Proxy Access

The SEC Issues a New Staff Legal Bulletin on Shareholder Proposal Rule 14a-8

by Vanessa Schoenthaler on October 19, 2011

Yesterday the Division of Corporation Finance issued its latest in an ongoing series of Staff Legal Bulletins focusing on shareholder proposal Rule 14a-8. This, Bulletin No. 14F, addresses:

  • intermediates that meet the definition of “record” holder under Rule 14a-8(b)(2)(i) for purposes of verifying a beneficial owner’s eligibility to submit a proposal under Rule 14a-8 (Hint: the Division is reversing the position articulated in its 2008 The Hain Celestial Group, Inc. no-action letter);
  • two common errors in shareholder proof of ownership;
  • Q&A regarding the handling of proposal revisions;
  • procedures for withdrawing no-action requests related to proposals submitted by multiple proponents; and
  • the Division’s new process for transmitting Rule 14a-8 no-action response letters via email.

“Record” Holders

To be eligible to submit a proposal under Rule 14a-8 a shareholder must provide proof that they “have continuously held at least $2,000 in market value, or 1%” of the securities entitled to vote on the proposal for at least one year by the date of the proposal’s submission (and must confirm that they will continue to hold the securities through the date of the shareholder meeting).

There are two ways for a shareholder to hold securities: directly, as a registered owner, or indirectly, as a beneficial owner.

In the context of a registered owner, it’s fairly easy for a company to verify whether a shareholder satisfies Rule 14a-8′s eligibility requirements; just consult the transfer agent records.

In the context of a beneficial owner, where there are generally one or more intermediaries (e.g., broker-dealers or banks) between a shareholder and the company, and where the securities are held in the intermediary’s name (in “street name”) or deposited by the intermediary with DTC (if the intermediary is a DTC “participant”) and held in the name of DTC’s nominee, Cede & Co., verification is not quite as simple.

A shareholder who is a beneficial owner, as most shareholders are, can provide proof of ownership by submitting a statement from the “record” holder (the intermediary), verifying that the shareholder satisfies Rule 14a-8′s eligibility requirements.

On the company’s end, it can request a “securities position listing” from DTC, and at least verify that participating intermediaries have a position in the company’s securities as of a specified date. However, not all intermediaries are DTC participants. For example, introducing brokers have a direct relationship with shareholders, but do not maintain custody of their securities or funds, rather they engage a clearing broker for such purposes. Clearing brokers are generally DTC participants; introducing brokers are not. So there’s no way for a company to verify from the securities position listing whether an introducing broker has a position in its securities.

In light of the foregoing, and recent judicial precedent, the Division is reversing the position it previously took in The Hain Celestial Group, Inc. (October 2008) no-action letter, and going forward, for purposes of Rule 14a-8(b)(2)(i), only DTC participants will be considered “record” holders.

Two Common Proof of Ownership Errors

The Division notes that shareholder proof of ownership letters most often fail in two ways:

  • they do not verify beneficial ownership for the entire one year period prior to and including the date of a proposal submission; or
  • they fail to confirm continuous ownership.

To avoid these error the Division suggests (but does not require) the following language:

As of [date the proposal is submitted], [name of shareholder] held, and has continuously held for at least one year, [number of securities] shares of [company name] [class of securities].

Q&A: Proposal Revisions

Within the Deadline:

Q: If a shareholder submits a proposal within the company’s deadline for receiving proposals, and then submits a revision to that proposal, also within the company’s deadline for receiving proposals, does the company have to accept the revision?

A: Yes. The revised proposal should be treated as a replacement of the initial proposal and not as a second proposal in violation of Rule 14a-8(c)’s one proposal limit.

Note: This revises the Division’s earlier guidance, in Section E.2 of Staff Legal Bulletin 14, which states that a company may accept revisions to an initial proposal if the revisions are received prior to the company’s submission of a no-action request.

After the Deadline:

Q: Same scenario as in the previous question, except the shareholder does not submit a revision until after the company’s deadline for receiving proposals has expired. Does the company have to accept the revision?

A: No. But if the company does not accept the revision it must treat the revised proposal as a second proposal and submit a notice citing the reason for the exclusion. If the company intends to also exclude the initial proposal, it must cite the reasons for that exclusion as well.

Which Date:

Q: If a shareholder submits a proposal and then submits a revision, as of which date does the shareholder have to prove share ownership?

A: As of the date the original proposal was submitted.

No-Action Withdrawals

As addressed in Staff Legal Bulletin 14 and 14C, when a proposal is withdrawn a company should include with its withdrawal letter documentation demonstrating that the proponent has withdrawn the proposal. If the proposal had multiple proponents and each designated a lead individual to act on its behalf, and if the company is able to demonstrate that the individual is authorized to act, the company need only provide a withdrawal letter from the lead individual.

Going forward the Division will process related no-action request withdrawals if the company provides a letter from the lead individual that includes a representation that such lead individual is authorized to act on behalf of each proponent identified in the company’s no-action request.

Email Responses

The Division will begin transmitting its Rule 14a-8 no-action response letters via email and will no longer send copies of the related correspondence to companies or proponents. It will continue to post everything to its website.

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Amended Rule 14a-8 Takes Effect

by Vanessa Schoenthaler on September 20, 2011

The Commission’s notice, Facilitating Shareholder Director Nominations, was published in the Federal Register this morning, making the Rule 14a-8 amendments effective as of today.

Rule 14a-8 requires a company to include in its proxy materials, under certain circumstances, shareholder proposals seeking to establish procedures in the company’s governing documents for the inclusion of shareholder director nominees in the company proxy materials.

(Download File)

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The SEC Is Not Seeking Judicial Review of the Order Vacating Proxy Access Rule 14a-11

by Vanessa Schoenthaler on September 7, 2011

As has been reported pretty much everywhere at this point, the Securities and Exchange Commission has declined to seek a rehearing of the D.C. Circuit Court of Appeal’s order vacating proxy access Rule 14a-11.

The Commission’s official statement on the matter was finally made available this morning.

As to Rule 14a-8, adopted and then voluntarily stayed  in conjunction with the challenge to Rule 14a-11, and which permits eligible shareholders to propose proxy access procedures on a company-by-company basis, the Commission should, barring any other action, publish notice of the rule’s effective date sometime after its stay order expires on September 13, 2011.

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D.C. Circuit Court of Appeal’s Order Vacating Proxy Access Rule 14a-11

by Vanessa Schoenthaler on July 22, 2011

The U.S. Court of Appeals for the D.C. Circuit handed down its decision in the Business Roundtable and Chamber of Commerce’s challenge to proxy access today.

The Court vacated Exchange Act Rule 14a-11, finding that the Commission acted arbitrarily and capriciously when promulgating the rule, because: (1) “it neglected its statutory responsibility to determine the [Rule's] likely economic consequences … and to connect those consequences to efficiency, competition, and capital formation … [and (2) of its] decision to apply Rule 14a-11 to investment companies … .” The Court did not address the petitioner’s First Amendment challenge.

Judge Ginsburg penned a scathing opinion for the Court, and as Broc Romanek and Brian Breheny note, other than appealing the decision en banc, the Commission generally has three options going forward: revise and reapprove Rule 14a-11 now, allow Rule 14a-8 to go effective now and revise and reapprove the Rule 14a-11 later, or do nothing.

(Download File)

Update: 4:30 PM

Each of the parties has now made their obligatory public statement:

The Business Roundtable and U.S. Chamber of Commerce issuing a joint statement applauding the decision as a “big win for America’s job creators and investors …” and the SEC a brief statement expressing disappointment, noting that it is exploring its options and reminding us that Rule 14a-8  remains unaffected by the decision.

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The New Proxy Access Rules Are On Hold … For Now

by Vanessa Schoenthaler on October 4, 2010

Last week the U.S. Chamber of Commerce and the Business Roundtable announced the filing of a joint lawsuit challenging the Securities and Exchange Commission’s adoption of proxy access Rule 14a-11. The groups also filed a motion requesting that the Commission stay the effect of the Rule pending resolution of the suit.

Today the Commission did just that; staying not only the effect of Rule 14a-11, but also of the amendments to Rule 14a-8. The groups’ motion didn’t actually request a stay of the effect of the amendments to Rule 14a-8, but the Commission reasoned that the amendments, “designed to complement” Rule 14a-11, were so “intertwined” that allowing them to become effective while staying Rule 14a-11 could potentially be confusing.

At this point the Commission and the groups will file a joint motion with the U.S. Court of Appeals for the District of Columbia Circuit requesting an expedited review of the suit.  However, as reported by Bloomberg, the Commission doesn’t expect the suit to be resolved until “late spring”.  So, even if the Commission prevails, it now looks like the new proxy access rules will not affect most issuers before the 2012 proxy season.

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The Battle for Proxy Access Isn’t Over Yet

by Vanessa Schoenthaler on September 30, 2010

Yesterday the U.S. Chamber of Commerce and the Business Roundtable announced the filing of a joint lawsuit challenging the Securities and Exchange Commission’s adoption of proxy access Rule 14a-11 as, among other things, arbitrary and capricious and in excess of the Commission’s authority.  In a joint press release, members of the Chamber of Commerce assert that:

The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders … [and] will give small groups of special interest activist investors significant leverage over a business’ activities. …  The SEC failed to engage in evidence-based rulemaking, and we intend to hold the SEC to its statutory obligation to conduct a thorough cost-benefit analysis.

The groups also filed a motion requesting that the Commission stay Rule 14a-11, including its November 15, 2010 effective date, pending resolution of the suit.  The Commission has until October 5, 2010 to respond, but in a preliminary statement, as reported by Bloomberg News, a spokesman for the Commission stated that:

We believe that the commission’s proxy-access rules are both lawful and in the best interests of the public and shareholders. The commission will, of course, carefully consider and timely respond to the motion for a stay.

So, unless and until the Commission or the Court of Appeals stays the effective date, if you mailed your proxy materials out on or after March 15, 2010 you should continue to anticipate Rule 14a-11 affecting your 2011 proxy season.  Also of note, the motion is not seeking a stay of the amendments to Rule 14a-8 so, regardless of its outcome, those amendments will be effective on November 15, 2010.

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The SEC’s New Proxy Access Rule is Set to Take Effect

by Vanessa Schoenthaler on September 16, 2010

The Securities and Exchange Commission’s new proxy access rule was published in the Federal Register today.  The rule is effective on November 15, 2010 for all companies except smaller reporting companies, which have a three-year deferral.  That means if you mailed your proxy materials out on or before March 14, 2010, the 2011 window for shareholder submissions will have already lapsed by the November 15, 2010 effective date (with November 14, 2010 being the 120th calendar day before the one year anniversary of a March 14, 2010 mailing date) and the rule will not effect you until the 2012 proxy season.  If you mailed your proxy materials out on or after March 15, 2010 the rule will affect your 2011 proxy season (although for companies that mailed their proxy materials out between March 15, 2010 and April 12, 2010, the 2011 window for shareholder submissions will vary in length between 1 and 29 days, rather than the full 30 days prescribed in the new rule).

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SEC Adopts New Proxy Access Rule

by Vanessa Schoenthaler on August 26, 2010

Yesterday the Securities and Exchange Commission adopted Exchange Act Rule 14a-11, a new proxy access rule requiring public companies to include the director nominees of certain shareholders in their proxy materials.

The new rule is effective for all companies except smaller reporting companies 60 days after its publication in the federal register.  The rule is effective for smaller reporting companies after a three year deferral period.  The rule does not effect foreign private issuers, which are exempt from the Exchange Act proxy rules altogether.

Under the new rule a company is required to include a shareholder’s director nominee in its proxy materials if the nominating shareholder:

  • owns a minimum of 3% of the total voting power of the company’s securities (groups of shareholders can aggregate their shares to meet this minimum threshold);
  • has held the minimum number of shares for at least three years;
  • certifies that they will continue to hold the minimum number of shares through the date of the shareholder meeting; and
  • certifies that they are not holding the shares for purposes of effecting a change in control or to gain a number of board seats in excess of the maximum permitted under the rule.

A nominating shareholder must provide notice to the Commission and the company of their director nominees between 150 and 120 days before the date on which the company’s proxy materials were mailed the year before.  To be eligible, a shareholder nominee must meet the requirements of applicable federal, state and foreign laws and the national securities exchange or association rules.

The new rule also limits the number of shareholder nominees to the greater of one nominee or up to 25% of the total number of board seats.  If more shareholder nominees are put forth than seats are available, only the nominees of the shareholder or shareholder group with the largest percentage of qualifying voting power must be included in the company’s proxy materials.

The Commission also amended Exchange Act Rule 14a-8(i)(8) to allow shareholders to propose amendments to a company’s governing documents that would establish procedures for the inclusion of shareholder director nominees in the company’s proxy materials.

The Commission’s full adopting release (all 451 pages) is available here.

of their intent to have a director nominee included in a company’s annual proxy materials between 150 and 120 days before the date on which the prior year’s proxy materials were mailed

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