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

Question 4: How long can my proposal be?

The proposal, including any accompanying supporting statement, may not exceed 500 words.

§ 10.01 Background of the Exclusion

§ 10.01[A] History of the Exclusion

When it adopted the shareholder proposal rule in 1942, the SEC did not limit the length of proposals, but did limit supporting statements to no more than 100 words.[fn1]

In 1972, the SEC expanded the limitation on supporting statements to 200 words. As part of this revision, the SEC began to treat preambles and "whereas" clauses as part of the supporting statement and thus subject to the 200-word limit. Before this change, the staff viewed these clauses as part of the proposal since they were arguments in support of them. In changing its position, the SEC recognized that the entire supporting statement consisted mainly of arguments in support of a proposal.[fn2]

In 1976, the SEC began to limit the length of proposals to 300 words and maintain the cap of 200 words for supporting statements.[fn3]

In 1983, the SEC adopted the current limit of 500 words, which applies to the proposal and the supporting statement taken as a whole. The limit applies to every word in the proposal and supporting statement, including words such as "whereas" and "resolved."[fn4]

In 1998, the SEC changed the practice of notifying proponents that their proposals and supporting statements exceed the 500-word limit. Under Rule 14a-8(f), the company is required to provide a proponent with notice that a proposal exceeds the limit and allow the proponent to remedy the problem.[fn5] The modified rule is consistent with past staff practice of allowing proponents to shorten their submissions.

[fn1] Exchange Act Release No. 3347, 1942 SEC LEXIS 44 (Dec. 18, 1942).

[fn2] Exchange Act Release No. 9432, 1971 SEC LEXIS 252 (Dec. 22, 1971) (proposing release); Exchange Act Release No. 9782, 1972 SEC LEXIS 155 (Sept. 22, 1972) (adopting release).

[fn3] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1032 (1976) (proposing release); Exchange Act Release No. 12,999, 10 SEC Dock. 1006, 1009 (1976) (adopting release).

[fn4] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 505 (1982) (proposing release); Exchange Act Release No. 20,091, 28 SEC Dock. 798, 801 (1983) (adopting release).

[fn5] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 10.01[B] Purpose of the Exclusion

The purpose of the 500-word limit is to allow companies to limit the cost of including proposals. If there were no limit, a proponent theoretically could submit a 500-page proposal that would be quite expensive to print and mail as part of a company's proxy materials. In addition, the word limit helps to keep proposals and supporting statements from obscuring the other disclosure in the company's proxy statement. According to the SEC, long proposals "constitute an unreasonable exercise of the right to submit proposals at the expense of other shareholders and tend to obscure other material matters in the proxy statements of issuers, thereby reducing the effectiveness of such documents."[fn6]

[fn6] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

§ 10.02 Application of the Exclusion

§ 10.02[A] Identifying the Key Issues

In most cases, there is no dispute over what constitutes a "word" and the application of the exclusion is straightforward. If a proposal and its supporting statement consist of more than 500 words and the company provides adequate notice and an opportunity to cure, the proponent must reduce the number of words or the staff will allow the proposal to be excluded. If a company does not provide adequate notice and an opportunity to cure, the staff will give the proponent additional time to reduce the length of the proposal.

If there is a dispute over length, even if a company provides adequate notice, the SEC staff will review the arguments from both sides and perform its own word count. In the event that the staff sides with the company, it may or may not allow the proponent an additional opportunity to cure.

The staff does not police this limitation on its own. As a result, it will not allow a company to exclude a proposal on this basis if a company does not raise it.

§ 10.02[B] Staff Performs Own Count Manually

When the SEC staff is required to conduct its own count in a disputed situation, it performs the count manually. It does not rely on the word count from a word processing software program or the word count made by the company or proponent.

§ 10.02[C] Waiver of Word Limit

Companies are free to allow proponents to include proposals and related supporting statements containing more than 500 words. In some cases, companies may want to allow proponents to include more words if a proposal or supporting statement appears to ramble and is incoherent, since it may dissuade shareholders to vote for the proposal. On the other hand, some companies do not want to include rambling disclosure in their proxy statements, even if they are not responsible for it.

§ 10.02[D] Need for More Words

Occasionally, a proponent may believe that it needs to use more than 500 words to present its proposal adequately. Such a belief stems from concern that the proposal, if kept to 500 words, might omit material information and thus violate Rule 14a-9's prohibition on false and misleading statements.

Although the need for more disclosure has not persuaded the SEC staff to waive the 500-word requirement, it may be persuasive with companies, which may decide to waive voluntarily the word limit. Companies may be willing to do so to ensure that its proxy statement is not misleading, even though the company is not liable for the proponent's disclosure.[fn7]

[fn7] For more information about the liability of companies for proposal disclosure, see supra Chapter 6.

§ 10.03 Notification of Deficiency and Opportunity to Cure

§ 10.03[A] Notification Requirement

Under Rule 14a-8(f)(1), if a proposal and supporting statement exceed the word limit, the company must give the proponent written notice and 14 calendar days to reduce the length of the proposal.

§ 10.03[B] Contents of Notice

In most cases, a company sends a one-page letter to the proponent that:

informs her of the deficiency;

describes how the word count was calculated by the company; and

explains that the proponent has an opportunity to cure, including the 14 day deadline.

If the notice fails to include any of these three items, the SEC staff may not allow the proposal to be excluded. It is important that a company explain how it calculated that a proposal and supporting statement exceeds 500 words in order to provide the proponent with a fair opportunity to cure a deficient proposal.

EXAMPLES:

Lack of notice

In Excal Enterprises, Inc.,[fn8] the SEC staff denied no-action relief because the company had not requested that the proponent reduce the number of words in the proposal to comply with the word limit. The company argued that the excess verbiage was not susceptible of cure.
In Paccar Inc.,[fn9] the company was required to include a proposal because the company had not requested that the proponent cure the word limitation overage.

EXAMPLE:

Methodology not explained

In TF Financial Corporation,[fn10] the proponent successfully defended against a no-action challenge because the company failed to provide any evidence that the proposal exceeded 500 words. The proponent noted that the company's letter to the staff did not state how many words the company counted in the proposal nor did it divulge the company's counting methodology. Instead, the company merely claimed that the proposal exceeded the word limitation. The proponent argued that the company's conclusory statements made it impossible to address the company's purported concerns regarding the word limitation and noted that his word processing program indicated that the proposal contained fewer than 500 words.

[fn8] 1999 SEC No-Act. LEXIS 621 (July 15, 1999).

[fn9] 1999 SEC No-Act. LEXIS 224 (Feb. 22, 1999).

[fn10] 1999 SEC No-Act. LEXIS 93 (Jan. 28, 1999).

§ 10.03[C] No Second Chance to Cure

Because proponents are given an opportunity to cure proposals that contain too many words, the SEC staff rarely grants a second chance to reduce the word count. If a proponent does not cure a deficiency after receiving proper notice, it normally waives any right to have the proposal included. In other words, a proponent may not be permitted to reduce the word count after unsuccessfully contesting a company's word count.

The rationale for the staff's position is its desire to prevent prolonged disagreements over proposal length. However, if a word count is legitimately open to dispute, the staff may give a proponent seven more days to cure a deficiency.

EXAMPLE:

In Northrop Grumman Corporation,[fn11] the company successfully excluded a proposal even though the proponent offered to reduce the proposal's word count below 500 words. The company noted that the proponent did not make this concession until after the company had replied to the proponent's rebuttal. The company argued that the proponent had been given the opportunity to reduce the number of words once and that despite his experience in these matters he chose not to comply.

[fn11] 2000 SEC No-Act. LEXIS 373 (Mar. 17, 2000),

§ 10.03[D] Revised Proposal Exceeding Limit

In response to a request from the SEC staff to modify a proposal, proponents sometimes submit a revised proposal that exceeds the word limit. If the company complains, the staff may ask the company to revise the proposal so that it falls within the limit. This places the company in the difficult position of revising the proponent's proposal. This can be risky as the proponent may complain about the changes and it could be argued that the company is now liable for the proponent's disclosure since the company altered it. Often in the interest of time, a company will decide to include the proposal even though it exceeds the limit.

§ 10.04 Determination of What Constitutes a "Word"

Over the years, the determination of what constitutes a "word" has been the most controversial issue under this exclusion. In numerous close cases, the crucial issue has been whether the SEC staff considers particular terms, graphics or other questionable markings to be "words" for purposes of this exclusion.

§ 10.04[A] Titles and Introductory Statements

The SEC staff counts words that make up the titles of proposals or supporting statements and any other introductory statements toward the word limit.[fn12] The staff's reasoning is that these statements often constitute arguments sometimes the strongest arguments in support of a proposal, so they should be considered part of the proposal and supporting statement.

EXAMPLE:

In Northrop Grumman Corporation,[fn13] the company successfully excluded a proposal that barely exceeded 500 words. The proponent argued that the proposal consisted of only 498 words and the count had been calculated in the same manner as an earlier proposal. The company argued that the proposal exceeded the word limitation by 15 words. It noted that it calculated the word count directly after "Proposal ___________", excluded the name and address of the shareholder and ended with "Yes on _______." The proponent argued that only the words beginning with the word "Resolved" and ending with the words "Yes on _______" should be counted. The company replied that this would be contrary to the legislative history of the rule and recent no-action precedent, as well as common logic.

[fn12] See Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001), Item C2(a) (available at www.sec.gov/interps/legal/cfslb14.htm).

[fn13] 2000 SEC No-Act. LEXIS 393 (Mar. 17, 2000).

§ 10.04[B] Numbers

The SEC staff treats numbers as "words." However, all characters within a word are grouped together, so a number like "20,000" is considered one word. Under the staff's interpretation, each number within a chart or table is considered a separate word.

EXAMPLES:

In Staten Island Bancorp,[fn14] the proponent defeated a no-action challenge to a proposal over the company's objection that it contained at least 519 words. In counting the numbers in tables, the company counted each number as only one word, rather than multiple words. As an example, it stated that it did not count $20.00 as two words ("twenty dollars"), but as only one word.
In Aetna Life and Casualty Company,[fn15] the company was permitted to exclude a proposal because it exceeded 500 words after the numbers in some tables were counted. The company argued that the proponent had been notified of the word limit violation after he submitted his first proposal, and that in the revised proposal, the proponent merely substituted numbers and graphics for the words in the original proposal in an attempt to circumvent the word limitation. The proponent responded that while the proposal might contain more than 500 words, the staff should focus on the accuracy of the information and recognize that the factual data included in the proposal are the same data that the company discloses in its periodic reports.

[fn14] 2000 SEC No-Act. LEXIS 462 (Mar. 21, 2000).

[fn15] 1995 SEC No-Act. LEXIS 133 (Jan. 18, 1995).

§ 10.04[C] Hyphens

The SEC staff counts hyphenated words as two or more words, but does not count the hyphen itself as a word. For example, "over-the-hill" is three words for the purpose of this exclusion. This ensures that proponents do not evade the word limit by excessively using hyphens.

EXAMPLE:

In Minnesota Mining and Manufacturing Company,[fn16] the company successfully sought to exclude a proposal that exceeded 500 words after the proponent failed to correct the deficiency as requested. The proponent argued he had used the word count feature embedded in his WordPerfect word processing software, which indicated that the proposal was only 503 words long. The proponent believed that the company's count of 506 indicated that its Microsoft Word software considered hyphenated words to be two or more words, unlike WordPerfect. The proponent noted that "fortunately, I did not include brothers-in-law and sons-in-law in the shallow `pool' from which corporate directors currently are selected" because then the word count would have been even higher.

[fn16] 2000 SEC No-Act. LEXIS 233 (Feb. 27, 2000).

§ 10.04[D] Graphics

Although not entirely clear, it appears that the SEC staff does not consider graphics or other images to be "words" unless there is text in the graphics or images themselves. This interpretation probably stems from the fact that graphics and images normally are not considered text. On the other hand, a graphic, such as a photograph, can be more compelling than mere text. In these cases, companies may argue that the graphic is false and misleading, thus making the proposal excludable under Rule 14a-8(i)(3).

EXAMPLE:

In Ferrofluidics Corp.,[fn17] the company was required to include a proposal containing several graphs after the staff ruled that "Rule 14a-8(b)(1) only imposes a limitation on the number of words, and provides no basis for equating graphic presentations to words." The company argued that the size of the graphics, combined with the number of words in the proposal, exceeded the 500-word limit. The proponent argued that the rule regarding the 500-word limitation has no application to graphs or graphic representations, and that he had made every attempt to reduce the size of the graph as the company requested.

[fn17] 1992 SEC No-Act. LEXIS 932 (Sept. 18, 1992).

§ 10.04[E] Web Site Addresses

The SEC staff recently clarified the status of Web site addresses (known as "uniform resource locators" or "URLs") in the context of the 500-word limit on proposals; for example, the inclusion of the URL www.sec.gov in a proposal. The staff explained that it counts a URL as one word for purposes of the limitation and stated that it does not "believe that a website address raises the concern that Rule 14a-8(d) is intended to address." The staff did caution, however, that a Web site address "could be subject to exclusion if it refers the reader to information that may be materially false and misleading, irrelevant to the subject matter of the proposal or otherwise in contravention of the proxy rules."[fn18]

[fn18] Staff Legal Bulletin, supra note 12, Item C(2)(b). For more information about the URLs in proposals, see infra Chapter 16.

§ 10.05 Practice Pointers

Company Practice Pointers

Ensure that notice is adequate. To ensure that notice is adequate, a company should clearly describe the word restriction under this exclusion and explain why the company believes the proposal exceeds that limit. It also is critical that the company inform the proponent that she has 14 calendar days to submit an amended proposal that complies with the rule.

Attach a copy of Rule 14a-8 to the notice. As a safeguard, the company should attach a copy of Rule 14a-8 so that the proponent can see for itself what is required. However, a copy of the rule is not a substitute for notice itself. The staff requires companies to send adequate notice even if a proponent is experienced or has been sent a copy of the rule.

Proponent Practice Pointers

Ensure that notice is adequate. Surprisingly, companies occasionally do not send adequate notice. They forget to indicate when an amended proposal is due or do not explain how they arrive at a disputed word count. Proponents should first verify that they received proper notice before responding on the substantive issue of whether the word count was proper since inadequate notice automatically impairs a company's ability to exclude a proposal on this basis.

Offer to reduce the length even if the word count is disputed. Since proponents often do not get a second chance, it is important that they at least offer to reduce the word count even if there appears to be a valid basis for arguing that the number of words in the proposal and supporting statement is equal to or less than 500. Such an offer protects a proponent from having a proposal omitted if the staff sides with the company and does not give the proponent an opportunity to reduce the number of words.

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