3.01 Background
In 1998, for the first time, the SEC provided a definition of a “shareholder proposal.” In Rule 14a-8(a), the SEC defined a shareholder proposal as a “recommendation or requirement that the company and/or its board of directors take action, which you intend to present at a meeting of the company’s shareholders.” The SEC also clarified in that provision that “[u]nless otherwise indicated, the word `proposal’ as used in this section refers both to your proposal, and to your corresponding statement in support of your proposal (if any).”fn1]
[fn1] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).
3.02 Mere Expression of Views
A communication that seeks no specific action, but merely purports to express shareholders’ views, is inconsistent with the purposes of Rule 14a-8 and is not a “proposal.” In 1998, the SEC specifically overturned a prior no-action letter in which the staff had not allowed a company to exclude a “proposal” requesting that shareholders express their dissatisfaction with the company’s public position on a controversial political referendum.[fn2]
[fn2] The overturned letter was Pacific Gas & Electric Company, 1997 SEC No-Act. LEXIS 140 (Jan. 21, 1997).
3.03 Request for Information Not Automatically Excludable
The SEC has cautioned that a request for information may qualify as a proposal. In a 1998 release, the SEC stated, “In formulating the definition, it was not our intention to preclude proposals merely because they seek information, and the fact that a proposal seeks only information will not alone justify exclusion under the definition.”[fn3] However, as a practical matter, companies receive and respond to numerous requests for information from shareholders. The key factor is whether there is any indication that the shareholder intends for other shareholders to act on the request for information.
[fn3] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).
3.04 Determining Whether Communication is a Proposal or Suggestion/Complaint
As a practical matter, it is not uncommon for a company to receive a communication that may or may not be a shareholder proposal. The shareholder typically does not state whether such a communication is a proposal under Rule 14a-8 nor does the communication have the typical “trappings” of a proposal, such as proof of ownership or a clear division between a “proposal” and “supporting statement.”
This problem has been compounded by the ability of proponents to submit their proposals to companies electronically. Not long ago, the SEC recommended in a Note to Rule 14a-8, but did not require, that proponents submit their proposals by certified mail-return receipt requested. In 1998, the SEC deleted this Note in recognition of the fact that electronic communications have become more popular, particularly the submission of proposals by facsimile.
Electronic communications tend to be more informal, which makes the analysis of whether a communication is intended to be a proposal challenging. For example, an employee-shareholder may send an e-mail to the corporate secretary recommending that the company take a certain action â is the communication just an employee suggestion or complaint, or is it a shareholder proposal?
As a practical matter, nearly all proposals still are submitted by paper or facsimile, probably because the disclosure in proxy statements provides this type of contact information for companies. However, proponents increasingly are submitting proposals via e-mail, particularly proponents who are employees, since they have access to the e-mail address of the person within the company who handles proposals. The risk for proponents using e-mail addresses is that there might be some uncertainty regarding whether a proposal will be considered properly received if an e-mail address is not provided in the proxy statement as a means to submit proposals. For an example of a proposal submitted by e-mail, see Anheuser-Busch Companies.[fn3.1]
[fn3.1] 2001 SEC No-Act. LEXIS 870 (Dec. 31, 2001).
3.05 Determining Whether Communication is a Proposal or Nomination
When a shareholder communicates with a company with the apparent intention to nominate himself or herself to the company’s board, that communication often is ambiguous regarding whether the shareholder seeks to have a proposal included in the proxy statement or merely intends to provide the company with notice of its intention to be nominated to the board.
The bylaws of many companies permit shareholders to nominate themselves orally for board membership at an annual shareholders’ meeting. This right is often coupled with a requirement that the shareholder provide advance notice. The question then is whether a written communication from a shareholder is intended to be a shareholder proposal governed under Rule 14a-8 or a notice of nomination under the company’s bylaws.[fn4] It is not uncommon for a written communication to fail to address this issue.
If the shareholder’s intention clearly is to nominate herself pursuant to the company’s bylaws, the SEC staff normally declines to address a no-action request. If there is no clear indication whether the communication is a shareholder proposal, the SEC staff often couches its response by allowing exclusion if the proponent’s submission is deemed to be a proposal, but the staff avoids making the determination about whether the submission is indeed a proposal. The staff leaves this up to the parties to debate.
EXAMPLES:
- In Horizon Group Properties, Inc.,[fn4.1] the SEC staff did not issue a definitive answer to the company’s no-action request after it determined that the so-called “proposal” related to nomination procedures and therefore did not raise a Rule 14a-8 issue. The two shareholders who wrote the “proposal” argued that their letter did not request or recommend that the company or board of directors take any action. In addition, they argued that they did not explicitly seek inclusion of their nomination letter in the company’s proxy materials under Rule 14a-8. Rather, they noted that they nominated themselves to stand for election pursuant to the company’s bylaws with that nomination letter. Furthermore, they noted they later wrote to the company to inform it that they intended to conduct a proxy solicitation, including invoking Rule 14a-7 to ask for shareholder information and asking the company to either mail their proxy materials or to furnish mailing lists so as to enable them to do so on their own.
- In Lipid Sciences, Inc.,[fn4.2] the SEC staff agreed with the company that, to the extent the proponent’s submission purported to be a shareholder proposal submitted pursuant to Rule 14a- 8, it was excludable under Rule 14a-8(i)(8). The proposal stated, “That a resolution be put to the stockholders to remove Phil Radlick as a director of Lipid Sciences, Inc., without cause, and I be nominated to fill the vacancy thereby created on the board of directors if Mr. Radlick is removed.”
- In The York Group, Inc.,[fn5] after the SEC stated that it was unclear whether the submission was a proposal, the company was permitted to exclude a proposal nominating six persons for membership on the company’s board. The shareholder’s submission to the company stated, “The undersigned stockholders of The York Group, Inc. hereby notify the Company of their intent to nominate for election to the board of directors of the Company at the Company’s 2001 annual meeting of stockholders each of the persons set forth on Appendix A hereto.” The submission did not indicate whether the shareholder intended his letter to be a proposal and the company argued that it was one. The proponent did not submit a rebuttal.
[fn4] See infra Chapter 21.
[fn4.1] 2001 SEC No-Act. LEXIS 533 (Apr. 19, 2001).
[fn4.2] 2002 SEC No-Act. LEXIS 550 (May 2, 2002).
[fn5] 2001 SEC No-Act. LEXIS 446 (Apr. 2, 2001).