2.01 Submission of Proposal to Company
An eligible shareholder can submit a proposal to a company to be voted upon by shareholders at the next shareholders’ meeting. The process provides a way for a shareholder to bring matters that it believes are important to the attention of a company’s shareholders and management.
2.01[A] Eligibility Requirements
Under Rule 14a-8(b), only shareholders that hold at least 1% or $2,000 in the company’s securities and that have held them for at least one year (and will continue to hold them through the date of the shareholders’ meeting) are eligible to submit proposals. Under Rule 14a-8(c), each shareholder is allowed to submit only one proposal per meeting.
2.01[B] Deadline for Submitting Proposals
Under Rule 14a-8(e), the shareholder must ensure that its proposal is received at the company’s principal executive offices not fewer than 120 calendar days before the date on which the company released its definitive proxy statement in the previous year. This deadline normally is disclosed in the company’s proxy statement from the prior year. In some circumstances, the company is allowed to move the deadline, so shareholders should call the company’s corporate secretary to ensure that the date has not been changed. Companies also are required to give notice of such changes in their periodic reports (e.g., Form 10-Q or 8-K). When the proposal is submitted to the company, it should be delivered in a way that allows the shareholder to prove receipt.
2.01[B] How to Draft a Proposal
Under Rule 14a-8(d), the shareholder should ensure that its proposal, including any accompanying supporting statement, does not exceed 500 words. Shareholders should review Rule 14a-8 to become familiar with the numerous procedural and substantive bases for exclusion. Perhaps the easiest drafting method is to find a proposal on the same topic from prior years that was not excluded (even though a no-action request had been filed) and conform it to the target company.
2.02 Submission of No-Action Request and Rebuttal to Staff
A company that believes it has a basis to exclude a proposal from its proxy materials must proceed under the SEC staff’s “no-action” letter process set forth in Rule 14a-8. To commence this process, the company must timely write a letter to the Office of Chief Counsel of the SEC’s Division of Corporation Finance[fn1] requesting that the Division not recommend that the SEC’s Division of Enforcement bring an enforcement action if the company excludes the proposal. No-action requests, rebuttals and other communications to the staff should be submitted to: U.S. Securities and Exchange Commission Division of Corporation Finance Office of the Chief Counsel 450 Fifth Street, N.W. Washington, DC 20549 In Staff Legal Bulletin No. 14C, the SEC provided procedural guidance about the no-action process, including about the materials a company must include when submitting a no-action request or to show withdrawal of a proposal submitted by multiple shareholder proponents. To assist companies preparing these requests, the SEC has issued an Interpretive Release outlining the specific procedures for granting no-action relief. Although this release is over 25 years old, it still provides important information relating to the no-action letter process. A recently issued Staff Legal Bulletin contains insights on the process, though it also deals with the substantive and procedural bases for exclusion. [fn1] Requests to exclude proposals submitted to registered investment companies must be submitted to the Division of Investment Management’s Office of the Chief Counsel. Although this book addresses a few areas regarding proposals submitted to investment companies, the Division of Investment Management may in some instances handle these requests differently than the Division of Corporation Finance. A thorough treatment of those differences is outside the scope of this book. [fn1.1]See Division of Corporation Finance, Staff Legal Bulletin No. 14C (June 28, 2005) (available at http://www.sec.gov/interps/legal/cfslb14c.htm). [fn2] Statement of Informal Procedures for the Rendering of Staff Advice with Respect to Shareholder Proposals, Exchange Act Release No. 12,599, 41 Fed. Reg. 29,998 (July 7, 1976). [fn3] See Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001) (available at www.sec.gov/interps/legal/cfslb14.htm).
2.02[A] Company Responses
When a shareholder submits a proposal to a company for inclusion in its proxy materials, the company may respond in several different ways:
- Include: The company and proponent may agree on how to treat a particular proposal, either by including it in its original form or by revising it before including it.
- Convince proponent to withdraw: A company may be able to convince a shareholder to withdraw the proposal, either by showing that the proposal is excludable or by compromising with the proponent to take certain actions that the proponent requested.
- Exclusion: If the company and proponent disagree over what to do with the proposal, the company probably will decide to request no-action relief from the staff and go through the no-action letter process. If the company receives no-action relief, it will almost certainly exclude the proposal. If a company omits a shareholder proposal before receiving a staff response, or despite a staff response to the contrary, the company’s proxy materials could be deemed misleading and it may be subject to an SEC enforcement action.
2.02[B] Deadline for No-Action Request
Under Rule 14a-8(j)(1), a company must submit its request to the Office of Chief Counsel no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the SEC. Failure to comply with the 80-day deadline can result in the forfeiture of the right to exclude a proposal.
2.02[C] What to Submit to the SEC Staff
Under Rule 14a-8(j)(2), as part of the no-action request, companies must submit six paper copies each of:
- the company’s arguments for excluding the proposal, citing the most recent applicable authority, such as prior no-action letters relating to similar fact patterns;
- the proposal and supporting statement received from the proponent; and
- if applicable, an opinion of counsel.
In addition, the SEC staff recommends that a company include any other correspondence that it has exchanged with the proponent. If the company provided the proponent with notice of a perceived eligibility or procedural defect, it should include a copy of the notice, documentation demonstrating when the company notified the shareholder, documentation demonstrating when the shareholder received the notice, and any shareholder response to the notice.[fn4] [fn4] Id., Item G-7.
2.02[D] How to Make Arguments to the SEC Staff
No-action requests describe the proposal and the reasons that a company believes it can exclude the proposal from its proxy materials. Under Rule 14a-8(g), the burden is on the company to demonstrate that it is entitled to exclude a proposal. Companies often raise more than one procedural and/or substantive basis to exclude a proposal because the staff generally will consider only those exclusion grounds presented by the company. This also is recommended since the staff only has to agree with one of these arguments to allow exclusion. To assist the staff, the company should separate its arguments according to particular exclusion bases. The extent to which a company should provide detailed arguments depends on the nature of the proposal and the exclusion raised. Some situations call for full-blown arguments because the matter is complex and the exclusion requires subjective analysis by the staff. In these situations, companies should carefully construct arguments and conduct research to cite no-action letter precedent. Since the staff generally will not render a decision based on any rationale not identified by the company, it is incumbent on a company to carry its own burden of proof. Other situations are straightforward and involve the routine application of objective exclusion bases. These situations sometimes can be dealt with in a few paragraphs with no precedent cited at all.
2.02[E] Copy of No-Action Request to Proponent
Under Rule 14a-8(j)(1), companies are required to transmit their no-action requests to the proponents including any exhibits and legal opinions at the same time as they are submitted to the SEC staff. This puts the proponent on notice of the company’s actions and allows an opportunity for the proponent to respond to the company’s claims.
2.02[F] Timetable for Rebuttal
Although the SEC staff is not required to consider a proponent’s response to a company’s incoming request, the SEC staff does consider, and encourages, rebuttals. Since companies bear the burden of proof, proponents are not required to rebut the company’s arguments, and companies often fail to convince the staff that a proposal is excludable even if the proponent does not respond. Under Rule 14a-8(k), a proponent should submit a rebuttal as soon as possible after the company makes its submission. Even though there is no deadline for rebuttals, proponents should not view this as an opportunity to take their time: the staff can act without receiving a rebuttal, even if a proponent has communicated that one is forthcoming. As a result, proponents should act quickly after receiving a copy of the company’s incoming request. The extent to which a proponent should provide detailed arguments depends on the nature of the company’s arguments and the exclusion or exclusions at issue. However, a proponent may find that it can persuade the staff if it points out fallacies in the company’s arguments or can cite its own precedent that is more directly on point. If a proponent decides to submit a rebuttal, it should submit six paper copies of it to the staff and one copy to the company. In some cases, a company may rebut the response submitted by a proponent, who may then reply to the company’s rebuttal. The staff is not required to consider any of these submissions but likely will if time permits. Since the staff does try to accommodate a company’s print and delivery schedule, unless the company belatedly submitted its original request, the ultimate deadline normally is driven by that schedule. In addition, the staff’s ability to consider these rebuttals depends on its overall workload, which is quite heavy during the December-March timeframe each year. Occasionally, to address a rebuttal belatedly received by the staff from a proponent, the SEC staff will issue a second no-action response and state whether the rebuttal affects its original response.[fn4.1] [fn4.1] See, e.g., Sensar Corporation, 2001 SEC No-Act. LEXIS 574 (May 15, 2001).
2.02[G] Proposal Revisions
Proponents do not have a right to make revisions to their proposals and supporting statements once they have been submitted to companies.[fn4.2] It is within a company’s discretion whether to accept any revisions, both before and after a no-action request is filed, unless the revisions are requested specifically by the SEC staff. If any revisions are material in nature, they may violate the one-proposal rule. [fn4.2] For more about the process of negotiation and settlement, see Chapter 35, Negotiation and Settlement of Proposals.
2.02[H] Withdrawn Proposals
It is not uncommon for proposals to be withdrawn after a no-action request has been filed with the SEC staff. This can happen after the company and proponent negotiate and settle on a solution, such as the company’s agreeing to take an action that appeases the proponent or deciding to include the proposal as originally requested.[fn4.3] Sometimes a proposal is withdrawn on the proponent’s own volition. Regardless of the reason for the withdrawal, the SEC requests that the staff be informed of the withdrawal so that it does not needlessly process the no-action request. The staff then issues a no-action response noting the withdrawal as well as the stated reason for it. EXAMPLES:
- In Bristol-Meyers Squibb Company,[fn4.4] the SEC staff responded to a letter from the company that indicated that the proponent had withdrawn the proposal. This response from the staff was issued several days after a prior staff response.
- In Constellation Energy Group,[fn4.5] the proponent withdrew its proposal, and the company’s request for no-action relief was subsequently withdrawn. The proponent withdrew its proposal because the company agreed to take the requested action posting a description of the company’s strategic development process on its Web site. Although not required, the company included the proponent’s withdrawal letter in its follow-up letter to the staff about the no-action request.
- In Boeing Company,[fn5] the company agreed to include a proposal relating to the company’s involvement in space-based weaponization and withdrew its request for no-action relief. The SEC staff called to ask the company if the withdrawal had resulted from the company’s agreement to include the proposal after receiving a letter from the company asking to withdraw the no-action request.
[fn4.3] For an example, see 2002 SEC No-Act. LEXIS 301 (Mar. 7, 2002). [fn4.4] 2002 SEC No-Act. LEXIS 35 (Jan. 17, 2002). [fn4.5] 2002 SEC No-Act. LEXIS 39 (Jan. 17, 2002). [fn5] Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001), Items E1-E4 (available at www.sec.gov/interps/legal/cfslb14.htm).
2.03 Staff Processing Procedures For Proposals
Companies that intend to exclude shareholder proposals must seek no-action relief from the Division of Corporation Finance’s Office of Chief Counsel.
2.03[A] Staff’s Workload Gradually Growing
Each year, the SEC staff reviews several hundred requests for no-action relief under Rule 14a-8. Until 2001, when there was no increase over 2000, the number of requests grew each year. Since 2001, the number of proposals has grown each year. In fact, the 2003 proxy season included about 1000 proposals. As shareholder proposals have increased in popularity, the percentage of no-action requests regarding proposals received by the staff as a percentage of the overall number of no-action requests has risen to over 50%. Since most requests are received during December and January, the staff is particularly busy from Christmas until mid-April. To handle this burden, the Division of Corporation Finance forms a task force. This task force dedicates an extraordinary amount of time to process these requests, and the members seek to ensure that all time-sensitive requests are processed quickly. During the 2003 proxy season, there were approximately 15 staff members on the task force and the staff processed over 400 no-action letters regarding proposals.
2.03[B] Internal Staff Processing
Unless special time considerations are present, the staff attempts to respond to a request within 45 days of its receipt. The staff attempts to respond in a timely way and normally will deviate from this timing if a company can show good cause. When a company files a no-action letter request, it typically sends it in paper form to the SEC’s filing desk as required by the rule. The request is sent up to the Office of Chief Counsel, where it is date-stamped and logged in. It is then processed by a “screener” and forwarded to a member of the shareholder proposal task force for initial examination. Despite Rule 14a-8(j)(2)’s mention of filings by paper, the staff will accept requests by e-mail if sent to [email protected] This is rarely done since companies must attach copies of the proponent’s submission to them which is rarely available in electronic form. A task force member reviews the incoming request, prepares a memorandum addressing each of the arguments that the company raises and drafts a tentative no-action response letter and a cover letter. The staff considers a variety of factors in reaching a conclusion, including specific arguments asserted by the company and the shareholder, the way in which the proposal is drafted, and how the arguments and prior no-action responses apply to the specific proposal and company at issue.[fn6] The staff does not judge the actual merits of a proposal. It is not uncommon for the staff to conduct its own independent research and seek to uncover a no-action precedent that a company may have overlooked.[fn7] The staff attempts to maintain the same format for each of its response letters. An experienced reviewer then reviews the initial examiner’s memorandum and tentative staff response and directs the examiner to issue the staff’s response letter with any necessary modifications. In general, the staff first considers the most objective arguments made before addressing subjective substantive bases. As a result, if a company argues that a proponent missed a deadline or was not eligible to submit a proposal, the staff likely will “hang its hat” on that basis. The most subjective determinations, such as personal grievance and ordinary business, are considered last. [fn6] Id., Item B6. [fn7] Id., Item B5.
2.03[C] Staff Response Letters
Once the SEC staff is finished processing a request, it will issue a “no-action” letter.[fn8] The staff’s response normally includes the staff’s conclusions, but not its analysis. The responses generally follow a standard format depending on the basis for exclusion discussed in the response. The staff’s response is accompanied by a cover letter as well as all of the correspondence received from both the company and the proponent in connection with the request. All of these items comprise the “no-action” letter. The staff provides a copy of its response both to the company and to the proponent. Staff no-action letters are available in the Commission’s Public Reference Room and on commercially available database services.[fn9] [fn8] The staff almost always responds to no-action requests even though it is not required to do so. Id., Item B8. [fn9] Id., Item A10.
2.03[D] Types of Staff Responses
When it issues a no-action letter, the SEC staff may respond in one or more of several ways:
- Include: The staff rejects each of the grounds that the company has raised as a basis for exclusion.
- Exclusion: The staff accepts one or more of the arguments that the company has made and states that it will not recommend enforcement action to the Commission’s Division of Enforcement if the company excludes the proposal.
- No view: The staff states that it is unable to accept or reject any of the bases that the company has raised for exclusion. Normally, these cases involve proposals that have been withdrawn by the proponent. Occasionally, the staff expresses no view when it is too difficult for the staff to make a decision on an unsettled legal issue, usually after both the company and proponent have made extensive arguments to the staff.
- Opportunity to cure: Often, if the staff finds a deficiency in a proposal, it permits the proponent to cure the problem if this can be accomplished without materially altering the proposal. Normally, a proponent is given seven calendar days from the date of the staff’s response to cure the deficiency; if the proponent does not timely cure, the company is allowed to exclude the proposal.
2.03[E] Single Basis Cited
In most cases, the SEC staff will cite only a single basis for exclusion in its no-action response even if other bases would also permit exclusion. The staff normally does not comment on the availability of other alternative bases since to do so would require it to spend additional time processing the request. Since one basis is sufficient to allow a company to exclude a proposal, the staff saves time by not continuing to process the request. The saved time helps the staff process the numerous other requests that it has before it. Occasionally, the staff will rely on two bases if they both are equally applicable.
2.03[F] Lack of Precedential Effect
No-action letters “only reflect [the Division’s] informal views regarding the application of Rule 14a-8” to the specific facts in the letter. The SEC staff does not “claim to issue `rulings’ or `decisions’ on proposals that companies intend to exclude, and [its] determinations do not and cannot adjudicate the merits of a company’s position with respect to a proposal.”[fn10] In practice, however, the letter may serve as precedent with respect to future no-action requests. In Rule 14a-8(j)(2), the SEC encourages companies to cite similar fact patterns as support for their position. As a result, both parties should review recent no-action letters to gain insight into the staff’s current view of a particular fact pattern. [fn10] Id., supra note 3, Item B11.
2.03[G] No-Action Letters Provide Limited Protection
Companies should recognize that receipt of a favorable no-action letter does not preclude the proponent from bringing a private cause of action against the company for failure to include its proposal. No-action letters are not binding on a court, which may decide to effectively reverse a staff’s decision and issue an injunction. Due to the costs and time involved, proponents rarely appeal directly to the courts, although such suits have increased in recent years. More common are appeals for the staff to reconsider its decision or an appeal to the Commission itself.[fn11] Proponents rarely are successful in these administrative appeals, however, since they ask the staff to reconsider a decision it only recently rendered. As a result, the staff’s decision in a no-action letter is usually upheld. [fn11] See infra Chapter 5.
2.04 Post-Ruling Role of Staff
After the SEC staff responds to a company’s no-action request, the time constraints under which it operates limit its role in supervising further proceedings between the parties. The SEC staff encourages the company and shareholder to resolve their differences without staff assistance if possible. If its letter gave the shareholder additional time to provide proof of ownership or revise the proposal, and the company does not believe that the shareholder’s submission complies with the staff’s instructions, the company need not submit a second no-action request.[fn12] [fn12] Staff Legal Bulletin, supra note 3, Item B12.
2.05 Inclusion of Proposal
2.05[A] What Company Must Do to Include Proposal
If a company cannot convince the staff to allow exclusion of a proposal or the company otherwise agrees to include it the company must make disclosure regarding the proposal in its proxy statement and include the proposal on its proxy card.
2.05[B] Disclosure of Opposition to Proposal
If it so chooses, a company can include a statement about its opposition to a shareholder proposal in its proxy statement. Before filing and delivering its proxy statement, under Rule 14a-8(m), a company must send a copy of the disclosure it intends to make about the shareholder proposal to the proponent within a specified time period. This allows a proponent to complain to the staff if it believes that the disclosure contains false and misleading information.