By Cydney Posner
The SEC has issued yet another staff legal bulletin, SLB 14G, regarding shareholder proposals under Rule 14a-8. This SLB addresses issues regarding proof of ownership and the use of website references in proposals and supporting statements.
Parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying eligibility of a beneficial owner to submit a proposal
Sufficiency of proof of ownership letters provided by affiliates of DTC participants. Here is another chapter in an ongoing saga about proof of ownership. If a shareholder submitting a proposal is a beneficial owner of the securities (not a record owner), whose securities are held in book-entry form through a securities intermediary, Rule 14a-8(b)(2)(i) provides that documentation proving ownership of the requisite amount of securities for the requisite duration can be in the form of a "written statement from the ‘record' holder of your securities (usually a broker or bank)…." In SLB No. 14F, Corp Fin stated that only securities intermediaries that are participants in DTC should be viewed as "record" holders of securities deposited at DTC and, as a result, to satisfy the proof of ownership requirements, a beneficial owner must obtain a proof of ownership letter from the DTC participant through which its securities are held. Corp Fin is now expanding that advice to allow proof of ownership letters from entities that are not themselves DTC participants, but are affiliates of DTC participants. By virtue of the affiliate relationship, Corp Fin believes "that a securities intermediary holding shares through its affiliated DTC participant should be in a position to verify its customers' ownership of securities."
Adequacy of proof of ownership letters from securities intermediaries that are not brokers or banks. Rule 14a-8(b)(2)(i) acknowledges that the record holder is "usually," but not always, a broker or bank. A shareholder who holds securities through a securities intermediary that is not a broker or bank can satisfy the documentation requirement of Rule 14a-8 by submitting a proof of ownership letter from that securities intermediary. However, if the securities intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant or an affiliate of a DTC participant that can verify the holdings of the securities intermediary.
Notice to proponents of failure to provide proof of ownership for the required one-year period
A common error in proof of ownership letters is the failure to verify beneficial ownership for the entire one-year period as required by Rule 14a-8(b)(1). Sometimes these letters speak as of a date before or after the proposal was submitted, thereby leaving a gap in time. In that event, a company may be able to exclude the proposal, but only if it notifies the proponent of the defect with adequate detail and the proponent fails to correct it. Corp Fin is "concerned that companies' notices of defect are not adequately describing the defects or explaining what a proponent must do to remedy defects in proof of ownership letters. For example, some companies' notices of defect make no mention of the gap in the period of ownership covered by the proponent's proof of ownership letter or other specific deficiencies that the company has identified." Corp Fin views these notices as inadequate.
Going forward, Corp Fin will not concur in the exclusion of a proposal on this basis "unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect. [Corp Fin views] the proposal's date of submission as the date the proposal is postmarked or transmitted electronically. Identifying in the notice of defect the specific date on which the proposal was submitted will help a proponent better understand how to remedy the defects described above and will be particularly helpful in those instances in which it may be difficult for a proponent to determine the date of submission, such as when the proposal is not postmarked on the same day it is placed in the mail. In addition, companies should include copies of the postmark or evidence of electronic transmission with their no-action requests."
Use of website addresses in proposals and supporting statements
Corp Fin has previously taken the position that a reference by a proponent to a website address in a proposal or supporting statement does not violate the 500-word limitation in Rule 14a-8(d). Unfair as it seems, Corp Fin continues to be of this view. As a result, Corp Fin "will continue to count a website address as one word for purposes of Rule 14a-8(d). To the extent that the company seeks the exclusion of a website reference in a proposal, but not the proposal itself, [Corp Fin] will continue to follow the guidance stated in SLB No. 14, which provides that references to website addresses in proposals or supporting statements could be subject to exclusion under Rule 14a-8(i)(3) if the information contained on the website is materially false or misleading, irrelevant to the subject matter of the proposal or otherwise in contravention of the proxy rules, including Rule 14a-9."
In addition, Corp Fin reminds shareholders who include website addresses in their proposals to comply with all applicable rules regarding proxy solicitations because a website that provides more information about a shareholder proposal may constitute a proxy solicitation under the proxy rules.
Corp Fin is also providing some additional guidance on the appropriate use of website addresses in proposals and supporting statements that could be helpful (theoretically, at least) in seeking exclusions:
References to website addresses in a proposal or supporting statement and Rule 14a-8(i)(3). References to websites in a proposal or supporting statement may raise concerns under Rule 14a-8(i)(3), relating to violations of the proxy rules. For example, a proposal may be excluded under Rule 14a-8(i)(3) as "vague and indefinite… if neither the shareholders 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." Although Corp Fin generally considers only the information contained in the proposal and supporting statement in determining whether, based on that information, shareholders and the company can determine what actions the proposal seeks, if the information in a website reference is "necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, then [Corp Fin believes] the proposal would raise concerns under Rule 14a-9 and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite." By contrast, if the information on the website only supplements the information contained in the proposal and in the supporting statement, and shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the website information, then the proposal would not be subject to exclusion under Rule 14a-8(i)(3).
Providing the company with the materials that will be published on the referenced website. A reference to a non-operational website in a proposal or supporting statement could be excluded under Rule 14a-8(i)(3) as irrelevant to the subject matter of a proposal. If, however, the proponent wants to wait to activate the website until it becomes clear that the proposal will be included in the company's proxy materials, the proposal will not be excluded as irrelevant so long as the proponent, at the time the proposal is submitted, provides the company with the materials that are intended for publication on the website along with a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials. That practice will allow the company (and the staff) to evaluate whether there is a basis to exclude the website reference.
Potential issues that may arise if the content of a referenced website changes after the proposal is submitted. If a website changes after submission of a proposal and the company then wants to seek exclusion as a result of the change, the company must submit a letter presenting its reasons. Although, under Rule 14a-8(j), the company is required to submit its reasons for exclusion no later than 80 calendar days before filing its definitive proxy materials, Corp Fin "may concur that the changes to the referenced website constitute ‘good cause'" and agree to waive the 80-day requirement.