Rule 14a-8(m) — former Rule 14a-8(e)
(m) Question 13: What can I do if the company includes in its proxy statement reasons why it believes shareholders should not vote in favor of my proposal, and I disagree with some of its statements?
(1) The company may elect to include in its proxy statement reasons why it believes shareholders should vote against your proposal. The company is allowed to make arguments reflecting its own point of view, just as you may express your own point of view in your proposal’s supporting statement.
(2) However, if you believe that the company’s opposition to your proposal contains materially false or misleading statements that may violate our anti-fraud rule, § 240.14a-9, you should promptly send to the Commission staff and the company a letter explaining the reasons for your view, along with a copy of the company’s statements opposing your proposal. To the extent possible, your letter should include specific factual information demonstrating the inaccuracy of the company’s claims. Time permitting, you may wish to try to work out your differences with the company by yourself before contacting the Commission staff.
(3) We require the company to send you a copy of its statements opposing your proposal before it mails its proxy materials, so that you may bring to our attention any materially false or misleading statements, under the following timeframes:
(i) If our no-action response requires that you make revisions to your proposal or supporting statement as a condition to requiring the company to include it in its proxy materials, then the company must provide you with a copy of its opposition statements no later than 5 calendar days after the company receives a copy of your revised proposal; or
(ii) In all other cases, the company must provide you with a copy of its opposition statements no later than 30 calendar days before its files definitive copies of its proxy statement and form of proxy under § 240.14a-6.
6.01 Background of the Provision
A company may include a statement in opposition to a shareholder proposal in its proxy statement, although it is not required to do so. Before delivering its proxy statement to shareholders, a company must first send a copy of the disclosure it intends to make about the shareholder proposal to the proponent within a specified time period. This allows a proponent to complain to the staff if it believes that the disclosure contains false and misleading information.
6.01[A] History of the Provision
In 1978, the SEC adopted this provision, primarily as the result of litigation by the Sisters of the Precious Blood against Bristol-Myers.[fn1] In that case, the proponent claimed that the company had made a number of false or misleading statements in its disclosure opposing a proposal on infant formula. The district court held that there was no judicial remedy under Section 14(a) for materially inaccurate statements made by management in connection with shareholder proposals. The SEC stated that it was adopting this provision on an “experimental basis” due to some commentators’ concerns that the provision might provide a forum for unnecessary, extended debate on the merits of each proposal.[fn2] In 1997, the SEC proposed to eliminate this provision because it was rarely invoked by proponents. After receiving negative comments on this proposal, the SEC decided to maintain the right of proponents to review statements in opposition before they are printed and delivered.[fn3]
[fn1] Sisters of the Precious Blood v. Bristol-Myers Co., 431 F. Supp. 385 (S.D.N.Y. 1977).
[fn2] Exchange Act Release No. 15,384, 1978 SEC LEXIS 159 (Dec. 6, 1978).
[fn3] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).
6.01[B] Purpose of the Provision
The purpose of the provision is to provide proponents with an opportunity to alert the staff to potential misstatements about a proposal. This is important because proponents frequently are more knowledgeable about the subject matters of their proposals than the staff. According to the SEC, “a number of witnesses during the hearings indicated that under the [former] system a proponent [did] not have a practical means of curing any misstatements which are made in the discussion of his proposal.”[fn4]
[fn4] Exchange Act Release No. 15,384, 1978 SEC LEXIS 159 (Dec. 6, 1978) (“The purpose of this proposal was to provide a shareholder-proponent with the opportunity to bring materially inaccurate statements contained in opposing statements to the attention of management and the Commission before the proxy materials are mailed to shareholders.”).
6.02 Application of the Provision
6.02[A] Identifying the Key Issues
Most companies elect to provide some type of disclosure opposing a shareholder proposal, either describing why shareholders should vote against a proposal or clarifying its position on the proposal’s subject matter. The most important issue in connection with this provision is determining what constitutes false and misleading disclosure.
6.02[B] Staff Review of Proposal Disclosure
If the proponent does not object to the company’s statement in opposition, the SEC staff reviews it only if the proxy statement is selected for review in accordance with the staff’s nonpublic screening criteria. Most companies are eligible to deliver their proxy statements to shareholders immediately after filing them in definitive form because the matters to be voted on are considered to be routine under Rule 14a-6(a). As a result, the SEC staff normally does not review either the proposal or the company’s statement in opposition. If a proxy statement is selected for review, the SEC staff will review the disclosure for compliance with the anti-fraud provisions of Rule 14a-9.
6.02[C] Company Not Liable for Proponent’s Disclosure
Under Rule 14a-8(l)(2), the company is not directly or indirectly liable for a proposal or supporting statement included in its proxy statement. As a result, a company is not liable under Rule 14a-9 for false or misleading information contained in a proposal or related supporting statement included in its proxy statements.
Although the proponent is theoretically liable for the disclosure in its proposal and supporting statement, there never has been a lawsuit filed against a proponent for such “disclosure.” Such an action is not likely under the securities laws since the proxy statement is filed and delivered by a company, but it is possible that a proposal could serve as the basis for a lawsuit for defamation or other tort action against the proponent.
6.02[D] No Word Limitation
Unlike the 500-word limit imposed on shareholder proposals under Rule 14a-8(d), the length of companies’ statements in opposition is not limited. They can provide as much disclosure as they wish urging shareholders to vote against a shareholder proposal. In fact, it is not uncommon for a company’s statement in opposition to exceed 500 words.
A company’s latitude is only subject to antifraud concerns if the statement in opposition is so long that it obscures the other disclosure made in the proxy statement. The disparity in treatment is based on the fact that companies are ultimately responsible for providing adequate information to shareholders so that they can make an informed voting decision.
6.02[E] Advance Copy Must Be Provided to Proponent
Under Rule 14a-8(m)(3), if a company intends to provide disclosure opposing the proposal in its proxy statement, it must send a copy of the disclosure to the proponent not later than 30 calendar days prior to the date that the company files its definitive proxy statement. If the proposal must be revised by the proponent to be includable, the statement in opposition must be furnished to the proponent not later than five calendar days after receipt by the company of the revised proposal.
A common question is what a company should do if it needs to print and deliver proxy materials in approximately 30 days but the SEC staff has not yet ruled on its no-action request. The staff allows a company to provide a proponent with an advance copy of the disclosure the company intends to use in the event the staff denies its request for relief. In the staff’s opinion, sending an advance copy does not obligate a company to include a proposal; however, a company should make clear to the proponent that it is sending a proposed statement in opposition as a precaution to comply with the rule and that the company has not withdrawn its request to the staff.
6.02[F] Proponent’s Belief that Disclosure Is False and Misleading
If a proponent believes that the company’s statement in opposition is materially false or misleading, it can complain to the SEC staff. Under Rule 14a-8(m)(2), such a complaint must be lodged by promptly sending a letter to the staff containing specific facts demonstrating the inaccuracy of the company’s statement, along with a copy of the company’s proposed statement of opposition. The proponent is required to submit a copy of the company’s statement of opposition because the staff does not normally have it. A copy of the letter should also be sent to the company because the SEC staff encourages the parties to try to resolve their differences informally, as indicated in Rule 14a-8(m)(2).
If the staff agrees with a proponent’s concerns, it normally will direct the company to change the misleading portions of its disclosure. This direction from the staff is conveyed orally rather than in writing.
6.02[G] Who Has Standing to Challenge Disclosure
Under Rule 14a-8(m)(2), it is clear that the company’s statement in opposition is subject to the antifraud provisions of Rule 14a-9. Accordingly, in addition to the proponent, the SEC staff has standing to seek relief against the company for false and misleading disclosure.
In United Paperworkers International Union v. International Paper Co.,[fn5] the Court of Appeals for the Second Circuit held that the company’s recommendation in its proxy statement that shareholders should vote against a shareholder proposal on an environmental issue was misleading because it inaccurately described the company’s environmental record and failed to disclose its non-compliance. The proponent sued because the company’s statement in opposition contained a glowing description of the company’s environmental record despite considerable evidence to the contrary. In a strongly worded opinion, the court required the company to include the proposal and supporting statement in the company’s next proxy statement, including a description of the court’s judgment as well as quoted portions of the court’s opinion.
[fn5] 985 F.2d 1190 (2d Cir. 1993).
6.03 Practice Pointers
Company Practice Pointers
- Send copy of the proposed disclosure while waiting on the staff.Often, a company needs to print and deliver proxy materials soon but does not yet know how the SEC staff will decide its no-action request. The staff allows a company to provide the proponent with an advance copy of its proposed statement of opposition that it would use if the staff ruled against it. Companies should make clear to proponents that they have not withdrawn their request to the staff. If a company is worried that the proponent will prematurely publicize its proposed statement, it should hesitate to hand over the proposed disclosure. However, the company then faces a dilemma about how to comply with this exclusion since the staff has not fashioned any other avenues of relief. It is worth noting that the staff does not like to cause delays in a company’s printing schedule and will make every effort to settle disputes about statements in opposition in an expeditious manner.
Proponent Practice Pointers
- Attempt to negotiate claims of false and misleading disclosure.As recommended by the SEC, the parties should try to work out disclosure issues on their own. Since a company probably is under a tight deadline to print and deliver its proxy materials, it may be willing to acquiesce and make reasonable changes requested by a proponent.
- Attach a copy of the company’s proposed statement. If a proponent decides to complain about the false and misleading nature of the company’s proposed disclosure, it must submit a copy of the company’s statement of opposition to the staff. This is required by the rule because the staff normally does not have this disclosure.