alerts & publications
SEC’s Division of Corporation Finance Publishes Guidance Regarding Shareholder ProposalsOctober 16, 2012
On October 16, 2012, the SEC’s Division of Corporation Finance published its annual “Staff Legal Bulletin” presenting guidance relating to shareholder proposals submitted to public companies pursuant to Exchange Act Rule 14a-8. This Staff Legal Bulletin — SLB No. 14G — provides the Division’s views regarding:
- the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8;
- the manner in which companies should notify proponents of a failure to provide proof of ownership for the one-year period required under Rule 14a-8(b)(1); and
- the use of website references in proposals and supporting statements.
Parties That Can Provide Proof of Ownership
Affiliates of DTC Participants
In SLB No. 14F (October 18, 2011), the Division described its view that only securities intermediaries that are participants in the Depository Trust Company (“DTC”) should be viewed as “record” holders of securities that are deposited at DTC for purposes of Rule 14a-8(b)(2)(i) (i.e., a shareholder will be eligible to submit a shareholder proposal only if the record holder of the securities provides proof of ownership). During the 2011-2012 proxy season, some companies questioned the sufficiency of proof of ownership letters from entities that were not themselves DTC participants, but were affiliates of DTC participants. Consistent with the view expressed by the Division in no-action letters, SLB No. 14G provides that the Division is of the view that “for purposes of Rule 14a-8(b)(2)(i), a proof of ownership letter from an affiliate of a DTC participant satisfies the requirement to provide a proof of ownership letter from a DTC participant.”
Securities Intermediaries That Are Not Brokers or Banks
Where a shareholder holds securities in book-entry form through a securities intermediary that is not a DTC participant or an affiliate of a DTC participant, it is not sufficient to submit proof of ownership from only that securities intermediary. Instead, the Division is of the view that the shareholder “will also need to obtain a proof of ownership letter from the DTC participant or an affiliate of a DTC participant that can verify the holdings of the securities intermediary.”
Company Notification of a Proponent’s Failure to Provide Proper Proof of Ownership
If a company intends to exclude a proposal from its proxy materials because the proponent failed to adequately prove sufficient ownership, Rule 14a-8(f) requires the company to first notify the proponent of that deficiency within 14 days of receiving the proposal and then provide the proponent with 14 days to respond and provide sufficient proof of ownership to “cure” that deficiency. The Division has consistently expressed its view that the notice of a defect in the proof of ownership must adequately describe that defect and the means in which it may be cured.
The Division stated in SLB No. 14F that a common error in proof of ownership letters is that they do not verify a proponent’s beneficial ownership for the entire one-year period preceding and including the date the proposal was submitted, as required by Rule 14a-8(b)(1). For example:
- the proof of ownership letter may speak as of a date before the date the proposal was submitted -- which creates a gap between the date of verification and the date the proposal was submitted; or
- the proof of ownership letter may speak as of a date after the date the proposal was submitted but cover a period of only one year from that date -- which fails to verify the proponent’s beneficial ownership over the required full one-year period preceding the date of the proposal’s submission.
In SLB No. 14G, the Division again reminded companies of the need to adequately describe the defect(s) and explain with specificity the manner in which the proponent may cure the defect(s). Specifically, the Division expressed its view that a notice of defect in the situations discussed above would not satisfy the notice requirement of Rule 14a-8(f) unless the notice mentions the gap in the period of ownership covered by the proponent’s proof of ownership letter. Similarly, notices of defect(s) with regard to other deficiencies would not be sufficient without adequate specificity regarding the deficiencies noted. Based on this view, the Division stated that it will not consider a notice of deficiency to have appropriately provided the proponent an opportunity to cure the defect(s) in the proof of ownership in the situations discussed above unless that notice:
- identifies the specific date on which the proposal was submitted; and
- explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including the date on which the proposal was submitted.
In this regard, the Division stated its view that the date of a proposal’s submission is “the date the proposal is postmarked or transmitted electronically.” Consistent with past practice, where a company seeks a no-action letter to exclude a proposal because of the proponent’s failure to adequately prove sufficient ownership for the required one-year period, the Division reminded companies to include copies of the postmark or evidence of electronic transmission with their no-action requests.
Use of Website Addresses in Proposals and Supporting Statements
It is becoming increasingly common for proponents to include (in either the proposal itself or the supporting statement) the addresses of websites that provide more information about their proposals. In some cases, companies have viewed the inclusion of this website address as a basis for seeking to exclude either the website address or the entire proposal.
In SLB No. 14 (July 13, 2001), the Division expressed its view that a reference to a website address in a proposal does not raise the concerns addressed by the 500-word limitation in Rule 14a-8(d). The Division reiterated this view in SLB No. 14G and stated that it will continue to count a website address as one word for purposes of Rule 14a-8(d).
Where a company seeks to exclude a website reference in a proposal, but not the proposal itself, the Division stated that it will continue to follow the guidance stated in SLB No. 14. Under that guidance, references to website addresses in proposals or supporting statements may be subject to exclusion under Rule 14a-8(i)(3) if the information contained on the website is:
- materially false or misleading;
- irrelevant to the subject matter of the proposal; or
- otherwise in contravention of the proxy rules, including the anti-fraud provisions of Rule 14a-9.
Application of Rule 14a-8(i)(3) to Inclusion of Website Addresses
In assessing the application of Rule 14a-8(i)(3) to the inclusion of websites in a proposal or supporting statement, it is necessary to apply the “vague and indefinite” standard the Division articulated in SLB No. 14B (September 15, 2004). Specifically, a proposal and supporting statement may be excluded under Rule 14a-8(i)(3) as “vague and indefinite” where neither the shareholders voting on the proposal nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.
The Division’s assessment of the application of the “vague and indefinite” test to the inclusion of a website address will depend upon whether the information on that website provides information that is “necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement.” If the website does provide that information, the proposal may be excluded in reliance on Rule 14a-8(i)(3) as vague and indefinite. Conversely, if shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information provided on the website, the Division would not view exclusion of the proposal as appropriate.
While not relevant to the analysis under Rule 14a-8, the Division also indicated that “[a] website that provides more information about a shareholder proposal may constitute a proxy solicitation under the proxy rules.” As such, the Division reminded “shareholders who elect to include website addresses in their proposals to comply with all applicable rules regarding proxy solicitations.”
Providing the Company With the Materials On a Referenced Website
The Division addressed the situation in which a proposal or supporting statement references a website that is not operational at the time a proposal is submitted. In this situation, neither the company nor the Division will be able to evaluate whether the website reference may be excluded in reliance on one of the substantive bases of Rule 14a-8. In such a situation, it is the Division’s view that the reference to a non-operational website in a proposal or supporting statement could be excluded under Rule 14a-8(i)(3) as irrelevant to the subject matter of a proposal.
Where a proponent includes a reference to a website containing information related to the proposal, but wishes to wait to activate the website until it becomes clear that the proposal will be included in the company’s proxy materials, the Division expressed a different view. In this situation, the Division is of the view that the reference to the website may not be excluded as irrelevant under Rule 14a-8(i)(3) if the proponent, at the time the proposal is submitted, provides the company with:
- the materials that are intended for publication on the website; and
- a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.
If the information on a website changes after submission of a proposal and the company believes the revised information renders the website reference excludable under Rule 14a-8, the company would need to submit a no-action request asserting its reasons for exclusion. Rule 14a-8(j) would require the company to submit these reasons no later than 80 calendar days before it files its definitive proxy materials. However, the Division expressed its view in SLB No. 14G that changes to the referenced website occurring after submission of the proposal may constitute “good cause” for the company to file its no-action request after the 80-day deadline and, as such, the Division would grant the company’s request that the 80-day requirement be waived.
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