New SEC Staff Legal Bulletin Regarding Shareholder Proposals

By: Cydney Posner

The SEC Staff has just issued a new interpretive bulletin, SLB 14B, intended to clarify and update SLB No. 14 and to provide additional guidance on rule 14a-8. The bulletin addresses:

• the application of rule 14a-8(i)(3);
• notices of defects to a shareholder proponent under rule 14a-8(f);
• the application of the 80-day requirement in rule 14a-8(j);
• opinions of counsel under rule 14a-8(j)(2)(iii); and
• processing and public availability of submitted materials and responses.

1. Rule 14a-8(i)(3)

Rule 14a-8(i)(3), permits exclusion of a shareholder proposal or statement (or portion thereof) that is materially false or misleading under Rule 14a-9. Rule 14a-8(i)(3), unlike the other bases for exclusion under rule 14a-8, refers explicitly to the supporting statement as well as the proposal as a whole and has been used to exclude portions of the supporting statement, even if the balance of the proposal may not be excluded. Companies have apparently been using this rule well beyond the SEC's original intent by asserting deficiencies in virtually every line of a proposal's supporting statement as a means to justify exclusion of the proposal in its entirety. (During the last proxy season, nearly half the no-action requests asserted that the proposal or supporting statement was wholly or partially excludable under this rule.) The Staff views this type of heavy-editing approach as inappropriate, given that the rules expressly state that the company is not responsible for the contents of shareholder proposals. As a result, the Staff believes that it would not be appropriate for companies to rely on rule 14a-8(i)(3) in the following circumstances:

• "the company objects to factual assertions because they are not supported;
• the company objects to factual assertions that, while not materially false or misleading, may be disputed or countered;
• the company objects to factual assertions because those assertions may be interpreted by shareholders in a manner that is unfavorable to the company, its directors, or its officers; and/or
• the company objects to statements because they represent the opinion of the shareholder proponent or a referenced source, but the statements are not identified specifically as such."

Specifically, reliance on rule 14a-8(i)(3) to exclude or modify a statement may be appropriate where:

• "statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation;
• the company demonstrates objectively that a factual statement is materially false or misleading;
• the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders 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 - this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result; and
• substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote."

The Staff emphasizes that the company may seek to exclude a proposal or a statement that is contrary to any of the proxy rules, including rule 14a-9, but that the company has the burden to demonstrate objectively that the statement or proposal is materially false or misleading. The Staff also cautions that the discussion of rule 14a-9 and its interaction with the operation of rule 14a-8 is applicable only to rule 14a-8 no-action requests, not to proxy statements or other contexts.

2. Notices of Defects

In drafting letters to notify shareholder proponents of eligibility or procedural defects, companies should:

• "provide adequate detail about what the shareholder proponent must do to remedy the eligibility or procedural defect(s);
• although not required, consider including a copy of rule 14a-8 with the notice of defect(s);
• explicitly state that the shareholder proponent must transmit his or her response to the company's notice within 14 calendar days of receiving the notice of defect(s); and
• send the notification by a means that allows the company to determine when the shareholder proponent received the letter."

If the company cannot determine whether the shareholder satisfies the rule 14a-8 minimum ownership requirements, the company should request, using language that tracks rule 14a-8(b), that the shareholder provide proof of ownership that satisfies the requirements of rule 14a-8 by submitting:

• "the shareholder proponent's written statement that he or she intends to continue holding the shares through the date of the company's annual or special meeting; and
• either:
  • a written statement from the "record" holder of the securities (usually a broker or bank) verifying that, at the time the shareholder proponent submitted the proposal, the shareholder proponent continuously held the securities for at least one year; or
  • a copy of a filed Schedule 13D, Schedule 13G, Form 3, Form 4, Form 5, or amendments to those documents or updated forms, reflecting the shareholder proponent's ownership of shares as of or before the date on which the one-year eligibility period begins and the shareholder proponent's written statement that he or she continuously held the required number of shares for the one-year period as of the date of the statement."

Companies may not merely refer the shareholder proponent to rule 14a-8(b), but must also either address the specific requirements of that rule in the notice or attach a copy of rule 14a-8(b) to the notice.

3. Request for Waiver of Rule 14a-8(j)'s 80-Day Requirement

Rule 14a-8(j) provides that, if the company intends to exclude a proposal from its proxy materials, it must file its reasons with the SEC no later than 80 calendar days before it files its definitive proxy statement and simultaneously provide the shareholder proponent with a copy of its submission. The Staff may waive the 80-day requirement if the company demonstrates "good cause" for missing the deadline, most often because the proposal was not submitted to the company until after the 80-day deadline had passed.

Where the Staff does not agree to waive the requirement, the Staff generally will still nevertheless consider the bases upon which the company intends to exclude a proposal and advise the company and the shareholder proponent of its views regarding the application of rule 14a-8 to the proposal. In that circumstance, the Staff will include its view that the company has not followed the appropriate procedure under rule 14a-8. The company would not, however, be required to wait to file its proxy materials until 80 days after its rule 14a-8 submission, although the Staff cautions that the filing of definitive proxy materials before the expiration of the 80-day time period would not be in accordance with the rule's procedural requirements, notwithstanding the Staff's substantive response to the submission. The Staff also emphasized that, practice aside, it still reserves the right to decline to respond to rule 14a-8 no-action requests that are not submitted on a timely basis.

4. Supporting Opinions of Counsel

Rules 14a-8(i)(1) and (2) permit the company to exclude a proposal if it demonstrates that the proposal is improper under state law or, if implemented, would cause the company to violate state, federal or foreign law. Rule 14a-8(i)(6) permits the company to exclude a proposal if it demonstrates that it lacks the power or authority to implement the proposal.

Under rule 14a-8(j)(2)(iii), the company must provide the SEC with a supporting opinion of counsel when the reasons asserted for exclusion are based on matters of state or foreign law. In submitting the opinion, the Staff advises that the company and its counsel should consider whether the law underlying the opinion of counsel is unsettled or unresolved and, whenever possible, the opinion should cite relevant legislative authority or judicial precedents.

In analyzing an opinion of counsel that is submitted under rule 14a-8(j)(2)(iii), the Staff considers whether counsel is licensed to practice law in the jurisdiction where the law is at issue and the extent to which the opinion makes assumptions about the operation of the proposal that are not called for by the language of the proposal. Shareholder proponents may also submit an opinion of counsel supporting their position.

If the company asserts that a proposal should be excluded under rule 14a-8(i)(2) or rule 14a-8(i)(6) because the proposal would require the company to breach existing contractual obligations and, therefore, require the company to violate applicable law or exceed the company's power or authority, the company should provide a copy of the relevant contract, cite specific provisions of the contract that would be violated and explain how implementation of the proposal would cause the company to breach its obligations under that contract. The submission also should provide a supporting opinion of counsel or indicate that the arguments advanced under state or foreign law constitute the opinion of counsel.

5. Processing No-Action Requests

Under SEC rules, written communications under rule 14a-8(j) must be made available to any person upon request for inspection or copying, including written communications voluntarily submitted by shareholder-proponents or other persons, and all materials required to be filed with the SEC pursuant to rule 14a-8(j) are considered public records. As a result, no-action requests under rule 14a-8 are immediately forwarded to the SEC's Public Reference Room.

Once the Staff has completed review of a no-action request, it sends the response by mail to both parties and forwards a copy, along with the relevant correspondence, to the Public Reference Room. During high-volume time periods, the mailing may be delayed. The Staff cautions that commercial databases that check the Public Reference Room routinely for new no-action responses often publish the responses before the company or the shareholder proponent receive it in the mail.

As a courtesy, the Staff will fax copies of its responses to both parties when it has a fax number for both; when there is a fax number only for the company, it will fax to the company only if the company agrees to forward the response promptly to the shareholder proponent. To facilitate prompt delivery, companies should provide as much contact information as possible regarding the shareholder proponent.

The Staff requests that, when submitting a no-action request, companies provide all relevant correspondence, including the shareholder proposal, any cover letter that the shareholder proponent provided with the proposal, the shareholder's address and fax number and any other correspondence the company has exchanged with the shareholder relating to the proposal.

Although the Staff responds to telephone questions regarding the status of requests, it will not discuss the substantive nature of any specific no-action request with either the company or the shareholder proponent and requests that any additional information be submitted in writing.

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