Staff Issues SLB 14C

By: Cydney Posner

The SEC staff has recently posted Staff Legal Bulletin 14C, which provides further staff interpretations regarding shareholder proposals under Rule 14a-8.  In some instances, the interpretation includes charts with specific references to actual decisions.

The bulletin provides the following guidance:

• Addresses for submitting no-action requests. Rule 14a-8 no-action requests and shareholder responses to those requests should be sent to:

  U.S. Securities and Exchange Commission
  Division of Corporation Finance
  Office of Chief Counsel
  100 F Street, N.E.
  Washington, D.C. 20549

  Requests concerning registered investment companies and business development companies should be sent to the Division of Investment Management.

• Application of rule 14a-8(i)(6) to proposals calling for director independence. Rule 14a-8(i)(6) permits a company to exclude a proposal on the basis that the company lacks the power or authority to implement it. The staff's willingness to allow exclusion on this basis turns on whether the proposal requires continued independence at all times. The staff would not agree with a company's argument that it is unable to ensure the election of independent directors; however, it would agree with the argument that a board of directors lacks the power to ensure that its chairman or any other director will retain his or her independence at all times. As a result, when a proposal is drafted in a manner that would require a director to maintain his or her independence at all times, the proposal may be excluded because it does not provide the board with an opportunity or mechanism to cure a violation of the standard requested in the proposal. In contrast, if the proposal does not require a director to maintain independence at all times or contains a cure provision, any loss of independence would not result in an automatic violation of the standard in the proposal and, therefore, the staff would not permit the company to exclude the proposal under rule 14a-8(i)(6). The staff believes that this position is consistent with Section 10A(m) and rule 10A-3, which not only contemplate that an audit committee member may lose independence, but require that mechanisms exist to allow an issuer to cure such a loss.

• Application of rule 14a-8(i)(7) to proposals referencing environmental or public health issues. Rule 14a-8(i)(7) permits a company to exclude a proposal relating to the company's ordinary business operations. However, the fact that a proposal relates to ordinary business matters is not necessarily determinative. If the proposal also focuses on "sufficiently significant social policy issues," it may transcend day-to-day business matters and therefore not be excludable. Many proposals of this type are made each year. In determining whether the focus of these proposals is a significant social policy issue, the staff considers both the proposal and the supporting statement as a whole. To the extent that these focus on the company's "engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations that may adversely affect the environment or the public's health," the staff permits exclusion on the basis that it relates to an evaluation of risk. To the extent that a proposal and supporting statement focus on the company's "minimizing or eliminating operations that may adversely affect the environment or the public's health," the staff does not permit exclusion.
• Application of rule 14a-8(l). Rule 14a-8(l) is a self-executing provision of the rule that permits a company to exclude from its proxy statement a shareholder proponent's name, address and number of voting securities held, so long as the company includes a statement that it will provide this information to shareholders promptly upon receipt of an oral or written request. The company need not submit a no-action request to exclude this information.
• Company fax number for transmitting shareholder proposals. If a shareholder proponent transmits a proposal or a response to a notice of defects by fax, the shareholder should ensure that he or she has obtained the correct fax number. If the shareholder obtains the company's fax number from a third-party website and the number is wrong, the shareholder's proposal may be subject to exclusion on the basis that the proposal or response was not submitted in a timely manner. Shareholders should use the fax number for submitting proposals that the company disclosed in its most recent proxy statement. In the event that the company does not disclose in its proxy statement a fax number for submitting proposals, shareholders should contact the company to obtain the correct fax number.
• Written materials that should accompany a no-action request. To avoid processing delays, a company should provide to the SEC all relevant correspondence when submitting a no-action request, including:
  • a copy of the shareholder proposal;
  • copies of any cover letters that the shareholder proponents provided with the proposal;
  • any addresses and fax numbers of the shareholder proponents; and
  • any other correspondence the company has exchanged with the shareholder proponents relating to the proposal, such as any notices of defects and any shareholder responses to the notices.
• Withdrawal of a proposal submitted by multiple shareholder proponents. When a proposal is submitted by multiple shareholder proponents and the proposal is withdrawn, the company should include with its withdrawal letter documentation demonstrating that each shareholder proponent has agreed to withdraw the proposal. If each shareholder proponent has designated a lead individual to act on its behalf and the company can show that the individual is so authorized, the company need only provide a letter from that lead individual indicating that he or she is withdrawing the proposal on behalf of all of the shareholder proponents.
• Fax of no-action responses. As a courtesy, the staff may, as a courtesy, transmit its responses by fax if, during the highest volume periods of the rule 14a-8 season, it is unable to mail its response promptly and the company requests fax transmission and provides fax numbers for both the company and the shareholder proponent. The staff will not transmit the response to the company by fax unless it also has a fax number for the shareholder proponent. The staff reminds companies and shareholder proponents that they often may find the staff's responses in the Public Reference Room or on a commercial database prior to receipt of that response by the company or shareholder.