On October 16, the staff of the SEC's Division of Corporation Finance issued Staff Legal Bulletin No. 14G (CF) (SLB 14G), the staff’s most recent guidance addressing interpretive issues under Exchange Act Rule 14a-8, the SEC’s shareholder proposal rule. In SLB 14G, the staff:
- Clarifies its views concerning the parties that can provide proof of ownership of a company’s voting securities under Rule 14a-8(b)(2)(i) for purposes of verifying that a beneficial owner of the securities is eligible to submit a proposal;
- Expands its previous guidance on the manner in which companies should notify proponents of a failure to provide proof of share ownership for the one-year period required under Rule 14a-8(b)(1); and
- Provides additional guidance on the use of website addresses in proposals and supporting statements.
SLB 14G is the staff’s third legal bulletin in as many years in which the staff has provided guidance on the requirements of Rule 14a-8. The bulletins highlight the need for companies and proponents to be sensitive to the staff’s evolving view of these requirements. SLB 14G can be found here.
Verification of proponent share ownership under Rule 14a-8(b)(2)(i)
In SLG 14G, the staff supplements last year’s guidance on the types of entities that are considered “record” holders of a company’s voting securities for purposes of verifying a proponent’s beneficial ownership of the securities under Rule 14a-8(b)(2)(i).
Under Rule 14a-8(b)(1), to be eligible to submit a proposal for inclusion in a company’s proxy materials, the proponent must have continuously held at least $2,000 in market value, or 1%, of the company’s securities entitled to be voted on the proposal at a meeting of shareholders for at least one year by the date it submits the proposal. If the shareholder holds the securities in “street name” through a securities intermediary such as a bank or broker, it generally must provide proof of its beneficial ownership of the securities under Rule 14a-8(b)(2)(i) by delivering to the company a written statement from the record holder of the securities verifying the shareholder’s continuous ownership of the securities for the required period.
As discussed in the SEC Update we issued on November 8, 2011, available here, in Staff Legal Bulletin No. 14F (October 18, 2011) (SLB 14F), the staff advised that, for purposes of Rule 14a-8(b)(2)(i), only securities intermediaries that are “participants” in The Depository Trust Company (DTC) should be viewed as record holders of securities deposited at DTC. In SLB 14G, the staff clarifies that entities that are not themselves DTC participants but are affiliates of such participants also will be considered record holders of the securities whose proof of ownership letters will be acceptable under the rule. If the securities intermediary is neither a DTC participant nor an affiliate of a DTC participant, the proponent will have to obtain a letter verifying its ownership from a DTC participant or an affiliate of a DTC participant.
Notification to proponents of their failure to provide proof of share ownership under Rule 14a-8(b)(1)
Rule 14a-8(f) permits a company that has identified eligibility or procedural defects in the proponent’s submission to exclude the proposal only if it notifies the proponent in writing of the defects and the proponent fails to correct them on a timely basis.
The staff identified in SLB 14F a number of common procedural defects relating to verification of the one-year holding period requirement of Rule 14a-8(b)(1) discussed above. In SLB 14G, the staff expresses its concerns that company deficiency letters sent to proponents do not adequately describe such defects or the corrective action required of proponents.
To address these concerns, the staff says it no longer will concur in the company’s exclusion of a proposal under Rules 14a-8(b)(1) and 14a-8(f) based on a failure to satisfy the one-year ownership requirement unless the company’s deficiency letter to the proponent:
- Identifies the specific date on which the proposal was submitted, which the staff views as the date on which the submission was postmarked or transmitted electronically to the company; and
- Indicates that, to cure the defect, the proponent must obtain a new proof of ownership letter that verifies the proponent’s continuous ownership of the required amount of securities during the entire one-year period preceding and including the date of submission.
Use of website addresses in proposals and supporting statements
The staff notes in SLB 14G that proponents increasingly are including in their proposals or supporting statements references to website addresses that provide more information about their proposals. In some cases, companies have sought to exclude either the website or the entire proposal because of the reference to the website address. The staff reiterates in SLB 14G the position it expressed earlier in Staff Legal Bulletin No. 14 (July 13, 2001) that website addresses could be excludable under Rule 14a-8(i)(3) if the information on the website is “materially false or misleading, irrelevant to the subject matter of the proposal, or otherwise in contravention of the proxy rules, including Rule 14a-9.”
The staff explains in SLB 14G that a proposal also may be excludable under Rule 14a-8(i)(3) as "vague and indefinite" if neither the shareholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with reasonable certainty exactly what actions or measures the proposal requires. The staff outlines the following two-pronged approach it takes in applying the vague-and-indefinite standard under Rule 14a-8(i)(3) to a proposal if the proposal or the supporting statement contains a website address:
- If the 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 this information is not also contained in the proposal or the supporting statement, the proposal would raise concerns under Rule 14a-9 and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite.
- On the other hand, 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, the proposal would not be subject to exclusion under Rule 14a-8(i)(3) on the basis of the reference to the website address because, in this case, the information on the website only supplements the information contained in the proposal and supporting statement.
References to websites that are not operational when a proposal is submitted
SLB 14G also addresses situations in which a website referenced in a proposal is not operational at the time the proponent submits its proposal to the company, which will preclude the company and the staff from being able to evaluate whether the website reference may be excluded under Rule 14a-8(i)(3). The staff expresses the view that a company may not exclude the proposal solely because the website is not yet operational if, at the time it submits the proposal, the proponent (1) provides the company with the materials that will appear on the website when it becomes operational, and (2) represents to the company that the website will become operational at or before the time at which the company files its definitive proxy materials.
Changes in the content of a referenced website after a proposal is submitted
The staff also provides guidance in SLB 14G regarding the effect of changes in the content of a referenced website after the proponent has submitted its proposal to the company. The staff indicates that if the company believes the new website content renders the proposal excludable under Rule 14a-8, it must submit a no-action request seeking the staff’s concurrence in its determination. If the company submits its request to the staff after the submission deadline under Rule 14a-8(j) (80 days before the company files its definitive proxy materials), the staff may concur that the changes to the referenced website constitute “good cause” for it to waive the deadline.