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.
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.
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.
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.
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.