Proposals On October 18, 2011, the SEC Division of Corporation Finance issued Staff Legal Bulletin No. 14F ("Shareholder Proposals"). The bulletin contains information regarding:

  • brokers and banks that constitute "record" holders under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8
  • common errors shareholders can avoid when submitting proof of ownership to companies
  • the submission of revised proposals
  • procedures for withdrawing no-action requests regarding proposals submitted by multiple proponents
  • the division's new process for transmitting Rule 14a-8 no-action responses by email

"Record" Holders. In a 2008 no-action letter, the staff took the position that an introducing broker could be considered a "record" holder for purposes of Rule 14a-8(b)(2)(i) even though the introducing broker is not a DTC participant. As a result, companies were required to accept proof of ownership letters from introducing brokers where, unlike the positions of registered owners and brokers and banks that are DTC participants, the company was unable to verify the positions against its own or its transfer agent's records or against DTC's securities position listing. Going forward, the SEC is reversing its previous position and will take the view that, for Rule 14a-8(b)(2)(i) purposes, only DTC participants should be viewed as "record" holders of securities that are deposited at DTC.

With respect to confirming ownership, shareholders and companies can confirm whether a particular broker or bank is a DTC participant by checking DTC's participant list, which is available on the DTC website. If a shareholder's broker or bank is not on DTC's participant list, the shareholder will need to obtain proof of ownership from the DTC participant through which the securities are held. The shareholder should be able to identify this DTC participant by asking the shareholder's broker or bank.

If the DTC participant knows the shareholder's broker's holdings, but does not know the shareholder's holdings, Rule 14a-8(b)(2)(i) may still be satisfied if the shareholder obtains and submits two proof of ownership statements verifying that, at the time the proposal was submitted, the required amount of securities were continuously held for at least one year – one from the shareholder's broker or bank confirming the shareholder's ownership and the other from the DTC participant confirming the broker or bank's ownership.  

The SEC will grant no-action relief on the basis that the shareholder's proof of ownership is not from a DTC participant, only if the company's notice of defect describes the required proof of ownership in a manner that is consistent with the guidance contained in the bulletin. Under Rule 14a-8(f)(1), the shareholder will have an opportunity to obtain the requisite proof of ownership after receiving the notice of defect.

Common errors regarding proof of ownership. The SEC notes that shareholder proof of ownership letters most often fail in two ways: (1) they do not verify beneficial ownership for the entire one-year period preceding and including the date the proposal is submitted; or (2) they fail to confirm continuous ownership. To avoid these errors the SEC suggests (but does not require) the following format: "As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least one year, [number of securities] shares of [company name] [class of securities]."

Submission of revised proposals. With respect to submission of revised proposals the SEC provided the following guidance:

  • If a shareholder submits a revised proposal before the company's deadline for receiving proposals, the company must accept the revisions. The shareholder is not in violation of the one-proposal limitation in Rule 14a-8(c) as the SEC views the revised proposal as a replacement of the initial proposal and effective withdrawal of the initial proposal. As a result, if the company intends to submit a no-action request, it must do so with respect to the revised proposal.
  • If, however, the revised proposal is submitted after the deadline for receiving proposals, the company is not required to accept the revisions. If the company does not accept the revisions, it must treat the revised proposal as a second proposal and submit a notice stating its intention to exclude the revised proposal as required by Rule 14a-8(j). The company's notice may cite Rule 14a-8(e) as the reason for excluding the revised proposal. If the company does not accept the revisions and also intends to exclude the initial proposal, it would also need to submit its reasons for excluding the initial proposal.
  • A shareholder must prove ownership as of the date the original proposal is submitted; submitting a revised proposal does not trigger a requirement to provide proof of ownership a second time.  

Withdrawal of no-action requests. Going forward, the SEC will process a withdrawal request if the company provides a letter from the lead filer that includes a representation that the lead filer is authorized to withdraw the proposal on behalf of each proponent identified in the company's no-action request.

Use of email to transmit Rule 14a-8 no-action responses. In order to accelerate delivery of responses to companies and to reduce costs going forward, the SEC will begin transmitting its Rule 14a-8 no-action response letters by email and encourages companies to include email contact information in any correspondence to the SEC. The SEC will continue to post its response and related correspondence on its website.