On October 16, 2012, the staff of the Securities and Exchange Commission (the "SEC") issued Staff Legal Bulletin 14G (the "Bulletin"). The Bulletin provides guidance to reporting companies and their shareholders regarding (i) how shareholders submitting proposals under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), can demonstrate that they are eligible to submit such a proposal, (ii) how a reporting company should notify the proponent of a proposal of the proponent's failure to satisfy the eligibility requirements of Rule 14a-8, and (iii) the extent to which the proponent of a proposal may refer to websites in their proposals.

Background

Rule 14a-8 requires reporting companies with a class of securities registered under Section 12 of the Exchange Act to include certain proposals submitted by shareholders in the reporting company's proxy materials. In order to submit a proposal, a shareholder must meet certain eligibility requirements, including those described below.

The Bulletin

1. Proof of ownership for eligibility to submit a proposal under Rule 14a-8

To be eligible to submit a proposal under Rule 14a-8, a shareholder must, among other things, provide documentation demonstrating that the shareholder has owned at least $2,000 in market value, or one percent, whichever is less, of the reporting company's shares for the one-year period immediately preceding and including the date of the proposal. If the shareholder owns the shares in book-entry form through a securities intermediary (i.e., the shareholder is the "beneficial owner" of the shares, as opposed to the "record holder"), Rule 14a-8 provides that such documentation can be provided in the form of a written statement from the record holder of the shares. Rule 14a-8 also provides that, usually, such record holder is a broker or bank.

In a prior Staff Legal Bulletin, the SEC staff stated that, for beneficial owners of shares deposited at the Depositary Trust Company ("DTC"), only securities intermediaries that are participants in DTC should be viewed as record holders for purposes of substantiating that shareholder's eligibility to make a Rule 14a-8 proposal. Some reporting companies had questioned whether a written statement from an affiliate of a DTC participant was sufficient to prove ownership for this purpose if the affiliate itself is not a DTC participant. The Bulletin clarifies the SEC staff's view that a written statement of ownership from an affiliate of a DTC participant satisfies the requirement to provide a written statement of ownership from a DTC participant.

The Bulletin goes on to note that, in the case where the securities intermediary in whose account a Rule 14a-8 proponent's shares are registered is not a broker or a bank and is also not a DTC participant (or an affiliate thereof), the proponent would need to submit both a written statement of ownership from the securities intermediary and an additional written statement of ownership from the DTC participant (or affiliate thereof) that can verify the holdings of the securities intermediary.

2. Notice of a proponent's failure to substantiate ownership for the one-year period

Rule 14a-8 permits a reporting company to exclude a shareholder proposal if, among other things, the shareholder does not provide sufficient evidence to establish its eligibility to submit the proposal, so long as the reporting company notifies the proponent of the defect and the proponent fails to correct it. According to the Bulletin, common mistakes made by Rule 14a-8 proponents include providing a written statement of ownership that shows sufficient ownership over a one-year period, but the statement speaks of a date either before or after the date of submission of the proposal. That type of statement does not prove that the proponent owned the sufficient amount of stock for the one-year period immediately preceding and including the date of submission of the proposal.

The Bulletin notes the SEC staff's concern that some reporting companies' defect notices do not adequately describe the defect or explain what the proponent must do to correct the defect. Thus, the Bulletin states that, going forward, in order for a reporting company to validly disregard a shareholder proposal on the grounds that the proponent did not sufficiently prove its eligibility based on the one-year ownership requirement, the reporting company's notice of defect must (i) specifically identify the date on which the proposal was submitted, and (ii) explain that, in order for the proposal to be valid, the written statement of ownership must cover the one-year period immediately preceding and including the date on which the proposal was submitted. Finally, the Bulletin expresses the SEC staff's view that the date of a proposal's submission is the date the proposal is postmarked or transmitted electronically.

3. References to websites in shareholder proposals

According to the Bulletin, a recent trend among shareholder proposals has been to include a link to a website that provides more information regarding the proposal, so as to provide the reporting company and other shareholders with more information than can be included in the proposal without violating the 500-word limit imposed by Rule 14a-8. Prior guidance from the SEC staff has stated that a reporting company may exclude a link to a website from its proxy materials only if the information on the website is materially false or misleading, if the information on the website is irrelevant to the subject matter of the proposal or if the inclusion of the link would otherwise violate the SEC's other proxy rules. The Bulletin clarifies the prior website guidance as follows:

  • A website may only serve to supplement the information contained in the proposal and cannot serve as an integral part of the proposal, for purposes of Rule 14a-8(i)(3). If the proposal itself is so vague and indefinite that the reporting company or other shareholders would not reasonably be able to ascertain what action or measures the proposal requires without also reading the website to which the proposal refers, the reporting company may exclude the proposal from its proxy materials.
  • If a proposal refers to a website that is not yet operational, the proponent of the proposal must (i) provide the reporting company with the materials that will be published on the website and (ii) represent that the website will become operational at, or prior to, the time the reporting company files its definitive proxy materials. If the proponent fails to do so, the reporting company may exclude the reference to the website from the proposal.
  • A change in the information contained in the website linked in a proposal may render the website reference subject to exclusion by the reporting company. In such a case, the reporting company must submit a letter explaining its reasons for excluding the website reference in its request that the SEC staff concur with the exclusion. The Bulletin notes that, while normally a reporting company must submit its reasons for exclusion no later than 80 calendar days before it files its definitive proxy materials, changes to the referenced website may constitute "good cause" for the reporting company to file its reasons for excluding the reference after the 80-day deadline.