In New SLB 14F, Corp Fin Withdraws Position Taken in Hain Celestial re Proof of Ownership

By Cydney Posner

Today, Corp Fin issued Staff Legal Bulletin No. 14F, Shareholder Proposals  This SLB covers

• 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 (withdrawing the Staff's position in Hain Celestial);
• 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; and
• Corp Fin's new process for transmitting Rule 14a-8 no-action responses by email.

The types of 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

Background. To be eligible to submit a shareholder proposal, a shareholder must have continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the shareholder meeting for at least one year as of the date the shareholder submits the proposal. The shareholder must also continue to hold the required amount of securities through the date of the meeting and must provide the company with a written statement of intent to do so.

If a shareholder is a registered owner, the company can independently confirm that the shareholder's holdings satisfy Rule 14a-8(b)'s eligibility requirement. If the investor is a beneficial owner, under Rule 14a-8(b)(2)(i), he or she can provide proof of ownership to support eligibility by submitting a written statement from the record holder of the securities, which is usually a broker or bank, verifying that, at the time the proposal was submitted, the shareholder held the required amount of securities continuously for at least one year.

Most large U.S. brokers and banks deposit their customers' securities with Depository Trust Company (DTC), a registered clearing agency, and, as result, they do not appear as the registered owners on the shareholder list. Rather, DTC's nominee, Cede & Co., appears on the shareholder list as the sole registered owner. The participating brokers and banks are "DTC participants," and their securities positions in DTC can be identified from a "securities position listing," which a company can request, as of a specific date, from DTC. However, not all brokers are DTC participants. An "introducing broker," a broker that engages in sales and other face activities with the customer, but does not maintain custody of customer funds and securities, is generally not a DTC participant. A "clearing broker," a broker engaged by the introducing broker to hold custody of client funds and securities, to clear and execute customer trades and to handle other functions, such as issuing confirms and account statements, generally is a DTC participant.

Reversing Hain Celestial. In The Hain Celestial Group, Inc. (October. 1, 2008), 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, but were unable to verify the positions against its own or its transfer agent's records or against DTC's securities position listing.

As a result of two recent court cases relating to proof of ownership under Rule 14a-8, and in light of the SEC's recent Proxy Mechanics Concept Release, the staff has reconsidered its position in Hain Celestial: "Because of the transparency of DTC participants' positions in a company's securities, we will take the view going forward 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. As a result, we will no longer follow Hain Celestial. " The new position is intended to provide greater certainty and is also consistent with staff's approach to Exchange Act Rule 12g5-1. Note that neither DTC nor Cede & Co. should be viewed as the sole "record" holder of the securities, and the staff continues to take the position that shareholders are not required to obtain a proof of ownership letter from DTC or Cede & Co.

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 currently available at . 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.

To obtain no-action relief on the basis that the shareholder's proof of ownership is not from a DTC participant, the company must describe the required proof of ownership in its notice of defect in a manner that is consistent with the guidance contained in this SLB. 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 shareholders can avoid when submitting proof of ownership to companies

Failure to verify the shareholder's beneficial ownership for the entire one-year period. Rule 14a-8(b) requires a shareholder to establish that he or she has "continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the proposal." Many proof of ownership letters fail because they do not verify ownership for the entire one-year period preceding and including the date the proposal is submitted. Common errors include using a date before the date the proposal was submitted (leaving a gap between the date of the verification and the date the proposal is submitted) or using a date after the date the proposal was submitted but covering a period of only one year (failing to verify ownership over the required full one-year period preceding the date of the proposal's submission).

Failure to verify continuous ownership. Many letters also fail to confirm continuous ownership of the securities, for example, when a broker confirms "as of" holdings but omits any reference to continuous ownership for a one-year period.

Prescribed language for verification of ownership. Corp Fin suggests using 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]."

As discussed above, if a shareholder's broker or bank is not a DTC participant, the shareholder may also need to provide a separate written statement from the DTC participant through which the shareholder's securities are held.

The submission of revised proposals

• 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); rather, the staff 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. This guidance represents a revision of the guidance of the staff in Q&A E.2 of SLB No. 14, which led some companies to believe that the company was free to ignore revisions even if submitted before the deadline for receipt of shareholder proposals. The staff's position now is that, in this situation, the company may not ignore a 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, under Rule 14a-8(j), it must treat the revised proposal as a second proposal and submit a notice stating its intention to exclude the revised proposal. 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. As outlined in Rule 14a-8(b), proving ownership includes providing a written statement that the shareholder intends to continue to hold the securities through the date of the shareholder meeting. Under Rule 14a-8(f)(2), if the shareholder fails to hold the required number of securities through the date of the meeting, then the company may exclude all of the shareholder's proposals from its proxy materials for any meeting held in the following two calendar years.

Procedures for withdrawing no-action requests for proposals submitted by multiple proponents

The staff is simplifying its procedures for withdrawal of proposals submitted by multiple proponents (as compared with procedures discussed in previous SLBs). Going forward, the staff 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 to companies and proponents

Instead of transmitting copies of Rule 14a-8 no-action responses by U.S. mail, going forward, the staff intends to use email to deliver Rule 14a-8 no-action responses. To that end, companies and proponents are encouraged to include email contact information in any correspondence to each other and to the SEC. In the absence of that information, the staff will use U.S. mail. Because responses and the related correspondence are now posted on the SEC's website and because companies and proponents must copy each other on correspondence submitted to the SEC, the staff will no longer transmit copies of the related correspondence along with the no-action response.

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