-efforts-to-bring-back-the-redskins/ (on file with the Columbia Law Review); Theresa Vargas, U.S. Patent Office Cancels Redskins Trademark Registration, Says Name Is Disparaging, Wash. Post (June 18, 2014), http://www.washingtonpost.com/local/us-patent-office-cancels-redskins-trademark-registration-says-name-is-disparaging/2014/06/18/e7737bb8-f6ee-11e3-8aa9-dad2ec039789_story.html (on file with the Columbia Law Review). the staff determined that the proposal was excludable as “relat[ing] to the manner in which FedEx advertises its products and services” 215 FedEx Corp., supra note 213, at *1. —falling squarely into a category on which the staff has previously relied to ex­clude proposals. 216 See, e.g., The Quaker Oats Co., SEC No-Action Letter, 1999 WL 152450, at *1 (Mar. 16, 1999) (permitting the exclusion of a proposal relating to the company’s review of its advertising contracts for content that demeans based on race, ethnicity, or religion because it relates to “the manner in which a company advertises its products”); PepsiCo Inc., SEC No-Action Letter, 1998 WL 92657, at *1 (Feb. 23, 1998) (permitting the exclu­sion of a proposal requesting a “report regarding the use of non-racist portrayals and designations” in the company’s advertising because it relates to “the manner in which a company advertises its products”). The staff’s resort to a bright-line rule in FedEx paral­lels the staff’s position in Cracker Barrel, in which the staff announced that it would grant no-action relief for all employment-related proposals regardless of their social policy focus. 217 See supra section I.C.4. But today, there is a greater lack of transparency.

III. Proposals for Reform

Part II identified problems with the “rulification” of the ordinary business operations exclusion through informal SEC staff opinions. This Part explores ways to reform the exclusion. Section III.A recommends recast­ing the exclusion as a “catalog” and creating procedures that channel changes to the catalog through notice and comment. Section III.B sug­gests modifying the “significance” requirement for the social policy exception to provide for private ordering through corporate-charter purpose clauses.

A. Recasting the Ordinary Business Operations Exclusion as a “Catalog”

Some commentators have proposed drastic reforms, such as eliminating the ordinary business operations exclusion, 218 See, e.g., Palmiter, supra note 12, at 918–19. eliminating Rule 14a-8 altogether (leaving shareholder proposals to state law), 219 See, e.g., Susan W. Liebeler, A Proposal to Rescind the Shareholder Proposal Rule, 18 Ga. L. Rev. 425, 454–59 (1984). and raising share-ownership requirements. 220 Cf. John C. Coffee Jr., Editorial, Blocking Bias via Proxy, Wall St. J., Feb. 2, 1993, at A14 (on file with the Columbia Law Review) [hereinafter Coffee, Blocking Bias] (mentioning, without necessarily advocating for, higher share-ownership requirements as a potential response to concerns about misuse of Rule 14a-8). But these suggestions, respec­tively, undervalue the ordinary business operations exclusion as a bul­wark against proposals that waste corporate resources, 221 Notwithstanding its flaws, the exclusion still serves an important function: ensur­ing that Rule 14a-8 does not force companies to wastefully subsidize profit-focused pro­posals that are immaterial to their shareholders’ investments. Shareholders still occasionally make such proposals. See, e.g., Ford Motor Co., SEC No-Action Letter, 2014 WL 7388137, at *1, *3 (Jan. 30, 2015) (finding a proposal requesting a report on the impact of oil cartels on gasoline prices excludable under (i)(7)). undervalue the shareholder proposal rule as a channel for dialogue between sharehold­ers and management, 222 See infra note 223 (addressing objections to shareholder proposals generally); see also section III.B.4 (highlighting the impact of social policy proposals). Tellingly, neither shareholders nor companies have been receptive to leaving regulation of shareholder proposals to states. See Amendments to Rules of Shareholder Proposals, Exchange Act Release No. 34–39093, 62 Fed. Reg. 50,682, 50,684 n.28 (proposed Sept. 26, 1997) (codified at 17 C.F.R. pt. 240) (reporting the results of a survey by the SEC). and undervalue the contributions of small-stake shareholders. 223 First, small-stake shareholders have meaningfully contributed to U.S. corporate governance. Early in the rule’s history, Lewis Gilbert used shareholder proposals to urge practices like consistent financial accounting that modern financial economists now sup­port. Palmiter, supra note 12, at 897. More recently, small-stake shareholders have brought proxy-access proposals, see, e.g., Whole Foods Market, Inc., SEC No-Action Letter (Jan. 16, 2015), http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2015/jamesmcritchiecheveddenrecon011615-14a8.pdf [http://perma.cc/4D9T-NHDT], most of which gained majority support in the 2015 proxy season, see Sullivan & Cromwell LLP, 2015 Proxy Season Review 4 (2015) [hereinafter 2015 Review], http://www.sullcrom.com/
siteFiles/Publications/SC_Publication_2015_Proxy_Season_Review.pdf [http://perma.cc/
DC63-WYBX]. Second, small-stake shareholders have contributed to important social policy causes, such as divestment from apartheid South Africa. See Donald E. Schwartz & Elliot J. Weiss, An Assessment of the SEC Shareholder Proposal Rule, 65 Geo. L.J. 635, 642–48 (1977); see also infra note 313 and accompanying text. Although there has been abuse in the past, see Steven Davidoff Solomon, Grappling with the Cost of Corporate Gadflies, N.Y. Times: Dealbook (Aug. 19, 2014, 8:02 pm), http://dealbook.
nytimes.com/2014/08/19/grappling-with-the-cost-of-corporate-gadflies (on file with the Columbia Law Review) (discussing one shareholder’s practice of encourag­ing companies to buy copies of her annual newsletter for $600), companies could respond to such abuse in other ways, cf. Del. Code Ann. tit. 11, § 846(8) (2016) (codifying the ele­ments of extortion). This section proposes a more modest approach to re­form: recasting the ordinary business operations exclusion as a “catalog.”

1. Constructing the Catalog. — Neither rules nor standards seem en­tirely appropriate for the ordinary business operations exclusion. Rules tend to be a poor fit for conduct that frequently varies in relevant ways from case to case, which calls for particularistic decisionmaking. 224 See Schauer, Playing by the Rules, supra note 144, at 152; Kaplow, supra note 13, at 599–601. Given the infinite variety of proposals that shareholders could devise, rules therefore seem ill suited to the ordinary business operations exclusion—they would inevitably be either vastly underinclusive or vastly overinclu­sive (or both). 225 Cf. Schauer, Playing by the Rules, supra note 144, at 31–34 (discussing the inclusivity problems associated with rules); Sunstein, supra note 144, at 992–93 (same). As the business operations, corporate governance, and social policy landscapes evolve, share­holders will inevitably devise new types of proposals, for which it would be incredibly diffi­cult, if not impossible, to account ex ante. Thus, crafting a comprehensive set of bright-line rules would be very costly, leading to severe inclusivity problems for virtually any set of rules that the SEC could plausibly design. But a standard would present complications as well. First, the current, standard-like formulation of the exclusion is difficult to construe in light of the inherent ambiguity of the term “ordinary busi­ness operations.” 226 See supra section II.A (discussing the exclusion’s ambiguity). Unlike with more familiar standards like “reasonable­ness,” the line between ordinary and nonordinary business operations, much less between sufficiently and insufficiently significant social policy issues, is not intuitive. 227 See supra section II.A (describing different views on these terms’ meanings). Second, as Part II of this Note suggests, the exclusion may inevitably become more rule-like even when the SEC at­tempts to set “rules against rulification.” 228 See supra Part II (presenting evidence of the exclusion’s rulification).

There is a third type of legal directive that may fare better: the “cata­log.” A catalog, as Professors Gideon Parchomovsky and Alex Stein de­fine it, contains a list of two or more enumerated items with a “general provision” empowering the decisionmaker to proscribe (or permit) other similar items. 229 Parchomovsky & Stein, supra note 27, at 168. Thus, a typical catalog “consists of an outright ban on a detailed, but incomplete, list of specific activities and a general prohibition of all activities falling into the same category.” Id. For example, a statute might prohibit leaving a dog, cat, or other pet unattended in a parked vehicle. 230 Id. at 170. To determine the mean­ing of the general term (“pet”), the decisionmaker searches for the com­mon characteristics shared by the enumerated terms (“dog” and “cat”). 231 Id. at 182. If there is more than one characteristic in common, the deci­sionmaker may refer to the catalog’s context and underlying legislative purpose to find the relevant characteristic. 232 Id. at 183.

To create a catalog, the SEC might amend the exclusion’s text to provide for exclusion of any proposal that “focuses on management of the workforce, decisions on production quality and quantity, the reten­tion of suppliers, or other ordinary business operations of the com­pany,” 233 These examples come from the adopting release accompanying the 1998 amend­ments. See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,108 (May 28, 1998) (codified at 17 C.F.R. pt. 240). In a sense, then, the exclu­sion is already a catalog. But this Note proposes that the SEC incorporate these and other illustrative examples into the text of Rule 14a-8 itself, which would provide superior guidance, see infra notes 238–243 and accompanying text. perhaps in table format. 234 See infra Appendix at Table A.1. In conjunction with this change, the SEC should emphasize that the focus of the proposal determines whether it falls within the exclusion’s scope. This would clarify that, consistent with current staff practice, a proposal would not be excludable merely because it “implicates” the company’s ordinary business operations. 235 Cf. Bank of America Corp., supra note 41, at *1 (concluding that a proposal urging divestment of “all non-core banking business segments” was not excludable under (i)(7)). A proposal urging divestment of certain business segments clearly “relates” to the company’s ordinary business operations in the usual sense of the word. But the proposal was not excludable because, as the staff correctly concluded, the proposal “focuse[d] on an extraordinary business transaction.” Id. (emphasis added). The SEC should also clarify the meaning of the term “focus,” which has been a recurring source of confusion relating to the exclusion’s scope. 236 See supra section II.A. The correct interpretation would, consistent with the 1983 release, track substance over form. 237 See supra section I.C.3 (discussing the “substance-over-form” principle from the 1983 amendments).

Recasting the ordinary business operations exclusion as a catalog would address many of the concerns previously discussed. First, by con­straining the staff’s discretion as to excludability, a catalog would reduce the potential for abuse and align staff decisions with Commission pol­icy. 238 Cf. Brown, supra note 200, at 532–33 (noting the costs of staff discretion); Parchomovsky & Stein, supra note 27, at 184 (arguing that catalogs give decisionmakers “weak (or limited) discretion”). Relatedly, these constraints would improve decisional accuracy by mitigating both inclusivity problems and the so-called “tyranny-of-choice” problem. 239 The tyranny-of-choice problem, which may partially drive the rulification of stand­ards, arises when decisionmakers, faced with too many different options, are unable to take into account all the considerations necessary to come to an optimal decision. See Schauer, Rulification, supra note 21, at 811–13. Because catalogs restrict decisionmakers’ analyses to searching for “family resemblance,” Parchomovsky & Stein, supra note 27, at 185, a catalog would mitigate this problem. Second, a catalog would provide greater transparency and predictability. 240 Cf. Parchomovsky & Stein, supra note 27, at 190 (contending that catalogs generally create certainty and predictability). Along similar lines, one might view a catalog as creating what Professor Bert Huang has called “exceptional spaces.” See Huang, supra note 174, at 2262–67. Although Professor Huang identifies NALs as a possible model for exceptional spaces, see id. at 2263 n.102, 2264, a catalog could more effectively delineate these spaces. Moreover, compared to some of the NALs related to other SEC regulations, Rule 14a-8 NALs do not “identify criteria that are readily observable” to market partici­pants. Id. at 2263. Compare Credit Suisse First Boston Corp., SEC No-Action Letter, 1998 WL 799305, at *1–5 (Sept. 9, 1998) (detailing the basis for a staff determination under non–Rule 14a-8 regulations), with Wal-Mart Stores, Inc., supra note 40, at *1 (making a conclusory determination as to excludability under Rule 14a-8). Able to rely on the catalog’s list of illustrative proposals, shareholders and companies would have less need to divine answers from the nebulous common law of prior NALs, whose weight is unclear to begin with. 241 See supra section I.B.2 (discussing the weight given to NALs). Even if there is general agreement that Skidmore provides the appropriate framework for analyzing NALs’ weight, Skidmore provides little certainty as to how much weight courts will accord NALs in any particular instance. Cf. Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (announcing a multifactor test). This is particularly important for Rule 14a-8, since shareholders may submit proposals without consulting counsel or prior NALs at all, 242 See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,106–07 (May 28, 1998) (codified at 17 C.F.R. pt. 240) (explaining the reasons for adoption of a plain-language Q & A format for Rule 14a-8). wasting corporate resources if the shareholder is mistaken as to excludability. 243 See infra note 292 and accompanying text (noting that the cost associated with determining whether to include a proposal is $54,000). Third, a catalog would still allow the staff enough flexibility to adapt to changing circumstances as shareholders devise new types of proposals. 244 See Parchomovsky & Stein, supra note 27, at 184 (claiming catalogs “grow and develop through a process of accretion”). Indeed, this is one of catalogs’ principal advantages: They allow decisionmakers enough flexibility to add items for which it would be too costly—in terms of either informational or political costs—for the rulemaker to craft a rule in the first instance.

2. Maintaining the Catalog. — To address concerns about under­ground staff rulemaking and increase public participation in the rulemaking process, 245 See supra section I.C (discussing these concerns). the SEC should, in addition to ensuring that the initial adoption of the catalog adheres to notice-and-comment proce­dures, create procedures to ensure that future revisions to the catalog are also channeled through notice and comment. 246 Notice-and-comment procedures give notice to the public of a proposed rule change and afford an opportunity to comment on the proposed change before the agency promulgates the final rule. See 5 U.S.C. § 553 (2012). The SEC might, for example, require the staff to release an annual report to the public following each proxy season, noting trends in staff interpretation. The SEC could then periodically—perhaps once every five years—funnel any nascent de facto rules through notice-and-comment rulemaking. This would enhance the rules’ democratic legitimacy, increase transparency, and decrease the risk of regulatory capture. 247 See supra notes 181–190 and accompanying text (discussing the benefits of no­tice-and-comment rulemaking vis-à-vis the undemocratic characteristics of the exclusion’s underground rulification).

Granted, conditioning every small change to Rule 14a-8 on satisfac­tion of onerous procedural requirements could contribute to the SEC’s ossification, making rulemaking more costly and difficult. 248 See Thomas O. McGarity, Some Thoughts on “Deossifying” the Rulemaking Process, 41 Duke L.J. 1385, 1387 (1992) (discussing the burdensomeness of administrative rulemaking). For exam­ple, requiring the SEC to route uncontroversial procedural changes—like announcing a new email address to which companies must send no-action requests—through notice and comment may impose significant costs without commensurate benefits. Such changes are properly an­nounced in SLBs. But for those changes that would substantively affect shareholders’ and companies’ rights and obligations under Rule 14a-8, as staff-created rules regarding the ordinary business operations exclusion have done, 249 See supra section II.B (documenting the exclusion’s rulification). utilizing notice and comment is worth the bother. 250 See supra note 187 and accompanying text (discussing the benefits of public participation in administrative rulemaking).

B. Replacing the “Significance” Requirement—A Private Ordering-Based Solution?

As previously discussed, the requirement that a social policy issue must be “sufficiently significant” in order to qualify a proposal for the social policy exception is problematic. 251 See supra section II.C (discussing several issues with the significance require­ment). But if the SEC abandons the significance requirement, what should take its place?

1. Two Extreme Solutions Rejected. — One option, advanced by Professor Stephen Bainbridge, would be to abandon the social policy ex­ception altogether by requiring materiality as to a reasonable share­holder’s economic interest in the corporation. 252 See Stephen M. Bainbridge, Revitalizing SEC Rule 14a-8’s Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal 31 (UCLA Sch. of Law, Law & Econ. Research Paper No. 16-06, 2016) [hereinafter Bainbridge, Ordinary Business Exemption], http://ssrn.com/abstract=2750153 (on file with the Columbia Law Review) (proposing a “material economic importance” standard). In the context of disclo­sure under Rule 14a-9, the Supreme Court has held that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). But there are several issues with this approach. To begin, there is a practical legal obstacle: Elimination of the social policy exception would be inconsistent with the official Commission-approved interpretations of the ordinary business operations exclusion set forth in the adopting releases to the 1976 and 1998 amendments to Rule 14a-8, which the SEC adopted after notice and comment. 253 See supra sections I.C.2, I.C.5 (describing the 1976 and 1998 adopting releases, respectively). As previously explained, courts grant these regulatory interpretations considerable deference. 254 See supra section I.B.1. Although Professor Bainbridge correctly recognizes that courts do not owe Chevron deference to SEC interpretations of Rule 14a-8, see Bainbridge, Ordinary Business Exemption, supra note 252, at 28–29, that is because Rule 14a-8 is a regulation, not a statute. Chevron governs only judicial review of administrative interpreta­tions of statutes, while a different case, Auer v. Robbins, governs judicial review of administrative interpretations of regulations. Compare Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984) (announcing the standard of review “[w]hen a court reviews an agency’s construction of the statute which it administers” (emphasis added)), with Auer v. Robbins, 519 U.S. 452, 461–62 (1997) (announcing a different standard of review when a court reviews agency interpretations of the agency’s “own regula­tions” (emphasis added)). See generally Charles H. Koch, Jr. & Richard Murphy, Review of Interpretations, 3 Admin. L. & Prac. (West) § 10:26 (last updated Feb. 2016) (“One of the most venerable doctrines in administrative law is that a court will give great deference to an agency’s interpretation of its own rules.”). True, the shifting posi­tions expressed in the staff’s NALs may permit courts to accord those NALs less weight under Mead and Skidmore—but the social policy exception derives from the 1976 and 1998 adopting releases, not from the staff’s NALs. See supra sections I.C.2, I.C.5 (describing, respectively, the 1976 and 1998 adopting releases). Thus, to eliminate the social policy exception, action by either the full Commission or Congress would likely be necessary.

But even if this practical obstacle did not exist, there are other prob­lems with Professor Bainbridge’s proposal. First, a materiality standard would impose costs of its own. Given that courts have struggled to apply the materiality standard in other contexts, 255 See Dan A. Oesterle, The Overused and Under-Defined Notion of “Material” in Securities Law, 14 U. Pa. J. Bus. L. 167, 184–92 (2011). it may also be difficult to determine whether a proposal presents “material” issues. Second, this would imply a uniform federal standard as to corporate purpose, focused solely on profit, which would arguably be inconsistent with state law that allows corporations to pursue “any lawful purpose.” 256 See, e.g., Del. Code Ann. tit. 8, § 102(a)(3) (2016) (allowing corporations to be organized for any lawful purpose); A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 583–86 (N.J. 1953) (recognizing a broad view of corporate purpose); Principles of Corp. Governance: Analysis and Recommendations § 2.01(b)(2)–(3) (Am. Law Inst. 1994) (allowing corpora­tions to “take into account ethical considerations” and “devote a reasonable amount of resources” to the public good); Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163, 168–72 (2008) (discussing the states’ broad treatment of corporate purpose); cf. Food & Allied Serv. Trades Dep’t v. Wal-Mart Stores, Inc., CIV. A. No. 12551, 1992 WL 111285, at *1, *4 (Del. Ch. May 20, 1992) (Allen, C.) (holding that moral and political purposes may constitute a “proper purpose” for the exercise of share­holder inspection rights). But cf. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (holding that the inevitable break-up of a company changes directors’ duties to maximize shareholder wealth); eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 35 (Del. Ch. 2010) (finding that the board’s adoption of a defensive measure “that openly eschews stockholder wealth maximization” violated the directors’ fiduciary duties); State ex rel. Pillsbury v. Honeywell, Inc., 191 N.W.2d 406, 411–12 (Minn. 1971) (finding political purposes improper for the exercise of inspection rights).
Although courts have sometimes emphasized shareholder-wealth maximization, this has usually been in the context of directors’ fiduciary duties, not shareholders’ abilities to express normative preferences for certain corporate activity. See Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135, 145–55 (2012) (highlighting the focus on directors’ fiduciary duties in several landmark cases). Perhaps, then, courts have been suspicious of granting manage­ment discretion to seek nonpecuniary goals because management could abuse that discre­tion, whereas this is less of a risk with shareholders. See Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. Pa. L. Rev. 2063, 2065 (2001) (noting the potential for management abuse of discretion as a reason to expect directors to pursue shareholder-wealth maximization). Third, it would run contrary to the rationale underlying the Supreme Court’s opinions in Citizens United and Hobby Lobby, which, respectively, assumed share­holder participation in corporate decisions over political spending 257 See Citizens United v. FEC, 558 U.S. 310, 361–62, 370 (2010) (tacitly assuming shareholder power over political speech); Lucian A. Bebchuk & Robert J. Jackson, Jr., Shining Light on Corporate Political Spending, 101 Geo. L.J. 923, 944–45 (2013) (arguing that Citizens United supports the case for disclosure of corporate political spending to shareholders). Political-spending proposals would probably be excludable under this standard to the extent that this spending is only a small fraction of total revenue or profit. Compare Microsoft Transparency Hub: Political Engagement, Microsoft, http://www.microsoft.com/about/corporatecitizenship/en-us/transparencyhub/political-engagement/ [http://perma.cc/SJW3-DA6V] (last visited July 27, 2016) (reporting combined 2014 spending in public-policy advocacy, political-action-committee contributions, and direct corporate political contributions of less than $19 million), with Microsoft Corp., Annual Report (Form 10-K), at 28 (July 31, 2015) (reporting 2014 revenue of $86.8 billion and net income of $22.1 billion). and shareholder ability to impose normative constraints on companies in which they own shares. 258 See Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2770–71 (2014) (contending that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else” and corporations may pursue nonprofit objectives “with ownership approval”); Michele Benedetto Neitz, Hobby Lobby and Social Justice: How the Supreme Court Opened the Door for Socially Conscious Investors, 68 SMU L. Rev. 243, 260–68 (2015) (discussing Hobby Lobby’s relevance for social-responsibility investors). For a Cracker Barrel–era argument that shareholders should be able to impose “normative constraints” on the companies in which they hold shares, see Coffee, Blocking Bias, supra note 220, at A14. Finally, denying shareholders a voice in whether their investments are managed in what they believe to be a so­cially responsible manner, even if that manner is not the most profitable, would lie in considerable tension with nearly fifty years of jurisprudence and SEC practice, as well as the congressional purpose underlying sec­tion 14(a) of the ’34 Act. 259 See Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 427–28 (D.C. Cir. 1992) (R.B. Ginsburg, J.) (recognizing the significant policy exception); Med. Comm. for Human Rights v. SEC, 432 F.2d 659, 680 (D.C. Cir. 1970) (suggesting that exclusion of a proposal because of the proponent’s political or social motivations may “conflict with the congressional intent underlying section 14(a) of the [’34] Act”); Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc. 821 F. Supp. 877, 890 (S.D.N.Y. 1993) (deny­ing exclusion of a proposal requesting a report on the company’s equal-employment-opportunity practices); supra note 30 (discussing the purpose underlying section 14(a)); supra section I.C (discussing SEC practice regarding social policy proposals).

Another route would be to simply eliminate the significance require­ment and not replace it at all, opening Rule 14a-8 to social policy pro­posals of all variety. The obvious downside to this change would be the potential flooding of corporations’ proxy statements with social policy proposals about which most shareholders do not care, 260 See infra Appendix at Table A.2 (showing an average of 21.2% support for social policy proposals appearing on Fortune 500 proxy statements in the 2015 season, with no proposal gaining majority support). at the corpora­tion’s expense.

2. A Better Solution: Private Ordering via Corporate Purpose. — The bet­ter solution, lying between these two extremes, would be for the SEC to replace the significance test with a new exclusion that allows for private ordering 261 Private ordering refers to the ability of private actors—here, shareholders and companies—to set the rules that govern their conduct. See James D. Cox & Thomas Lee Hazen, Private Ordering and Shareholder Suits, 3 Treatise on the Law of Corporations (West) § 15:23 (last updated Dec. 2015) (discussing private ordering in corporate law). via corporate purpose. 262 State law generally requires a corporation to state the purpose for which it exists in its certificate of incorporation. See, e.g., Del. Code Ann. tit. 8, § 102(a)(3) (2016). Most states permit corporations significant freedom in defining that purpose. See Michael A. Schaeftler, The Purpose Clause in the Certificate of Incorporation: A Clause in Search of a Purpose, 58 St. John’s L. Rev. 476, 476 n.1 (1984) [hereinafter Schaeftler, Purpose Clause]. California is unusual in requiring that most ordinary corporations adopt a standardized purpose clause providing that “[t]he purpose of the corporation is to engage in any lawful act or activity” with limited exceptions. Cal. Corp. Code § 202(b) (West 2016). But the California statute also implies that additional statements “by way of limita­tion” are permissible, id., so it appears that there is flexibility as to corporate purpose even in California. This new exclusion would ask whether the shareholder proposal, if implemented, would be consistent with the corporation’s purpose as stated in its certificate of incorpora­tion. If inconsistent, the proposal would be excludable. This test would resemble the classical ultra vires doctrine, which acts as a state law limit on corporate activity that is beyond the corporation’s purposes. 263 See tit. 8, § 124 (codifying the ultra vires doctrine). Corporations with broad purpose clauses in their certificates 264 See, e.g., Apple Inc., Restated Articles of Incorporation of Apple Inc. (Form 10-Q, exh. 3.1) (July 22, 2009). would thus be unable to challenge social policy-focused proposals under the new exclusion, while corporations with more narrow purpose clauses may be able to successfully challenge such proposals. For example, if a corporation’s charter stated that its sole purpose is maximization of shareholder wealth, most social policy proposals would be off the table. Meanwhile, proposals that raise social policy issues but seek to “micro-manage” the details of those policies’ implementation would still be ex­cludable under (i)(7) even when the corporation has framed its purpose broadly because such exclusion does not hinge on the “significance” of any social policy issue. 265 See supra section I.C.5 (describing the micromanagement test). The microman­agement test, which lacks the inherently subjective inquiry into whether a social policy issue is “sufficiently significant,” still serves an important function by ensuring that compa­nies are not required to subsidize proposals that seek excessive specificity. Keeping this test intact would strike the proper balance between allowing shareholders to express their normative views on the ethical implications of corporate policies and ensuring that pro­posals do not delve too deeply into implementation of those policies, about which shareholders are unlikely to be informed. See Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 427 (D.C. Cir. 1992) (R.B. Ginsburg, J.) (holding that small timing differ­ences failed to raise significant policy issues). Instead of abandoning the micromanage­ment exception, the SEC should clarify its scope by listing examples in a catalog. See supra section III.A (recommending a catalog-based approach). Additionally, proposals that are not “signifi­cantly related” to the corporation’s business would still be excludable under Rule 14a-8(i)(5), 266 See 17 C.F.R. § 240.14a-8(i)(5) (2016). meaning there would still need to be some economic nexus between the social policy issues raised and the corpora­tion’s business. 267 See Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554, 561 n.16 (D.D.C. 1985) (opining that a proposal would be excludable under Rule 14a-8(i)(5) if it lacked a “meaningful relationship” to the company’s business). Given the relative ease with which a corporation may amend its certificate, 268 See, e.g., tit. 8, § 242(b)(1) (requiring a board resolution followed by shareholder approval at a meeting). this change would likely impose fairly low administrative costs on corporations that wish to amend their certificates to provide for a different purpose.

In order to avoid uncertainty and respect the congressional purpose underlying section 14(a), 269 See sources cited supra note 30 and accompanying text (noting the congressional purposes of promoting “fair corporate suffrage” and preventing management abuse of proxy machinery). the SEC could require corporations to demonstrate any inconsistency by clear and convincing evidence. 270 Cf. Palmiter, supra note 12, at 918 (proposing a similar “clear and convincing” burden of proof for several Rule 14a-8 exclusions). Un­der this standard, unless the charter manifested clear intent to exclude a certain type of proposal—for example, by declaring that shareholder-wealth maximization is the corporation’s sole purpose—then a proposal would not be excludable under the inconsistent-purpose standard. In a sense, this burden would be analogous to the canon of interpreting ambi­guity against the drafter in contract law, 271 See, e.g., Restatement (Second) of Contracts § 206 (Am. Law Inst. 1981) (recom­mending interpretation against the drafter as a general rule in choosing among reasona­ble meanings). which is fitting because many states require boards to initiate the charter-amendment process. 272 See, e.g., tit. 8, § 242(b)(1).

Although purpose clauses now occupy a much less prominent role in corporate law than they once did, 273 See, e.g., Schaeftler, Purpose Clause, supra note 262, at 477. a corporate-purpose approach to social policy proposals would have several advantages over the current framework. First, it would strike the right balance between private order­ing, a principle that underlies much of corporate law 274 See Lucian A. Bebchuk, Letting Shareholders Set the Rules, 119 Harv. L. Rev. 1784, 1787 (2006). and may improve firm performance, 275 See Gillian K. Hadfield & Eric L. Talley, On Public Versus Private Provision of Corporate Law, 22 J.L. Econ. & Org. 414, 415–17 (2006) (modeling the relative efficiency of “public versus private provision of corporate law”). and some degree of mandatory standardization. 276 Others have suggested eliminating the ordinary business operations exclusion entirely and instead letting firms’ bylaws govern which types of proposals are excludable. See D. Gordon Smith et al., Private Ordering with Shareholder Bylaws, 80 Fordham L. Rev. 125, 185–87 (2011). But too much private ordering could be counterproductive. The pres­ence of company-specific systems would require a specialized, company-specific inquiry for each excludability determination, which would impose additional informational and administrative costs on the SEC, companies, and shareholders. Cf. Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 Yale L.J. 1, 38–41 (2000) (contending that third-party information costs demand a degree of mandatory standardization in property rights). Notably, there has been general opposition to company-specific shareholder proposal systems. See Amendments to Rules of Shareholder Proposals, Exchange Act Release No. 34–39093, 62 Fed. Reg. 50,682, 50,684 n.28 (proposed Sept. 26, 1997) (codified at 17 C.F.R. pt. 240). Second, by recognizing that corporations are not necessarily bound to a single purpose, it would be appropriately deferential to fundamental state law principles, 277 See supra note 256 and accompanying text (noting the generally flexible treat­ment of corporate purpose under state law). which the SEC has recognized drive the policy be­hind the ordinary business operations exclusion. 278 See supra section I.C (discussing the exclusion’s history). Finally, it would re­move the SEC staff from its awkward role as social policy censor, through which bias and shifting views may cause inconsistency and inaccuracy. 279 See supra notes 203–204 and accompanying text (discussing the potential for bias).

3. A Numerical Cap Reconsidered. — In the past, others have proposed capping the number of Rule 14a-8 proposals that a company must in­clude for any annual meeting. 280 See Palmiter, supra note 12, at 918–19 (proposing a numerical cap in conjunction with the elimination of certain exclusions); Longstreth, supra note 12, at 11–12 (same). Under Professor Alan Palmiter’s pro­posal, for example, a company must include only seven proposals, with priority given to the shareholders (or groups of shareholders) with the largest shareholdings should the company receive more than seven pro­posals. 281 See Palmiter, supra note 12, at 918–19. Giving priority to large-stake shareholders has precedent in corporate law. See, e.g., 2015 Review, supra note 223, at 4–7 (discussing the minimum-ownership requirements in successful proxy-access proposals during the 2015 proxy season). The SEC should, in order to reduce the costs associated with an increased number of social policy proposals, consider such a numerical cap if it eliminates or revises the significance requirement. 282 See infra notes 291–295 and accompanying text (noting the possibility of in­creased costs). Even if the overall cost of social policy proposals does not substantially increase, 283 See infra notes 291–295 and accompanying text (finding a substantial increase in costs unlikely). a cap would act as insurance for companies against an unusually high num­ber of proposals in any given year. The SEC might also consider allowing proposals beyond the cap for proponents who are willing to post a bond covering the cost of including the proposal, to be returned only if the proposal gains some threshold level of support from shareholders at the meeting—say, 10 or 15%. 284 Professor George Dent proposed requiring that all would-be shareholder propo­nents post a bond that the corporation would refund only if the proposal obtained at least 20% support. See George W. Dent, Jr., Response, Proxy Regulation in Search of a Purpose: A Reply to Professor Ryan, 23 Ga. L. Rev. 815, 823–24 (1989). But Professor Dent’s bond requirement, applied to all proposals, would unduly discriminate against small-stake shareholders, who have made valuable contributions through Rule 14a-8. See supra note 223 and accompanying text (noting these contributions).

4. Objections to the Corporate-Purpose Model. — There are two obvious objections to the corporate-purpose model. First, managers of corpora­tions that adopt narrower purpose clauses may find their freedom to pur­sue attractive projects constrained by the threat of ultra vires actions. 285 Cf. Del. Code Ann. tit. 8, § 124 (2016) (codifying Delaware’s ultra vires doctrine). Such suits could impose significant costs without commensurate bene­fits, 286 Cf. Michael A. Schaeftler, Clearing Away the Debris of the Ultra Vires Doctrine—A Comparative Examination of U.S., European, and Israeli Law, 16 Law & Pol’y Int’l Bus. 71, 79–113 (1984) [hereinafter Schaeftler, Ultra Vires] (discussing the costs of the ultra vires doctrine). and managers may have incentives to favor narrow purpose clauses even when they would not be in shareholders’ interest. For example, managers may wish to avoid the reputational harm associated with being subjected to social policy proposals notwithstanding any constraints on their abilities to pursue attractive projects. But if narrow purpose clauses would indeed impose more costs than benefits, it seems unlikely that many corporations would adopt them. Ultimately, amending the corpo­rate charter requires approval by both the board and shareholders, 287 See, e.g., tit. 8, § 242 (codifying Delaware’s charter-amendment procedures). and one would not expect shareholders to vote for an amendment that they believe will harm their interests. Moreover, if exposure to ultra vires suits does become a concern, states could respond by further limiting the ultra vires doctrine’s reach, as some scholars have already proposed. 288 See, e.g., Schaeftler, Ultra Vires, supra note 286, at 79–113 (proposing revisions to the ultra vires doctrine).

More realistically, the corporate-purpose model may result in a sub­stantial uptick in social responsibility proposals for corporations that do not adopt narrower purpose clauses, which would be costly. Indeed, most public corporations probably would choose to continue to maintain broad purpose clauses. Not only would shareholders likely find corporate exposure to ultra vires suits undesirable, but profit-only clauses could present public relations difficulties in light of the reputational pressures on corporations to be perceived as committed to corporate social responsibility. 289 Cf. Paul Polizzotto, Millenials Are Embracing Corporate Social Responsibility Campaigns, AdvertisingAge (Dec. 18, 2015), http://adage.com/article/digitalnext/ways-marketers-create-smarter-csr-campaigns/301796/ [http://perma.cc/JN6W-NN65] (recom­mending that marketers “build a reputation for supporting social causes and initiatives” to create brand loyalty). Additionally, management may value the latitude that broad purpose clauses allow them to pursue nonpecuniary goals. 290 See supra notes 285–286 and accompanying text (noting the potential constraints on managerial discretion); cf. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (allowing a corporation to consider various constituencies when determining whether to enact takeover defenses). It is unclear how exactly the first prong of Unocal would apply to a corporation with a narrow purpose clause, but such a clause may limit the board’s ability to consider constituencies other than shareholders. Granted, it is doubtful whether directors could even do this under current law. See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 35 (Del. Ch. 2010) (striking down a defensive measure “that openly eschew[ed] stockholder-wealth maximization”); David A. Wishnick, Comment, Corporate Purposes in a Free Enterprise System: A Comment on eBay v. Newmark, 121 Yale L.J. 2405, 2410–12 (2012) (characterizing Newmark as requiring shareholder wealth maximization). Thus, one might worry that the change to a corporate-purpose model would result in shareholders bearing the cost of a great many more proposals that they are unlikely to support, with nothing to show for it.

Although an uptick in social responsibility proposals could indeed impose increased costs, these concerns are ultimately misplaced. First, the cost of additional proposals would not be as high as one might ini­tially assume. Although additional proposals would impose printing, mailing, and administrative costs, 291 See Palmiter, supra note 12, at 883 n.15. the certainty afforded by doing away with the “significance” standard would likely result in fewer companies seeking no-action relief, thereby reducing legal costs. And these legal costs are significant: According to one estimate, determining whether to include a proposal costs a company approximately $54,000 in 2015 dol­lars. 292 See Stephen M. Bainbridge, A Comment on the SEC Shareholder Access Proposal 7 (UCLA Sch. of Law, Law & Econ. Research Paper No. 03-22, 2003) [hereinafter Bainbridge, Comment], http://ssrn.com/abstract=470121 (on file with the Columbia Law Review) (reporting a $37,000 cost in 1998); CPI Inflation Calculator, Bureau of Labor Statistics, http://data.bls.gov/cgi-bin/cpicalc.pl (type “37000” into “$” field; select “1998” into first “in” field; select “2015” into second “in” field; follow “Calculate” hyperlink) (on file with the Columbia Law Review) (last visited Sept. 6, 2016). Professor Bainbridge’s figures come from the adopting release accompanying the SEC’s 1998 amendments to Rule 14a-8. See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34–40018, 63 Fed. Reg. 29,106, 29,116 (May 28, 1998) (codified at 17 C.F.R. pt. 240); see also Brown, supra note 200, at 532 n.185 (noting a 2010 estimate of $47,784). Given that the cost of simply including a proposal is not much higher—around $73,000 in 2015 dollars by one estimate 293 See Bainbridge, Comment, supra note 292, at 7 (reporting a $50,000 cost in 1998); CPI Inflation Calculator, supra note 292 (type “50000” into “$” field; select “1998” into first “in” field; select “2015” into second “in” field; follow “Calculate” hyperlink). —fears of enormous costs seem unwarranted. A numerical cap, which this Note recommends, 294 See supra section III.B.3. would further reduce the risk of additional costs creating an undue burden. 295 This is not to say that there would be no other costs associated with narrowing the ordinary business operations exclusion. For example, union pension funds may abuse shareholder proposals as “bargaining chips during wage negotiations,” see John G. Matsusaka et al., Opportunistic Proposals by Union Shareholders 26 (Univ. of S. Cal. CLASS, Research Paper No. CLASS15-25, 2016), http://ssrn.com/abstract=2666064 (on file with the Columbia Law Review), thereby imposing what Professors Zohar Goshen and Richard Squire call “principal costs,” see Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and Governance, 117 Colum. L. Rev. (forthcoming 2017) (manuscript at 25–29) (on file with the Columbia Law Review) (explaining how exercise of control by self-serving investors can lead to “principal conflict costs”). However, opportunistic shareholders tend to leverage executive compensation and corporate governance pro­posals rather than social policy proposals, which serve as weaker bargaining chips. See Matsusaka et al., supra, at 18. The changes proposed by this Note would therefore not encourage such opportunism.
One other objection concerns the influence of proxy-advisory firms like Institutional Shareholder Services (ISS). ISS recommends “against” or “withhold” votes for directors who have failed to implement a precatory proposal that gained majority shareholder sup­port, which may coerce directors into implementing successful shareholder proposals that they do not believe are in the company’s best interest in order to retain their positions. See Cohen & Schleyer, supra note 12, at 126–28. However, this is a weak argument for elimination of social policy proposals, considering the rarity with which these proposals gain majority support. See infra Appendix at Table A.2 (noting that zero social policy pro­posals at Fortune 500 companies passed in the 2015 proxy season). Moreover, to the ex­tent that this objection is premised on economic arguments for allocating control to the board, such arguments miss the point when the question is whether shareholders ought to be able to impose normative constraints on corporate behavior.

Second, an objection based on the rarity of majority support for so­cial policy proposals in shareholder votes understates shareholder inter­est. Although they rarely “win” at the polls, these proposals still obtain significant support—just not enough to pass. 296 See Cohen & Schleyer, supra note 12, at 124–25. In the 2015 proxy season, for example, social policy proposals averaged 21.2% support among shareholders at Fortune 500 companies. 297 Infra Appendix at Table A.2. And even these figures likely understate true support. 298 See infra notes 299–305 and accompanying text. Given institutional investors’ dominance in proxy voting and these institutions’ strong tendencies not to support so­cial policy proposals, 299 See, e.g., Rasha Ashraf & Narayanan Jayaraman, Determinants and Consequences of Proxy Voting by Mutual Funds on Shareholder Proposals 37, 51 (Feb. 2007) (un­published manuscript), http://ssrn.com/abstract=962126 (on file with the Columbia Law Review) (recording low levels of mutual-fund support for social policy proposals); Vanguard’s Proxy Voting Guidelines, Vanguard, http://about.vanguard.com/vanguard-proxy-voting/voting-guidelines/ [http://perma.cc/NM4J-NFZF] (last visited July 27, 2016) (noting that Vanguard funds “typically abstain from voting” on social policy proposals). annual-meeting voting results likely do not reflect the views of individual investors—including the holders of beneficial interests in mutual funds. 300 See Scott Hirst, Social Responsibility Resolutions 16–18 (Harvard Law Sch. Program on Corp. Governance, Discussion Paper No. 2016-06, 2016), http://ssrn.com/
abstract=2773367 (on file with the Columbia Law Review) (presenting evidence indicating that mutual funds frequently vote against their investors’ preferences on social policy proposals). Moreover, voting results do not account for withdrawn proposals, which are likely to have garnered, on average, more support than those proposals that do appear on companies’ proxy statements. 301 See infra notes 302–304 and accompanying text. Typically, a shareholder withdraws her proposal because management has agreed to some or all of her requests. 302 See supra Figure 1 (showing that proponents withdrew nineteen out of twenty-five proposals because management implemented the proponents’ requests or showed willingness to negotiate). But manage­ment may agree to a proponent’s requests because it believes that share­holder support for the proposal would be high if it were to appear on the company’s proxy statement, whereas management may ignore propo­nents’ requests because it believes that shareholder support would be low. 303 See John G. Matsusaka & Oguzhan Ozbas, A Theory of Shareholder Approval and Proposal Rights 12–26 (Univ. of S. Cal. CLEO, Research Paper Series No. C12-1, 2016), http://ssrn.com/abstract=1984606 (on file with the Columbia Law Review) (introducing an applied theoretical model).
Given social policy proposals’ significant withdrawal rate, 304 See supra Figure 1 (showing that proponents withdrew fifteen out of sixty social policy proposals for which the company had requested an NAL in reliance on Rule 14a-8(i)(7)). this effect is likely signifi­cant. Finally, shareholders’ inability to submit a reply to management’s response to the proposal—giving management the last word in the proxy statement—puts proponents at a disadvantage when attempting to per­suade fellow shareholders of their position, which may bias outcomes in management’s favor. 305 See John C. Coffee, Jr., The SEC and the Institutional Investor: A Half-Time Report, 15 Cardozo L. Rev. 837, 901 (1994) (noting that shareholders’ inability to make “counter-proposals” creates an “unlevel” playing field favoring management); Lee Harris, The Politics of Shareholder Voting, 86 N.Y.U. L. Rev. 1761, 1776–80, 1785–86 (2011) (argu­ing that vote outcomes depend in part on persuasion).

Third, if the concern is that additional proposals would have no impact because they would not win majority support, history does not sup­port this prediction. Although social policy proposals rarely pass, they nevertheless frequently win enough support to put management on no­tice that a significant number of shareholders care about the policy issues implicated. 306 See supra notes 296–300 and accompanying text. This often causes management to implement proponents’ suggestions even after a proposal fails to gain majority support. 307 See, e.g., Neel Rane, Comment, Twenty Years of Shareholder Proposals After Cracker Barrel: An Effective Tool for Implementing LGBT Employment Protections, 162 U. Pa. L. Rev. 929, 953–54 (2014) (finding that 64% of the proposals from 2005 to 2012 relat­ing to LGBT nondiscrimination that did not obtain majority support nevertheless resulted in company implementation); Carol Marquardt & Christine Wiedman, Can Shareholder Activism Improve Gender Diversity on Corporate Boards? 17–23 (Nov. 2014) (unpublished manuscript), http://ssrn.com/abstract=2538909 (on file with the Columbia Law Review) (finding that companies frequently increased board gender diversity following gender-diversity-focused proposals even when the proposals did not receive majority approval). Moreo­ver, as previously discussed, proponents frequently induce management to agree to implement their suggestions and withdraw their proposals be­fore management sends out its proxy materials. 308 See supra notes 302–304 and accompanying text. Indeed, many social policy proponents happily negotiate an agreement with management and subsequently withdraw their proposals, 309 See, e.g., Press Release, Trillium Asset Mgmt., Trillium Successfully Withdraws Board Diversity Proposal at PANW (Oct. 8, 2015), http://www.trilliuminvest.com/trillium-successfully-withdraws-board-diversity-proposal-at-panw/ [http://perma.cc/WZ8V-YLST] (announcing the withdrawal of a proposal following the company’s agreement to imple­ment the proponent’s suggestions regarding board diversity). and many withdrawals lead to concrete change. 310 See, e.g., Rane, supra note 307, at 954 (finding that most withdrawn proposals relating to LGBT nondiscrimination from 2005 to 2012 led to “concrete corporate change”); cf. Karen Fisher-Vanden & Karin S. Thorburn, Voluntary Corporate Environmental Initiatives and Shareholder Wealth, 62 J. Envtl. Econ. & Mgmt. 430, 443 (2011) (finding that companies that receive higher numbers of climate-change-related proposals are more likely to adopt environmental programs). Such successes show that majority support in an actual vote is not necessary for a proposal to have its desired impact.

Finally, to the extent that shareholder proposals increase the general public welfare, social policy proposals are valuable for reasons other than their worth to corporations and their shareholders. Historically, share­holder proposals have played a small, albeit significant, role in effecting valuable social change. 311 See Schwartz & Weiss, supra note 223, at 642–48; see also infra notes 312–313 and accompanying text. For example, shareholder proposals have been directly responsible for many companies’ adoptions of LGBT nondis­crimination policies. 312 See Rane, supra note 307, at 953–54. Additionally, shareholder proposals played an important role in the 1980s campaign for divestment from apartheid South Africa. 313 See, e.g., Aaron A. Dhir, Realigning the Corporate Building Blocks: Shareholder Proposals as a Vehicle for Achieving Corporate Social and Human Rights Accountability, 43 Am. Bus. L.J. 365, 383 (2006); Shireen B. Rahnema, The SEC’s Reversal of Cracker Barrel: A Return to Uncertainty, 7 U. Miami Bus. L. Rev. 273, 282 (1999). Unless we are willing to declare that shareholder pro­posals’ ability to effect such change should have no bearing on Rule 14a-8’s design, then any costs that corporations might incur by including more social policy proposals in their proxy statements must be balanced against these benefits. The law, after all, need not confine itself to shareholder-wealth maximization, a truth that Congress recognized when it allowed the SEC to promulgate the proxy rules not only “for the protection of investors,” but also as “appropriate in the public interest.” 314 15 U.S.C. § 78n(a)(1) (2012).

Conclusion

The underground rulification of the ordinary business operations exclusion underscores the need for reform. The SEC staff may be capa­ble at administering other aspects of the securities laws, but here, there is inadequate public participation and transparency around the staff’s de facto rulemaking procedures. In a sense, the problem relates to institu­tional roles—the staff, which is fairly insulated from electoral accountability, should not be charged with resolving complex policy is­sues that substantively affect private parties’ rights. Recasting the exclu­sion as a catalog, channeling future changes to the catalog through no­tice and comment, and replacing the social policy exception’s “signifi­cance” requirement with a standard tied to corporations’ purpose clauses would help to address these issues. By placing some constraints on the staff’s discretion, the SEC would also better align the staff’s decisions with Commission policy and provide much-needed certainty and predictability for management and shareholders alike.

 

Appendix

Figure A.1: Rule 14a-8 No-Action Request Results, 2015 Proxy Season (Fortune  500)

4

Table A.1: Sample Catalog of Recurring Proposal Types to Place in Rule 14a-8(i)(7) Text

Focus of Proposal Excludable?
Nonexecutive Employee Compensation and Benefits ✔
Management of Nonexecutive Employees ✔
Management of Expenses; Expenses < [x]% of Company’s Revenue ✔
Product Development; Product < [x]% of Company’s Revenue ✔
Marketing of Product; Product < [x]% of Company’s Revenue ✔
Management of Ongoing Litigation ✔
Senior Executive Compensation ✖
Corporate Governance ✖
Material Risks to Company Reputation ✖
Proposals Focusing on Social Policy Issues (Even If Otherwise Excludable) ✖

Table A.2: Rule 14a-8 Proposal Voting Results, 2015 Proxy Season (Fortune 500)

Proposal Type Fail Pass Not Voted On Total Average Support
Corporate Governance & Operational 205 45 77 327 34.7%
Social & Environmental Policy 170 0 90 260 21.2%