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Chapter 5 Appealing a Staff Decision



§ 5.01 Introduction

§ 5.02 Reconsideration of Staff Decisions

§ 5.03 Practice Pointers

Chapter 5 Appealing a Staff Decision

§ 5.01 Introduction

A company or proponent that believes the SEC staff erred in ruling on a no-action request has three non-exclusive choices: ask the staff to reconsider its decision, ask the full Commission to review the staff's decision or sue in court to obtain a judicial determination of the question. Deciding which one (or more) of these options to pursue requires an aggrieved party to assess the likelihood of a staff reversal and the expense and delay the party is willing to incur in connection with the proceedings.

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§ 5.02 Reconsideration of Staff Decisions

There are no formal procedures for companies or proponents to follow when they request reconsideration by the staff of its no-action decision. Generally, the aggrieved party sends a letter to the Office of Chief Counsel requesting reconsideration and explaining why the staff should overturn its decision. Of course, timing is important because a request for reconsideration is moot if a company has already printed and delivered its proxy materials.

As a matter of practice, the staff entertains requests for reconsideration even though it is not required to do so. The staff rarely overturns its own decisions, which is unsurprising since its initial decision typically was made just a few weeks before the request for reconsideration. The staff is more likely to reverse itself upon reconsideration when there has been a material change in the facts or legal issues since the staff issued its initial decision.

The staff normally responds to reconsideration requests by way of a letter addressed to the party seeking reconsideration. In response to a reconsideration request, the staff can take one of four possible actions. The most common is that the staff denies reconsideration and lets its prior decision stand. Another common response is that the staff grants reconsideration, but reaffirms its prior position. The staff may also reaffirm its position but ask the proponent to make changes to its proposal. Finally, the staff can grant a reconsideration request and reverse itself, which happens infrequently.

EXAMPLE:

Reconsideration where staff did not change decision

In AT&T Corp.,[fn1] the staff allowed the company to exclude a proposal regarding the separation of the positions of Chairman and CEO on the ground that it related to an election of directors because it criticized the Chairman/ CEO, who was standing for reelection at the next annual meeting. The proponent requested reconsideration of the staff's decision because it felt that "the appropriate remedy ought to be revision or deletion of the part or parts that may be impermissible." In its response, the staff stated that "after reviewing the information contained in your letter, we find no basis to reconsider our position."

EXAMPLE:

Reconsideration where staff did not change decision but asked proponent to make changes

In AT&T Corp.,[fn2] the company asked the staff to reconsider its decision requiring the company to include a proposal relating to the company's equal opportunity statement. In its response, the staff stated that "the division grants the reconsideration request, and upon reconsideration, we are unable to concur in your view that AT&T may exclude the entire proposal." However, the staff did allow the company to exclude a statement that it deemed false and misleading.

EXAMPLES:

Reconsideration where staff changed decision

[fn1] 2001 SEC No-Act. LEXIS 460 (Mar. 29, 2001).

[fn2] 2001 SEC No-Act. LEXIS 241 (Feb. 28, 2001).

[fn3] 1999 SEC No-Act. LEXIS 809 (Oct. 12, 1999).

[fn3.1] 2001 SEC No-Act. LEXIS 589 (June 1, 2001).

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§ 5.02[A] Commission Appeal of Staff Decision

In lieu of or in addition to staff reconsideration, an aggrieved party may challenge a staff decision by asking the full Commission itself to rule on the no-action request. The Commission has the discretion to accept a request to review a staff decision. In other words, neither party has an absolute right to appeal a staff decision to the Commission. A party need not ask the staff for reconsideration of its decision before submitting an appeal to the Commission.

There are no formal procedures for companies or proponents to follow when they request review by the full Commission. A letter is normally sent to the Office of Chief Counsel and the Secretary of the Commission requesting an appeal and setting forth the reasons why the Commission should overturn the staff's decision. Copies sometimes are sent to each Commissioner as a courtesy but this is not required or particularly useful.

Under Section 2.02.1(d) of the Commission's Rules of Practice, parties can ask the Commission to review a no-action response from the staff. This provision specifies that the Commission will review no-action responses from the staff if they involve a "matter of substantial importance and where the issues are novel or unique." As a matter of practice, the staff takes nearly every appeal request to the Commission for its consideration.

In most cases, the Commission considers the request in "seriatim" rather than at a formal Commission meeting. "Seriatim" is a process whereby the Chairman of the Commission or the Commissioner who serves as the duty officer on that particular day can render an opinion by himself, but typically a majority of the Commissioners (or their Counselors on their behalf) execute an order attached to a memorandum describing the situation. It is extremely rare that the Commission overrules the staff.

Over the years, the number of appeal requests has outpaced even the explosion in the number of shareholder proposals submitted to companies. In recent years, approximately 15 to 20 full Commission appeal requests were filed per proxy season, although the Commission processed only one appeal during the 2001 proxy season.

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§ 5.02[B] Litigating Against the Company

Even if a company obtains no-action relief, it still faces the risk that a proponent may file a private lawsuit against it in federal district court seeking an order compelling inclusion of the proposal. A proponent who believes that a company has wrongfully failed to include its proposal has an implied private right of action under Rule 14a-8 to challenge the exclusion, even if the staff has issued a no-action letter allowing a company to exclude the proposal.

In Roosevelt v. E. I. Du Pont de Nemours & Co.,[fn4] a federal court first squarely addressed the issue of whether there is an implied right to bring a private action under Rule 14a-8. The SEC staff had allowed the company to omit a proposal that asked the company to phase out its use of chlorofluorocarbons under the "ordinary business" exclusion. The proponent sued to enjoin the company's exclusion of its proposal. The trial court upheld the staff's decision and the proponent appealed. Since the proponent still sought to include her proposal in the company's proxy materials, the court of appeals expedited the appeal. The company claimed that a disappointed proponent had no implied private right under Rule 14a-8 to challenge the company's decision. The court concluded otherwise, stating, "in view of Congress' intent that section 14(a) have real force, relevant judicial precedent, and the agency's view of the private right, we hold that shareholders may seek appropriate declaratory and injunctive relief when management refuses to distribute their proposals." However, the court held that the company was entitled to exclude the proposal under the "ordinary business" exclusion and limited its holding to proponents seeking declaratory or injunctive relief.

[fn4] 958 F.2d 416 (D.C. Cir. 1992).

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§ 5.02[B][1] Staff Guidance is Non-Binding

As several court decisions have emphasized, the staff merely issues non-binding guidance to companies in the form of no-action letters. The staff's procedures are informal, so the staff's no-action determinations — even if affirmed by the Commission — do not purport to adjudicate the merits of a company's arguments for exclusion.

As the SEC has stated, "We do not claim to issue `rulings' or `decisions' on proposals that companies indicate they intend to exclude, and our determinations do not and cannot adjudicate the merits of a company's position with respect to a proposal."[fn5] Accordingly, these determinations are not binding on either the SEC or the parties to the dispute. Only federal courts are empowered to decide whether a company is legally obligated to include a proposal in its proxy statement.In recent years, proponents increasingly have challenged the decisions of the SEC staff to allow companies to exclude their proposals. (So far, no company has sued in court to compel exclusion after receiving an adverse response from the staff in a no-action letter.) The court's decision about whether the proposal should have been excluded may be affected by the denial of no-action relief, depending on the extent to which the court defers to the staff's determination. Although a court does not have to disregard a no-action letter, courts historically have relied on the consistency of the staff's position and the strength of its reasoning in determining whether a proposal deemed excludable by the SEC staff should be omitted. If a particular topic is being litigated, the staff normally will refrain from issuing a no-action letter regarding a proposal that involves that topic.[fn6]

[fn5] Division of Corporation Finance, Staff Legal Bulletin No. 14, Item B11 (July 13, 2001) (available at www.sec.gov/interps/legal/cfslb14.htm).

[fn6] Id., Item A9.

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§ 5.02[B][2] Staff Expressing "No View"

Another reason for the gradual increase in lawsuits regarding proposals is the staff's willingness to issue "no view" responses. In these responses, the staff refuses to take a position because of the close calls involved, often because the governing law is unclear and neither party has submitted a convincing legal opinion regarding the law's application to the disputed issue.

Although a "no view" response may provide some comfort to a company that the SEC will not bring an enforcement action if it excludes the proposal, it is probably more likely that a court would compel inclusion since there is no staff decision for a court to defer to, or consider, in making its decision.

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§ 5.02[B][3] Attorneys' Fees

Proponents can incur substantial expense when pursuing litigation over shareholder proposals. Based on some court decisions, it appears possible that a proponent can be awarded attorneys' fees if it is successful on a claim that a company wrongfully excluded its proposal. However, attorneys' fees cannot be awarded until after the proponent prevails, which can be a considerable period of time.

In Amalgamated Clothing and Textile Workers Union v. Wal-Mart Stores, Inc.,[fn7] the SEC staff allowed the company to exclude a proposal relating to the company's equal employment and affirmative action policies under the ordinary business exclusion. After the proponent sued, the district court for the Southern District of New York overturned the staff's decision and held that the proposal was includable because it related to a significant policy issue. Although the proposal was not widely supported by shareholders, the proponent moved for an award of attorneys' fees. Because a substantial benefit had been conferred on the "easily identifiable" group of shareholders, the court concluded that the costs should be shifted to the shareholders that benefited from the litigation; in practical terms, this meant that the company was responsible for the fees. The court reasoned that the proposal benefited shareholders because it facilitated communication among them and between them and management, and that the presentation of the proposal allowed shareholders to exercise their voting franchise.

[fn7] 821 F. Supp. 877 (S.D.N.Y. 1993), aff'd, 54 F.3d 69 (2d Cir. 1995).

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§ 5.02[C] Lawsuits Against the Commission or Staff

In most cases, a proponent's sole remedy is suing the company for improper exclusion of the proposal. If the SEC's only action is the issuance of a no-action letter by the staff, neither the Commission nor the staff can be sued. However, if the proponent appeals to the Commission and the Commission renders a decision, the Commission can be sued in a federal court of appeals. Section 26 of the Securities Exchange Act of 1934 gives federal courts exclusive jurisdiction over all claims asserted to enforce any liability or duty thereunder.

In Kixmiller v. SEC,[fn8] the U.S. Court of Appeals for the D.C. Circuit held that the Commission could not be sued because the Commission had not ruled on an appeal from the staff's decision. In this case, the proponent sued the SEC after the staff excluded his proposal to the Washington Post Company and the Commission refused to express its own view on whether the proposal was excludable. Relying on Section 25(a) of the Securities Exchange Act of 1934, the court found that its jurisdiction was confined to "orders" issued by the Commission. The court held that the staff had not issued an "order" by issuing a no-action response, nor had the Commission when it declined to review the staff's position. The court distinguished its prior decision in Medical Committee for Human Rights v. SEC,[fn9] in which the Commission had agreed to review the staff's exclusion of a proposal and had affirmed the staff's position. As noted by the Kixmiller court, the Medical Committee court believed that the Commission's affirmation constituted an administrative action subject to judicial review.

[fn8] 492 F.2d 641 (D.C. Cir. 1974).

[fn9] 432 F.2d 659 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972).

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§ 5.03 Practice Pointers

 Company Practice Pointers

  • Submit counter-arguments if proponent appeals. Even if a company believes that a proponent has no basis for its request for reconsideration or appeal, it should consider making a brief counter-argument so that the Commission and its staff continues to appreciate the importance of the matter to the company.

  • Skip request for staff reconsideration. If time is short, a company should immediately ask the Commission to review a staff decision. Since there are no formal procedures for the reconsideration or appeal processes, it is not necessary to request first that the staff reconsider its decision before appealing to the Commission.

    •  Proponent Practice Pointers

  • Send copies of letters to staff. To ensure that the Commission quickly considers a request for appeal, the proponent should copy the staff when it submits its request for appeal to the Secretary of the Commission. This is important because the staff needs time to prepare a briefing memorandum for the Commissioners before they will consider an appeal.

  • Seek attorneys' fees. If a company excludes a proposal and the proponent decides to sue, the proponent should ask the court to require the company to pay for the proponent's attorneys' fees.

  • Skip the appeal to Commission. If the matter is of great importance and time is short, a proponent should consider not appealing to the Commission and going straight to court. Since it is unlikely that the staff or Commission will reverse the staff's initial decision, a proponent has better odds before a judge in getting a reversal. However, the costs are definitely greater in court, and it often is beneficial to show a court that all administrative remedies have been exhausted, so this "fast track" should be used sparingly.

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