At the end of February, the SEC staff issued a No-Action Letter to Dunkin’ Brands Group, Inc., permitting the company to exclude a shareholder proposal under Rule 14a-8(i)(5), often referred to as the economic relevance exception. This is the first no-action relief granted under the rule since the SEC issued Staff Legal Bulletin No. 14I (“SLB 14I”) on November 1, 2017, and it could have implications for other retailers seeking to exclude shareholder proposals under the rule in the future.
Under Rule 14a-8(i)(5), an issuer may exclude a shareholder proposal that relates to operations that account for less than 5 percent of a company’s total assets and less than 5 percent of its net earnings and gross sales at the end of its most recent fiscal year, and is not otherwise significantly related to the company’s business. In the recent past, the SEC staff has rarely granted no-action relief to permit a company to exclude a proposal under this exemption.
Dunkin’ Brands Group received a shareholder proposal requesting that its board of directors issue a report assessing the environmental impact of using K-Cup Pods brand packaging, and the company sought to exclude the proposal under Rule 14a-8(i)(5). Dunkin’ Brands Group’s no-action request noted that the nominating and corporate governance committee of its board of directors had considered the proposal’s significance to the company’s business and had presented its findings to the entire board. First, the company’s revenue related to K-Cup pod sales was generated from licensing fees and royalties and accounted for less than 5 percent of the company’s total assets, gross sales and net earnings for the most recent fiscal year. Additionally, the proposal did not relate to the company’s primary business operations as a franchisor of quick service restaurants, but instead the proposal related to the packaging used in products manufactured by third parties under licensing arrangements. The committee had also considered the fact that a prior vote on an almost identical proposal had received less than 14 percent support among shareholders, and during the course of the company’s significant shareholder engagement efforts, no other shareholder had raised concerns over the environmental impact of K-Cup pods packaging. Based on this analysis, Dunkin’ Brands Group’s board of directors concluded that the proposal was not significantly related to the company’s business.
The SEC staff granted no-action relief, noting that the 5 percent total assets, net earnings and gross sales threshold was not met, and the proponent had not demonstrated that the proposal was otherwise significant to the company’s business. The staff’s decision also specifically mentioned the description of the board’s analysis process that was included in Dunkin Brands Group’s submission. The detailed discussion of factors considered by Dunkin’ Brands Group’s board of directors, informed by SLB 14I, provides useful guidance for other issuers when analyzing shareholder proposals and requesting no-action relief under the economic relevance exception.