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

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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