On October 16, 2012, the Division of Corporation Finance of the Securities and Exchange Commission issued Staff Legal Bulletin 14G ("SLB14G").  SLB14G provides guidance for companies and shareholders regarding shareholder proposals submitted pursuant Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act").  Specifically, SLB14G provides guidance on three issues with respect to the submission of shareholder proposals for inclusion in proxy statements:

  • the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8;
  • the manner in which companies should notify proponents of a failure to provide proof of ownership for the one-year period required under Rule 14a-8(b)(1); and
  • the use of website references in proposals and supporting statements.

Proof of Ownership:  Pursuant to Rule 14a-8 of the Exchange Act, a shareholder submitting a shareholder proposal to be included in a proxy statement must provide documentation evidencing that the shareholder has continuously held at least $2,000 in market value, or 1%, of the company’s securities for at least one year as of the date the shareholder submits the proposal. If the shareholder holds the securities in book-entry form through a securities intermediary or in "street name," the shareholder must submit a written statement as to his beneficial ownership from the record holder of the securities. See Staff Legal Bulletin 14F ("SLB14F"). In SLB14F, the SEC provided guidance that a beneficial owner must obtain a proof of ownership letter from the DTC participant through which its securities are held at DTC in order to satisfy the proof of ownership requirements in Rule 14a-8.  In SLB14G, the SEC has further refined its guidance to provide that a proof of ownership letter from an affiliate of a DTC participant satisfies the requirement to provide a proof of ownership letter from a DTC participant.

Manner of Notification:  A common error in proof of ownership letters is that they do not verify a proponent’s beneficial ownership for the entire one-year period preceding and including the date the proposal was submitted, as required by Rule 14a-8(b)(1) of the Exchange Act.  Under Rule 14a-8(f) of the Exchange Act, if a shareholder fails to follow one of the eligibility or procedural requirements of the rule, a company may exclude the shareholder proposal only if it notifies the proponent of the defect and the shareholder fails to correct the defect.   In SLB14G, the SEC noted that it is concerned that companies’ notices of defect are not adequately describing the defects or explaining what a shareholder must do to remedy defects in proof of ownership letters.  Accordingly, in SLB14G, the SEC states that it would no longer agree to exclude a proposal under Rules 14a-8(b) and 14a-8(f) of the Exchange Act on the basis that the shareholder did not prove one-year ownership unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect.

Website References:  SLB14G clarifies when a shareholder proposal may contain a cross-reference to an informational website.  If the proposal or supporting statement refers to a website that provides information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, then the proposal would be subject to exclusion under Rule 14a-8(i)(3) of the Exchange Act as vague and indefinite. If, however, shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information provided on the website and  the website reference only supplements the information contained in the proposal and in the supporting statement, then the proposal would not be subject to exclusion under Rule 14a-8(i)(3) of the Exchange Act on the basis of the reference to the website.

Additionally, SLB14G clarifies that a company may not exclude a shareholder proposal under Rule 14a-8(i)(3) of the Exchange Act on the basis that the website is not yet operational if the shareholder, at the time the proposal is submitted, provides the company with:

  • a copy of the materials that are intended for publication on the website; and
  • a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.

If the information on a website changes after submission of a proposal and the company believes the revised information renders the website reference excludable under Rule 14a-8 of the Exchange Act, a company seeking the SEC’s concurrence that the website reference may be excluded must submit a letter to the SEC presenting its reasons for doing so.  In such case, the SEC can waive the 80-day requirement set forth in Rule 14a-8(j) of the Exchange Act.