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Practice Pointers From the Experts — In house Counsel, Outside Counsel, Former SEC Staffers, Academics, and Activists



1. Craig Adoor - Strategy for Responding to Stockholder Proposals
2. Jonathan Bates - Shareholder Resolutions for UK Companies
3. Dennis Bertron - Tips For Managing the SEC Staff During the Shareholder Proposal Process
4. Kit Bingham - Shareholder Resolutions in the UK
5. Brian T. Borders - Dealing With, or Avoiding, Your First Shareholder Proposal
6. Mark Britton - Newly Public Companies — Particularly Technology Companies
7. Aaron Brown - Ten Tips For Dealing With "Business" Shareholder Proposals
8. Alan Dye - Ten Tips For Responding to Shareholder Proposals
9. Charles Elson - Ten Practice Pointers
10. Terry Gallagher - How to Avoid Receiving Shareholder Proposals
11. Andrew Gerber - Considerations Upon Receipt of a Shareholder Proposal
12. John Gorman - What Every Manager Should Understand About the SEC Shareholder Proposal Rule — Ten Practical Insights
13. Michael Holliday - Managing the Shareholder Proposal Process — Strategies for Success
14. Cynthia Richson, & Keith Johnson - Ten Insights on Shareholder Proposals
15. Cynthia M. Krus - Ten Tips When Faced With a "Sell the Company" Shareholder Proposal
16. Paul Lapides - Nine Principles For a More Effective Board of Directors
17. Philip R. Lochner, Jr. - Shareholder Proposal Considerations
18. Nell Minow - Ten Tips for Effective Shareholder Proposals
19. Mark Preisinger - A Look Over the Shareholder Horizon 10 Things Likely to Occur in the Shareowner Proposal Process
20. Lawrence M. F. Spaccasi - Ten Tips on Dealing With Shareholder Proposals
21. James R. Ukropina - Factors Management May Apply in Considering Whether to Include or Attempt to Omit a Proposal
22. John C. Wilcox - Shareholder Proposals: Minimizing the Pain
23. Susan Ellen Wolf - Ten Tips For Dealing With Shareowner Proposals
24. Frank Zarb, Jr. - Shareholder Proposal No-Action Requests: Dos and Don'ts For a Company's General Counsel

1. Strategy for Responding to Stockholder Proposals

by Craig Adoor, Partner, Blackwell Sanders Peper Martin, LLP

Stockholder proposals generally raise issues of a substantive nature, sometimes aimed at the very core of a public company's business or they may raise public policy issues that demand a thoughtful and measured response from top management. However, effectively responding to stockholder proposals often raises procedural issues as well because there are specific rules that proponents must follow to properly submit proposals for inclusion in the public company's proxy statement and that management must follow to respond to the proposals.

Given this unique mixture of substance and procedure, the management of public companies should implement a strategy to deal with stockholder proposals. The strategy should allow the company to respond to such proposals in a manner that its goals and objectives are not disrupted.

At the same time, the strategy should not result in a perception among the stockholders that they have been disenfranchised or among the public at large that the company is a bad, or at least uncaring, corporate citizen.

Listed below is a suggested strategy that public companies may find useful when confronted with a stockholder proposal.

1. Prepare a timetable with due dates corresponding with the requirements of Rule 14a-8.

2. Research the identity of the proponent.

3. Review the proposal for compliance with applicable procedural rules.

4. Review the proposal to determine whether it may be excluded on substantive grounds.

5. Analyze potential for negotiating a resolution involving the proponent's concern in exchange for the withdrawal of the stockholder proposal.

6. Prepare the no-action request for the Staff of the Division of Corporation Finance challenging inclusion of the proposal in the proxy statement.

7. Begin preparing management's response to the stockholder proposal for inclusion in the proxy statement in case the Staff does not agree that the proposal may be eliminated from the proxy statement.

8. Arrange meetings between key members of the Board and management and institutional investors to elicit the support of the institutions in defeating the stockholder's proposal.

9. Prepare a strategy for dealing with the proponent at the Annual Meeting.

10. If the proposal is supported by a majority of shareholders, determine whether the company may exercise discretion in acting upon the recommendation of the stockholders.

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2. Shareholder Resolutions for UK Companies

by Jonathan Bates, Director of Institutional Design (jjb@institutionaldesign.com) and Verdun Edgtton, Senior Associate of Institutional Design (ve@institutionaldesign.com)

© 2001 Institutional Design. Not to be amended or reproduced or circulated without the consent of Institutional Design.

1. Introduction

The bringing of a shareholder resolution for companies incorporated in the United Kingdom[fn1] is governed by English company law.[fn2] A strict legal regime applies and is determined by the Companies Act 1985 and certain common law requirements.[fn3] The legal regime should be strictly adhered to in order to ensure the proponents' intentions can be fulfilled and the company is not put into a position of compromise or conflict with the proponent. In particular US investors holding American Depositary Shares (ADS) or American Depositary Receipts should be aware that there are certain procedural steps they will need to undertake if they wish to requisition a shareholder resolution.

2. Standing to bring a resolution

a) Number of members and shares

Section 376 of the Companies Act 1985 sets out the share ownership threshold required to bring a shareholder resolution.

The Act requires a number of members representing:

  1. Not less than 1/20th of the total voting rights of all members having the right to vote; or

  2. 100 members owning, on average, £ 100 in nominal value of the capital of the company.

For a large capitalized widely held company, members are most likely to avail themselves of the 100 members/£ 100 nominal value qualification. To ascertain the level of qualification under this limb, a simple calculation is required.

   100   X  £ 100     = £ 10,000 ÷   £ 0.25[fn4] =       60,000     =  10000
members   average       total     nominal value    ordinary shares     ADS
       nominal value   nominal     per ordinary       required       required
        required per    value         share
          member       required
b) The need to be a "member"

The Companies Act confers the right to requisition a shareholder resolution on members of the company. Only those persons whose names are entered on the company's register of members are members of the company. The issue of membership is important for US investors who hold American Depositary Shares in a UK company. Those investors will hold either directly with a Depositary Bank or indirectly through banks and brokers in the DTC.

Only the Depositary bank will be entered in the company's register of members. Since the ADS holders are not themselves entered on the register of members, they must go through certain procedural requirements to bring a resolution. The appropriate procedure depends upon the manner in which those investors hold their ADS.

3. The company's statutory duty to circulate a resolution

Only where the statutory requirements as to the standing to bring a resolution are fulfilled is the company under a statutory duty to give notice to members of the company of any resolution and to circulate any associated statement to members by the requisitionists of the resolution that accompanies the resolution. The concept of compliance with a statutory duty is important. It ensures that the company and therefore the other shareholders and the board will not be legally liable under English company law for any damage that may be caused to a third party as a result of the circulation of any associated statement made by the requisitionists. This might occur, for example, where a negative statement is made in the associated statement about a third party in which the company holds shares and the share price of that third party drops, thereby causing loss to investors in the third party.

English companies are therefore likely to be very reluctant to permit resolutions to be circulated that do not meet the statutory requirements under section 376 as they would be without the protection which they are afforded if they are under a statutory duty to circulate a resolution.

The statutory processes have been designed to balance the interests of the majority of shareholders who must consider the proposal with those of the minority that are seeking change through the resolution. As such, companies should follow the processes strictly as they provide a fair and objective standard for all.

4. Important procedural requirements for ADS holders

a) Holding directly with a Depositary Bank

If an ADS holder holds directly with a Depositary Bank, it is now commonplace for the Deposit Agreement to prescribe under the section in the Deposit Agreement "Actions by Holders" for the Depositary (in its capacity as a member) to take actions requested in writing by a holder listed as holding with the Depositary.

It is also possible to bring a resolution without the Depositary being a party. Using the example in 2(a) above, the procedures are as follows:

i. Depositary is a party

  1. The Depositary as a member signs the requisition and commits 9,901 ADSs (59,406 ordinary shares) at the request of an ADS Holder(s). They may be the same or additional to the ADS Holders under b. An ADS Holder need not be a member to commit his ADSs to the requisition through the Depositary. The shares underlying the ADSs committed through the Depositary count toward the requisite holding.

  2. In order to obtain the requisite number of members, a further 99 ADS Holders convert at least one ADS each to ordinary shares, or each purchases, for example, 6 ordinary shares. Each ADS Holder then becomes a member eligible to sign the requisition. They together then commit a total of 594 ordinary shares to the requisition.

Therefore the requirement of 100 members (the Depositary plus 99 members) holding the requisite 60,000 ordinary shares is fulfilled.

ii. Depositary is not a party

  1. 99 ADS Holders convert at least one ADS each to ordinary shares, or, for example, each purchases six ordinary shares, so that each such ADS Holder becomes a member eligible to sign the requisition. They thus commit a total of 594 ordinary shares to the requisition.

  2. 1 or more of the 99 ADS Holders in (a) or other ADS Holder(s) convert 9,901 ADSs to 59,406 ordinary shares and commit them to support the requisition.

Therefore the requirement of 100 members holding the requisite 60,000 ordinary shares is fulfilled.

b) Holding indirectly through banks and brokers

US investors who hold ADS indirectly must rely on the procedures of their broker or financial institution to facilitate the requisitioning of a shareholder resolution. Although procedures may vary, generally such ADS holders will be required to convert ADS to ordinary shares and become a member eligible to sign the requisition as detailed in 4(a)(ii).

5. Substantive requirements for the form of resolution

The form that the resolution must take for it to be capable of being moved at a general meeting depends upon the content of the resolution. A resolution that requests, recommends or informs the board that it should manage the company's affairs in a particular way is considered by law to be outside the scope of the function of the members in general meeting. Careful consideration therefore needs to be given to the precise drafting of the resolution to ensure that it is not precatory in substance. This is very different from US law where the SEC both recognizes and regulates the acceptance of precatory resolutions for the ballots of general meetings of US companies (and state law requires a precatory form).

English law requires that a resolution that directs or instructs the board can only be effective if moved as a special resolution. This is because the members of the company delegate authority to the directors of the company through the memoranda and articles of association. Any change in the nature of the delegated authority must be effected by the same method that created the original delegation. As memoranda and articles are created by special resolution, they — and the authority they create — can only be amended by special resolution. A special resolution requires not less than 75% support of shareholders in a general meeting for it to be passed.

6. Timetabling requirements and implications for shareholders

There is a strict timetable under the Act for the deposit of a resolution with the company. The Companies Act requires that a copy of the requisition be signed by the requisitionists and deposited at the registered office of the company at least 6 weeks before the meeting. In light of the substantive content requirements for a resolution, shareholders intending to bring a resolution should ensure that it is deposited with the company well in advance of the 6 week deadline. In the event that the resolution does not meet the statutory and common law requirements, companies may advise shareholders of the deficiencies and provide them with an opportunity to resubmit.

Shareholders are also required to deposit a sum reasonably sufficient to meet the company's expenses in giving effect to the resolution. The costs of circulating a resolution are low if it is received early in the process of preparing for the annual general meeting and companies have generally accepted that if material is received in time to meet the mailing system for the annual general meeting no costs will be incurred. This is important for shareholders to bear in mind when planning the logistics of submitting a resolution to the company.

[fn1] Incorporated under the law of England and Wales.

[fn2] The law of England and Wales.

[fn3] Common law relies on the doctrine of precedent as established by legal cases or case law. English courts have made decisions as to the form of a resolution that may be moved at a general meeting where legislation does not prescribe the requirements.

[fn4] Assumed nominal value.

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3. Tips For Managing the SEC Staff During the Shareholder Proposal Process

by Dennis Bertron, Associate, Akin, Gump, Strauss, Hauer & Feld, L.L.P.* (dbertron@akingump.com)

1. Submit your no-action request as early as possible, preferably before the late December/early January crush. Do not wait — you will generally encounter quicker results from the SEC Staff if you submit your request prior to the holiday season. If timing is a great concern of yours, you should call the Staff to get an estimate as to the turn-around time you can expect when you submit your request.

2. Score points by being courteous. You should know that the Staff regularly reviews and responds to over 400 no-action requests in a brief three- or four-month period. You will find the Staff will be more accommodating to you and your proposal if you are considerate in your correspondence and communications with the Staff.

3. Fully research the subject matter of your proposal. You should recognize that the Staff is inclined in most instances to follow its most recent precedents under the particular subject matter of your proposal. If the Staff has routinely refrained from granting no-action relief to issuers who have received similar proposals in the past, there is a small likelihood of success for your proposal, unless you can distinguish it in some way. On the other hand, if the Staff has granted no-action relief with regard to similar proposals in the recent past, you should pattern your arguments in accordance with the last few letters.

4. Always cite a few precedents in support of your argument, even if you seek to omit your proposal for technical reasons. The Staff generally will not automatically grant no-action relief even for blatant technical violations of the shareholder proposal rules. The Staff often refers to its precedents to determine if no-action relief should be granted. You should present your argument accordingly.

5. Refrain from citing too many precedents, however. Do not obscure your arguments by citing too many precedents. Cite a few relevant precedents in support of your position and then analyze why the Staff should view your proposal in the same way.

6. Limit the number of possible bases for exclusion, unless it appears to be a close call as to your primary basis of exclusion. Your research should give you a good sense as to how the Staff has handled similar proposals in the past. If you determine that it is a close call under your primary basis for exclusion, do not hesitate to raise other possible bases for omitting the proposal under the shareholder proposal rule. However, arguing to omit a proposal under multiple bases usually comes across as grasping at straws and in many instances, there is limited substance behind these multiple arguments. The Staff often is best impressed with strong arguments steeped in precedent.

7. If you are unhappy with the result of your no-action request, do not be afraid to call the Staff. If you are unhappy with the result of your no-action request, do not be afraid to call the Staff. You should contact the Chief Counsel's Office in the Division of Corporation Finance or, if possible, the signatory of the response letter from the SEC Staff to discuss a reconsideration of your no-action request letter. When seeking a reconsideration, you should cite precedents or facts that the Staff may not have considered in its determination of your initial no-action request. You should know that reconsiderations are rarely successful.

8. Let Staff know if there is a withdrawal. As a matter of courtesy, inform the SEC Staff if the proponent has withdrawn a proposal so that the Staff does not waste its resources processing your moot issue.

* Member of the SEC Staff Shareholder Proposal Task Force (1998-1999).

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4. Shareholder Resolutions in the UK

by Kit Bingham, Editor, Governance

GENERAL

  • In marked contrast to the US, shareholder resolutions are unusual in the UK. There may only be a handful a year.

    PRACTICAL ISSUES — LAW AND REGULATION

  • To submit a resolution, requisitionists (proponents) must represent 5% of the share capital, or muster 100 shareholders with shares on which at least £ 100 on average has been paid.

  • Resolutions can be on any subject — removal of a director, environmental issues, strategic direction, etc. There is no equivalent of the SEC's Rule 14a-8. (This may change. See final bullet point below.)

  • Shareholders representing 10% of the share capital can call an Extraordinary General Meeting. Shareholder activists and institutional investors do use this power on occasion to submit resolutions calling for a fundamental strategic shift or to remove the incumbent directors. This is a "nuclear" option that should only be considered as a last resort and if the company is performing very badly.

  • The deadline for circulation by the company is usually disclosed in the previous year's annual report or Notice of Meeting. If no date is given, requisitionists should approach the Company Secretary to learn the date to be sure of having their resolution included in the company's mailing.

  • At its 2001 annual meeting, BP Amoco excluded resolutions on the basis that they were filed by holders of American Depositary Receipts, and not by full shareholders. This was a controversial move, and BP was heavily criticised by US investors. BP's position has not been challenged in court, and it remains to be seen if other companies will adopt it.

    GARNERING SUPPORT

  • Shareholder resolutions do not tend to fare all that well in the UK. The most successful to date have focused on environmental issues. For example, environment-related resolutions achieved a 15% vote in favour at BP in 2000. But similar resolutions submitted in 2001 scored only a 5 — 8% vote in favour.

  • Because shareholder resolutions are unusual, they tend to receive considerable press attention, especially at large companies.

  • There are no "hot button" resolutions (such as those in the US relating to poison pills, etc.) that can be guaranteed to garner institutional investor support.

  • Most UK institutions do not regard shareholder resolutions as an important part of the corporate governance dialogue, and no major investor has ever filed a shareholder resolution at an annual general meeting. But major investors can — and do — use the power to call an Extraordinary General Meeting.

    THE FUTURE

  • The UK government is midway through an ambitious project to reform Company Law. There are proposals to reform the regulations governing the submission of shareholder resolutions, so this whole area is somewhat fluid at the moment. Would-be filers should obtain UK legal advice before submitting a resolution.

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    5. Dealing With, or Avoiding, Your First Shareholder Proposal

    by Brian T. Borders, President, Association of Publicly Traded Companies, Of Counsel, Mayer, Brown & Platt (bborders@mayerbrown.com)

    For most publicly traded companies, shareholder proposals are a rarity. However, avoiding them requires more than simply wishing them away. In addition, when one is filed, some appreciation of their various flavors and purposes can be helpful.

    1. Open channels of communication and a positive relationship should be the rule with all long-term shareholders.

    2. Knowing your shareholder base is a good start in heading off proposals before they are drafted. If your company has long-term holders, understanding their views on corporate governance might provide an ounce of prevention.

    3. If your company is part of a widely-held index of companies, some research into the practices of the activist institutions could help you anticipate contact by an activist or the issues they might raise.

    4. The fact that you now have a certain shareholder — or have grown to a certain size — may be the only thing that is new.

    5. It might not be about your company in particular, but about fairly standard practices, like classified boards or poison pills. Much can be learned from looking at the long history of these types of proposals submitted to other companies.

    6. The corporate governance agendas of pension funds are often driven by strong individuals within the organizations. If your company's pension fund investors have seen changes at the top, you may see a new level of activism from these funds.

    7. Proponents of proposals are almost by definition activists of one sort or another. They probably do not share your view of your company, the "corporate world," or the world at large.

    8. Many proponents want to negotiate, not fight. The proposal process is a clumsy, inconclusive way to change a company. An offer to talk may shortcut an extensive formal process.

    9. In negotiations, stick to the basics: yes, shareholders have rights to access the proxy materials under the rules; yes, shareholders are the owners of the company. However, corporate democracy is not civil democracy. Selling stock is much easier than renouncing one's citizenship or changing one's domicile.

    10. Some proponents use the proposal process just to get your attention. They want to talk about something quite separate from the subject of the proposal. The real issue may be an ordinary business matter that would fail as a proposal; however, it may be something the company would not mind discussing rather than fighting over.

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    6. Newly Public Companies — Particularly Technology Companies

    by Mark Britton, Former Senior Vice President, General Counsel and Secretary, Expedia, Inc.*

    Application of general business principles in the "new age" economy to the shareholder proposal process.

    1. At start-ups, most — if not all — employees are shareholders of the company. They are different from the non-employee shareholders because they typically share in the original vision and/or mission of the company. They are mentally enfranchised, if you will. This enfranchisement usually results in the shareholder employees informally offering their ideas for change through internal corporate channels, rather than through the formal shareholder proposal process. This is also helped by proximity to management.

    2. Interestingly, non-employee investors in start-ups are also less likely to utilize the formal shareholder proposal process, albeit for different reasons. Non-employee investors, often venture capitalists, tend to be shorter-term investors hoping to achieve a significant return on their investment at the corporation's first liquidity event. If their expectations are dashed, they will quickly exit and move on to more promising prospects, rather than attempt to dictate corporate action through shareholder proposals. Even if they do wish to dictate corporate action, particularly with respect to venture capitalists, they tend to have enough influence through their presence on the board of directors or through their role as a potential source of additional capital that they need not resort to shareholder proposals.

    3. New technology companies often take "old world" processes and make them more efficient and effective. That is what the majority of the successful high-tech business models are all about. This dedication to efficiency and effectiveness often spreads to investor relations. These companies reach out to their shareholders through Web pages, email suggestion boxes, Internet audio streams, etc., in order to reach and accommodate a larger portion of their investors more effectively and more often. This efficient and effective interaction keeps shareholders better informed and gives them a voice — both of which reduce their desire or need to resort to the shareholder proposal process.

    4. On the other hand, new companies are new companies. They generally do not have a lot of experience in the world of "being public." As a result, faced with shareholder proposals, sophisticated proponents often have to hold their hand to take them through the process, helping them understand that things like negotiating the proposal are an acceptable part of the process.

    5. Part of this education process may also be that, no matter how "hightech" or "new-age" a company might be, technology plays little role in navigating the shareholder proposal minefield once a proposal is actually filed. These companies must respect the old-world order in deciding whether they want to fight a proposal and seek no-action relief from the staff.

    6. Many new technology companies find value in attempting to bring segmented markets together and make them more efficient. Ideally, they will apply this mindset to the shareholder proposal process, which is inefficient in many respects. One possible way is for companies to assist proponents to find out if there is sufficient interest in a proposal to warrant its inclusion in the company's proxy statement. This could be done easily and cheaply through a corporate Web site.

    * Member of the SEC's Division of Corporation Finance from 1994-1997.

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    7. Ten Tips For Dealing With "Business" Shareholder Proposals

    by Aaron Brown, Co-Founder of eRaider.com

    1. Most shareholder proposals fall into one of two categories. Social proposals are made by activist groups whose main concern is attracting public support for their positions. Governance proposals are made by institutions whose main concern is raising the overall level of corporate governance in the country. There is a small, but rapidly growing, group of proposals that I call "Business" proposals. They fall in neither category. I believe within the next few years they will become the majority of shareholder proposals.

    2. Social proposals typically win support on the order of 5 percent. Governance proposals often get 50 percent or more. Support for Business proposals will fall in between, around 25 percent support.

    3. Social proposals really have nothing to do with the target company. Governance proposals generally apply to each and every company. Business proposals apply specifically to the target company.

    4. Social proposals are typically made by very small shareholders, often alter egos or people who bought stock only to submit the proposal. Governance proposals are often made by large institutional shareholders. Business proposals typically come from long-term individual shareholders with $25,000 to $500,000 invested in company stock, often a significant fraction of their total wealth.

    5. Social proposals are a public relations problem. They often must be defeated in order to run the business sensibly, but it must be done without causing unnecessary offense to any group. Governance proposals normally should not present a problem at all, since a company should willingly embrace sound governance ideas supported by a majority of shareholders. But to the extent the target company wants to resist, Governance proposals pose legal and investor relations problems. Business proposals raise business issues, and should concern the top business managers (CEO, CFO, COO) more than the head of public relations.

    6. Social proposal proponents may know a lot about their issue, but seldom know much about the target company's overall business and strategy. Governance proposal proponents usually lack the resources for a detailed business analysis. Business proposal proponents often have studied the company for years and may have educational and professional qualifications that exceed those of the company's managers.

    7. Shareholders are predisposed to believe Social proposals are fringe ideas that would interfere with running the business. Governance proposals are vulnerable to the accusation that they are "one-size-fits-all," and represent abstract principles rather than relate to moneymaking. Business proposals carry none of these liabilities as they come from serious long-term shareholders, focus on the specific circumstances of the business and are designed solely to increase profit and cash flow.

    8. Mishandling a Social proposal can make management seem uncaring. Mishandling a Governance proposal can make management seem entrenched. In either case, if the mishandling is bad enough, management may even seem dishonest. Mishandling a Business proposal can make management seem incompetent and unwilling to accept common sense advice.

    9. Properly handled, a Social proposal gives the target company an opportunity to highlight its positive accomplishments, and can serve as a heads-up warning about potential public relations problems. Properly handled, a Governance proposal gives the target company an opportunity to forge better relations with its investors. Properly handled, a Business proposal gives the target company an opportunity to educate shareholders about its business and strategy, and can serve as a source of ideas and challenges.

    10. Successfully dealing with Social proposals will not improve the target company's capital structure. At best, it will avoid possible divestment. Successfully dealing with a Governance proposal may increase institutional ownership. Successfully dealing with a Business proposal can increase the target company's base of long-term, serious individual shareholders. These shareholders are far more loyal than institutions. Not only are they slow to sell when times are bad, they often buy more stock on price declines. This can significantly reduce the downward volatility of a company's stock price. These shareholders understand the company's business and will say good things about it to potential employees and customers. Winning their respect means more stability and a lower cost of capital.

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    8. Ten Tips For Responding to Shareholder Proposals

    by Alan Dye, Partner, Hogan & Hartson LLP* (aldye@hhlaw.com)

    1. Make sure the shareholder is in fact submitting a proposal under Rule 14a-8. Often, letters from shareholders requesting that the company take certain action or address a certain matter at the annual meeting are not intended as a shareholder proposal under Rule 14a-8. Instead, the shareholder is seeking merely to air a grievance, or to have someone in a position of authority within the company address the shareholder's concern. If a shareholder's letter does not clearly reflect the shareholder's intention to submit a proposal under Rule 14a-8 (i.e., the letter does not mention Rule 14a-8 and does not address the shareholder's eligibility to submit a proposal), do not respond with a letter addressing the submission's deficiencies under Rule 14a-8, which may have the effect of suggesting to the shareholder a process that he or she otherwise would not have considered. Instead, initiate a dialogue with the shareholder to determine what the shareholder wishes to accomplish.

    2. Work with the proponent toward a withdrawal of the proposal. As often as not, the proponent is more interested in a dialogue with a responsible company representative, or some assurance that his or her proposal has been, or will be, given appropriate consideration by management or the board of directors, than in submitting the proposal to shareholders. In other cases, the proponent has no real interest in the proposal, but instead wants to achieve some unrelated objective, and will withdraw the proposal if that objective can be achieved. Accordingly, it is almost always worth the company's time and effort to place a call to the proponent to explore whether the concerns can be resolved without resort to the shareholder proposal process.

    3. Require the shareholder to demonstrate his or her eligibility to submit a proposal. Although some companies are hesitant to raise "technicalities" when dealing with a disgruntled shareholder, the technicalities of Rule 14a-8 usually become relevant only after all reasonable efforts to address the shareholder's concerns have failed, and the company's relationship with the shareholder is already strained. In any case, the eligibility requirements of Rule 14a-8 (e.g., the requirement that the shareholder has owned at least $2,000 or 1% of the company's stock for at least one year) are there for good reason, and companies should not be bashful in assuring that a proponent satisfies them. Proponents often are unaware of, and fail to meet, the eligibility requirements, and some simply choose to go away rather than obtain and submit the required proof of continuous ownership.

    4. Count the words in the proposal. If the proposal, including the accompanying supporting statement, exceeds 500 words, inform the shareholder of the 500-word limit and timely indicate that the proposal will be excluded unless the shareholder trims its length to comply with the limit. The type of proponent who runs afoul of the 500-word limit has a high probability of lacking the focus or enthusiasm to redraft the proposal.

    5. Watch the pros and cons of arguing that a proposal is false or misleading. Although companies generally should not be shy about asserting any applicable substantive bases for excluding a shareholder proposal, in some circumstances a company may be well-advised not to seek exclusion on the ground that the proposal is false or misleading, even where the exclusion seems plainly applicable. When a company establishes that information in a proposal is false or misleading, the SEC staff nevertheless likely will require the company to include the proposal in its proxy statement if the shareholder agrees to re-draft the proposal to clarify or eliminate the false or misleading statements. In some cases, this process has the effect of helping the shareholder remove from the proposal outrageous, offensive, or incorrect statements that might otherwise provide vote-influencing insight into the proponent's motivation or seriousness.

    6. Watch for "ordinary business" disguised as "significant policy." Rule 14a-8(i)(7) permits companies to exclude proposals that relate to the company's "ordinary business operations." A proposal that raises a "significant policy" issue, however, may not be excluded under the "ordinary business" exclusion. Sophisticated shareholder proponents have learned to disguise "ordinary business" proposals by embedding them in proposals that, on their face, address subjects that have been declared by the SEC staff to raise significant policy issues. Because the staff deems the subject of executive compensation, for example, to involve significant policy, proponents often craft proposals that seek to tie executives' compensation to the company's "achievement" of an "objective" that may constitute ordinary business (e.g., improvement of employee working conditions). The staff has occasionally shown a willingness to lift the mask on proposals of this type and permit their exclusion.

    7. Consider omitting the identity of the proponent from the proxy statement. Although most companies choose to identify the proponents of shareholder proposals in their proxy statements, the rules do not require that the proponent be identified. Instead, the company may indicate in the proxy statement that the company will provide identifying information to shareholders promptly upon request. If being identified in the proxy statement seems to be part of a proponent's motivation for pursuing the proposal, consider leaving the proponent's name out of the proxy statement. Doing so may make the proponent seek a friendlier company next proxy season.

    8. Take the high road when drafting a statement in opposition. Any statement in opposition to a proposal included in the company's proxy statement should be courteous and businesslike in tone, regardless of the nature or tone of the proposal, and should avoid criticism of the proponent. This advice may be hard to follow where the proponent is abrasive or the proposal includes offensive statements, but the company stands a much better chance of obtaining the support of shareholders if the proponent is treated respectfully.

    9. If the proponent fails to advance the proposal at the meeting, do not call the matter for a vote. It is the responsibility of the proponent to make a motion to approve the proposal at the annual meeting. If the shareholder fails to attend the meeting or to make the motion when called upon to do so, the company has no obligation to call the proposal for a vote. The company should assess, based on the number of proxies voting on the proposal, the effect of publishing the results of the vote in the company's next Form 10-Q. If the company is opposed to the proposal but shareholders showed significant support for it, the company may not wish to publish the voting results in the Form 10-Q. On the other hand, if the proposal garnered little support, the company may wish to highlight that weakness in its Form 10-Q, and may also be able to exclude the proposal from future proxy statements based on the proposal's failure to gain the support levels specified in Rule 14a-8.

    10. Limit the proponent's "air time" at the meeting. The SEC's rules do not specify the amount of time that a proponent is allowed to speak at the annual meeting in support of his or her proposal. This aspect of the process is governed by state law, which likely will require only that the shareholder be treated "fairly." Most companies conduct their annual meetings on tight timetables, and devote little time to discussion to any of the matters to be voted upon at the meeting. If the company generally spends only a minute or two discussing company-sponsored proposals, the company should limit a proponent to a similar amount of time, and should inform the proponent of the time limit in advance of the meeting.

    * Member of the SEC's Division of Corporation Finance from 1982 to 1984 and Counselor to the SEC's Chairman from 1984-1986.

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    9. Ten Practice Pointers

    by Charles Elson, Edgar S. Woolard, Jr. Professor of Corporate Governance, University of Delaware*

    1. View the corporate governance related shareholder resolution as a potential positive event rather than a negative. Making the changes recommended by the proponents builds good-will with your investors, is usually business-friendly and creates better performance through greater accountability.

    2. Never allow a resolution to come to a vote — work towards a compromise. Even if you win the vote, you lose. A sufficiently large number of votes in favor of the resolution signals dissatisfaction with management and may provide the base for a potentially successful proxy fight.

    3. Avoid attempting to keep a governance related resolution off the ballot by seeking a SEC no-action ruling. More likely than not, you will lose the attempt and end up angering your investors for no good reason. And, even if you are successful, you will only create energized investor ire that will come back in the form of a new, reworded resolution that will pass SEC staff muster.

    4. Always give the proponents ample time to speak in favor of their proposals at the annual meeting. It is their right as investors. No one has ever been harmed by informed discussion and the management and directors may even end up being persuaded by their points.

    5. Be professional, respectful and courteous to proponents. They had enough faith in you to invest their hard-earned dollars — show them the same respect.

    6. Make sure that your directors attend the annual meeting. It is the one time each year that they must face their voters. It is not a pleasantry but an obligation that is based on fundamental notions of accountability. At best, they learn something and create good will; at the worst, they have given up a couple of hours.

    7. If a resolution is approved by the shareholders, take it seriously. Although legally you need take no action, from an ethical and even practical standpoint, you should appropriately respond — it is their company after all. To deny them that "say" will only make it more difficult to raise capital from them in the future and certainly will increase the odds of a successful proxy fight.

    8. When you receive the resolution vote tallies, immediately report the results to the proponents — whether they won or lost, they are entitled to learn the results. Remember that their ultimate concern is the company's success. That is why they brought the resolution to begin with. As part of management, the company's success is your success too. Everyone in this arena is fundamentally on the same side.

    9. Try to avoid reliance on the technicalities. You may be right on a word count but wrong on the ultimate objective — satisfied investors.

    10. I was once told never to ignore a customer complaint. If they cared enough to call you, you probably have a problem that needs addressing. The same rule applies to a shareholder proposal. It is not a simple thing to put a resolution together — if someone makes the effort, there is probably some problem worth addressing.

    * Also Director of the Center for Corporate Governance at the University.

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    10. How to Avoid Receiving Shareholder Proposals

    by Terry Gallagher, CEO of Corporate Governance Associates, LLC* (corpgov61@aol.com)

    1. Avoiding shareholder proposals from being presented at the Annual Meeting of Shareholders starts with establishing relationships with the groups of shareholders who frequently make proposals, primarily large institutional shareholders, international union pension funds, religious groups and shareholders with a particular issue.

    2. Meet with these shareholders on a regular basis so that you know them and their issues. Establish a relationship of trust.

    3. Open a dialogue with the senior management and the Board of Directors so you can convey the shareholders' positions to them. Let the shareholders know that you have that access so that they feel the discussions with you will receive consideration at the highest level.

    4. Join the organizations of investors to present your views and establish relationships.

    5. If in spite of all your efforts you receive a shareholder proposal, acknowledge it immediately and request a meeting with the proponent. Prepare your position and present it to the proponent. Establish fallback positions to reach a compromise between your's and the proponent's position.

    6. Consider seriously whether there are any grounds on which the proposal may be excluded from your proxy statement if you cannot convince the proponent to withdraw. Even if you conclude there are grounds, it is generally best not to file for a no-action letter if there is any chance that further negotiations will result in withdrawal.

    7. If you are unsuccessful in avoiding the proposal, then make an effort to solicit support from the shareholder groups to vote with management on the proposal. With the relationships you have already established, this should hold down the vote in favor of the proposal and either prevent or discourage the proponent from bringing it up again.

    8. Prepare your best defense of management's position for the proxy statement. It is important for convincing all the shareholders, but particularly for use as a tool with the institutional shareholders.

    9. Prepare your Chairman so that he or she is fully versed in the substance of the proposal and management's position. He or she should be comfortable in debating the merits of the proposal with the proponent.

    10. If the proponent or a representative is not present at the meeting, do not consider the proposal — even if the vote is clearly against it. It is preferable that the proposal not be discussed in any post-meeting report and that the proponent be barred by not presenting it.

    * Recently retired as Vice President-Corporate Governance of Pfizer, Inc.

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    11. Considerations Upon Receipt of a Shareholder Proposal

    by Andrew Gerber, Partner, Hunton & Williams* (agerber@hunton.com)

    1. Always Ask For Proof of Beneficial Ownership. I always advise clients to request this information, even if they are virtually certain that a proponent meets the ownership requirements under Rule 14a-8. Companies seeking to exclude shareholder proposals should create as many reasonable hurdles as possible since proponents occasionally trip over them.

    2. Determine Whether the Proposal Offends Anyone. While the goal of most companies is to exclude all proposals, some proposals are more likely to offend or embarrass than others. Proposals that are not offensive (for example, pure corporate governance proposals), may not be worth a significant commitment of corporate time and resources to attempt exclusion. Offensive proposals generally attack a specific person or project. Further, inclusion of non-offensive proposals is good for shareholder relations and provides shareholders with a seat at the table.

    3. Submit First — Negotiate Later. Under Rule 14a-8(j) (Question 10), if a company intends to exclude a proposal from its proxy materials, it must file its reasons with the SEC no later than 80 days before it files its definitive proxy materials. Occasionally, a company will miss this deadline due to prolonged negotiations with a proponent. If the proposal is not ultimately withdrawn, the SEC may not accept or rule upon a no-action letter after the 80-day deadline. I always advise clients to submit a letter to the SEC, even if they expect a negotiated withdrawal. By filing the letter with the SEC, they leave themselves more flexibility and leverage.

    4. Research, Research, Research. This one is self explanatory. With an existing deep database of no-action letters, there is limited virgin territory left in the shareholder proposal world. Barring a change in position, you can almost always find relevant guidance. Find out how the type of proposal or a particular proponent has fared in the past.

    5. Don't Make Losing Arguments. After you have done your research, you can determine what the likely result will be if you submit a no-action letter. I always advise clients against making weak arguments on clear losers. It is a waste of time and money and is not appreciated by the SEC staff. If you have a strong, new angle on an old loser, that may be an argument worth making.

    6. Don't Give the Proponent Any Credit in the Proxy Statement. I always counsel clients to take advantage of Rule 14a-8(l) (Question 12). I am convinced that a large number of proponents are more interested in the spotlight than the substance of their proposal. Some proposals are submitted for perverse reasons such as the proponent just wants his or her name in a Fortune 100 proxy statement; some proponents want to show their constituents evidence of their corporate harassment campaign; others may want to plug some organization. Rule 14a-8(l) lets you take the credit away from these proponents by not mentioning them in the proxy statement. Always use it.

    7. Distinguish Between Institutional and Individual Shareholders. This is primarily a shareholder relations issue. Life at your company will be much less fun if your institutional shareholders are not happy. They are more sophisticated, have more resources and can inflict more harm on your company. Institutions generally focus on pure corporate governance proposals and take a more business-like approach. As noted in #10 below, institutions are much more likely to litigate a perceived wrongful exclusion of their proposal. However, institutions tend to be more reasonable and accordingly, more likely to withdraw their proposal as part of a negotiated settlement.

    8. Solicit Views on the Proposal From Within the Company. Always pass the proposal through the people at the company that are likely to have substantive knowledge about the proposal. For example, a recent proposal to a public utility looked, at first glance, to be includable. However, after review by and discussions with the company's regulatory personnel, it was clear that the proposal was excludable.

    9. Network With Other In-House Counsel. Representing corporate clients, I promote communication among clients (even among competitors) with respect to Rule 14a-8 matters. Frequently, companies receive the same proposal or deal with the same proponent. This is a great resource for finding and sharing information about proponents, proposals, Rule 14a-8 arguments for exclusion and past experiences generally. I would view this as an additional research tool that should not be wasted.

    10. Last Resort — Assess the Proponent's Litigation Probability. Since SEC no-action letters are not binding on companies or the courts, in the event that the SEC staff does not concur with a company's position, such company may still exclude the proposal, albeit with some risk. Generally, institutional investors are more likely to litigate than individual investors. However, certain proponents purporting to act in an individual capacity may be supported by larger institutions. Only proposals that are close to the includable/excludable line should be considered for omission in the face of an SEC no-action letter denial. The SEC may not be willing to commit substantial time and resources to enforce a close call under Rule 14a-8. However, exclusion of a proposal that is clearly includable is more likely to result in an SEC enforcement action.

    11. The Cabot Treatment. Occasionally, a company finds a nagging proponent that just won't go away. The SEC staff has issued a number of no-action letters to deal with such a proponent. For example, in Cabot Corporation (November 4, 1994), the staff permitted Cabot to exclude a proposal under Rule 14a-8(c)(4) (now Rule 14a-8(i)(4)) because the proposal related to a redress of a personal claim or grievance. What was unusual about this letter was that the staff went on to say that its "response shall also apply to any future submissions to the [Cabot] of a same or similar proposal by the same proponent." The SEC further stated that Cabot's current no-action letter request "shall be deemed by the staff to satisfy Cabot's future obligations under Rule 14a-8 with respect to the same or similar proposals submitted by the same proponent." This little known or used type of no-action letter is a powerful tool.

    * Member of the SEC Staff Shareholder Proposal Task Force (1993-1996, including co-leader for 1995-1996).

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    12. What Every Manager Should Understand About the SEC Shareholder Proposal Rule — Ten Practical Insights

    by John Gorman, Partner, Luse, Lehman, Gorman, Pomerenk & Schick (john@luselaw.com)*

    1. There is a regulatory presumption under SEC Rule 14a-8 that a proposal submitted by a shareholder who satisfies the share ownership and procedural requirements of the rule shall be included in a company's proxy statement. The burden is on the company to justify the exclusion of a proposal.

    2. The SEC staff determines whether a proposal meets the criteria under the rule for exclusion from a proxy statement. Written concurrence from the SEC staff is required to exclude any proposal received by a company, regardless of the obvious applicability of a basis for exclusion (e.g., the proposal is received after the deadline set forth under Rule 14a-8). The SEC staff generally considers itself the guardian of the rights of shareholder proponents.

    3. When challenged, court decisions under Rule 14a-8 have reflected a strong institutional prejudice in favor of a shareholder's right to have a proposal included in a company's proxy statement.

    4. Unless there is prior history, do not assume an antagonistic position with respect to a proponent. Although there are specific timeframes for responding to a proposal, a frank telephone conversation often can ultimately lead to the withdrawal of a proposal.

    5. Determine whether the proponent is an experienced or professional player in the shareholder proposal arena, e.g., an institutional investor, such as SWIB, or a seasoned shareholder activist. The more sophisticated the proponent, the less likely it is that the proposal can be excluded from the proxy statement under Rule 14a-8 (i.e., it has been drafted to withstand 14a-8 review).

    6. It should not be difficult to determine whether the proponent has satisfied the procedural requirements of the rule. If in doubt, and as to the substance of a proposal, consult with securities counsel who is familiar with the shareholder proposal rule. Someone who has a working familiarity with Rule 14a-8 often can determine quickly whether a proposal can be excluded under the staff's interpretation of the rule (i.e., relatively few shareholder proposals should require a significant research assignment).

    7. Be open-minded (i.e., do not automatically react with the notion that you need to talk to a different lawyer) to the advice that requesting SEC approval to exclude a proposal will be a waste of the company's money and the SEC staff's time. Sometimes only the lawyer giving you this advice will benefit from your rejection of the same.

    8. If the substance of a proposal cannot be excluded from the proxy statement, and the proposal is written poorly, consider running the proposal exactly as submitted (i.e., do not attempt to clean it up through Rule 14a-9 objections). Sometimes the quality (or lack thereof) of the proposal speaks volumes in the eyes of stockholders.

    9. Be aware that the shareholder proposal rule can be utilized as a relatively inexpensive tool in a control contest — even though, as a general matter, a proposal cannot mandate board action and must be in the form of a recommendation. For example, a proposal that recommends that the board pursue a sale of the company is includable in the proxy statement. Under the SEC's proxy rules, it is possible for a proponent to solicit support of the proposal from other stockholders without having to prepare and distribute separate proxy materials, since the proxy card distributed by management will enable stockholders to vote on the proposal. A referendum from stockholders on the sale of the company can send a damaging message to a board of directors. On the other hand, also remember that as the rule presently stands, an election contest cannot be conducted under Rule 14a-8 (i.e., stockholders cannot use the rule to nominate persons to the board).

    10. Some of the cardinal rules of a publicly traded company apply equally as well to the stockholder proposal arena: know who your stockholders are, and know how your company's performance compares to industry/peer standards. A company with a strong performance record will have a deeper reservoir of support among stockholders, regardless of the "socially-appealing" nature of a proposal. Weaker performing companies are more vulnerable to receiving a significantly negative stockholder response to a shareholder proposal. Institutional stockholders have a somewhat predictable voting record with respect to the more common types of stockholder proposals.

    • * Member of the SEC's Division of Corporation Finance in early- to mid-1980s and primary draftsman of 1983 rule changes.

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    13. Managing the Shareholder Proposal Process — Strategies for Success

    by Michael Holliday, Retired Corporate Counsel, Corporate & Securities Law, Lucent Technologies

    The process of managing shareowner proposals can be time consuming for issuers. The key to managing the process is communication and responsiveness. In general, one of the major ideas that issuers should attempt to convey to proponents is that including a proposal in the proxy statement often is not in the best interests of the shareowner or the issuer. Thoughtful planning and strategic communications can make what could be a corporate nightmare into a collaborative effort. A few reminders that issuers should keep in mind are: Before your Shareowner Proposal Deadline

    1. Develop an internal communications plan so organizations that would likely be approached by activists/interest groups have an awareness of the players and the issues

     A misdirected or unanswered letter can turn into a proposal. Communicate with internal organizations prior to the start of proxy season to assure that proposals are directed to a central point of contact. This also assures that responses will be consistent.

    2. Obtain the support of your internal business partner

     Obtaining the cooperation at an early stage of the internal organization where the subject matter expert is located is important. For example, it may be possible to perform a study or take some other actions that would satisfy the proponent if the involved organization is willing to bear the expense.

    3. Do your homework — Review internal policies and practices to see if the proposal duplicates an existing internal practice

     In some cases, a company may have a "policy" in practice that has not been formally documented. Even if the practice is not sufficient to convince the SEC staff to exclude the policy, the existence of the company practice may persuade individual shareowners and institutions, as well as voting services such as Institutional Shareowner Services ("ISS"), to support management

    4. Know the shareholder proposal rule

     When a proposal is received, make sure all the technical requirements have been satisfied. If a shareowner does not comply with the requirements of the proxy rules (i.e., proof of ownership), and does not agree to voluntarily withdraw the proposal, file for no-action relief as soon as possible after the deadline for shareowner proposals.

    5. Openly communicate with your shareowners

     Some shareholders may decide to submit proposals because they feel they have no other options. For example, directing shareowners to a company Web site may give them enough information on the subject matter to lead to a withdrawal. A discussion of how time consuming the process is, as well as how expensive it can be for the company, along with an explanation that the shareowner will have to present the proposal, is sometimes enough to prompt a withdrawal on the part of the shareowner.

    After Your Proposal Deadline and Before Your No-Action Letter Deadline

    6. Involve appropriate members of upper management

     You should discuss the issue with management. The company, in appropriate cases, may be open to voluntarily adopting the proposal in which case you should seek the concurrence of upper management. Try to involve the decision-makers and engage in a dialogue with the shareowner before the proxy statement is sent to the board of directors. If an institutional proponent sees that a company is taking the matter seriously, it may agree to withdraw. If the proposal is not withdrawn and the matter is a policy issue management does not want to change, it may be useful to test the waters with the shareowner vote. A proponent may gain a better understanding of the company and its reasons for opposing a proposal, and not resubmit the next year.

    7. Plan to submit no-action requests to the SEC staff well in advance of the deadline

     It is benefical to issuers to submit letters to the SEC staff as soon as practicable after the proposal deadline, if not sooner. If feasible, it is best to have the request letters to the SEC prepared by the time of the proposal deadline. It can take up to two months to receive a response from the SEC staff.

    After No-Action Letters are Submitted, and Prior to Printing

    8. Keep a dialogue open with your shareowner

     Again, it helps to keep the lines of communication open with the proponent in an ongoing dialogue. There still is time for a voluntary withdrawal of the proposal.

    9. Circulate the proposals and company opposition statements to your Public Relations and Investor Relations departments

     If a proposal is submitted by an activist institutional shareowner, there may be press coverage. Keeping all organizations informed that have a need to know and that may have to respond to press inquiries is helpful.

    After Printing and Prior to Annual Meeting

    10. Have additional Q&A developed in anticipation of discussion at your Annual Meeting. Plan alternate scenarios in case the proponent is a "no-show" at the meeting

     When preparing briefing materials for the Annual Meeting, anticipate questions that may be posed by other shareowners on the proposals. In addition, management should be in agreement before the meeting whether to present a proposal if the proponent does not appear to introduce a proposal. If the proposal is a "hot issue," an issuer may want to consider the public relations impact if the proposal is not presented. If the proposal is from a shareowner who routinely submits proposals but never attends the meetings, it may benefit the issuer to make a brief statement that the proponent is not present and did not notify the company beforehand. In this case, it will be a part of the public record and may assist in obtaining future exclusions if a proponent tries to submit the proposal the next year.

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    14. Ten Insights on Shareholder Proposals

    by Cynthia Richson, Investor Responsibility Program Director, and Keith Johnson, Chief Legal Counsel, State of Wisconsin Investment Board*

    1. Is the company an under-performer? Many shareholders subscribe to the old adage "if it ain't broke, don't fix it." Shareholder proposals are more likely to grab attention and be successful when the company has been under-performing its peers for several years or recently suffered a major gaff.

    2. Do you know the facts? Get educated. Make sure you have done your research and understand the other side's point of view. A sure way to fail is to engage in a public fight over a shareholder proposal when it is obvious to others that your views are not well-founded in reality.

    3. Will the proposal enhance shareholder value? Shareholders are usually more supportive of proposals that will address factors that have been interfering with a company's success or are otherwise expected to positively effect the company's value (e.g., remove an insulating poison pill or eliminate a staggered board). If there is no financial basis for pursuing the proposal, many shareholders will not take it seriously.

    4. Will other shareholders support the proposal? If you don't already know, find out how other shareholders view the issue and what their voting policies are. Is a major block of stock controlled by insiders or affiliates that oppose the proposal? Is the company widely owned by small retail investors who are not generally aware of the situation and may be expensive to reach? In general, if a proposal involves an issue on which institutions (and their advisors) maintain established voting policies, the larger the percentage of institutional ownership of a particular target company, the more certain you can be of the outcome. (Be aware of applicable state change in control statutes and any poison pill that might be triggered where a change of control issue is involved and cooperative shareholder action is contemplated.)

    5. Will the proposal survive legal challenges? Has the SEC approved the same proposal for inclusion in a proxy in the past? Use of different language or a new concept could provide fodder for a no-action letter request to omit the proposal. When a binding by-law change is sought, is there law on whether the resolution is permissible under state law where the company is incorporated? (For example, the Oklahoma Supreme Court has upheld the right of shareholders to adopt binding bylaws on shareholder approval of poison pills, while the issue has not yet been resolved in Delaware.)

    6. Negotiate. Talk to the other side about the proposal. If they have concerns that are legitimate and you are uncertain of a win, search for a compromise that can achieve the goals of both sides. Involve the independent directors in discussions if you think they are likely to be helpful. Remember that both sides should ultimately be after the same thing — a successful company that is highly valued in the marketplace.

    7. Can the existing board block implementation of the proposal? If the proposal passes, can the company ignore it or undermine the effectiveness of the change? Most shareholder resolutions are merely advisory and have no binding effect. Others can be technically followed without any true implementation of the proponent's intent (e.g., independent directors can be added who are totally ineffective). Shareholders might consider running an alternate slate under these circumstances.

    8. Is there a potential acquirer for the company? Shareholders and management should not overlook one of the market's best means of achieving corporate change — the acquisition. When a company is faltering, current management does not have the will and the skills to do what needs to be done, and it is not clear that a shareholder proposal can solve the problem, a sale of the company to more capable managers might be the best way to tap unrealized value. However, this option requires close attention to structure and pricing of any transaction to ensure that fair value is received by the shareholders. Otherwise, the company might be subjected to legal action.

    9. Should the shareholder sell its stock? When a shareholder does not hold the stock in an index fund, be sure the shareholder has considered whether the company continues to fit in its portfolio. Shareholders should always evaluate whether they have a long-term commitment to maintaining ownership in the company, as the time and effort required for a proxy fight may not be merited if the stock could soon be sold. Indeed, a proponent must continue to hold at least some stock through the date of the shareholder meeting.

    10. Keep your message simple and make it timely. If the proposal is submitted to shareholders for a vote, keep your communications with them short and focused. Limit the number of points you try to get across. Structure communications to be clear and easy to understand. Remember that many shareholders may not be as interested in — or as knowledgeable about — the issue as you are. You have to get your story to them when they are deciding how to vote, grab their attention, be understood, and give clear instructions on what you want them to do. Follow up with as many shareholders as possible to ascertain whether they have any questions and how your message is getting across.

    * The views expressed are those of the authors and do not represent an official position of the State of Wisconsin Investment Board.

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    15. Ten Tips When Faced With a "Sell the Company" Shareholder Proposal

    by Cynthia M. Krus, Partner, Sutherland, Asbill & Brennan (ckrus@sablaw.com)

    1. Investigate the shareholder who is making the proposal. First and foremost, you need to determine who the proponent is. You need to find out as much background as possible.

      • Has the proponent made this type of proposal before?

      • How successful was the proposal?

      • Have the proponent's prior proposals to sell a company turned into proxy contests?

    2. Investigate the proponent's agenda. You need to determine the proponent's preferred course of action. Determine what appetite the proponent has for hostile activity.

      • Does the proponent have the stomach or the wherewithal to go the distance?

      • Does it seem that the proponent wants to elicit discussion or is really serious about forcing a sale?

      • What is the proponent's ownership position in your company?

      • What, if anything, has the proponent said in the press about either your company or other companies?

    3. Try to determine what the proponent truly wants. Negotiate with the shareholder to withdraw his sales proposal. Find out what he wants. Is he trying to drum up support for the sale of the company? Does he want to meet with members of the board to determine their strategic vision? Is he unhappy with the stock price?

      You should attempt to listen to his concerns and build a common ground, and, if possible, work with him. You may be able to satisfy him. If nothing else, you will know a little more about him than before you started the negotiation — and the upside of having the proposal withdrawn is the home run.

    4. Never forget to check the details. Although there is limited likelihood that the SEC will permit you to exclude a sale proposal from your proxy materials, you need to make sure that the shareholder has followed all the technical requirements of Rule 14a-8. You may miss a significant opportunity to exclude the proposal if you do not demand proof of ownership or count the days. Many proposals never make it to the meeting because of a technicality — and a sale proposal is one you would rather not deal with.

    5. Develop a strategy to respond to the sale proposal. More than likely the sale proposal will suggest that your company hire an investment banker to "explore the company's strategic options" which is code for selling the company to the highest bidder. Yes, this type of proposal must be included in your proxy under most circumstances — but one major decision point is how to deal with the supporting statement. Many times the supporting statement will make assertions that will make you squirm. Do not let it get personal! You have three alternatives:

      • First, you can respond to the assertions in the supporting statement as it was submitted. This is sometimes the best approach because if the shareholder has included gross inaccuracies then it is easier for you to draft a convincing statement against his proposal, thereby making a persuasive case for all shareholders to vote on.

      • Second, attempt to negotiate with the shareholder in order to eliminate possible misstatements. However, be careful not to make the shareholder look more credible.

      • Third, submit a no-action letter to the SEC to have the proposal excluded on the basis of the misleading statements. This is generally not effective because the SEC staff will give the proponent the opportunity to correct any statements that you convince the staff are misleading. Submission of a no-action letter has little utility unless there are gross misstatements that the proponent is not willing to modify, and you do not want them printed in your proxy.

    6. Know your shareholders. If you do not already know who your shareholders are, this is the time to get to know them. You need to know who will support the sale proposal, who are your institutional investors and how they vote, as well as the percentage of retail investors you have. Talk to your largest investors and open the lines of communication. This type of communication will be helpful to you even outside the context of the proposal and will help you determine where particular investors stand in case of a proxy contest.

    7. Hire a proxy solicitor. You need to hire a professional proxy solicitor that will not only help you find out who your shareholders are, but also get the outcome you want. The sooner a solicitor is retained the more useful it can be. Even if the sale proposal passed, you want to reduce the level of support for the proposal as much as possible. Furthermore, you need to be prepared in case the proponent takes more aggressive actions, such as a proxy contest or tender offer.

    8. Monitor any unusual activity in your stock. You need to be aware of an accumulation in your stock. Essentially, the proponent is trying to put a "for sale" sign on the door. You need to be aware that such activity may indicate that an acquiror has already been identified. You should have stock watch firms in place to alert you to this type of activity. You also need to monitor any filings with the SEC. Watch for possible formation of a group — even if the proponent cannot effect a takeover himself, he may be seeking allies. If he does, he has to disclose the existence of a group in SEC filings.

    9. Control the meeting. Regardless of whether the proponent shows up to present the proposal, you need to be prepared to run the meeting so that you do not create a platform for his issues. You should adopt rules of procedure that dictate the governance of the meeting, including the amount of time that may be spent on each item and how long a proponent may comment — no more than five minutes. Prepare your CEO in advance by giving her answers to possible questions. Adjourn the meeting as soon as the official business is concluded.

    10. Prepare for the worst. Keep in mind that even if the sale proposal passes, the worst that can happen is that you hire an investment banker to review "strategic alternatives." Even though a number of sale proposals have passed, relatively few companies have been sold as a result. Sometimes investors and the public do not even know the outcome of the proposal

      or the investment banker's review. However, a greater problem occurs if the proponent is motivated by his success to take even more aggressive action such as mounting a proxy contest. In the end, you need to make sure you are prepared for whatever the proponent decides to do. Developing a strategic plan for your company is the best defense.

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    16. Nine Principles For a More Effective Board of Directors

    by Paul Lapides, Director of the Corporate Governance Center at the Coles College of Business, Kennesaw State University

    Boards and board members have received a lot of attention in the last few years; most of it bad. Business Week reported "At troubled companies, the same directors' faces pop up" and included pictures of the 10 directors most often on boards of companies targeted by shareholder groups. Forbes announced the director who was the "Worst Board Appointment," and, maybe most interesting, the Teamsters union announced "Corporate America's Least Valuable Directors." Other institutional investors have also started to focus on individual directors.

    For many CEOs and directors, the search for ways to make the board more effective may cause some head scratching, confusion, and bewilderment. For most, the question will cause some reflection on directors' role and responsibilities. The increasing scrutiny of their work and contribution, not to mention the accompanying additional time commitment required for effective board service, may signify that the time has come to leave the board.

    Let's face it, shareholder activism is not going to go away and maybe that's a good thing. After all, while many Fortune 500 companies have made significant improvements in their governance policies and practices, the majority of public companies have made very little progress. And, as you probably know, regardless of all the attention on corporate governance, the reality is that as long as the company performs well, no one really cares about your board. No one, that is, but you — the CEO, board chair, and other directors.

    You care because you want to do what is in the best interests of the company and its shareholders and, in most cases, you are a big shareholder. With that in mind, what can you learn from all this attention to boards and directors? I think you will find that there are nine principles you and the board should consider adopting.

    1. The board must understand and support management's vision and strategy. If the vision and strategy are not clear to the directors, you can be sure that they will not be clear to management or employees. Directors should question management about the vision and strategy.

    Many companies include their vision in their annual reports, some have it on their business cards, wall plaques, and I've even seen it on mouse pads. The point here is that the board needs to assure that management has a vision and strategy that make sense and that the vision is shared by management and employees throughout the company.

    One board chairman and CEO recently stated, "If the board cannot do that [support management's vision and strategy], it should replace management." After all, if management is unable to inspire confidence from the directors, it is very unlikely to have much success with the employees or in the marketplace. Other chairs/CEOs have replaced a director or two.

    2. Boards should have a majority of independent — not just outside — directors. The stock exchanges require listed companies to have a minimum of three independent directors. With most boards having seven or more directors, three is just not enough.

    Management on the board should be limited to one or two members, typically the CEO and President/COO. Many companies have only the CEO on the board. The insiders already know what is going on (or should). Their opinions are known to the CEO and each other (or should be). The board is there to assure that it all makes sense — strategy, operations, human resource planning, mergers and acquisitions, etc.

    The stock exchanges have recently revised their definition of an independent director. Independence has been defined broadly by the stock exchanges, and more specifically by the National Association of Corporate Directors (NACD) and the Council of Institutional Investors (Council). The Council defines an independent director as "someone whose only nontrivial connection to the corporation is that person's directorship."

    The Council includes, as part of its definition of an independent director, a list of relationships that pose the greatest threat to a director's independence. The existence of any one of these relationships removes a director from the independent category. The Council's list says, "a director will not generally be considered independent if he or she is, or during the past five years has been:

    3. Boards should develop board leadership skills among the independent directors. What does that mean? The directors may need to be empowered to take on leadership roles as board committee chairs, committee members, or for special projects. If you want the most out of the directors, you want them to feel and act as active participants and a vital part of the company's leadership, not like infrequent visitors to the company.

    Some companies require directors to visit corporate facilities on a regular basis. Home Depot boasts monthly store visits by individual directors, and when they visit, their presence is announced to all employees and customers. The directors are there to observe and listen. How often is this done at your company? Should it be done? What about letting employees and customers know you are here for them?

    There has been a lot of talk and support for independent directors serving as board chairs. Studies indicate that 30% of public companies do this. The chair leads and manages the board, while the CEO leads and manages the company. It is a good idea and seems to be very important to separate these roles for companies in transition or with major problems. Otherwise, the marketplace doesn't seem to have a strong opinion on this issue.

    Another way to promote board leadership is to appoint a lead director, someone to whom the independent directors look for leadership. This person should be ready to rise to chair the board if necessary or provide leadership to the public, employees, and others as circumstances warrant. This might occur because of management conflicts, management malaise, or the type of crisis that requires strong leadership which management is no longer able to provide (e.g., death of several members of management, unexpected departure of CEO and/or other members of management, or loss of investor/public confidence in management).

    4. The independent directors should actively participate in establishing board procedures, agendas, and policies. Addressing a few questions will help directors participate,

    5. The independent directors should schedule regular meetings without insiders. Many companies already do this. At first, these meetings are often difficult. What do the directors talk about without a formal agenda? Without management's reports?

    If they have nothing to talk about, they will probably realize how dependent they are on management. It should encourage the directors to get more involved — to read management and industry reports, ask questions, and listen more carefully.

    As the independent directors get comfortable meeting without insiders, the conversation is likely to address issues about which some individuals may have concerns, but didn't want to question. Maybe everyone is concerned, but each mistakenly thought that if no one else was, it's probably okay. A director might be concerned about the CEO — it doesn't have to be bad. It could be about working too hard — yes, working too hard. CEO and management's health and wellness, mental and physical, should be important to directors — they are clearly important to the company's success.

    Other issues that might come up should include succession planning, retaining key employees, economic conditions, or a merger opportunity. These meetings will produce issues that need to be discussed with management, possibly for the second or third time.

    It is easy to listen to management and think you know what is going on. Meeting without management will help all board members speak up and possibly identify problem areas, areas for additional discussion, or the directors' need for more information.

    These meetings can be led by the independent board chair, or absent one, the lead director, or any other independent director. While management might be concerned about these meetings at first, they will actually produce a much more effective board — board members will be more knowledgeable and more involved with the important issues and decisions management needs to address. It will also make the directors more confident with management and the company.

    6. The audit committee, compensation committee, governance committee, and nominating committee should be composed solely of independent directors. This is already required by the stock exchanges for the audit committee. For the other committees, it may be required by state statute or other regulations. Whether required or not, independence is important.

    For the nominating and governance committees (often one committee), independent directors should nominate new directors. One of the first questions that will be asked if the company has problems is: Who controls the board? Or, to say it another way, who picked the board members?

    I am not proposing that the independent directors nominate candidates without getting input from management. After all, directors need to be able to get along with the CEO, other executives, and the other board members. That's very important, but candidates should be nominated by independent directors, not management. The CEO can suggest candidates to the committee, and so can shareholders — who often do.

    It is easier to inspire confidence in the marketplace (shareholders, analysts, investment bankers, and media) if the directors are nominated by independent directors. This point highlights why boards should have a majority of independent directors.

    7. The board should conduct annual performance reviews of the CEO and other key members of management, board members, and the board itself. In most companies, everyone receives an annual evaluation addressing past performance and development plans. Everyone, that is, but the CEO. The board should evaluate the CEO — not just for determination of next year's compensation, but to give him or her feedback.

    A lot of companies are doing this today. I've sat through a few CEOs' 360 degree reviews and, each CEO, while humbled at first, really appreciated the feedback. A little humbling may be a good thing for most CEOs.

    Similarly the directors should evaluate the board and the board chair or the governance committee should formally evaluate each individual director's performance and the board as a whole.

    8. The board should develop an annual agenda of board activities to assure that it fulfills all of its duties and responsibilities properly. Overseeing a corporation's business can impose substantial demands on the time of its directors. Much of that time is spent reviewing and approving items that require minimal discussion, like the date of the annual shareholders' meeting, and complying with other ceremonial and regulatory requirements. In fact, items requiring immediate board approval are often the only items on the agenda at many board meetings. Consequently, a great deal of time is spent on issues that are urgent, at the expense of discussing issues that are important — such as strategic planning.

    To fulfill their numerous duties and responsibilities, the directors should set an annual or perpetual agenda for board activities. This will enable the CEO and other directors to agree in advance when various topics will be reviewed and deliberated. An annual agenda will enable directors and committees to prepare for and give in-depth attention to specific topics at each meeting, in addition to addressing the inevitable urgent matters and routine compliance tasks. The annual agenda should include meetings that address:

    Some of these topics may be grouped together, such as strategic and portfolio planning, and human resource and performance appraisals. Some topics will probably warrant being discussed only once each year (e.g., strategic planning, human resource planning), while others may warrant discussion two or more times during the year, depending on the marketplace and the particular needs of each organization.

    9. Directors should have a substantial personal stake in the company, their pay should be only in stock and cash, and directors' compensation should be fully disclosed in the proxy statement. The debate should not be about cash or stock, both are fine. The fringe benefits should be stopped — medical benefits, pension, life insurance, and control over charitable contributions. Directors should be paid for their service, not for their length-of-service, which often makes directors more reluctant to question management.

    Disclosure is another straightforward issue — disclosing annual retainer, meeting fees, committee fees, special fees, and director stock option plans. Shareholders also want to know the total amount paid to each director.

    The current debate is mostly about having a stake in the company. A conversation observed at a shareholder meeting went something like this:

    Shareholder: Mr. [director], please tell us why you don't believe [company name]'s stock is a good investment.

    Director: How do you know what I think about the company's stock?

    Shareholder: Because you own zero shares of stock.

    Director: Well that doesn't mean that I don't believe in the company.

    Shareholder: What does it mean? What else should we assume it means?

    So, if stake is important, and almost everyone agrees on this, how much is enough? The answer is not easy, but many companies are adopting a minimum number of shares or minimum dollar amounts (e.g., three to five times directors' annual compensation, $100,000). And that's good. Every board chair and CEO should wonder why a director has not made a significant investment in the company — significant to that particular director's net worth.

    Consider the nine principles presented above. Share them with your fellow directors. Discuss them at your next board meeting. These principles will improve board performance, and a more effective board will improve the company's reputation and performance. That's good for you, the directors, employees, and customers, and it's good for the shareholders.

    To summarize:

    1. The board must understand and support management's vision and strategy.

    2. Boards should have a majority of independent — not just outside — directors.

    3. Boards should develop board leadership skills among the independent directors.

    4. The independent directors should actively participate in establishing board procedures, agendas, and policies.

    5. The independent directors should schedule regular meetings without insiders.

    6. The audit committee, compensation committee, governance committee, and nominating committee should be composed solely of independent directors.

    7. The board should conduct annual performance reviews of the CEO and other key members of management, board members, and the board itself.

    8. The board should develop an annual agenda of board activities to assure that it fulfills all of its duties and responsibilities properly.

    9. Directors should have a substantial personal stake in the company, their pay should be only in stock and cash, and directors' compensation should be fully disclosed in the proxy statement.

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    17. Shareholder Proposal Considerations

    by Philip R. Lochner, Jr., Member of the Board of Directors of Clarcor Inc., and of Apria Healthcare*

    Many companies view the proxy proposal process as beginning with the receipt by the company of a proposal from a shareholder. But whether a company ever receives a proposal depends on a variety of factors which frame the environment in which a company operates and how it is perceived. Any company concerned about proposals needs to start with by considering these factors. 1. The first factor is company performance, both as reflected in its financial statements and in its stock price. The best situation a company can find itself in is never receiving shareholder proposals in the first place. The best start to achieving this nirvana is to have great financial and stock price performance.

    2. A second important element in reducing vulnerability to shareholder proposals is having good governance. Any company with a very large board, with too many insiders on that board, with outside directors who are also consultants to the company, and with no director retirement age — to name a few examples — is asking for trouble.

    3. Even companies which generally perform well and have good governance structures can get shareholder proposals. And all companies are vulnerable to the vagaries of economic cycles and stock market ups and downs. So every company concerned about shareholder proposals needs to worry about more than economic and stock market performance. Companies also need to worry about their constituencies, which are a common source of shareholder proposals. Good relationships with a company's employees, labor unions, regulators, customers and the communities in which it does business will go a long way towards reducing the likelihood that the company will receive a shareholder proposal.

    4. Another step companies can — and should — take to reduce the likelihood of receiving shareholder proposals, is to track the principal shareholder activists carefully. Some of these — such as certain state and local public pension funds — may be a source of shareholder proposals irrespective of what business a company is in. Others — environmental groups, for example — may be a more likely source of shareholder proposals for some industries (heavy industry, for example) than for others (e-commerce companies). Companies need to figure out which activists are the most likely sources of shareholder proposals for their specific businesses, and be aware of the issues which these activists are interested in. Then they need strategies for defusing these issues before they reach the stage when they become shareholder proposals.

    5. Another essential prerequisite for remaining on the sidelines in the shareholder proposal game is for a company to manage its media and public relations efforts effectively. A small and obscure company's mistakes are unlikely to make the front page of The Wall Street Journal; conversely, nearly anything a Fortune 100 company does will make it into the media. Thus, large companies or companies with widely known products and brands (fast food, clothing) are especially vulnerable to stories which may generate shareholder proposals. While these companies cannot prevent unfavorable publicity once a corporate mistake has been made, they can reduce the fallout from mistakes by full and fast disclosure of those mistakes and comprehensive and speedy efforts to correct the mistakes. It is also important to clean up any damage and put systems in place that can give reasonable assurance that the mistakes will not be repeated. Better yet, of course, is not to make mistakes in the first place, but sooner or later every company will fail in that effort.

    6. Companies need to stay in touch with social and political trends and developments beyond those directly affecting their bottom lines. Being the last company in the United States to bow to what are perceived to be the forces of political correctness on some issue may seem to its CEO like a principled decision. But there is a cost to bucking any social trend, and for companies it may be receipt of shareholder proposals questioning why management is so far behind the times. Remember, the question is not whether in the cosmic scale of things the society's judgments are correct; the question is whether a company is likely to be successful if it is significantly out of sync with the society in which it is trying to do business.

    7. Companies need to have proactive shareholder relations programs to keep on the right side of the shareholder activist community. That does not mean just having an IR department which fields analysts' questions and organizes quarterly earnings conference calls, though those are nice things to have. Nor does it just mean a slick annual report and a Web site, though those rarely hurt. What it does mean is to have someone on staff — the corporate secretary, perhaps, or the general counsel — who is responsible for reminding activist investors that the company is well run and well governed. That, in turn, means that the secretary or general counsel has to get out from behind his or her desk and go see those investors, hear what they have to say, and try to address their concerns. If a company has regular, positive contacts with such investors, it is far less likely that those investors will be the source of shareholder proposals. And if trouble comes, those regular, positive contacts can be of immense value in ending the trouble.

    8. If a shareholder or activist group writes the board or the CEO or any senior officer a letter, the company should use the letter as an opportunity to meet with the author, find out what concerns him or her, and do its level best to meet those concerns. Many companies have ended up on the receiving end of activist shareholder campaigns because they have ignored shareholder letters or calls, or treated activists without basic courtesy and consideration. Company management may find a particular activist to be offensive and ill-informed, but that is no excuse for management behaving badly itself.

    9. If, after doing all these things, a company still receives shareholder proposals (who said life was fair?), then the first thing the company should do is call up the proponent and ask for a meeting. Hear the proponent out. Try to correct misinformation. And, most importantly, see if there is a basis for any kind of compromise which would result in withdrawal of the proposal. Many proponents simply want concrete evidence that management takes their concerns seriously and will try to address them. If they get those assurances, proponents may be willing to withdraw their proposals.

    10. In the very first meeting with a shareholder proponent, make it known that, of course, the SEC has procedures under which the company can contest inclusion of a shareholder proposal, and that while the company sincerely wants to see if there is the basis for some agreement with the proponent, the company must on a timely basis follow these SEC procedures. By saying this up front, the proponent should understand that the proposal will be dealt with by the company simultaneously on two separate tracks — the SEC process and negotiation directly with the proponent. Also make it known — and this is critical for establishing a good faith environment for negotiations — that even if the SEC should decide in the company's favor, the company wants to attempt to address the proponent's concerns if it is possible to do so in a mutually satisfactory fashion.

    11. If a company cannot get relief from the SEC for a proposal which the company feels should not be in its proxy statement, and if the proponent is unwilling to compromise, make sure the company's argument which opposes the proponent's proposal in the proxy statement is clearly written and backed up by facts. Many company statements in opposition appear to be written by lawyers more familiar with trust indentures than with effective communication. Remember that the purpose of the company statement in opposition is to persuade shareholders to vote against the shareholder proposal.

    12. Companies seeking to defeat a shareholder proposal should not rely on the statement in opposition to do the job. Companies need to visit large shareholders and the major services that recommend proxy votes to institutional investors, in order to make the case for why the shareholder proposal is wrongheaded or harmful. Companies need to put their arguments in terms that are persuasive and meaningful to large shareholders and to proxy advisory services.

    * Former Commissioner of the Securities and Exchange Commission.

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    18. Ten Tips for Effective Shareholder Proposals

    by Nell Minow, Editor, The Corporate Library

    1. Choose your target company carefully. Before you submit a shareholder proposal, think carefully about where to file it. In rare cases, the issue that concerns you may be specific to one company. But the SEC's shareholder proposal rule provides that the proposal may not concern either the company's "ordinary business" or any matter relating to a specific person (such as termination of employment). Therefore, in most cases, shareholder proponents will be dealing with more generic issues, and will have a choice of target companies.

    Pick the one that will have the most impact. Factors to consider include:

    2. Pick a company that gets a lot of press coverage, because then your proposal will get a lot of press coverage. Bigger companies get more press. Household name companies get more press. Companies that dominate their geographical area get more press.

    3. Pick a company with the greatest likelihood of support from other shareholders. Check out the company's largest shareholders to try to get a sense of how likely they are to support you. If you are looking at two companies and one has among its largest holders the California Public Employees Retirement System or TIAA-CREF, and the other has 15 percent of its stock held by the company's ESOP, pick the former.

    4. Pick a company with "governance vulnerability." Find a company that has as many reasons for shareholder concern as possible. No matter what the specific topic of your resolution, you always want to characterize it as a vote of no confidence in management. You want a proposal with a broad range of appeal (see below), but you also want a target company with a broad range of reasons to be unhappy. Governance vulnerability factors include shareholder-unfriendly actions and issues like:

    a. poor performance compared to peers,

    b. lack of responsiveness to shareholder concerns,

    c. board members with economic ties to the company,

    d. board members with inadequate investment in the company,

    e. poor pay-performance links, or

    f. a poor asset mix (too much retained cash, poor combination of operating divisions).

    5. Draft a bulletproof proposal. It is a given that the company has all the resources to fight you, and they will not hesitate to use them. Pick a proposal that has already withstood attack at the SEC. This is not the time to make new law, unless your pockets are very deep. Stick with the tried and true on the proposal itself. You can always get creative with the supporting statement (see #7 below).

    6. Do not get creative. Your proposal should strive for two goals, which may at times seem to conflict with one another. First, you want to be able to withstand challenge at the SEC (see #5 above). Second, you want to obtain the greatest possible percentage of votes in favor. It takes at least three to five years for a new kind of proposal to seep into the consciousness of the institutional investor community deeply enough to become a part of their standard proxy voting guidelines. And it is almost impossible to get them to vote with you until that happens. Draft it to be familiar to them and within the range of established proposals that get reliable support. This is why so many people stick with "put the poison pill to a vote" proposals when their real concerns are often elsewhere.

    7. Use the supporting statement wisely. One of the benefits of using a tried and true proposal is that you don't have to waste too many of your limited words explaining it in the supporting statement. That gives you the chance to talk about your real concerns with the company and why it is so important that the shareholders send a message to the board and the outside world about their concerns with this company.

    8. Negotiate. You may get a call from the company asking if you are willing to talk. This is what you hope for. My advice is that no matter what the basis of your concern is, you ask to meet with the nominating committee of the board, or its chair. Any concern that you have with the company that has not been addressed up to now will not be addressed unless you get to the board, and that means some new directors. The agenda for your meeting is the process and criteria for selecting new directors. You can provide some names to illustrate your ideal, as a way of establishing the standard that you want new directors to meet. Insist that the nominating committee use a search firm in locating new directors. Do not withdraw the proposal until the new directors have been announced.

    9. Go around Rule 14a-8 if necessary. The SEC rules govern only proposals that get printed in the company's proxy materials. There are no subject or word limits to proposals that you want to send out on your own or that you want to introduce at the annual meeting from the floor. If you have a concern that does not meet Rule 14a-8 limitations, consider presenting it at the annual meeting. You will never get enough votes to be able to introduce it again next year, but you can get a good discussion going at the annual meeting on a subject you care about. Be sure to notify the corporate secretary of your plans ahead of time.

    You can also go beyond the Rule 14a-8 process by submitting a "220 demand letter" to the company. Under Section 220 of the Delaware General Corporation Law, the shareholders are entitled to inspect certain of the company's records. Use that power to ask for memoranda or notes from board meetings relating to your concerns.

    Another option — if the company's by-laws permit, nominate candidates to the board by submitting their names to the nominating committee.

    10. Choose your battles. Shareholder proposals are limited and nonbinding. They should be used strategically but should never be confused with the underlying issues. You do not need to get a majority vote to send a message to the board. Follow up on your proposal by asking to meet with the board to discuss the issues. And if they do not respond, be prepared to go all the way with a proxy fight

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    19. A Look Over the Shareholder Horizon 10 Things Likely to Occur in the Shareowner Proposal Process

    by Mark Preisinger, Director of Share-Owner Affairs, The Coca-Cola Company (mark.preisinger@na.ko.com)

  • Social activists, many owning no shares in the companies they target, become a greater influence in the shareowner proposal process.

  • Mainstream governance issues give way to a broader range of concerns, particularly social issues.

  • As more players enter the process with more issues, conflicting agendas arise among proponents.

  • Gadfly ranks grow as shareowner activism becomes a cottage industry.

  • The growth of large institutional shareowners continues to create institutional giants, often bigger than the companies they own, further changing the dynamics of the shareowner proposal process.

  • As the process continues to evolve, more cooperation emerges on both sides — proponent and company — in terms of a willingness to dialogue on issues with an eye towards mutually acceptable resolutions.

  • Public relations campaigns, particularly the use of mainstream publicity and the Internet, become the norm as proponents seek to embarrass companies into adopting their positions.

  • "Vote-No" campaigns begin to have more impact where a company has shown indifference to a majority vote.

  • Some Delaware corporations conduct virtual annual meetings out of frustration that their current meetings are no longer useful.

  • Given ongoing frustration by all sides with Rule 14a-8, the SEC considers changes and improvements.

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    20. Ten Tips on Dealing With Shareholder Proposals

    by Lawrence M. F. Spaccasi, Esq., Partner, Muldoon, Murphy & Faucette (lspaccasi@mmflaw.com)*

    The following recommends certain steps a company can take in order to better prepare itself for shareholder proposals and determine its course of action after receipt of a shareholder proposal. These tips should be considered in addition to the obvious tasks of reviewing the procedures required to submit the proposal and the proponent's eligibility to make the proposal.

    1. Review Process for Shareholder Proposals and Nominations. Review your corporate governance documents well in advance of the preparation of your proxy statement t