New SEC Staff Legal Bulletin No. 14G on Shareholder Proposals

Skadden, Arps, Slate, Meagher & Flom LLP

Brian V. Breheny Marc S. Gerber Richard J. Grossman Andrew J. Brady Hagen J. Ganem

Earlier this week, the staff of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance released Staff Legal Bulletin No. 14G (SLB 14G) concerning shareholder proposals submitted under Exchange Act Rule 14a-8. SLB 14G clarifies SEC staff positions on three topics arising from last proxy season:

  • who can provide proof of beneficial ownership verifying that a person is eligible to submit a proposal;
  • what companies must include in their deficiency notices concerning proponents’ proof of ownership; and
  • what limitations apply to website references in proposals and supporting statements.

A brief summary of the staff’s positions is set forth below.

To submit a proposal under Rule 14a-8, shareholders are required to prove that they satisfy minimum ownership requirements. A shareholder whose name does not appear in the company’s records or in beneficial ownership forms filed with the SEC must provide a letter from the record holder verifying the shareholder’s ownership. In these instances, the shareholder will likely hold its securities in “book-entry” form through a broker, bank or other securities intermediary that will have deposited the securities with the Depository Trust Company (DTC) to facilitate prompt clearance and settlement. The securities intermediaries that deposit securities with the DTC, known as DTC participants, are considered the record holders of those securities. A list of DTC participants is available here.

Given that the DTC participants are considered the record holders, the staff indicated last year in Staff Legal Bulletin No. 14F that shareholders who are required to submit proof of ownership letters from record holders must provide a letter from their DTC participant. Because some brokers and banks have separate but affiliated entities that serve as their DTC participants, some shareholders submitted letters from their brokers or banks that were not DTC participant record holders. The failure of those shareholders to provide a proof of ownership letter from the actual record holder arguably provided a basis for excluding their proposals. However, last proxy season the staff disagreed, noting in one no-action letter that “the proof of ownership statement was provided by a broker that provides proof of ownership statements on behalf of its affiliated DTC participant.” SLB 14G reiterates this position, indicating that a proof of ownership letter from a DTC participant or an affiliate of a DTC participant satisfies this requirement.

Deficiency notices. When submitting proof of ownership, many shareholders fail to account for the entire required one-year holding period prior to and including the date they submit a proposal. Failure to provide adequate proof of ownership is grounds for omitting a shareholder proposal from a company’s proxy materials. However, in order to omit the proposal on those grounds, a company is first required to notify a shareholder within 14 days of receiving a proposal that the proponent’s proof of ownership is deficient.

In SLB 14G, the staff expresses its concern that such deficiency notices have not been “adequately describing the defects or explaining what a proponent must do to remedy defects in proof of ownership letters.” As a result, the staff indicates that it will not concur in the exclusion of a proposal based on the proponent’s failure to provide adequate proof of ownership unless a 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.”

Website references. References to websites in shareholder proposals remain permissible, but such references may be omitted for various reasons. SLB 14G clarifies two positions regarding permissible website references contained in proposals or supporting statements:

  • Shareholders are permitted to reference a website that is not operational at the time it submits a proposal. However, in order to avoid exclusion of such reference, the shareholder must satisfy two additional requirements at the time of its submission. In particular, the shareholder must provide the following to the company:

    • the content that it intends for publication on the website (in order for the company and the staff to determine whether the website reference can be excluded); and
    • a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.
  • If the content of a website changes after a shareholder proposal is submitted, a company may seek to exclude such reference and, upon request, the staff may find “good cause” to waive the requirement that a company must submit its no-action request 80 calendar days before it files its definitive proxy materials.

SLB 14G also includes information about the following staff positions regarding website references:

  • Each reference to a website counts as one word for purposes of the 500-word limitation applicable to shareholder proposals;
  • Companies can exclude a website reference if that website includes information that is materially false or misleading, irrelevant or otherwise contravenes the proxy rules; and
  • Websites cannot be a substitute for information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires. Rather, such necessary information must be included in the proposal or supporting statement.

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