September 22, 2014

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September 19, 2014

Corp Fin Issues Staff Legal Bulletin on Shareholder Proposals

On October 16, 2012, the SEC’s Division of Corporation Finance issued Staff Legal Bulletin No. 14G ("Bulletin 14G"), which provides guidance on three technical issues relating to shareholder proposals under Exchange Act Rule 14a-8: (1) the parties that can provide proof of a shareholder proponent's beneficial ownership; (2) the manner of providing notice to a proponent that fails to provide adequate proof of ownership; and (3) the use of website addresses in shareholder proposals and supporting statements.

Verifying a Shareholder's Beneficial Ownership

Rule 14a-8(b) requires a shareholder proponent to provide proof of ownership from the "record" holder of the securities unless the proponent is the registered holder of his or her securities or has filed a Schedule 13D, Schedule 13G, Form 3, Form 4 and/or Form 5 demonstrating ownership of the securities.  In Staff Legal Bulletin No. 14F (Oct. 18, 2011), the SEC took the position that "only [Depository Trust Company ('DTC')] participants should be viewed as 'record' holders of securities that are deposited at DTC."  Accordingly, only those firms that are DTC participants (and not introducing brokers) can provide valid Rule 14a-8(b) proof of ownership for proponents whose shares are held in street name.  During the 2012 proxy season, some companies submitted no-action requests seeking to exclude shareholder proposals where proof of ownership letters were provided by entities that were not themselves DTC participants but were merely affiliated with a DTC participant and had a name that was similar to that of the DTC participant.  The Staff did not permit exclusion of these proposals, noting that "the proof of ownership statement was provided by a broker or bank that provides proof of ownership statements on behalf of its affiliated DTC participant."  Bulletin 14G further confirms this position, stating that "[b]y virtue of the affiliate relationship, we believe that a securities intermediary holding shares through its affiliated DTC participant should be in a position to verify its customers' ownership of securities." 

Content of Deficiency Notices

Rule 14a-8(b)(1) requires a shareholder proponent to establish that, at the time the shareholder proposal was submitted, the shareholder proponent had continuously held his or her securities for at least one year.  Bulletin 14G provides guidance to companies in the drafting of deficiency notices to shareholder proponents whose proof of ownership letters contain date-related procedural deficiencies and the submission of no-action requests when these deficiencies go unremedied.  Bulletin 14G confirms that the SEC staff will concur in the exclusion of a shareholder proposal on the basis that a proponent's proof of ownership does not cover the one-year period preceding and including the date the proposal is submitted only if the deficiency notice:

  • identifies the specific date on which the proposal was submitted; and
  • 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.

The Bulletin also confirms that the date of submission of a shareholder proposal is "the date the proposal is postmarked or transmitted electronically."  When companies submit no-action requests based on this type of procedural deficiency, such requests "should include copies of the postmark or evidence of electronic transmission."

Use of Web site Addresses in Proposals and Supporting Statements

Bulletin 14G also addresses several issues related to shareholder proposals and supporting statements that include Web site addresses.  Bulletin 14G first references and restates the guidance of Staff Legal Bulletin No. 14 (July 13, 2001) (“Bulletin 14”), in which it was explained that a reference to a Web site address counts as one word for purposes of applying the 500-word limitation for shareholder proposals under Rule 14a-8(d).  Moreover, the staff will continue to apply the guidance of Bulletin 14, which provides that references to Web site addresses in proposals or supporting statements may be subject to exclusion under Rule 14a-8(i)(3) if the information contained at the Web site address is materially false or misleading, irrelevant or otherwise in contravention of the proxy rules.

Bulletin 14G then goes on to provide additional guidance on the use of Web site addresses in proposals and supporting statements:

  • First, Bulletin 14G states that a shareholder proposal or supporting statement raises concerns under Exchange Act Rule 14a-9 and is subject to exclusion under Exchange Act Rule 14a-8(i)(3) if it includes a Web site address that links to content that is necessary for shareholders and the company to understand with reasonable certainty what actions or measures the proposal requires and such content is not otherwise contained in the proposal or supporting statement.  In contrast, the inclusion of a Web site address in a proposal does not provide a basis for exclusion under Rule 14a-8(i)(3) if shareholders and the company can understand with reasonable certainty what the proposal requires without reviewing the information provided on the Web site.
  • Second, Bulletin 14G states that a reference to a Web site that is not operational at the time the proposal is submitted may be excludable under Rule 14a-8(i)(3) as irrelevant unless (1) at the time the proposal is submitted, the proponent provides the material that will appear on the Web site once it is operational; and (2) the proponent provides "a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials."
  • Finally, Bulletin 14G states that if the information on a Web site changes after the submission of the shareholder proposal and the company believes that the changes render the Web site reference excludable, then based on a letter submitted by the company setting for its reasons for exclusion, the Staff may be willing to waive for "good cause" the requirement under Rule 14a-8(j) that companies submit their no-action requests no later than 80 days before filing definitive proxy materials.
© 2014 Schiff Hardin LLP

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