SEC Legal Bulletin on Shareholder Proposals

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

The SEC recently issued Staff Legal Bulletin No. 14G providing additional guidance on shareholder proposals submitted to companies pursuant to Rule 14a-8. The guidance is in response to several issues that came up during the 2012 proxy season.

Proof of ownership

In a prior bulletin, SLB No.14F, the SEC had reconsidered its view as to who constitutes a “record holder” for purposes of Rule 14a-8 and indicated that only DTC participants may provide adequate proof of ownership for shareholder proponents. Consistent with its no-action letter decisions during 2012, the Staff indicated in this bulletin that it would also view ownership letters from affiliates of DTC participants as satisfying the proof of ownership requirement.

Also, the Staff indicated that a shareholder who holds securities through a securities intermediary that is not a broker or a bank can satisfy Rule 14a-8’s documentation requirement by submitting a proof of ownership letter from that securities intermediary. If the securities intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant, or an affiliate of the DTC participant, that can verify the holdings of the securities intermediary.

Manner in which companies should notify proponents of inadequacies in the holding period

The Staff addressed companies’ notices of defect when a shareholder fails to provide adequate proof of ownership for the one-year period preceding and including the date that the proposal was submitted, as required by Rule 14a-8(b)(1). The Staff views the date of submission as the date of the proposal’s postmark or electronic transmission. Because of the timing of when proponents request and receive proof of ownership letters, the letters may speak as of a date before the date of submission thereby not covering the required period including and through the date of submission or may cover less than a one-year period when the letter speaks of a date after the date of submission.

The Staff expressed its concern that companies’ notices of defect often do not adequately describe the defect or explain what a proponent must do to remedy the defect. Accordingly, the Staff stated that it would no longer agree to exclude a proposal under Rules 14a-8(b) and 14a-8(f) on the basis that the proponent did not prove one-year ownership unless the company provides a notice of defect that (a) identifies the specific date on which the proposal was submitted (as the date of submission) and (b) 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 such date to cure the defect. In addition, companies should include copies of the postmark or evidence of electronic transmissions if making no-action letter requests.

Use of websites in proposals

The Staff addressed requests to exclude shareholder proposals as vague and indefinite under Rule 14a-8(i)(3) based on references to websites in such proposals. The Staff indicated that if the website provided information necessary to understand with reasonable certainty exactly what measures the proposal requires and such information is not also contained in the proposal or supporting statement, then the Staff would agree that the proposal can be excluded. If, however, the shareholders and the company can understand with reasonable certainty exactly what measures the proposal requires without reviewing the website, then that proposal would not be subject to exclusion just on the basis of reference to the website.

The SEC also expressed the view that references to a website that is not yet operational would not be subject to exclusion from the proposal as irrelevant if the proponent, at the time the proposal was submitted, provides the company with materials that are intended for publication on the website and a representation that the website will be operational at or before the company files its definitive proxy materials.

The Staff also indicated that if the information on a website changed after submission of a proposal in such a way as to make it subject to exclusion under Rule 14a-8, the Staff would view such changes as “good cause” for the company to file its reasons for excluding the website reference after the 80 day deadline (under Rule 14a-8(j)) for filing such reasons had passed.

Company actions

Companies should be aware of this guidance as we approach the shareholder proposal season. The guidance reflect the Staff’s views that it has expressed in public forums that they do not intend to support exclusion of shareholder proposals on the basis of what they view as highly technical failings by proponents, in particular with respect to procedural deficiencies. Letters to proponents addressing procedural deficiencies should follow the Staff’s guidance to be clear as to the defect and the steps necessary to remedy the defect, in particular with respect to proof of ownership and holding period.

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  2. By Shareholder Proposals: SLB 14G | Corporate Governance on Wednesday, December 19, 2012 at 9:33 am

    […] See also guidance from O’Melveny & Myers LLP, Katten Muchin Rosenman LLP and Davis Polk & Wardwell LLP. […]