The SEC Staff Provides Guidance Regarding Shareholder Proposals

Marty Dunn, Erin Jaskot, Rebekah Toton
 

On November 7, 2008, the SEC’s Division of Corporation Finance published Staff Legal Bulletin No. 14D as part of its ongoing guidance regarding the shareholder proposal rule -- Securities Exchange Act of 1934 Rule 14a-8. Staff Legal Bulletin No. 14D addresses two substantive issues and three procedural matters.

• Substantive Issues --

• ­the treatment of shareholder proposals that recommend, request, or require a board of directors to unilaterally amend the company’s articles or certificate of incorporation; and
• whether a company must send a notice of defect if the company’s records indicate that the proponent has not owned the minimum amount of securities for the required period of time as set forth in Rule 14a-8(b).
  
  

• Procedural Matters --

• ­the establishment of a new e-mail address for the receipt of Rule 14a-8 no-action requests and related correspondence;
• the requirement that a proponent send copies of correspondence to the company; and
• the manner in which the company and a proponent should provide additional correspondence to the Division and to each other.

Treatment of shareholder proposals that recommend, request, or require a board to unilaterally amend the company’s articles or certificate of incorporation

The Division’s discussion of shareholder proposals that recommend, request, or require a board to unilaterally amend the company’s articles or certificate of incorporation merely restates two longstanding positions of the Division:

• Rule 14a-8(i)(1), Rule 14a-8(i)(2), or Rule 14a-8(i)(6) may provide a basis for excluding such a proposal from the company’s proxy materials if the company shows that applicable state law does not provide the board with the authority to make such an amendment unilaterally, but instead requires any such amendment to be initiated by the board and then approved by shareholders; and
• The Division may permit the proponent to revise the proposal to provide that the board of directors “take the steps necessary” to amend the company’s articles or certificate of incorporation and, if the proponent revises the proposal properly within the time frame specified by the Division, none of Rule 14a-8(i)(1), Rule 14a-8(i)(2), or Rule 14a-8(i)(6) will provide a basis for excluding the proposal from the company’s proxy materials.

Staff Legal Bulletin No. 14D does not indicate why the Division is taking the opportunity to restate longstanding Division positions in this regard. It appears, however, that the Division addressed these types of proposals in Staff Legal Bulletin No. 14D to clarify a number of no‑action letters that it issued during the 2007-2008 proxy season.

During the most recent proxy season, the Division concurred with the omission of a proposal requesting that the board “adopt cumulative voting” in its no-action responses to American International Group, Inc. (dated March 28, 2008), Schering-Plough Corporation (dated March 27, 2008), Exxon Mobil Corporation (dated March 24, 2008), Bristol-Meyers Squibb Company (dated March 14, 2008), Pfizer Inc. (dated March 7, 2008), Northrop Grumman Corporation (dated February 29, 2008), Time Warner Inc. (dated February 26, 2008), PG&E Corporation (dated February 25, 2008), Citigroup Inc. (dated February 22, 2008), The Boeing Company (dated February 20, 2008), and AT&T, Inc. (dated February 19, 2008). In these no-action requests, each company argued that the proposal would require an amendment to its articles or certificate of incorporation and, in each case, the board did not have the authority to unilaterally effect such an amendment. The Division concurred in each company’s view and did not provide the proponent with an opportunity to revise the proposal to request that the board “take the steps necessary” to effect such an amendment.

The Division’s statements in Staff Legal Bulletin No. 14D make clear that, notwithstanding its 2008 positions with regard to the “adopt cumulative voting” proposals, the Division will continue with its longstanding practice of providing proponents with an opportunity to revise proposals that improperly seek unilateral board action.

A company’s obligation to send a notice of defect if the company’s records indicate that the proponent has not owned the required amount of securities for the required period of time

The Division makes clear that, while a company’s record can prove a shareholder’s eligibility to submit a proposal, those records alone cannot prove a shareholder’s ineligibility to submit a proposal. Specifically:

• If a shareholder is listed in a company’s records as a registered holder, the company can confirm that the shareholder’s holdings satisfy the ownership eligibility requirements of Rule 14a-8(b); however,
• Because the shareholder may hold the company securities by means other than as a record holder, the company’s records cannot prove conclusively that the proponent fails to meet the ownership eligibility requirement.

Accordingly, if a company’s records indicate that the proponent does not satisfy the ownership eligibility requirement in Rule 14a-8(b) and the company intends to exclude the proposal based upon the proponent’s failure to satisfy the requirements of Rule 14a-8(b), the company is still obligated to provide the shareholder proponent with a notice of defect indicating that the shareholder must provide proof of ownership that satisfies the requirements of rule 14a-8(b).

The Division’s new e-mail address for the receipt of Rule 14a-8 no-action requests and related correspondence

The Division has established a new e-mail address -- -- for the submission of Rule 14a-8 no-action requests and related correspondence. Submissions made through this e-mail address should include the name and telephone number of the person submitting the no-action request or related correspondence. The Division indicated that it will process no-action requests and related correspondence submitted through the new e-mail address in the same manner as no-action requests and related correspondence submitted in paper.

Proponents are required to send the company copies of correspondence that they send to the Division 

The Division reminded proponents of Rule 14a-8(k), which requires a proponent to provide the company with a copy of any correspondence submitted to the Division in response to the company’s no-action request.

The manner in which the company and a proponent should provide additional correspondence to the Division and to each other

In 2001, the Division stated in Section G.9 of Staff Legal Bulletin No. 14 that both the company and the shareholder proponent should promptly forward to each other copies of all correspondence provided to the Division in connection with Rule 14a-8 no-action requests. Although there is no requirement regarding the manner in which this correspondence should be provided, in Staff Legal Bulletin No. 14D the Division encourages companies and proponents to use the same means of transmitting correspondence to each other as they use to transmit materials to the Division. As an example, if a company transmits correspondence to the Division via overnight mail, the company should transmit a copy to the shareholder proponent via overnight mail as well.


Conclusion

Please contact any of the attorneys listed below if you need any assistance with regard to shareholder proposals or if you have any questions related to this Client Alert.
 

Beijing Yin Tai Centre, Office Tower 37th Floor 2 Jianguomenwai Avenue Chao Yang District Beijing, 100022 People’s Republic of China	Lawrence Sussman Eric Zabinski	+86-10-6563-5205 +86-10-6563-4639
Century City 1999 Avenue of the Stars Seventh Floor Los Angeles CA 90067-6035	Steven Grossman David J. Johnson, Jr.	+1-310-246-6727 +1-310-246-6816
Hong Kong 31st Floor, AIG Tower 1 Connaught Road Central Hong Kong S.A.R.	Mark Fairbairn	+852-3512-2385
London Warwick Court 5 Paternoster Square London EC4M 7DX	John Daghlian John Van de North Solomon Wifa	+44-20-7558-4862 +44-20-7558-4801 +44-20-7558-4866
Los Angeles 400 South Hope Street 15th Floor Los Angeles CA 90071-2899	Mark Easton John Laco John-Paul Motley Kathryn Sanders	+1-213-430-6549 +1-213-430-6544 +1-213-430-6100 +1-213-430-6376
Newport Beach 610 Newport Center Drive 17th Floor Newport Beach CA 92660-6429	Jay Herron Andor Terner	+1-949-823-6922 +1-949-823-6980
New York Times Square Tower 7 Times Square New York, NY 10036	Harvey Eisenberg Greg Gilbert Phillip Isom Doron Lipshitz Ilan Nissan John Scott	+1-212-408-2416 +1-212-408-2469 +1-212-408-2418 +1-212-326-2220 +1-212-408-2443 +1-212-408-2485
San Francisco Two Embarcadero Center 28th Floor San Francisco CA 94111	Peter Healy	+1-415-984-8833 +1-415-984-8756
Shanghai Plaza 66, 37th Floor 1266 Nanjing Road West Shanghai 200040 People’s Republic of China	Kurt Berney	+86-21-2307-7007
Silicon Valley 2765 Sand Hill Road Menlo Park CA 94025-7019	Timothy Curry Warren Lazarow	+1-650-473-2627 +1-650-473-2637 +1-650-473-2647 +1-650-473-2638
Singapore   9 Temasek Boulevard #09-01 Suntec Tower Two Singapore 038989 Singapore	Bertie Mehigan	+65-6407-1528
Tokyo Meiji Yasuda Seimei Building, 11th Floor 2-1-1, Marunouchi Chiyoda-ku, Tokyo 100-0005 Japan	Naosake Fujita	+81-3-5293-2714
Washington, D.C. 1625 Eye Street, NW Washington, D.C. 20006	Martin Dunn Robert Plesnarski David Pommerening Christopher Salter Todd Triller	+1-202-383-5418 +1-202-383-5149 +1-202-383-5110 +1-202-383-5371 +1-202-383-5130