On Nov. 7, 2008, the Securities and Exchange Commission published a staff legal bulletin, Shareholder Proposals, SLB No. 14D (CF), to provide companies and shareholders with further information regarding Exchange Act Rule 14a-8, which addresses shareholder proposals. Additional guidance regarding Rule 14a-8 may also be found in SLB No.s 14, 14A, 14B and 14C, each of which is available online at www.sec.gov.

The bulletin provides guidance regarding several issues that may arise under Rule 14a-8. The principal issue addressed by the bulletin deals with shareholder proposals that recommend, request or require a board of directors to amend the company’s articles or certificate of incorporation. The bulletin also addresses some technical issues of interest to issuers responding to proposals:

  • Submitting Rule 14a-8 no-action requests and related correspondence to the SEC by email;
  • Whether a company must notify a proponent of a defect in required owner ship under Rule 14a-8(b); and
  • The requirement that proponents provide copies of correspondence with the SEC to the company, using the same manner of correspondence.

Shareholder Proposals that Recommend, Request or Require a Board of Directors to Unilaterally Amend the Company’s Articles or Certificate of Incorporation

Rule 14a-8 is the proxy rule that governs shareholder access to the company’s proxy statement for its annual meeting. When a shareholder submits a proposal to be included in the proxy statement, the proposal and the proposing shareholder must satisfy certain requirements, otherwise the company is free to exclude the proposal. Among those requirements, Rule 14a-8(i)(1) allows the company to exclude a proposal if it is not a “proper subject” for action by the shareholders under the laws of the state in which the company is incorporated. Companies often seek to exclude proposals for bylaw or charter amendments on the ground that such amendments are not “proper” because under their state corporation law director action is also required – the so-called “two house rule.” In a state that has a “two house rule,” if a shareholder submits a proposal that requires the board amend the charter or bylaws, the proposal would violate state law and the company may exclude it.

The SEC has clarified that in response to a company’s request to omit a proposal on the foregoing grounds, the SEC may allow the shareholder proponent to make the request “precatory” -- to revise the proposal to provide the board of directors “take the steps necessary” to amend the company’s charter or articles of incorporation. If this revision is made within the time frame specified in the SEC’s response letter, the company will not be permitted to exclude the proposal on the basis of the state law exception.

Emailing the SEC Rule 14a-8 No-Action Requests and Related Correspondence

Companies and proponents may submit no-action requests and related correspondence to the SEC via e-mail to shareholderproposals@sec.gov, with the sender’s name and telephone number included in the e-mail.

Notice to Proponent of Defect in Required Ownership under Rule 14a-8(b)

To be eligible to submit a proposal under Rule 14a-8(b), the proponent must have continuously held at least $2,000 in market value or 1 percent of the company’s securities entitled to be voted on the proposal at the meeting for at least one year before the date the proposal is submitted.

If the proponent is a registered holder, the company may use its records to confirm the proponent’s holdings satisfy the ownership requirement. The company may not omit the proposal solely on the basis of the ownership requirement without first informing the proponent of the deficiency and allowing the proponent to provide proof of ownership.

Proponents Must Provide Copies of Correspondence with the SEC to the Company; Same Manner of Correspondence Encouraged

The proponent must provide the company with a copy of any correspondence submitted in response to the company’s no-action request, as required by Rule 14a-8(k). Both the proponent and the company should promptly provide one another with copies of all correspondence sent to the SEC in connection with Rule 14a-8 no-action requests, preferably employing the same method of transmission as used to send the materials to the SEC.