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Staff Issues Guidance on Shareholder Proposal Questions

The Division of Corporation Finance has issued Staff Legal Bulletin No. 14C to provide guidance on a number of issues that arise under 1934 Act rule 14a-8, including shareholder proposals calling for director independence and environmental or public health issues. No-action requests and shareholder responses should be sent to the SEC's new address at 100 F Street, NE , in Washington , DC , except for registered investment companies and business development companies, which should send their materials to 901 E Street, NW.

The staff explained the circumstances in which it will concur with the view that there is a basis for omitting from a company's proxy materials a proposal calling for director independence. Under rule 14a-8(i)(6), companies may exclude a shareholder proposal for which they lack the power or authority to implement. The staff focuses primarily on whether the proposal would require continued independence at all times. The staff would not agree with a company's argument that it is unable to ensure the election of independent directors, according to the bulletin, but it would agree with the argument that the board of directors lacks the power to ensure that the chairman or the other directors retain their independence at all times.

Accordingly, when a proposal is drafted in a manner that would require a director to maintain his or her independence at all times, the staff will permit the company to exclude the proposal in reliance on rule 14a-8(i)(6) on the basis that it does not provide a mechanism to cure a violation of the independence standard. If the proposal does not require the director to maintain independence at all times, or if it contains language that permits the company to cure the loss of independence, the staff would not permit the company to omit the proposal. This approach is consistent with 1934 Act section 10A(m) and rule 10A-3, the staff explained, which acknowledges that a board member may lose independence and requires that mechanisms exist to allow an issuer to cure the loss. The bulletin includes a chart that illustrates the language that resulted in different no-action responses during last year's proxy season.

The bulletin also describes the circumstances under which the staff will concur with a company's view that a proposal relating to environmental or health issues relates to ordinary business under rule 14a-8(i)(7) and therefore can be omitted from its proxy materials. When deciding whether a proposal raises a significant policy issue, the staff considers the proposal and the supporting statement together. If the proposal and the supporting statement focus on the company's internal assessment of the risks or liabilities that it faces as a result of its operations, the staff will concur with the company's view that there is a basis to exclude the proposal as relating to an evaluation of risk. If the proposal focuses on minimizing or eliminating operations that may adversely affect the environment or the public's health, the staff will not concur that there is a basis for excluding the proposal under rule 14a-8(i)(7). The bulletin provides another chart showing examples of the distinction between the two.

The staff advised that companies do not have to include a shareholder proponent's name, address and the number of voting securities the proponent holds as long as the proxy states that the information will be provided upon request.

Shareholder proponents must make sure that they have the correct facsimile number for submitting their proposals to a company. If the company does not disclose the number in its proxy statement, the shareholder should contact the company for the information.

When submitting a no-action request to the staff, companies should provide all relevant correspondence that has been exchanged with the shareholder proponents. The process will be delayed if a company fails to include a copy of the shareholder proposal, any cover letters from the shareholder proponent, the address and facsimile numbers of shareholder proponents and any other correspondence relating to the proposal.

When a company submits a letter to the staff advising that it is withdrawing a no-action request for a proposal that was submitted by multiple proponents, it must document that each of the shareholders has agreed to withdraw the proposal. If the proponents have designated a lead individual to act on their behalf and the company is able to show that the individual is so authorized, it may provide a letter from that individual advising that the proposal is being withdrawn on behalf of all of the shareholder proponents.

The SEC may transmit its responses via facsimile during peak proxy season to provide timely responses to companies and shareholder proponents. However, the staff will not transmit a facsimile response to a company if there is no facsimile number for the shareholder proponent as well. The bulletin reminds companies that the use of facsimile responses is a courtesy and is not required by the SEC's rules. The bulletin also notes that commercial databases may obtain no-action responses from the SEC's public reference room and make them available prior to the company's or the shareholder proponents' receipt of the staff's response.