American Airlines Group Inc., Delta Air Lines Inc., and United Continental Holdings Inc. are being asked by a group that advocates on behalf of flyers to report on potential business risks from cabin seats that are getting smaller while passengers get bigger.
The nonprofit Flyers Rights, which invests in the airlines through its education fund, has filed shareholder proposals requesting a report from each one that includes an analysis of how its profit margin and stock price could be affected by these trends. The group says the airlines face a risk of discrimination, as well as a potential regulatory risk.
The proposal states, in part:
RESOLVED: The shareholders of American Airlines Group, Inc. (the "Company'*) request that the Board of Directors prepare a report on the regulatory risk and discriminatory effects of smaller cabin seat sizes on overweight, obese, and tall passengers. This report will also analyze the impact of smaller cabin seat sizes on the Company's profit margin and stock price.
SUPPORTING STATEMENT: Average seat width in economy class has dramatically decreased in the past two decades, from 18.5 inches in the early 2000s to 17 inches today. Seat pitch (leg room) in economy class has similarly declined, "from an average of 35 inches in the early 2000s to 31 inches today —and in an increasing number of cases [...] 28 inches," On an American Boeing 737 MAX, the seat width in the main cabin ranges from 16.6 inches to 17.8 inches and seat pitch is 30 inches.
According to the CDC, over 70% of American adults aged 20 and over are overweight or obese. About 4% of adults are also now over 74 inches (6'2") tall.
Reducing seat size in the face of these trends risks losing loyal customers at best —and discriminates at worst.
American Airlines and United have both filed no action requests seeking to exclude the proposals. American's letter states that it is relying on the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that deal "with a matter relating to the company’s ordinary business operations.” The letter relies on the SEC's Exchange Act Release No. 34-40018 (May 21, 1998) (“1998 Release”):
The Commission stated in the 1998 Release that the policy underlying the ordinary business exclusion is based on two considerations:
first, whether a proposal relates to “tasks that are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;” and
second, whether 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.”
...
The Staff has consistently agreed that proposals relating to a company’s sale and marketing of its products or services, or seeking to dictate management’s day-to-day decisions regarding the selection of products or services offered, implicate a company’s ordinary business operations and may be excluded pursuant to Rule 14a-8(i)(7).
As someone who is somewhat horizontally challenged the constant shrinking of airline seats is a matter of considerable concern. So I hate to admit it, but I think American Airlines is clearly correct. In my paper, Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal, 85 Fordham Law Review 705 (2016), I argue that courts should use a two part test to identify ordinary matters:
Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
It's hard to see how seat size is not a matter of ordinary business under this test.
[A]mong the elements to be taken into account for purposes of determining what constitutes an “extraordinary” action, which would normally be outside the apparent authority of senior executives, are the economic magnitude of the action in relation to corporate assets and earnings, the extent of risk involved, the time span of the action’s effect, and the cost of reversing the action. Examples of the kinds of actions that would normally be “extraordinary” include the creation or retirement of long-term or other significant debt, the reacquisition of significant amounts of equity, significant capital investments, business combinations including those effected for cash, the disposition of significant businesses, entry into important new lines of business, significant acquisitions of stock in other corporations, and actions that would foreseeably expose the corporation to significant litigation or significant new regulatory problems. A useful generalization is that decisions that would make a significant change in the structure of the business enterprise, or the structure of control over the enterprise, are extraordinary corporate actions, and therefore are normally outside the apparent authority of senior executives.
Changes in seat size would not make "a significant change in the structure of the business enterprise" nor would it change "the structure of control over the enterprise." Likewise, it does not specify a process by which boards make decisions but rather specifies a specific outcome.
