Staff Legal Bulletin No. 14F ("Shareholder Proposals"), issued yesterday by the SEC Division of Corporation Finance, describes a change in the staff's position on proof of compliance with the share ownership requirement for persons making shareholder proposals.
A shareholder making a proposal for inclusion in an issuer's proxy materials generally must have held at least $2,000 in market value of the company's stock for at least one year as of the date the shareholder submits the proposal.
Most shareholders are not holders of record, but hold their securities in book-entry form through a securities intermediary, such as a broker or a bank, which in turn deposits customer securities with, and holds the securities through, the Depositary Trust Company ("DTC"). DTC's nominee, Cede & Co., appears on the issuer's shareholder list as the sole registered owner of securities deposited with DTC by DTC participants. The issuer can obtain from DTC a list of the DTC participants and the amount of issuer securities held by each.
An individual investor may conduct his transactions in a company's securities through an "introducing broker," who engages in direct contact with the customer, opens the customer's account and accepts customer orders, but is not permitted to maintain custody of customer securities. Here, the introducing broker must engage another broker, known as a "clearing broker," to hold custody of client securities and to execute trades. Clearing brokers are generally DTC participants; introducing brokers generally are not.
Since October 2008, the SEC has taken the position (the so-called Hain Celestial position) that a shareholder proponent could demonstrate compliance with the ownership requirements by submitting written verification from his "introducing broker" that the shareholder held the required amount of securities continuously for one year. One particularly active proponent, John Chevedden, who annually makes proposals for a number of public companies, has had a practice of demonstrating compliance in this fashion.
In the Bulletin, the staff, noting recent court decisions holding that Mr. Chevedden's verification from a non-DTC participant is insufficient for these purposes, states that it will no longer follow the Hain Celestial position, and instead will now require, for purposes of 14a-8 noaction treatment, ownership verification from a DTC participant, such as a clearing broker.
The Bulletin takes pains to be helpful to investors in complying with this more restrictive requirement, pointing investors to a DTC website where they can determine whether a particular broker or bank is a DTC participant, and telling investors that if their broker is not listed, their broker should be able to direct them to the relevant DTC participant. If the DTC participant knows the shareholder's broker or bank's holdings, but does not know the shareholder's holdings, the shareholder will be required to submit one proof of ownership statement 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.
In order to exclude a proposal, an issuer must timely notify the proponent of an asserted deficiency in demonstrating share ownership, and must describe the required proof of ownership in a manner that is consistent with the Bulletin. The proponent will have an opportunity then to obtain the requisite proof.