Rule 14a-8(b) former Rule 14a-8(a)(1)

(b) Question 2: Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible?

(1) In order to be eligible to submit a proposal, you 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 meeting for at least one year by the date you submit the proposal. You must continue to hold those securities through the date of the meeting.

(2) If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the securities through the date of the meeting of shareholders. However, if like many shareholders you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own. In this case, at the time you submit your proposal, you must prove your eligibility to the company in one of two ways:

(i) The first way is to submit to the company a written statement from the "record" holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year. You must also include your own written statement that you intend to continue to hold the securities through the date of the meeting of shareholders; or

(ii) The second way to prove ownership applies only if you have filed a Schedule 13D (§ 240.13d-101), Schedule 13G (§ 240.13d-102), Form 3 (§ 249.103 of this chapter), Form 4 (§ 249.104 of this chapter) and/or Form 5 (§ 249.105 of this chapter), or amendments to those documents or updated forms, reflecting your ownership of the shares as of or before the date on which the one-year eligibility period begins. If you have filed one of these documents with the SEC, you may demonstrate your eligibility by submitting to the company:

(A) A copy of the schedule and/or form, and any subsequent amendments reporting a change in your ownership level;

(B) Your written statement that you continuously held the required number of shares for the one-year period as of the date of the statement; and

(C) Your written statement that you intend to continue ownership of the shares through the date of the company's annual or special meeting.

§ 7.01 Background of the Exclusion

Rule 14a-8(b) sets eligibility requirements for shareholders seeking to submit proposals. To submit a proposal, a shareholder must:

be a record or beneficial owner of at least 1% or $2,000 of a company's securities;
have held those securities for at least one year; and
continue to hold them through the date of the shareholder meeting.

§ 7.01[A] History of the Exclusion

Before 1976, a person was only required to be a shareholder entitled to vote at a shareholders' meeting to qualify as a proponent. In 1976, the SEC codified existing staff practices relating to beneficial ownership, voting and continuous ownership to establish eligibility requirements. The SEC made clear that proposals could be submitted not only by record owners, but by beneficial owners as well, as long as they could document that interest within ten business days after receiving a request for appropriate documentation from a company. In addition, proponents were allowed to submit proposals only if they had the right to vote on the proposal and were required to maintain ownership of the voting securities from the time they submitted the proposal through the date on which the meeting was held. The SEC decided to not adopt provisions requiring proponents to have held a minimum amount of securities for a minimum period of time.[fn1]

In 1983, the SEC decided to narrow the shareholder eligibility requirements by adding a minimum holding period and ownership requirement. It adopted the standard of "one percent or $1,000, whichever is less, held at least one year prior to the meeting and retained through the day on which the meeting is held."[fn2]

In 1998, the SEC increased the minimum ownership requirement to $2,000 from $1,000 to account for inflation to some extent. Some commentators argued, however, that the increase did not sufficiently adjust for inflation.[fn3] In addition, the SEC changed the practice of how proponents were notified of the need to prove their eligibility. Under Rule 14a-8(f), companies are required to notify proponents of the need to provide documentary support for their eligibility within 14 calendar days of receiving a proposal.[fn4]

[fn1] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

[fn2] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 503 (1982) (proposing release); Exchange Act Release No. 20,091, 28 SEC Dock. 798, 799-800 (1983) (adopting release).

[fn3] The commentators are noted in footnote 72 to Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

[fn4] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 7.01[B] Purpose of the Eligibility Requirements

The purpose of the eligibility requirements is to ensure that only shareholders with a sufficient stake in the company enjoy the privilege of submitting proposals. The exclusion reflects a concern over costs since companies must print and deliver numerous copies of their proxy materials and each proposal adds to the cost of the process. Before incurring these costs, it is appropriate to determine that a proponent has a sufficient interest in the company to warrant the expense.

§ 7.02 Application of the Exclusion

§ 7.02[A] Identifying the Key Issues

Regardless of whether a proponent is a beneficial owner or record holder, the primary issues in applying the exclusion track the three elements set forth in the provision:

Does the proponent meet the size of holdings requirement?
Has the proponent held the shares for a sufficient length of time?
Has the proponent indicated a willingness to hold the shares through the meeting date?

Although there are nuances to each of these questions, their application is relatively straightforward. For the company, the key is ensuring that it provides proper notice to a proponent if these questions are not satisfactorily answered when the proponent submits a proposal to the company. For the proponent, the challenge is providing the correct documentation in a timely manner in response to the company's request.

§ 7.02[B] Only Applies to Section 12 Companies

Only holders of securities of a class registered pursuant to Section 12 of the Securities Exchange Act of 1934 may seek to include a proposal. This is because the proxy rules apply only to those companies. To register under Section 12, a company must have filed a Form 8-A or Form 10 with the SEC. Holders of securities of a class registered under Section 15 do not have the ability to submit proposals under Rule 14a-8.

§ 7.02[C] Securities Must Have Voting Rights

A proponent may only submit a proposal if it holds securities of a class entitled to vote on the proposal at the meeting. This does not mean that the proponent must vote for its own proposal, just that it must have the right to vote. Companies with multiple classes of securities, some of which may have limited voting rights, may receive proposals from holders whose voting rights are restricted. Since these shareholders cannot vote on shareholder proposals, these holders are not entitled to use Rule 14a-8 to submit proposals.

EXAMPLES:

In OshKosh B'Gosh, Inc.,[fn5] the SEC staff permitted exclusion of a proposal that related to implementing and monitoring human rights standards because the holders of its Class A stock, which included the proponents, were entitled to vote only on limited matters, none of which related to the subject of the proposal. The company noted that the voting rights of holders of the Class A stock were limited by the company's certificate of incorporation so that they could only vote for the election of Class A directors and other matters as provided by the bylaws.
In Media General, Inc.,[fn6] the company was permitted to exclude a proposal relating to stockholder approval of certain acquisitions because the holders of its Class A stock, of which the proponent was one, were not entitled to vote at all unless the company's articles of incorporation or law required otherwise. The company pointed out that its articles did not provide otherwise and that the company had successfully excluded the identical proposal in the prior three years.

[fn5] 2001 SEC No-Act. LEXIS 398 (Mar. 19, 2001).

[fn6] 2001 SEC No-Act. LEXIS 208 (Feb. 10, 2001).

§ 7.03 Verifying Eligibility

Rule 14a-8(b) requires proponents to provide information to help a company verify ownership information. Inexperienced proponents may be unfamiliar with these requirements and may thus fail to follow the requisite procedures when a company asks them to verify their eligibility.

§ 7.03[A] Requirements for Proponent's Transmittal Letter

Rule 14a-8(a)(1) requires shareholder proponents to submit with their proposals their:

names;
addresses;
number of voting securities held of record or beneficially;
the dates on which the securities were acquired; and
documentary support for claims of beneficial ownership (this is not required if the proponent is a record holder).

§ 7.03[B] Proponent as Record Holder

If the proponent is the registered owner of the shares (also known as the "record holder"), a company can verify the proponent's eligibility by reviewing its records of ownership, including the shareholder list. If a company requests information about the first four items listed above and subsequently files a no-action request because the proponent fails to timely provide information regarding its form of ownership, the staff will not allow the company to exclude the proposal because the company already should have information about the identities of its record holders in its records.

§ 7.03[C] Proponent as Beneficial Owner

Few shareholders hold stock of record, however; most are beneficial owners or "street name" holders, whose shares are held in the name of an intermediary, usually the proponent's bank or broker. Because the holdings of beneficial owners do not appear in the company's records, the proponent must prove its eligibility to submit a proposal.

§ 7.03[D] Trade Must Be Settled

The SEC staff does not allow shareholders to submit proposals if they are not record holders or beneficial owners. To determine if someone is a "shareholder," the key date is the settlement date of the transaction, not the date on which the person entered into a contract to buy securities.

EXAMPLE:

In McGraw-Hill, Inc.,[fn7] the SEC staff allowed the company to exclude two proposals after the staff noted that the proponent had not been a holder of record as of the deadline to submit a proposal. The proponent had provided a copy of his confirmation slip showing that his trade had settled one week after the deadline.

[fn7] 1980 SEC No-Act. LEXIS 2764 (Jan. 30, 1980).

§ 7.03[E] Request for Proof of Eligibility

Under Rule 14a-8(a)(1), a company may (but is not required to) request documentation from the proponent about its claim that it is the beneficial owner of the required amount of securities for the requisite period and has the intent to hold the securities through the meeting date. These requirements appear in Rule 14a-8(b) and Staff Legal Bulletin 14B (September 15, 2004) specifically states that a company should use language that tracks Rule 14a-8(b): the proponent "must" prove its eligibility by submitting:

the proponent's written statement that he or she intends to continue holding the shares through the date of the company's annual or special meeting; and
either:
- a written statement from the "record" holder of the securities (usually a broker or bank) verifying that, at the time the shareholder proponent submitted the proposal, the shareholder proponent continuously held the securities for at least one year; or
- a copy of a filed Schedule 13D, Schedule 13G, Form 3, Form 4, Form 5, or amendments to those documents or updated forms, reflecting the proponent's ownership of shares as of or before the date on which the one-year eligibility period begins and the proponent's written statement that he or she continuously held the required number of shares for the one-year period as of the date of the statement.

Further, the Staff expressed the view that a company does not meet its obligation to provide appropriate notice of defects in a proponent's proof of ownership where the company refers the shareholder proponent to rule 14a-8(b) but does not either:

address the specific requirements of that rule in the notice; or
attach a copy of rule 14a-8(b) to the notice.

Proponents can document their claim of beneficial ownership in a number of different ways. In practice, quite a few proponents do not initially include documentation when they submit their proposals to companies. However, more experienced proponents tend to include this information and remove any chance that their proposals will be excluded on this "technical" ground.

§ 7.03[F] Company Must Request Proof Within 14 Days

Under Rule 14a-8(b)(1)(i) and (ii), a company must request proof from proponents within 14 calendar days after receiving a proposal. While a company may still request no-action relief if it fails to send a timely notice to the proponent, the staff normally gives the proponent additional time to provide the information.

§ 7.03[G] Deficient Requests for Information

The SEC staff normally will review the company's notice to the proponent to ensure that it properly requested that the proponent cure any deficiencies. The staff's investigation is done on its own initiative, not only when a proponent points out a deficiency.

Specifically, the request must describe how the proponent may document ownership and must make clear that the proponent must respond within 14 calendar days. One way for a company to do this is by providing the proponent with a copy of Rule 14a-8 and referring to the applicable provisions in the rule. However, merely providing a copy of the rule is not sufficient to comply with the notice requirement. If the company's request is deficient in any way, the staff normally provides proponents with seven more calendar days from the date of the staff's response letter to respond fully to the company's corrected request.

As the SEC staff has warned, companies should be careful not to include a particular date by which they need to hear back from proponents.[fn8] Rule 14a-8(f) provides that shareholders must respond within 14 calendar days of actual receipt of the notice. If a company provides a specific date, it is possible that the deadline set by the company will be shorter than the 14-day period required.

EXAMPLES:

In Boise Cascade Corporation,[fn9] Duke Realty Corporation,[fn10] and Sysco Corporation,[fn10.1] the SEC staff noted that the companies failed to inform the proponents what would constitute appropriate documentation. The proponents were given seven calendar days to produce the appropriate documentary support; if they did not do so, the companies would be allowed to exclude the proposal. It is noteworthy that the proponents did not raise the company's failure to inform in all of these situations; rather, the staff raised the issue on its own volition.
In McGraw-Hill Companies,[fn10.2] the company was permitted to exclude the proposal because it had received the proposal after the deadline for submission. Although the proposal was dated November 21, 2001, it was not received by the company until November 28, 2001, five business days after the company's deadline.

[fn8] See Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001), Items C6(b) and G3 (available at www.sec.gov/interps/legal/cfslb14.htm).

[fn9] 2002 SEC No-Act. LEXIS 173 (Feb. 8, 2002).

[fn10] 2002 SEC No-Act. LEXIS 118 (Feb. 7, 2002).

[fn10.1] 2001 SEC No-Act. LEXIS 686 (Aug. 10, 2001).

[fn10.2] 2002 SEC No-Act. LEXIS 95 (Jan. 22, 2002).

§ 7.03[H] Deficiency Unable to Be Overcome

Rule 14a-8(f) allows companies to forego providing notice of a deficiency if the proposal has a deficiency that cannot be corrected. However, under Rule 14a-8(j), a company must still notify the proponent if it intends to exclude the proposal by providing a copy of its request to the SEC staff.

If a company forgets to request documentary support from a proponent, it is not unusual for it to argue that the proponent would be unable to overcome its eligibility deficiencies, even if does not truly believe this claim. This argument will not succeed unless a company can carry its burden of proof, such as submitting written evidence to the staff that a proponent did not have the requisite ownership stake or did not hold it for the requisite one-year period. The company cannot force a proponent to provide this evidence, but rather must obtain it on its own, which can be difficult to do.

The SEC staff has provided the following examples of incurable circumstances:[fn11]

the shareholder indicated that he or she does not own at least $2,000 in market value, or 1%, of the company's securities;
the shareholder indicated that he or she had owned securities entitled to be voted on the proposal for a period of less than one year before submitting the proposal;
the shareholder indicated that he or she did not own securities entitled to be voted on the proposal at the meeting;
the shareholder failed to submit a proposal by the company's properly determined deadline; or
the shareholder, or his or her qualified representative, failed to attend the meeting or present one of the shareholder's proposals that was included in the company's proxy materials during the past two calendar years.

[fn11] Staff Legal Bulletin, supra note 8, Item C6.

§ 7.03[I] Proponent's Failure to Satisfy Request for Information Deadline

Under Rule 14a-8(f), if a company adequately and timely requests proof and the proponent fails to respond in a proper and timely manner, the company can rely on this exclusion. The SEC staff applies the 14-day deadline strictly and there are no exceptions, even for good cause. The proponent must provide all of the information requested within the 14-day period. It cannot provide some of the information by the deadline and promise to provide the remainder at a later date. However, in its discretion, a company can waive the deadline.

If a proponent missed the deadline, it is precluded from submitting a proposal to the company for the upcoming shareholders' meeting. In other words, a proponent cannot submit another proposal if it fails to meet the 14-day deadline, even if the proposal deadline date under Rule 14a-8(e) has not yet passed. This is because proponents are permitted to submit only one proposal for any particular meeting under Rule 14a-8(c).

EXAMPLES:

In Minnesota Mining and Manufacturing Company,[fn13] the company successfully excluded a proposal because the proponent failed to supply, within 14 days of receiving the company's request, documentary support sufficiently evidencing that he satisfied the minimum ownership requirement for the one-year period. Not only did the proponent submit its documentary evidence after the expiration of the 14-day deadline, it also sent the information to the wrong address (despite the fact that the company had provided its address to the proponent in its notice).
In Eastman Kodak Company,[fn14] the SEC staff permitted exclusion of a proposal even though the proponent had timely responded to the response because the proponent had inadvertently omitted information evidencing ownership for a one-year period. After the proponent learned of its mistake in a phone call with the company, it immediately faxed additional information in support of the proponent's eligibility. However, the deadline had already passed.
In AT&T Corp.,[fn15] the SEC staff granted no-action relief with respect to a proposal because the proponent did not meet the 14-day deadline, despite the fact that the Rule 14a-8(e) deadline for submitting proposals had not yet passed. The proponent argued that the 14-day deadline was not meaningful because he could resubmit the same proposal in the time remaining before the proposal deadline date set by Rule 14a-8(e). The staff did not agree with this interpretation.

Recently, the SEC staff has appeared to be willing to apply the 14-day deadline less stringently.

EXAMPLE:

In Citigroup Inc.,[fn16] the company was required to include a proposal over the company's objection that the proponent had not timely responded to its request for documentation. The company argued that its notice of deficiency had been delivered via FedEx on October 12. The proponent phoned the company on October 24 as he returned to his home from a vacation and learned that his building superintendent had signed for the FedEx package in his absence and without his consent. The proponent argued that he obtained and returned the requisite documentation within 14 days of his return to his house.

[12] [Reserved.]

[fn13] 2001 SEC No-Act. LEXIS 301 (Feb. 26, 2001).

[fn14] 2001 SEC No-Act. LEXIS 152 (Feb. 5, 2001).

[fn15] 2000 SEC No-Act. LEXIS 992 (Dec. 11, 2000).

[fn16] 2002 SEC No-Act. LEXIS 87 (Jan. 22, 2002).

§ 7.04 Proof Of Ownership Requirements

Upon request from a company, a beneficial owner must provide documentary support that it has owned the requisite number of shares at least since the date one year prior to the submission date of its proposal.

§ 7.04[A] Documentary Support from a Record Holder

The SEC staff allows the "proof-of-holding" requirement to be satisfied by a statement from the proponent's record holder. The proof of ownership must come from the record holder; if the bank or broker is not itself the record holder, a statement from it does not satisfy the proof of ownership requirement.

EXAMPLE:

In Coca-Cola Company,[fn17] the company successfully excluded a proposal because the proponent submitted evidence from her investment manager regarding her ownership rather than documentary support from her record holder.

[fn17] 2001 SEC No-Act. LEXIS 57 (Jan. 10, 2001).

§ 7.04[B] Broker Documentation as Proof

Documentation from brokers assuming they are record holders typically is in the form of one or more brokerage account statements; these statements must come from more than one brokerage if the proponent has transferred its holdings during the past year. Sometimes, a company will call broker representatives to confirm that the broker statements submitted by the proponent are accurate and genuine.

EXAMPLES:

In Citigroup Inc.,[fn18] the company successfully excluded a proposal after receiving a broker's account statement from the proponent indicating that that he had bought 100 shares of the company's common stock only eight months before the submission date. The company then confirmed in a telephone conversation with a registered representative of the broker that the proponent had not owned the company's stock for the entire one-year period prior to the submission of his proposal.
In International Business Machines Corporation,[fn18.1] the company was allowed to exclude a proposal because the proponent failed to supply proof of ownership within 14 days of receiving the company's request. The proponent argued that it had provided proof that it held sufficient shares for the appropriate period when it stated that "the Funds intend to own shares in IBM through the 2002 annual meeting of shareholders." The proponent then submitted further proof that it still held the requisite shares. The company noted that the proof had been sent by an investment advisor, not the four portfolio funds sponsoring the proposal. The company also noted that it had not received authorization from the portfolio funds for the investment advisor to act on their behalf.

Even though documentation can come from a proponent's record holder, the intent to maintain ownership through the meeting date only can be expressed by the proponent itself. This representation cannot come from the record holder.

[fn18] 2001 SEC No-Act. LEXIS 197 (Feb. 5, 2001).

[fn18.1] 2002 SEC No-Act. LEXIS 11 (Jan. 7, 2002).

§ 7.04[C] Failure by Broker to Provide Documentation

It is not uncommon for a proponent to complain that its record holder will not cooperate with the company's request for documentary support. The SEC staff normally allows companies to exclude proposals even if the broker is the likely cause of insufficient or untimely documentation. In other words, proponents are responsible for the conduct of their own agents.

EXAMPLES:

In Duke Realty Corporation,[fn18.2] the proponent argued that its broker, despite repeated requests in writing, had failed to provide adequate proof of ownership. The proponent contended unsuccessfully that its brokerage statements, which showed beginning- and end-of-period holdings as well as all transactions in the account, sufficiently demonstrated the requisite continuous ownership.
In Bank of America Corporation,[fn19] exclusion was allowed of a proposal even though the broker appeared to be at fault in not providing the correct documentation. After the company requested a broker's statement indicating that the proponent owned at least $2,000 of the company's common stock, the broker sent a letter that did not indicate the number of shares owned by the proponent or the aggregate market value of the shares she owned. The broker's letter merely indicated that the proponent had been a "shareholder since at least January 1993."
In Coca-Cola Company,[fn21] the company successfully excluded a proposal because the proponent failed to provide proof of continuous ownership of a sufficient number of shares of the company's stock. The proponent did not dispute that he had failed to provide such proof, but rather argued that one of his brokers "refused to provide a letter of verification" so that "these admittedly unusual circumstances" should excuse him from complying with the requirement to provide such proof.

[fn18.2] 2002 SEC No-Act. LEXIS 118 (Feb. 7, 2002).

[fn19] 2001 SEC No-Act. LEXIS 220 (Feb. 12, 2001).

[20] [Reserved.]

[fn21] 2001 SEC No-Act. LEXIS 125 (Jan. 19, 2001).

§ 7.04[C][1] Snapshots in Broker Statements

A proponent must ensure that the brokerage account statements submitted to the company show that the proponent's ownership was continuous for the requisite one-year period. It is also important that the account statement run up to the date of the proposal submission. If account statements merely provide a "snapshot" of just one or more points in time rather than continuous ownership, the SEC staff allows a company to exclude the proposal. According to the SEC, "A shareholder must submit an affirmative written statement from the record holder of his or her securities that specifically verifies that the shareholder owned the securities continuously for a period of one year as of the time of submitting the proposal."[fn22]

It can be difficult for proponents to obtain broker letters that verify ownership through the submission date, particularly since proponents often just submit monthly account statements from their brokers. If a company is insistent, the proponent will need to submit a broker's letter dated after the submission date. A recent Staff Legal Bulletin contains the following question and answer on this point:

(3) If a shareholder submits his or her proposal to the company on June 1, does a statement from the record holder verifying that the shareholder owned the securities continuously for one year as of May 30 of the same year demonstrate sufficiently continuous ownership of the securities at the time he or she submitted the proposal?

No. A shareholder must submit proof from the record holder that the shareholder continuously owned the securities for a period of one year as of the time the shareholder submits the proposal.[fn23]

EXAMPLES:

In Sierra Health Services,[fn24] the SEC staff granted no-action relief with respect to a proposal because the proponent had failed to supply documentary support indicating that he had continuously satisfied the minimum ownership requirement. The company noted that the proponent's two brokerage account statements did not show that the proponent had owned $2,000 of its common stock for the requisite one-year period. Rather, one statement merely showed that he had owned $2,000 worth of stock as of one date and the other showed that he had owned $2,000 worth of stock for a six-week period. The company pointed out that this second account statement specifically showed that the proponent did not have $2,000 worth of stock in that account immediately prior to this six-week period.
In International Business Machines Corporation,[fn25] the company was permitted to exclude a proposal because the proponent failed to supply adequate proof of ownership. The company noted that the proponent's letter confirmed only that the proponent continuously held the requisite shares "since prior to November 30, 2000" and that this was not specific enough to show that the requisite shares were held for one year before November 8, 2001, the submission date.

[fn22] Staff Legal Bulletin, supra note 8, Item C(1)(c)(2).

[fn23] Id., Item C(1)(c)(3).

[fn24] 2001 SEC No-Act. LEXIS 394 (Mar. 16, 2001).

[fn25] 2002 SEC No-Act. LEXIS 17 (Jan. 14, 2002).

§ 7.04[D] SEC Filings

If a proponent made a filing with the SEC disclosing its level of ownership, the proponent may prove its eligibility by submitting copies of those filings, together with a written statement that the proponent has held the required shares for the requisite one-year period and intends to hold them through the meeting date. The types of SEC filings that typically provide this disclosure are the 5% ownership filings (i.e., Schedule 13D and Schedule 13G) and Section 16 reports (i.e., Forms 3, 4 and 5).

EXAMPLE:

In quepasa.com, Inc.,[fn26] the SEC staff permitted exclusion of a proposal because the proponent had not shown that it satisfied the minimum ownership requirement for a one-year period. The company pointed out that a Schedule 13D filed with the SEC on September 7, 2001, showed that the proponent did not acquire any of the company's voting shares until December 27, 2000, which was less than 11 months before he filed the proposal.

[fn26.1] 2002 SEC No-Act. LEXIS 43 (Jan. 2, 2002).

§ 7.04[E] Phone Conversations

Rule 14a-8(b)(i) requires that any documentary support must be in writing, which can be sent via postal mail, e-mail, hand delivery or any other method, as long as the evidence is a "writing." It is not sufficient for a proponent to call the company by telephone to explain that it can satisfy the ownership requirements or to request an extension.

EXAMPLE:

In Target Corporation,[fn27] the SEC staff permitted exclusion of a proposal even though the proponent had called before the deadline to acknowledge that she had not yet responded to the request for documentary support. The proponent never provided the documentary support.

[fn27] 2001 SEC No-Act. LEXIS 360 (Mar. 12, 2001).

§ 7.04[F] Failure to Respond Appropriately

The SEC staff allows companies to exclude proposals if proponents clearly do not respond satisfactorily or at all to a request for documentary support. If there is no response, the staff typically notes in its response letter that the proponent did not respond.

EXAMPLES:

Unresponsive replies

In Johnson & Johnson,[fn28] the SEC staff granted no-action relief with respect to a proposal because the proponent's rebuttal did not address the request for documentary evidence. Instead, the proponent merely continued to advocate his position regarding the proposal.
In Coca-Cola Company,[fn29] the SEC staff permitted exclusion of a proposal because the proponent's response did not address the request for documentary evidence. Instead, the proponent merely faxed a copy of her original letter, with a handwritten notation specifying which of her proposals she was submitting for consideration at the annual meeting.

EXAMPLES:

No responses

Wal-Mart Stores, Inc.[fn30]
Lucent Technologies[fn31]

[fn28] 2001 SEC No-Act. LEXIS 53 (Jan. 11, 2001).

[fn29] 2001 SEC No-Act. LEXIS 42 (Jan. 8, 2001).

[fn30] 2001 SEC No-Act. LEXIS 436 (Mar. 27, 2001).

[fn31] 2000 SEC No-Act. LEXIS 923 (Oct. 31, 2000).

§ 7.05 Holding Period

§ 7.05[A] One-Year Period

Under Rule 14a-8(b), the proponent must have held the company's securities for at least one year before the date on which it submits a proposal. The ownership must be continuous over the year.

EXAMPLE:

Stock held less than six months Intermet Corporation[fn32]

[fn32] 2001 SEC No-Act. LEXIS 26 (Jan. 5, 2001).

§ 7.05[B] Tacking of Holdings in Predecessor Company

Perhaps one of the oddest results under Rule 14a-8 is that proponents are not allowed to tack their prior ownership of stock of a company that is merged out of existence. The SEC staff normally allows a company to exclude a proposal if the proponent acquired its shares pursuant to a business combination within one year of submitting the proposal. The staff believes that business combinations that constitute separate sales and purchases of securities under the federal securities laws restart the clock for a proponent's holding period from the effective date of the business combination. The same analysis applies to spin-offs.

As a result, the form of the transaction takes precedence over the substance, so that even a simple holding company reorganization that results in a holder receiving new securities will trigger this interpretation. In these predecessor company situations, companies do not have to provide proponents with an opportunity to cure under Rule 14a-8(f) because the deficiency cannot be remedied.

EXAMPLES:

In Citigroup Inc.,[fn32.1] the company was allowed to exclude a proposal because the proponent had received his shares through a merger that had closed ten months before he submitted the proposal. The proponent argued that the company in which he owned shares had been the surviving company in a merger with the company's subsidiary.
In Exelon Corporation,[fn33] the company was permitted to exclude a proposal because the proponent had received his shares by virtue of a merger that had closed four months earlier. The proponent argued that he had abided by the deadline disclosed in the proxy statement of the predecessor company.
In Applied Power Inc.,[fn34] the SEC staff permitted exclusion of a proposal because the proponent had obtained his shares as the result of a merger. The company argued that the proponent's stock had been acquired as a result of a merger whose closing date was less than one year before the submission date. The proponent responded that the exclusion of the proposal would contravene the spirit of the rule, whose goal is to ensure that shareholders can submit proposals.

[fn32.1] 2002 SEC No-Act. LEXIS 210 (Feb. 28, 2002).

[fn33] 2001 SEC No-Act. LEXIS 382 (Mar. 15, 2001).

[fn34] 1999 SEC No-Act. LEXIS 784 (Oct. 4, 1999).

§ 7.06 Valuation of Securities

§ 7.06[A] $2,000 Requirement

Rule 14a-8(b)(1) requires that a proponent hold at least $2,000 in the company's securities. To determine whether that requirement is satisfied, the SEC staff looks at "whether, on any date within the 60 calendar days before the date the shareholder submits the proposal, the shareholder's investment is valued at $2,000 or greater, based on the average of the bid and ask prices."[fn35]

Depending on where the company's stock is listed, it may be difficult to obtain bid and ask prices. When this is the case, "companies and shareholders should determine the market value by multiplying the number of securities the shareholder held for the one-year period by the highest selling price during the 60 calendar days before the shareholder submitted the proposal. For purposes of this calculation, it is important to note that a security's highest selling price is not necessarily the same as its highest closing price."[fn36]

EXAMPLES:

In Saks Inc.,[fn37] the company successfully excluded a proposal because the proponent did not indicate its share ownership in its original submission and its transfer agent's records indicated that the proponent was the record owner of only 125 shares. The company showed that during the 60 days prior to the proponent's submission, the highest New York Stock Exchange price for the company's common stock was 10-3/16 and at that price, the value of the proponent's 125 shares did not exceed $1,273.
In Allstate Corporation,[fn38] the SEC staff allowed the company to omit a proposal because the market value of the proponent's holdings had never exceeded $2,000 during the previous year, regardless of which calculation method was used the market value using the highest selling price during the 60 calendar days before the proposal was submitted or the proponent's method of the 52-week high for the year.
In Gillette Company,[fn39 ] the SEC staff permitted exclusion of a proposal because the proponent had provided a brokerage statement showing that the proponent owned 50 shares of the company's common stock and that the highest price at which the company's common stock traded on the NYSE during the 60-day period prior to the date of submission was $35.50 per share. As a result, the highest market value of the 50 shares held by the proponent during the relevant 60-day period was $1,775.

[fn35] Staff Legal Bulletin, supra note 8, Item C(1)(a).

[fn36] Id., Item C(1)(a).

[fn37] 2001 SEC No-Act. LEXIS 219 (Feb. 9, 2001).

[fn38] 2001 SEC No-Act. LEXIS 144 (Feb. 5, 2001).

[fn39] 2001 SEC No-Act. LEXIS 106 (Jan. 23, 2001).

§ 7.06[B] No Need for Continuous Ownership of $2,000

Despite Rule 14a-8(b)'s language that a proponent "must have continuously held at least $2,000 in market value," the SEC staff has interpreted this language to allow shareholders to submit proposals so long as they meet the valuation threshold on at least one day during the 60-day qualifying period.[fn40]

[fn40] See infra § 8.07[A].

§ 7.07 Continuous Ownership Until Shareholders' Meeting

§ 7.07[A] Statements about Continuous Ownership

Rule 14a-8(b) requires that a proponent provide a written statement that it intends to continue to own the securities through the date of the shareholders' meeting. This representation must come from the proponent even if the requisite documentary support is provided by the proponent's record holder. The SEC staff does not accept any restricted or qualified statements from a proponent about its intent to hold the securities.

EXAMPLES:

In Exxon Mobil Corporation,[fn41] the company successfully excluded a proposal because the proponent would not unequivocally state that he intended to hold his shares through the meeting date. Rather, the proponent's letter provided, "I hold and will hold if possible until after the Meeting the required $2000 in stock."
In AmVesters Financial Corporation,[fn42] the company successfully excluded a proposal because the proponent would not unequivocally state that he intended to hold his shares through the meeting date. The proponent only stated that, "I plan to keep my stock until it reaches my selling point." This followed an earlier statement that he would keep the shares "if possible."

[fn41] 2001 SEC No-Act. LEXIS 103 (Jan. 23, 2001).

[fn42] 1996 SEC No-Act. LEXIS 14 (Jan. 3, 1996).

§ 7.07[B] Failure to Hold Securities until Meeting Date

Under Rule 14a-8(f)(2), if the company includes a proposal but the proponent disposes of its securities before the meeting date, the company may exclude any proposal submitted by the proponent for any meeting to be held during the following two calendar years. The proponent must demonstrate uninterrupted ownership of the requisite amount of securities from the date of submission of the proposal through the date of the meeting.

§ 7.08 Practice Pointers

Company Practice Pointers

Don't assume that a deficiency can't be cured. Companies should always send a request for documentary support to a proponent, even if it believes that the proponent has an incurable deficiency and cannot meet the eligibility requirements. For example, a company may believe that a proponent does not own sufficient shares after reviewing its own records, but it is possible that the proponent owns additional shares in "street name" so that it has sufficient aggregate holdings to meet the eligibility requirements.

Analysis can be limited. Unless a unique issue is presented, a company probably can draft its own request without the assistance of outside counsel, even if it does not have extensive experience with dealing with the SEC staff. In these requests to the staff, there usually is no need to cite no-action letter precedent or provide legal opinions to obtain no-action relief.

Take a hard line on broker documentation. It can be difficult for proponents to obtain broker letters that verify ownership through the submission date, particularly since proponents often just submit monthly account statements from their brokers. If a company is insistent, the proponent probably will have to get a broker's letter after its initial submission to the company and the broker may fail to assist its client in time to make the 14-day deadline.

Proponent Practice Pointers

Include documentary support with initial proposal submission. If a proponent provides adequate documentary support when it submits its proposal, it does not have to worry about meeting the 14-day deadline and risking omission on this basis.

Obtain documentary support from record holder before submitting the proposal. A proponent should obtain documentary support from its record holder even before it submits a proposal to a company. This time-saving technique can help avoid exclusion since brokers, particularly those that are not full-service organizations, can take more than 14 days to provide the necessary information. This approach is endorsed by the SEC staff.[fn43]

Act promptly when you receive request for documentary support. Procrastination in this area is particularly harmful since the SEC staff strictly applies the deadline. Because obtaining help from record holders can easily take the entire 14-day period, even prompt action may not be enough to meet the deadline. Proponents should respond in a manner that allows it to demonstrate that it responded to a notice.

[fn43] Staff Legal Bulletin, supra note 8, Item G2.

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