Rule 14a-8

The Division of Corporation Finance Issues a New Staff Legal Bulletin on Rule 14a-8 Shareholder Proposals

by Vanessa Schoenthaler on October 17, 2012

Yesterday the Division of Corporation Finance (CorpFin) issued a new Staff Legal Bulletin, No. 14G,  in its ongoing series of guidance focusing on shareholder proposals under Exchange Act Rule 14a-8.

Staff Legal Bulletin (SLB) No. 14G elaborates on three matters addressed in prior SLBs:

  • the sufficiency of proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a shareholder proposal;
  • the manner in which a company should notify a shareholder of a failure to provide sufficient proof of ownership under Rule 14a-8(b)(1)’s one-year continuous ownership requirement; and
  • the use of website addresses in proposals and supporting statements.

A Shareholder’s Proof of Ownership

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 a company’s securities entitled to vote on the proposal for at least one year by the date of proposal’s submission and 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 in their own name, as a registered owner, or indirectly, through one or more securities intermediaries, as a beneficial owner. In the latter case, the securities are either held in the name of the intermediary (in “street name”) or, where the intermediary is a Depository Trust Company (DTC) participant, are deposited with DTC and held in the name of DTC’s nominee (Cede & Co.).

One way for a beneficial owner to demonstrate eligibility under Rule 14a-8′s proof of ownership requirement is by obtaining a proof of ownership letter from the holder of record, the securities intermediary.

In SLB No. 14F CorpFin expressed the view that, with respect to securities that are deposited with DTC, only intermediaries that are DTC participants should be considered holders of record for purposes of providing proof of ownership.

In this latest SLB No. 14G, CorpFin clarifies that a proof of ownership letter from an affiliate of a DTC participant will also satisfy the requirement to provide proof of ownership from a DTC participant.

CorpFin also clarifies that a shareholder holding securities through an intermediary that is not a broker or bank can demonstrate eligibility under Rule 14a-8′s proof of ownership requirement by obtaining a proof of ownership letter from that intermediary. However, if that intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder must also obtain a proof of ownership letter from a DTC participant or affiliate that can verify the intermediary’s holdings.

A Company’s Notice of Failure to Provide Sufficient Proof of Ownership

If a shareholder submits a proposal but fails to satisfy one of Rule 14a-8′s eligibility or procedural requirements a company may exclude the shareholder’s proposal if, after the company notifies the shareholder of the defect and explains in adequate detail what the shareholder must do to remedy it, the shareholder fails to correct the defect.

In SLB No. 14G CorpFin voices concern over notices that are not adequately describing defects or explaining what a shareholder must do to remedy defects that occur in proof of ownership letters.

For example, CorpFin notes that a commonly occurring defect is for a proof of ownership letter not to verify a shareholder’s beneficial ownership for the entire one-year period preceding and including the submission date of a shareholder proposal. Yet some notices of defect fail to point out the gap in ownership covered by the proof of ownership letter.

As such, CorpFin will no longer concur in the exclusion of a shareholder proposal on the basis of the shareholder’s proof of ownership not covering the required one-year period unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that in order to cure the defect the shareholder 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 such date.

CorpFin considers the submission date to be the date on which the shareholder proposal is postmarked or transmitted electronically, and notes that companies should include copies of the postmark or evidence of electronic transmission with their no-action requests.

A Shareholder’s Use of Website Address in Proposals and Supporting Statements

In SLB No. 14 CorpFin takes the position that referencing a website address in a shareholder proposal or supporting statement will not violate the 500-word limitation imposed by Rule 14a-8(d) because the website address only counts as one word. However, a website address could be subject to exclusion if it refers to information that may be materially false or misleading, irrelevant to the subject matter of the proposal or otherwise in contravention of the Commission’s proxy rules.

SLB No. 14G reaffirms this position and provides additional guidance on appropriate uses of website addresses in shareholder proposals and supporting statements.

In particular, CorpFin notes that if a proposal or supporting statement refers to a website that provides information 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, then the proposal would raise concerns under Rule 14a-9 (false or misleading statements) and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite. However, 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, then the proposal would not be subject to exclusion under Rule 14a-8(i)(3) on the basis of the reference to the website address, as the information on the website would only be considered supplemental.

Secondly, CorpFin notes that it will not concur that a reference to a website may be excluded as irrelevant under Rule 14a-8(i)(3) on the basis of the website not yet being operational, if the shareholder, 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.

Finally, if information on a website is revised after submission of a proposal and the company believes that the revised information renders the website reference excludable, but the deadline for submitting a no-action letter request has lapsed, CorpFin may concur that the changes to the website constitute good cause for missing the no-action request deadline.

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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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