On October 16, 2012, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) released Staff Legal Bulletin No. 14G (SLB 14G). The release is the eighth staff legal bulletin discussing issues related to shareholder proposals submitted under Rule 14a-8 of the Securities Exchange Act of 1934 (the "Exchange Act"). Matters addressed in SLB 14G are discussed below.

Proof of Ownership

In order to be eligible to submit a proposal under Rule 14a-8, a shareholder must provide documentation that, as of the date the shareholder submits the proposal, the shareholder has continuously held, for at least one year, at least $2,000 in market value, or 1 percent, of the company's securities entitled to be voted on the proposal at the shareholder meeting. Rule 14a-8(b)(2)(i) under the Exchange Act provides that such documentary evidence can be in the form of a "written statement from the 'record' holder ... (usually a broker or bank)." Under guidance previously issued in Staff Legal Bulletin 14F, only securities brokers that were participants in the Depository Trust Company (DTC) were considered "record holders" for the purposes of providing such a proof of ownership letter. SLB 14G clarifies that affiliates of DTC participants may also issue such proof of ownership letters.

Additionally, in instances where a shareholder holds shares with a securities intermediary that is not a broker or bank, the shareholder may obtain a proof of ownership letter from that securities intermediary provided that the shareholder also obtains a proof of ownership letter from the DTC participant (or affiliate of the DTC participant) that can verify the holdings of the securities intermediary.

Company Notice of Defect in Proponent Proof of Ownership Letter

Proponents' proof of ownership letters often fail because of a failure to state the precise one-year period of ownership preceding and including the date the proposal was submitted. Commonly, the proof of ownership letter will instead state a verification date prior to the date of the proposal, thereby leaving a gap between the date of verification and the date the proposal was submitted. SLB14G notes that the SEC is concerned that companies' notices of defect are not adequately describing this error so that it can be corrected. Accordingly, SLB 14G states that the staff will no longer concur in the exclusion of a proposal on the basis of failure of the proof of ownership letter to cover the one-year period preceding and including the date the proposal was submitted unless the company provides a notice of defect that (1) identifies the specific date on which the proposal was submitted and (2) 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 must include copies of the shareholder proposal postmark or evidence of electronic submission.

Use of Website Addresses in Proposal or Supporting Statement

Given the increasing interest in including references to a website address, the staff stated that, consistent with previously issued Staff Legal Bulletin No. 14, it will continue to allow companies to exclude website addresses included in shareholder proposals, but not the entire proposal, on the basis that the website contains information that is materially false and misleading, and irrelevant to the subject matter of the proposal or otherwise in contravention of the proxy rules, including Rule 14a-9 under the Exchange Act.

Additionally, the staff has clarified the following three points:

  1. For purposes of determining whether a shareholder proposal is vague and indefinite, and therefore excludable, because neither the shareholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires, the staff will only consider information contained in the proposal itself, and information contained in a referenced website which would otherwise clarify the proposal will not remedy the deficiency unless that information is actually included in the proposal itself.
  2. A reference to a non-operational website will not be excluded as irrelevant to the subject matter if the proponent supplies 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.
  3. Where a proposal references a website and the information on the website changes after submission of the proposal, such changes may constitute "good cause" for the company to file its reasons for excluding the website after the date that is 80 days prior to the filing of the company's definitive proxy materials.