Amendments to Rules on Shareholder Proposals
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Part III
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 240
Amendments to Rules on Shareholder Proposals; Proposed Rule
Proposed Rules
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-39093; IC-22828; File No. S7-25-97]
RIN 3235-AH20
Amendments to Rules on Shareholder Proposals
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``we'' or
``Commission'') proposes revisions to the rule that opens, and then
regulates, a channel of communication among shareholders, and between
shareholders and the management of their companies: rule 14a-8, the
shareholder proposal rule. We propose to recast rule 14a-8 into a
Question & Answer format that both shareholders and companies should
find easier to follow, and to modify the rule to address concerns
raised by both shareholders and companies. We also propose revisions to
related rules.
DATES: Public comments are due November 25, 1997.
ADDRESSES: Please send three copies of the comment letter to Jonathan
G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington D.C. 20549. Comment letters can be sent
electronically to the following e-mail address: [email protected].
The comment letter should refer to File No. S7-25-97; if e-mail is used
please include the file number in the subject line. Anyone can inspect
and copy the comment letters in the SEC's Public Reference Room, 450
Fifth Street, N.W., Washington, D.C. 20549. We will post comment
letters submitted electronically on our Internet site (http://
www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Frank G. Zarb, Jr., Special Counsel,
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900, or Doretha M. VanSlyke, Division of Investment Management, at
ers in the SEC's Public Reference Room, 450
Fifth Street, N.W., Washington, D.C. 20549. We will post comment
letters submitted electronically on our Internet site (http://
www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Frank G. Zarb, Jr., Special Counsel,
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900, or Doretha M. VanSlyke, Division of Investment Management, at
(202) 942-0721, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for comment
amendments to the following rules under the Securities Exchange Act of
1934 (the ``Exchange Act''):\1\ 14a-8,\2\ 14a-4,\3\ 14a-5,\4\ 14a-2,\5\
and 13d-5.\6\
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\1\ 15 U.S.C. 78a et seq.
\2\ 17 CFR 240.14a-8.
\3\ 17 CFR 240.14a-4.
\4\ 17 CFR 240.14a-5.
\5\ 17 CFR 240.14a-2.
\6\ 17 CFR 240.13d-5.
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I. Executive Summary
The shareholder proposal rule provides an avenue for communication
between shareholders and companies, and among shareholders themselves.
Like any other well-traveled road, however, the rule is in need of some
repair. These proposals accordingly are designed to rectify problems
identified by both shareholders and corporations.
The proposals today would make it easier for shareholders to
include a broader range of proposals in companies' proxy materials, and
provide companies with clearer ground rules and more flexibility to
exclude proposals that failed to attract significant shareholder
support in prior years
proposals accordingly are designed to rectify problems
identified by both shareholders and corporations.
The proposals today would make it easier for shareholders to
include a broader range of proposals in companies' proxy materials, and
provide companies with clearer ground rules and more flexibility to
exclude proposals that failed to attract significant shareholder
support in prior years. We are proposing a ``package'' of reforms that
we believe best accommodates the concerns of most participants in the
shareholder proposal process, including proposals to accomplish the
following:
Recast the rule into a more understandable Question &
Answer format;
Reverse the Cracker Barrel policy, making it easier for
shareholders to include in companies' proxy materials employment-
related proposals that raise significant social policy matters;
Make it more difficult to present proposals again that
received an insignificant percentage of the votes cast on earlier
submissions, enhancing shareholders' ability to decide for themselves
which proposals are important to the company;
Introduce an ``override'' mechanism permitting 3% of the
share ownership to override a company's decision to exclude a proposal
under certain of the bases for exclusion;
Adopt a new qualified exemption from the proxy rules under
Section 14(a) of the Exchange Act, and a safe harbor under Section
13(d) of the Exchange Act and rule 13d-5, to make it easier for
shareholders to use the new ``override;''
Streamline the exclusion for matters considered irrelevant
to corporate business, to permit companies to exclude proposals that
relate to economically insignificant portions of their businesses;
Streamline our administration of the rule whereby
companies are permitted to exclude proposals furthering personal
grievances or special interests; and
Provide clearer ground rules for management's exercise of
discretionary voting authority when a shareholder notifies the company
that it intends to present a proposal outside the mec
to economically insignificant portions of their businesses;
Streamline our administration of the rule whereby
companies are permitted to exclude proposals furthering personal
grievances or special interests; and
Provide clearer ground rules for management's exercise of
discretionary voting authority when a shareholder notifies the company
that it intends to present a proposal outside the mechanism of rule
14a-8.
II. Introduction and Background
Rule 14a-8 provides, and then regulates, a channel of communication
among shareholders, and between shareholders and companies. It is not
the only avenue for communication, since a shareholder may undertake an
independent proxy solicitation or may seek informal discussions with
management or other shareholders outside the proxy process. Rule 14a-8
is popular because it provides an opportunity for any shareholder
owning a relatively small amount of the company's shares to have his or
her own proposal placed alongside management's proposals in the
company's proxy materials for presentation to a vote at an annual or
special meeting of shareholders.
The rule's operation is fairly simple. A shareholder must mail a
copy of his or her proposal to the company in time to meet the deadline
imposed by the rule.\7\ If the company intends to omit the proposal
from its proxy materials, it must first submit its reasons to the
Commission.\8\ The Division of Corporation Finance or Division of
Investment Management (the ``Division'') usually issues a written
response either concurring or declining to concur with the company's
reasoning.\9\ The Division's response is not legally binding, and does
not necessarily reflect the view of the Commission.\10\ Either party
may obtain a legally binding decision on the excludability of a
challenged proposal from a federal court.
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tten
response either concurring or declining to concur with the company's
reasoning.\9\ The Division's response is not legally binding, and does
not necessarily reflect the view of the Commission.\10\ Either party
may obtain a legally binding decision on the excludability of a
challenged proposal from a federal court.
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\7\ Rule 14a-8(a)(3) [17 CFR 240.14a-8(a)(3)].
\8\ Rule 14a-8(d) [17 CFR 240.14a-8(d)].
\9\ The Division of Corporation Finance has reviewed
approximately 400 submissions under rule 14a-8 annually. The
Division of Investment Management typically has reviewed fewer than
12 submissions from investment companies in previous years;
shareholder proposals have only infrequently been submitted to
investment companies, and those submitted have usually involved
closed-end investment companies.
\10\ The procedures on the rendering of staff advice for
shareholder proposals are explained in Exchange Act Release No.
12599 (July 7, 1976) (41 FR 29989). These proposals do not alter the
procedures set forth in that release.
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Proposals are considered appropriate for inclusion in proxy
materials under rule 14a-8 unless the company demonstrates that the
proposal falls within one of thirteen bases for exclusion, or that the
shareholder
proponent is otherwise ineligible to submit a proposal. A company may,
for example, omit a shareholder proposal that is not a proper matter
for shareholder action under state law,\11\ or if the shareholder fails
to demonstrate that he or she continuously held $1000 worth of the
company's voting securities for at least one year prior to submitting a
proposal.\12\
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\11\ Rule 14a-8(c)(1) [17 CFR 240.14a-8(c)(1)].
\12\ Rule 14a-8(a)(1) [17 CFR 240.14a-8(a)(1)].
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monstrate that he or she continuously held $1000 worth of the
company's voting securities for at least one year prior to submitting a
proposal.\12\
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\11\ Rule 14a-8(c)(1) [17 CFR 240.14a-8(c)(1)].
\12\ Rule 14a-8(a)(1) [17 CFR 240.14a-8(a)(1)].
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Between 300 and 400 companies typically receive a total of about
900 shareholder proposals each year.\13\ Their subjects vary. A
majority of the proposals each year focus on corporate governance
matters--such as proposals to repeal by laws establishing a classified
board of directors--and on compensation matters--such as proposals to
eliminate pension plans for non-employee directors. Social policy
issues, such as environmental matters or the manufacture of tobacco
products, and other issues, such as extraordinary business
transactions, are also the focus of a significant number of proposals
each year.
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\13\ See American Society of Corporate Secretaries (``ASCS''),
Report on Shareholder Proposals, July 1, 1995-June 30, 1996; IRRC
Summary of 1996 U.S. Shareholder Resolutions, Apr. 12, 1997. The
IRRC tracks proposals at approximately 1,500 companies each year,
and the ASCS monitors proposals at approximately 1,950 public
companies. A company is not required to contact the Commission staff
unless it intends to omit the proposal from its proxy materials.
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y of 1996 U.S. Shareholder Resolutions, Apr. 12, 1997. The
IRRC tracks proposals at approximately 1,500 companies each year,
and the ASCS monitors proposals at approximately 1,950 public
companies. A company is not required to contact the Commission staff
unless it intends to omit the proposal from its proxy materials.
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While we believe that the rule works well overall, some shareholder
and corporate groups have expressed concerns about certain aspects of
the rule and how it operates. Some shareholders seek to broaden the
subject matter categories of proposals that companies are required to
include in their proxy statements,\14\ focusing in particular on a 1992
no-action letter issued to Cracker Barrel Old Country Store, Inc.\15\
In the Cracker Barrel letter, the Division announced a new ``bright
line'' test for analysis of employment-related shareholder proposals
that raise significant social policy issues.\16\ Some shareholders want
that test changed.
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\14\ In response to a questionnaire on shareholder proposals
which we distributed last February (the ``Questionnaire''), 63% of
shareholder respondents ranked as a top goal of reform expanding the
categories of proposals that companies must include in their proxy
materials. As discussed more fully below, the Commission staff
prepared the Questionnaire as part of a Congressionally-mandated
study of the shareholder proposal process.
\15\ See, e.g., Rulemaking Petition dated July 27, 1995,
submitted to the Commission by the Interfaith Center on Corporate
Responsibility, Calvert Group Ltd., and the Comptroller of the City
of New York. The petition asked that the Commission modify its
position announced in the no-action letter Cracker Barrel Old
Country Store, Inc. (Oct. 13, 1992) (``Cracker Barrel'') (proposal
that company implement employment practices related to sexual
orientation)
ted to the Commission by the Interfaith Center on Corporate
Responsibility, Calvert Group Ltd., and the Comptroller of the City
of New York. The petition asked that the Commission modify its
position announced in the no-action letter Cracker Barrel Old
Country Store, Inc. (Oct. 13, 1992) (``Cracker Barrel'') (proposal
that company implement employment practices related to sexual
orientation). The proposals address the concerns raised by the
petition. See Section III, Part D of this release.
\16\ Cracker Barrel. The Commission subsequently upheld the
Division's response. See Letter dated January 15, 1993 from Jonathan
G. Katz, Secretary to the Commission, to Sue Ellen Dodell, Deputy
Counsel, Office of Comptroller, The City of New York.
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Just as some shareholders have expressed concern that the rule
permits companies to exclude important proposals, some companies in
turn believe that the rule and current interpretations of the rule
compel them to include too many proposals of little relevance to their
businesses.\17\ Some companies suggest that the problem be addressed by
an increase in the amount of stock a shareholder must hold to be
eligible to submit a proposal, or in the percentage of the vote a
proposal must receive to qualify for re-submission in future years.\18\
Among companies responding to the Questionnaire, 40% rank as a top
reform goal reduction of the types of proposals that they must include
in their proxy materials.
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r must hold to be
eligible to submit a proposal, or in the percentage of the vote a
proposal must receive to qualify for re-submission in future years.\18\
Among companies responding to the Questionnaire, 40% rank as a top
reform goal reduction of the types of proposals that they must include
in their proxy materials.
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\17\ See e.g., Response of Porter Lavoy & Rose Inc., No. 31; The
Finova Group, No. 61; Boise Cascade Corp., No. 163; Allied Signal
Inc., No. 184; Intel Corporation, No. 216; RJR Nabisco, Inc., No.
207; The Proctor & Gamble Company, No. 264. The responses are
available for inspection and copying in file number S7-5-97.
\18\ See, e.g., Response of Roanoke Electric Steel Corp, No. 44;
Cooper Industries, No. 174; Carolina Power and Light Co., No. 156;
Eastman Kodak Company, No. 268.
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Companies also seek additional guidance on their exercise of
discretionary voting authority \19\ when a shareholder notifies them of
his or her intention to present proposals without invoking rule 14a-
8.\20\ And they raise other concerns about the operation of the rules
governing shareholder proposals.\21\
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\19\ Discretionary voting authority is the ability to vote
proxies that shareholders have executed and returned to the company,
on matters not reflected on the proxy card, and on which
shareholders have not had an opportunity to vote.
\20\ See, e.g., Response of Gannett Co., Inc., No. 117; Questar
Corp., No. 18; Albertson's Inc., No. 204; CNF Transportation, No.
11; Safety-Kleen Corp., No. 180; Honeywell Inc., No. 198
uthority is the ability to vote
proxies that shareholders have executed and returned to the company,
on matters not reflected on the proxy card, and on which
shareholders have not had an opportunity to vote.
\20\ See, e.g., Response of Gannett Co., Inc., No. 117; Questar
Corp., No. 18; Albertson's Inc., No. 204; CNF Transportation, No.
11; Safety-Kleen Corp., No. 180; Honeywell Inc., No. 198.
\21\ The American Trucking Associations (``ATA''), for instance,
recently petitioned the Commission to amend rule 14a-8(c)(4), the
personal grievance exclusion, to ``prevent labor unions from
continuing to use the shareholder proposal process to advance union
interests not shared by the target company's shareholders'
generally.'' Rulemaking Petition dated October 13, 1995 submitted to
the Commission by the ATA. The Commission considered the ATA's
concerns in connection with these proposals. Section III, Part B,
describes proposed modifications to the way we administer current
rule 14a-8(c)(4).
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Congress recently required that we conduct a comprehensive study of
the shareholder proposal process, and submit a report on the results of
the study by October 11, 1997.\22\ We began the study in February 1997
with the distribution of a Questionnaire on shareholder proposals.
While we did not design the Questionnaire to obtain a scientific
sampling, it provided us with some indication of the views of
interested shareholders and companies, including those who do not
typically express their views to the Commission.\23\ In addition, the
Commission staff has held discussions with interested groups, and
tapped its own reservoir of experience and knowledge about the rule.
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provided us with some indication of the views of
interested shareholders and companies, including those who do not
typically express their views to the Commission.\23\ In addition, the
Commission staff has held discussions with interested groups, and
tapped its own reservoir of experience and knowledge about the rule.
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\22\ National Securities Markets Improvement Act of 1996, Pub.
L. No. 104-290, Sec. 510(b), 110 Stat. 3416 (1996). The Commission
is required to study ``(A) whether shareholder access to proxy
statements pursuant to section 14 of the Securities Exchange Act of
1934 has been impaired by recent statutory, judicial, or regulatory
changes; and (B) the ability of shareholders to have proposals
relating to corporate practices and social issues included as part
of proxy statements.''
\23\ We received a total of 330 responses, including 172
responses from companies, and 149 from individual and institutional
shareholders. We also heard from a handful of other types of
institutions, such as a proxy solicitation firm, an investor
relations consulting firm, and an economic consulting firm. You may
inspect and copy completed Questionnaires in our Public Reference
Room, public file number S7-5-97.
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Although we have considered some fundamentally different approaches
to regulating the shareholder proposal process, the proposals today
reflect our belief that most participants would prefer that we maintain
the current system, with modifications. We request your comments on
whether our view is correct, and on whether we should consider some
other approach in lieu of the amendments proposed today.
We could, for instance, withdraw entirely from the area, leaving it
to each state to adopt its own shareholder proposal rule to govern what
proposals are appropriate to be included in companies' proxy materials
ent system, with modifications. We request your comments on
whether our view is correct, and on whether we should consider some
other approach in lieu of the amendments proposed today.
We could, for instance, withdraw entirely from the area, leaving it
to each state to adopt its own shareholder proposal rule to govern what
proposals are appropriate to be included in companies' proxy materials.
The shareholder proposal process affects the internal governance of
corporations, and it is state law--not federal securities law--which is
primarily concerned with corporate governance matters. In its current
form, rule 14a-8 in fact defers to state law on the central question of
whether a proposal is a proper matter for shareholder action.\24\ The
``ordinary business'' exclusion \25\ is based in part on state
corporate law establishing spheres of authority for the board of
directors on one hand, and the company's shareholders on the other.\26\
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\24\ Rule 14a-8(c)(1).
\25\ Rule 14a-8(c)(7) [17 CFR 240.14a-8(c)(7)].
\26\ States likely do not currently have appropriated procedures
in place to accommodate such an approach. We could retain rule 14a-8
for a period of time, such as 3 or 6 years, to permit states to
adopt necessary procedures, if we decide to pursue this approach.
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c)(1).
\25\ Rule 14a-8(c)(7) [17 CFR 240.14a-8(c)(7)].
\26\ States likely do not currently have appropriated procedures
in place to accommodate such an approach. We could retain rule 14a-8
for a period of time, such as 3 or 6 years, to permit states to
adopt necessary procedures, if we decide to pursue this approach.
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In 1982, the Commission proposed for comment fundamental
alternatives to the existing shareholder proposal rule, although it did
not propose leaving the matter up to the states. Under one proposal,
the Commission would have adopted a supplemental rule to permit a
company and its shareholders to adopt a plan providing their own
alternative procedures governing the process. Another alternative would
have required companies to include in their proxy materials all
proposals that are proper under state law and that do not involve the
election of directors, subject to a numerical maximum. Most of those
who expressed views on the 1982 proposals rejected the proposed
alternatives, and the Commission adopted revisions that left the rule
essentially in its current form.\27\
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\27\ See Exchange Act Release No. 20091 (Aug. 16, 1983) (the
``1983 Release'') [48 FR 38218].
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n the 1982 proposals rejected the proposed
alternatives, and the Commission adopted revisions that left the rule
essentially in its current form.\27\
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\27\ See Exchange Act Release No. 20091 (Aug. 16, 1983) (the
``1983 Release'') [48 FR 38218].
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We believe that it is worthwhile to consider whether there is a
workable alternative approach to the current rule and process. Among
other things, the current rule in effect places the Commission and its
staff in the role of informal arbiter between companies and
shareholders submitting a growing variety of shareholder proposals. In
implementing rule 14a-8, the Commission and its staff are sometimes
called upon to make difficult judgments about the proper interpretation
of proposals and about the matters to which they relate. Should these
judgments be made by institutions other than the Commission, or by the
shareholders and companies themselves? Your comments are welcome on
these matters.
Despite these considerations, the results of the Questionnaire
appear to support the view that most participants would prefer that we
maintain the current system, possibly with modifications. The
Questionnaire sought views on a number of different alternatives to the
existing system, none of which appeared to receive strong support from
respondents. For instance, the Questionnaire asked about a system like
that discussed above where states would be urged to adopt their own
shareholder proposal rules in place of rule 14a-8; and about a system
where each company would be permitted to adopt its own shareholder
proposal rule, subject to shareholder approval. Neither shareholders
nor companies appeared to favor these approaches.\28\
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scussed above where states would be urged to adopt their own
shareholder proposal rules in place of rule 14a-8; and about a system
where each company would be permitted to adopt its own shareholder
proposal rule, subject to shareholder approval. Neither shareholders
nor companies appeared to favor these approaches.\28\
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\28\ One percent of shareholder respondents and 47% of company
respondents favored, and 93% of shareholders and 49% of companies
disfavored, allowing each company to set up its own shareholder
proposal process. Eighty-nine percent of shareholders, and an equal
percentage of companies, disfavored replacing rule 14a-8 with state-
adopted systems, while only 8% of companies and 5% of shareholders
favored the approach.
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The Questionnaire also asked about another approach that would have
substantially restricted companies' ability to exclude proposals, but
would have placed a numerical cap on the total number of proposals that
a company would be required to include in its proxy materials. The
results were mixed. Many companies supported the approach, while most
shareholders did not.\29\
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\29\ Sixty-three percent of company respondents and 9% of
shareholder respondents supported the approach, while 34% of
companies and 86% of shareholders disfavored it.
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The Questionnaire also asked whether respondents would prefer the
existing system, with possible modifications, to some other alternative
not identified in the Questionnaire. Most preferred retaining the
existing system.\30\
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ers disfavored it.
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The Questionnaire also asked whether respondents would prefer the
existing system, with possible modifications, to some other alternative
not identified in the Questionnaire. Most preferred retaining the
existing system.\30\
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\30\ Seventy-three percent of company respondents and 75% of
shareholder respondents preferred the existing system either without
reform or with other reforms. Only 6% of companies and 4% of
shareholders, preferred some other alternative.
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The results also reflected some support for the Commission's
continued involvement in the shareholder proposal process. Most
shareholders and a number of companies responding to the Questionnaire
indicated that the Commission's role should be expanded or stay the
same.\31\
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\31\ Fifty-four percent of shareholder respondents and 47% of
company respondents indicated that they believed the Commission's
role would either increase or stay the same. Twenty-six percent of
shareholders and 49% of companies indicated that our role should be
diminished, and only 1% of shareholders and 8% of companies thought
it should be eliminated. Additionally, 64% of shareholder
respondents and 74% of companies indicated their belief that the
Commission's role as informal ``referee'' in the shareholder
proposal process is beneficial.
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III. Proposed Amendments
should be
diminished, and only 1% of shareholders and 8% of companies thought
it should be eliminated. Additionally, 64% of shareholder
respondents and 74% of companies indicated their belief that the
Commission's role as informal ``referee'' in the shareholder
proposal process is beneficial.
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III. Proposed Amendments
We view the various reforms proposed today as a ``package''
designed to address in a balanced manner the sometimes conflicting
concerns of different participants. Your comments should therefore
focus not only on whether we should adopt each proposal viewed in
isolation, but also on whether we should adopt the proposal as part of
an overall package.
Part A below describes the proposed Question & Answer format for
revised rule 14a-8, and clarifying language changes. Part B addresses
our proposal to change the way the Division applies rule 14a-8(c)(4)
\32\, which permits companies to exclude proposals furthering personal
grievances or special interests. Proposed amendments to rule 14a-
8(c)(5) \33\, the ``relevance'' exclusion, are explained in Part C.
Part D describes how we propose to modify our interpretation of rule
14a-8(c)(7), which permits companies to exclude proposals relating to
their ``ordinary business operations.'' In Part E, we describe proposed
modifications to rule 14a-8(c)(12),\34\ which permits companies to
exclude proposals that received less than specified percentages of
voting support on earlier submissions.
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\32\ 17 CFR 240.14a-8(c)(4).
\33\ 17 CFR 240.14a-8(c)(5).
\34\ 17 CFR 240.14a-8(c)(12).
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ule 14a-8(c)(12),\34\ which permits companies to
exclude proposals that received less than specified percentages of
voting support on earlier submissions.
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\32\ 17 CFR 240.14a-8(c)(4).
\33\ 17 CFR 240.14a-8(c)(5).
\34\ 17 CFR 240.14a-8(c)(12).
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Part F describes a proposed mechanism to permit shareholders to
``override'' certain bases for excluding proposals. Part G addresses a
proposed safe harbor from Section 13(d),\35\ and a qualified exemption
from the proxy rules, for shareholders using the proposed ``override''
described in Part F. Part H describes proposed revisions to rule 14a-
4(c) \36\ designed to establish clearer guidelines for the exercise of
discretionary voting authority when a company receives advance notice
that a shareholder intends to present a proposal for a vote without
invoking rule 14a-8's mechanism. Finally, in Part I, we explain some
other proposed amendments to rules 14a-8 and 14a-5.
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\35\ 15 U.S.C. 78m(d).
\36\ 17 CFR 240.14a-4(c).
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A. Plain-English, Question & Answer Format
We propose to amend and recast Rule 14a-8 into a Question & Answer
format so that the hundreds of shareholders and companies who refer to
the rule each year can more easily understand its requirements.\37\ We
request your comments on whether the proposed revisions on the whole
would make the rule easier to understand. Should we instead retain the
format and style of the current rule?
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format so that the hundreds of shareholders and companies who refer to
the rule each year can more easily understand its requirements.\37\ We
request your comments on whether the proposed revisions on the whole
would make the rule easier to understand. Should we instead retain the
format and style of the current rule?
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\37\ The existing rule may be confusing for shareholders who may
have had little or no prior experience dealing with our rules. In
response to the Questionnaire, 65% of individual shareholder
respondents indicated that they do not believe that shareholders
generally understand the current shareholder proposal rule.
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Your comments should also address each of the proposed revisions
individually. Except as specifically noted here, or elsewhere in
Section III of this release, most of the proposed language
modifications are intended solely to make the requirements easier to
understand and follow, and not to result in substantive modifications.
Some proposed revisions described in this Part A, however, are intended
to reflect current Division or Commission interpretations of the rule.
Your
comments should address whether each proposed language modification
makes the rule more understandable, whether some other revision would
be more appropriate, and whether the proposed modification is
consistent with current interpretations.
Most of the current rule's procedural and eligibility requirements
would appear in the answers to Questions 2 through 8, and 12. We also
proposed revisions to some of the thirteen bases upon which a company
may rely for excluding a proposal, which appear in paragraph (c) of
current rule 14a-8. The bases would now appear in the answer to
Question 9
is
consistent with current interpretations.
Most of the current rule's procedural and eligibility requirements
would appear in the answers to Questions 2 through 8, and 12. We also
proposed revisions to some of the thirteen bases upon which a company
may rely for excluding a proposal, which appear in paragraph (c) of
current rule 14a-8. The bases would now appear in the answer to
Question 9.
In current paragraph (c)(1), permitting exclusion of proposals that
are not proper subjects for shareholder action under state law, the
reference to the ``laws of the issuer's domicile'' would be replaced by
a reference to ``the laws of the state of the company's
incorporation,'' which we have applied to have the same meaning. We
would revise the note to the paragraph to reflect the Division's
current practice of assuming that a proposal drafted as a
recommendation or request is proper unless the company demonstrates
otherwise.
We propose to make only minor plain-English revisions to current
paragraph (c)(2),\38\ replacing the word ``require'' with the word
``cause'' and moving to a ``note'' the portion of the current paragraph
discussing the priority accorded domestic laws. We request your
comments on whether some other formulation would make this paragraph
easier to understand and follow, and whether the revisions appear
consistent with current interpretations.\39\
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\38\ 17 CFR 240.14a-8(c)(2).
\39\ See, e.g., Firestone (Dec. 8, 1987).
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Current paragraph (c)(3) \40\ would be amended to eliminate the
reference to ``regulations'' because it is redundant. We request your
comments on whether this revision would make the rule clearer, or
whether some other revisions would make the rule easier to understand
and follow.
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------------------------------------
Current paragraph (c)(3) \40\ would be amended to eliminate the
reference to ``regulations'' because it is redundant. We request your
comments on whether this revision would make the rule clearer, or
whether some other revisions would make the rule easier to understand
and follow.
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\40\ 17 CFR 240.14a-8(c)(3).
---------------------------------------------------------------------------
A proposed modification of the way we administer current paragraph
(c)(4), and revisions to current paragraph (c)(5), are described in
Parts B and C below.
As proposed, current paragraph (c)(6) \41\ would be revised to
permit exclusion ``[i]f the company would lack the power or authority
to carry out the proposal.'' We believe that the revised language is
clearer, without altering the meaning of the paragraph, which currently
permits exclusion of proposals that are ``beyond the registrant's power
to effectuate.'' We request your comments on whether some other
revision would make the rule easier to understand and follow, and
whether the revision appears consistent with current interpretations of
the rule.\42\
---------------------------------------------------------------------------
\41\ 17 CFR 240.14a-(c)(6).
\42\ See, e.g., SCECorp (Dec. 20, 1995) (proposal that third
party fiduciary trustees amend discretionary voting agreements).
---------------------------------------------------------------------------
nd
whether the revision appears consistent with current interpretations of
the rule.\42\
---------------------------------------------------------------------------
\41\ 17 CFR 240.14a-(c)(6).
\42\ See, e.g., SCECorp (Dec. 20, 1995) (proposal that third
party fiduciary trustees amend discretionary voting agreements).
---------------------------------------------------------------------------
Current paragraph (c)(7) permits the exclusion of proposals
relating to a company's ``ordinary business operations.'' We recognize
that the term ``ordinary business'' is a legal term of art that
provides little indication of the types of matters to which it refers.
We therefore propose to revise the paragraph to permit exclusion ``if
the proposal relates to specific business decisions normally left to
the discretion of management.'' The revised rule would provide a list
of examples, which is not exclusive, including the way a newspaper
formats its stock tables, whether a company charges an annual fee for
use of its credit card, the wages a company pays its non-executive
employees, and the way a company operates its dividend reinvestment
plan. For an investment company, an example is a decision whether to
invest in the securities of a specific company.
These proposed revisions are intended to make the ``ordinary
business' exclusion easier to understand, not to modify current
interpretations. We request comments on whether the examples of
excludable matters provided are helpful and appropriate, and whether
some other examples than the ones proposed would be more helpful. We
also request your comments on the degree to which the proposed
formulation would be consistent with current interpretations.\43\
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\43\ See the summary of the principal considerations in the
application of the ``ordinary business'' exclusion in Part D below.
---------------------------------------------------------------------------
your comments on the degree to which the proposed
formulation would be consistent with current interpretations.\43\
---------------------------------------------------------------------------
\43\ See the summary of the principal considerations in the
application of the ``ordinary business'' exclusion in Part D below.
---------------------------------------------------------------------------
We also request your comments on whether some other revision would
be preferable. We could, for instance, retain the existing language,
with or without additional guidance on its meaning. An example of this
approach would be to revise current paragraph (c)(7) to permit omission
of a proposal ``if it deals with a matter relating to the conduct of
the company's ordinary business operations (matters that should be left
to the discretion of the company's managers because of their
complexity, impracticability of shareholder participation, or relative
insignificance).'' Would this formulation be preferable to the current
or proposed approach, and be consistent with current interpretations of
the rule?
The proposed revisions to current paragraph (c)(8) \44\ are
designed to reflect the current interpretation that the rule applies
only to proposals on elections of individuals for membership to, and
removal from, the board of directors.\45\ We propose to revise current
paragraph (c)(9) \46\ to reflect the Division's long-standing
interpretation permitting omission of a shareholder proposal if the
company demonstrates that its subject matter directly conflicts with
all or part of one of management's proposals.\47\ We request your
comments on whether some other revision would make these rules easier
to understand and follow, and whether the revisions appear consistent
with current interpretations of the rules.
---------------------------------------------------------------------------
e
company demonstrates that its subject matter directly conflicts with
all or part of one of management's proposals.\47\ We request your
comments on whether some other revision would make these rules easier
to understand and follow, and whether the revisions appear consistent
with current interpretations of the rules.
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\44\ 17 CFR 240.14a-8(c)(8).
\45\ See, e.g., Cornerstone Properties, Inc. (Mar. 8, 1996)
(proposal nominating proponent for election to company's board of
directors).
\46\ 17 CFR 240.14a-8(c)(9).
\47\ See, e.g., General Electric Corporation (Jan. 28, 1997)
(shareholder proposal requiring company to modify stock option plans
conflicted with company proposal); Northern States Power Co. (July
25, 1995) (shareholder proposal counter to management's).
---------------------------------------------------------------------------
Current paragraph (c)(10),\48\ permitting exclusion of ``moot''
proposals, would be revised to reflect the Commission's interpretation
permitting exclusion of proposals that have been ``substantially
implemented.'' \49\ Only minor stylistic revisions would be made to
paragraph (c)(11) \50\, which permits omission of substantially
duplicative proposals. Although we significantly revised current
paragraph (c)912),\51\ the rule restricting resubmission of certain
proposals, the only substantive proposed modifications to the paragraph
are described in Part E below. We request your comments on whether the
current rules are preferable, or whether some other revision would make
the rules easier to understand and follow, and whether the proposed
revisions appear consistent with current interpretations of the rules.
---------------------------------------------------------------------------
roposed modifications to the paragraph
are described in Part E below. We request your comments on whether the
current rules are preferable, or whether some other revision would make
the rules easier to understand and follow, and whether the proposed
revisions appear consistent with current interpretations of the rules.
---------------------------------------------------------------------------
\48\ 17 CFR 240-14a-8(c)(10).
\49\ 1983 Release Consistent with that release, in order to have
been ``substantially implemented,'' the company must have actually
taken steps to implement the proposal. It is insufficient for the
company to have merely considered the proposal, unless the proposal
clearly seeks only consideration by the company, and not necessarily
implementation.
\50\ 17 CFR 240.14a-8(c)(11). See, e.g., Detroit Edison (Jan.
16, 1996).
\51\ See, e.g., Gannett Co. (Feb. 12, 1996).
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Finally, the rule as proposed to be revised would permit both
companies and shareholders to send their rule 14a-8 submissions to the
Commission by
electronic mail. That option is not currently available.
B. Personal Claim or Grievance Exclusion: Rule 14a-8(c)(4)
We propose to modify the application of rule 14a-8(c)(4), which
permits companies to exclude proposals relating to ``a personal claim
or grievance against the registrant or any other person, or if it is
designed to result in a benefit to the proponent or to further a
personal interest, which benefit or interest is not shared by the other
security holders at large.'' The goal of paragraph (c)(4) is
straightforward: to screen out proposals designed to further a personal
grievance or a special interest, since such proposals are unlikely to
further the interests of all shareholders at large.\52\ The Commission
has recognized, however, that the exclusion is ``[p]erhaps the most
subjective provision and definitely the most difficult for the staff to
administer'' because it `
graph (c)(4) is
straightforward: to screen out proposals designed to further a personal
grievance or a special interest, since such proposals are unlikely to
further the interests of all shareholders at large.\52\ The Commission
has recognized, however, that the exclusion is ``[p]erhaps the most
subjective provision and definitely the most difficult for the staff to
administer'' because it ``requires the staff to make determinations
essentially involving the motivation of the proponent in submitting the
proposal.'' \53\
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\52\ Exchange Act Release No. 19135 (Oct. 14, 1982) [47 FR
47420].
\53\ Id.
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Application of the exclusion is particularly difficult when the
proposal is neutral on its face, meaning that the proposal itself does
not by its terms relate to a personal grievance or special interest of
the proponent. In those situations, the Division must make factual
determinations, sometimes involving the proponent's or the company's
credibility, based normally on circumstantial evidence presented in the
parties' submissions.\54\ In practice, the Division has infrequently
concurred in the exclusion of a ``neutral'' proposal under rule 14a-
8(c)(4).
---------------------------------------------------------------------------
\54\ See, e.g., Service Corporation Int'l (Feb. 28, 1997)
(company pointed to proponent's history of harassment as indicative
of a personal claim or grievance); Nortek Inc. (Aug. 13, 1996)
(staff did not concur with company's view that proposal requesting
recision of a bylaw was excludable under rule 14a-8(c)(4)).
---------------------------------------------------------------------------
--
\54\ See, e.g., Service Corporation Int'l (Feb. 28, 1997)
(company pointed to proponent's history of harassment as indicative
of a personal claim or grievance); Nortek Inc. (Aug. 13, 1996)
(staff did not concur with company's view that proposal requesting
recision of a bylaw was excludable under rule 14a-8(c)(4)).
---------------------------------------------------------------------------
We propose to modify the way the Division applies the rule so that
the staff would concur in the exclusion of a proposal on this ground
only if the proposal (including any supporting statement) on its face
relates to a personal grievance or special interest. While a company
would still be required to make a submission under rule 14a-8 if it
intends to omit a ``neutral'' proposal under paragraph (c)(4), the
Division would automatically express ``no view,'' rather than concur or
decline to concur in its exclusion.
We propose this new approach because we recognize that the basic
policy underlying paragraph (c)(4) is equally applicable to proposals
that are neutral on their face. The proposed modification of the way we
administer the rule merely reflects our appreciation that the
Division's ability to make the necessary factual findings is limited in
the context of such a proposal. Companies receiving ``no view''
responses could elect to omit the proposal if they believe they possess
adequate factual records to demonstrate the personal grievance or
interest. However, the Commission and its staff would not make that
determination.
While this is a change in the Division's administration of the
rule, we nevertheless request your comments on whether we should
implement this change, including whether it would lead to abuse by
either shareholders or companies.
C. Rule 14a-8(c)(5): The ``Relevance'' Exclusion
strate the personal grievance or
interest. However, the Commission and its staff would not make that
determination.
While this is a change in the Division's administration of the
rule, we nevertheless request your comments on whether we should
implement this change, including whether it would lead to abuse by
either shareholders or companies.
C. Rule 14a-8(c)(5): The ``Relevance'' Exclusion
We propose to narrow and clarify the operation of rule 14a-8(c)(5),
which is often called the ``relevance'' exclusion because its primary
purpose is to screen out proposals that are of little or no economic
relevance to the company and its business. Currently, the rule permits
companies to exclude a proposal relating to
operations which account for less than 5 percent of the registrant's
total assets at the end of its most recent fiscal year, and for less
than 5 percent of its net earnings and gross sales for its most
recent fiscal year, and is not otherwise significantly related to
the registrant's business.
Since its adoption, the rule has suffered from the inherently
subjective nature of the ``otherwise significantly related'' standard.
The Commission has considered more objective tests. In 1976, for
example, the Commission considered a purely economic test for
determining a proposal's relevance, but rejected the idea largely out
of recognition that some matters, such as cumulative voting rights or
the ratification of auditors, may be important to the company despite
the unavailability of a quantifiable economic value.\55\ The Commission
nonetheless recognized that there were ``circumstances in which
economic data may indicate a valid basis for omitting a proposal under
this provision.'' \56\
---------------------------------------------------------------------------
\55\ Exchange Act Release No. 12999 (Nov. 22, 1976) [49 FR
52994].
\56\ Id.
---------------------------------------------------------------------------
mission
nonetheless recognized that there were ``circumstances in which
economic data may indicate a valid basis for omitting a proposal under
this provision.'' \56\
---------------------------------------------------------------------------
\55\ Exchange Act Release No. 12999 (Nov. 22, 1976) [49 FR
52994].
\56\ Id.
---------------------------------------------------------------------------
Realizing that the rule continued to suffer from imprecision, the
Commission revised it in 1983 to add the specific 5% economic test and
to modify the reference to ``significantly related'' matters.\57\ Thus,
if the subject of the proposal represented less than 5% of total
assets, gross sales, and net earnings, the proponent could avoid
exclusion of a proposal by demonstrating that the proposal is
``otherwise significantly related'' to the company's business.\58\
---------------------------------------------------------------------------
\57\ 1983 Release; see also Exchange Act Release No. 19135 (Oct.
14, 1982).
\58\ The proponent carries the burden of demonstrating that the
proposal is ``otherwise significantly related.'' See Exchange Act
Release No. 19135 (Oct. 14, 1982).
---------------------------------------------------------------------------
Largely as a result of the subjectivity of the ``otherwise
significantly related'' language, that portion of the rule frequently
overshadows the 5% economic standard. Thus, even if a proposal
represents less than 5% of the company's total assets, net earnings,
and gross sales, the proponent often can satisfy the ``otherwise
significantly related'' part to defeat the company's reliance on the
rule. In the period between September 30, 1996, and the date of this
release, only two companies successfully invoked the rule to exclude
proposals.\59\
---------------------------------------------------------------------------
ny's total assets, net earnings,
and gross sales, the proponent often can satisfy the ``otherwise
significantly related'' part to defeat the company's reliance on the
rule. In the period between September 30, 1996, and the date of this
release, only two companies successfully invoked the rule to exclude
proposals.\59\
---------------------------------------------------------------------------
\59\ Atlantic Richfield Company (Jan. 28, 1997) (proposal on
company's operations in Myanmar); La Jolla Pharmaceutical Company
(Feb. 18, 1997) (proposal on use of human fetal tissue).
---------------------------------------------------------------------------
The rule as revised would apply a purely economic standard. The
exception for proposals that are ``otherwise significantly related''
would be deleted. A company would be permitted to exclude proposals
relating to matters involving the purchase or sale of services or
products that represent $10 million or less in gross revenue or total
costs, whichever is appropriate, for the company's most recently
completed fiscal year. However, an economic threshold lower than $10
million would apply if 3% of the company's revenue or total assets
(whichever is higher), for its most recently completed fiscal year,
results in a number lower than $10 million.
For instance, assume a proposal relates to a single retail store
operated by a company with multiple stores, and the store generated $4
million in gross revenue for the company' most recently completed
fiscal year. Because $4 million is less than $10 million, the company
would be permitted to exclude the proposal unless the exception in the
second part of the rule applies. However, because the company's gross
revenue worldwide for the last completed fiscal year was $500 million,
and its total assets totalled $400 million, the exception would not
apply in this example. Three percent of the company's gross revenue for
the relevant period (the higher number)
ny
would be permitted to exclude the proposal unless the exception in the
second part of the rule applies. However, because the company's gross
revenue worldwide for the last completed fiscal year was $500 million,
and its total assets totalled $400 million, the exception would not
apply in this example. Three percent of the company's gross revenue for
the relevant period (the higher number)
amounts to $15 million--a number greater than $10 million. If it
resulted in a lower number, that number would be the applicable
threshold.
In response to the Questionnaire, companies stated that rule 14a-8
operates in a manner that requires them to include too many proposals
of little or no relevance to their businesses.\60\ We believe that the
proposed revisions address this concern by establishing clearer, more
predictable criteria for excluding proposals. The proposed revisions
should also make it easier for companies to exclude economically
insignificant proposals. The approach would appear to balance the
various competing concerns, since under the proposed revision companies
may also be unable to exclude some proposals--with relatively greater
economic significance--that they are currently permitted to omit under
the existing 5% test.
---------------------------------------------------------------------------
\60\ See Section II above. In addition, of those responding to
the Questionnaire, 59% of shareholders, and 54% of companies, ranked
either simplification of the shareholder proposal process, or
reduction of the cost and time required to participate, as a top
goal of reform.
---------------------------------------------------------------------------
-------------------------------------------
\60\ See Section II above. In addition, of those responding to
the Questionnaire, 59% of shareholders, and 54% of companies, ranked
either simplification of the shareholder proposal process, or
reduction of the cost and time required to participate, as a top
goal of reform.
---------------------------------------------------------------------------
There would be four safeguards to prevent the revised rule from
precluding proposals that may be significant to the company despite a
low quantifiable value. First, the exclusion would apply only to
proposals relating to quantifiable matters, such as operations in a
specific foreign country, a specific product line, or a specific retail
store or set of stores. It would not apply to proposals where
quantification is impracticable or unreliable, such as proposals on
cumulative voting, or the ratification of auditors.
Second, the economic threshold in the proposed rule has been
reduced significantly from the threshold in current rule 14a-8(c)(5) to
counter-balance the elimination of the ``otherwise significantly
related'' portion of the current rule. The economic thresholds that
would apply under the proposed rule would be the lesser of either $10
million in gross revenues or total costs (which is appropriate), or 3%
of gross revenues or total assets (whichever is higher).
We recognize that $10 million may be economically significant for
some smaller companies. That is why we propose the alternative 3% test
which would make it more difficult to exclude proposals at smaller
companies. The alternatives test could operate only to reduce the $10
million threshold, not to increase the threshold.
Third, the exclusion would apply only to proposals relating to the
purchase or sale of products and services
conomically significant for
some smaller companies. That is why we propose the alternative 3% test
which would make it more difficult to exclude proposals at smaller
companies. The alternatives test could operate only to reduce the $10
million threshold, not to increase the threshold.
Third, the exclusion would apply only to proposals relating to the
purchase or sale of products and services. This qualification is
designed to help ensure that the exclusion is applied only to distinct
operational matters relating to the company's business activities, and
not to matters involving the company's internal governance, such as
voting procedures for the board of directors.
Finally, we believe that any inflexibility that may result from
adoption of a purely economic standard would be mitigated by the
adoption of the ``override'' mechanism described in Part F below. That
mechanism would permit a proponent who obtained sufficient shareholder
support to override a company's use of current paragraph (c)(5) if he
or she believed that it permitted exclusion of an important proposal.
We request your comments on whether we should consider some other
modification of current paragraph (c)(5). For example, instead of
eliminating the ``otherwise significantly related'' portion of the
current paragraph, should we attempt to clarify and narrow that portion
of the rule? Should it refer instead to specific types of proposals
that would not be subject to the exclusion, such as corporate
governance proposals and/or proposals relating to extraordinary
transactions? \61\ Should we revise the language to make it less
subjective, to refer for instance to proposals where the substantiative
action in the resolution relates to matters that under the applicable
corporate law can be effectuated only by shareholders or the board of
directors, or both acting together? Or should we instead retain the
``otherwise significantly related'' language?
---------------------------------------------------------------------------
ctive, to refer for instance to proposals where the substantiative
action in the resolution relates to matters that under the applicable
corporate law can be effectuated only by shareholders or the board of
directors, or both acting together? Or should we instead retain the
``otherwise significantly related'' language?
---------------------------------------------------------------------------
\61\ The Questionnaire asked about a reformulation that would
permit companies to exclude proposals representing less than 5% of
assets, earnings, and sales, unless the proposal relates to
corporate governance. Forty-one percent of shareholder respondents
and 23% of companies indicated that they would favor such an
approach.
---------------------------------------------------------------------------
We also request your comments on whether the qualification that the
exclusion apply only to matters relating to purchase or sale of goods
or services is necessary to ensure that the exclusion is not overly
broad? Would some other formulation work more effectively, such as
limiting application of the exclusion to matters relating to a
company's assets or earnings?
In addition, we solicit your comments on whether economic
thresholds other than $10 million in gross revenues or total costs, or
3% of gross revenues or total assets, might be more appropriate. Should
there be only one threshold, such as the $10 million threshold, or the
3% threshold, or is it appropriate to have alternative thresholds, as
proposed? The 3% test is intended to apply to relatively small
companies where the fixed dollar test might be too high. Is that
safeguard unnecessary if the fixed dollar threshold is set at a number
as low as $10 million? The alternative 3% percent test would operate
only to reduce the $10 million threshold, not to increase the
threshold. We request your comments on whether the alternative test
should also operate to increase the fixed dollar threshold
companies where the fixed dollar test might be too high. Is that
safeguard unnecessary if the fixed dollar threshold is set at a number
as low as $10 million? The alternative 3% percent test would operate
only to reduce the $10 million threshold, not to increase the
threshold. We request your comments on whether the alternative test
should also operate to increase the fixed dollar threshold.
Your comments should also address whether the proposed $10 million
threshold is too low, so that it would fail to permit omission of
economically insignificant proposals. If so, should the threshold be
higher, such as $15 million or $25 million? Or would the rule as
proposed permit companies to exclude too many proposals? If that is so,
should the threshold be lower, such as $1 million, or $5 million?
Similarly, should we adopt a percentage threshold lower than the
proposed 3%, such as 1% or .5%, or a higher one, such as 5% or 8%?
The proposed $10 million threshold would be based on total costs or
gross revenues, whichever is appropriate. Cost appears to be an
appropriate measure for some matters, such as supply contracts, while
revenue appears more appropriate for others, such as retail operations.
Companies would not be permitted to choose between the two measures.
For the percentage portion of the exclusion, we believe that a test
based alternatively on gross revenues or total assets is warranted
because it would apply in the most consistent and meaningful manner
among different companies and industries compared to other possible
measures. While revenues should in most cases be a consistent measure
of size, assets may be a better measure for some types of companies,
such as banks
the exclusion, we believe that a test
based alternatively on gross revenues or total assets is warranted
because it would apply in the most consistent and meaningful manner
among different companies and industries compared to other possible
measures. While revenues should in most cases be a consistent measure
of size, assets may be a better measure for some types of companies,
such as banks.
Should we instead adopt some other basis, or series of bases, for
measuring the fixed dollar amount, such as pre-tax income, total
assets, gross profit and/or net earnings? Instead of basing the amount
on an alternative between two measures--such as revenues or cost--
should we base it on only one measure, such as only cost, revenues, or
assets? Similarly, we request your comments on whether the percentage
portion of the test should be based on a measure other than gross
revenues or total assets. Should we instead adopt some other basis, or
series of bases, such as pre-tax income, gross profit and/or net
earnings?
D. The Interpretation of Rule 14a-8(c)(7): The ``Ordinary Business''
Exclusion
When adopted in 1953, the ``ordinary business'' exclusion had a
fairly straightforward mission: to ``relieve the management of the
necessity of including in its proxy material security holder proposals
which relate to matters falling within the province of management.''
\62\
---------------------------------------------------------------------------
\62\ Exchange Act Release No. 4950 (Oct. 9, 1953) [18 FR 6646].
---------------------------------------------------------------------------
to ``relieve the management of the
necessity of including in its proxy material security holder proposals
which relate to matters falling within the province of management.''
\62\
---------------------------------------------------------------------------
\62\ Exchange Act Release No. 4950 (Oct. 9, 1953) [18 FR 6646].
---------------------------------------------------------------------------
That mission became more complicated with the emergence of
proposals focusing on social policy issues beginning in the late
1960's. As drafted, the rule provided no guidance on how to analyze
proposals relating simultaneously to both an ``ordinary business''
matter and a significant social policy issue.
In 1976, the Commission considered revisions to the ``ordinary
business'' exclusion, hoping to fashion more workable language
distinguishing between ``mundane'' business matters and ``important''
ones.\63\ It declined to adopt the new language after commentators
expressed concern that the new language might be overly restrictive and
difficult to apply.\64\ In lieu of adopting revisions, the Commission
stated that it would apply the exclusion in a ``somewhat more flexible
manner.'' \65\
---------------------------------------------------------------------------
\63\ Exchange Act Release No. 12598 (Jul. 7, 1976) [41 FR
29982].
\64\ Exchange Act Release No. 12999 (Nov. 22, 1976) [41 FR
52994].
\65\ Id.
---------------------------------------------------------------------------
e Commission
stated that it would apply the exclusion in a ``somewhat more flexible
manner.'' \65\
---------------------------------------------------------------------------
\63\ Exchange Act Release No. 12598 (Jul. 7, 1976) [41 FR
29982].
\64\ Exchange Act Release No. 12999 (Nov. 22, 1976) [41 FR
52994].
\65\ Id.
---------------------------------------------------------------------------
In applying the ``ordinary business'' exclusion to proposals
relating to social policy issues, the Division applies the most well-
reasoned standards possible, given the complexity of the task. From
time to time, in light of experience dealing with proposals in
particular subject areas, it adjusts its approach. Over the years, for
instance, the Division has in several instances reversed its position
on the excludability of proposals involving plant closings,\66\ the
manufacture of tobacco products,\67\ executive compensation,\68\ and
golden parachutes.\69\
---------------------------------------------------------------------------
\66\ See Pacific Telesis Group (Feb. 2, 1989).
\67\ See Philip Morris Companies, Inc. (Feb. 13, 1990).
\68\ See Reebok Int'l Ltd. (Mar. 16, 1992).
\69\ See Transamerica Corp. (Jan. 10, 1990).
---------------------------------------------------------------------------
Another of these interpretive adjustments is a subject of today's
proposals. In a 1992 no-action letter issued to the Cracker Barrel Old
Country Stores, Inc.,\70\ the Division announced that
\70\ See Cracker Barrel.
---------------------------------------------------------------------------
the fact that a shareholder proposal concerning a company's
employment policies and practices for the general workforce is tied
to a social issue will no longer be viewed as removing the proposal
from the realm of ordinary business operations of the registrant.
Rather, determinations with respect to any such proposals are
properly governed by the employment-based nature of the proposal.
----
the fact that a shareholder proposal concerning a company's
employment policies and practices for the general workforce is tied
to a social issue will no longer be viewed as removing the proposal
from the realm of ordinary business operations of the registrant.
Rather, determinations with respect to any such proposals are
properly governed by the employment-based nature of the proposal.
As a basis for the interpretive shift, the Division explained in
the letter that
[n]otwithstanding the general view that employment matters
concerning the workforce of the company are excludable as matters
involving the conduct of day-to-day business, exceptions have been
made in some cases where a proponent based an employment-related
proposal on `social policy' concerns. In recent years, however, the
line between includable and excludable employment-related proposals
has been increasingly difficult to draw. The distinctions recognized
by the staff are characterized by many as tenuous, without substance
and effectively nullifying the application of the ordinary business
exclusion to employment-related proposals.
The Cracker Barrel interpretation has been controversial since it
was announced.\71\ While the reasons for adopting the Cracker Barrel
interpretation continue to have some validity, as well as significant
support in the corporate community,\72\ we believe that reversal of the
position is warranted in light of the broader package of reforms
proposed today. Reversal will require companies to include proposals in
their proxy materials that some shareholders believe are important to
companies and fellow shareholders. In place of the 1992 position, the
Division would return to its approach to such proposals prevailing
before it adopted the position. That is, employment-related proposals
focusing on significant social policy issues could not automatically be
excluded under the ``ordinary business'' exclusion.
---------------------------------------------------------------------------
and fellow shareholders. In place of the 1992 position, the
Division would return to its approach to such proposals prevailing
before it adopted the position. That is, employment-related proposals
focusing on significant social policy issues could not automatically be
excluded under the ``ordinary business'' exclusion.
---------------------------------------------------------------------------
\71\ Shortly after its announcement, the New York City Employees
Retirement System unsuccessfully challenged the Commission's
authority to adopt the position. See New York City Employee's
Retirement System v. SEC, 843 F. Supp. 858, rev'd 45 F.3d 7 (2d Cir.
1995). The Amalgamated Clothing and Textiles Union successfully
challenged Wal-Mart's decision to exclude an affirmative action
proposal after the Division concurred that the proposal could be
excluded. See Amalgamated Clothing and Textile Workers Union v. Wal-
Mart Stores, Inc., 821 F. Supp. 877 (S.D.N.Y. 1993). During the last
proxy season, we declined proponents' requests that we review three
Division no-action responses implicating the interpretation, and
concerning companies' affirmative action policies and practices.
Commissioner Wallman dissented, and issued a dissenting statement.
\72\ In response to the Questionnaire, 91% of companies favored
excluding employment-related shareholder proposals raising
significant social policy issues under the Cracker Barrel
interpretation. Eighty-six percent of shareholders thought such
proposals should be included.
---------------------------------------------------------------------------
issented, and issued a dissenting statement.
\72\ In response to the Questionnaire, 91% of companies favored
excluding employment-related shareholder proposals raising
significant social policy issues under the Cracker Barrel
interpretation. Eighty-six percent of shareholders thought such
proposals should be included.
---------------------------------------------------------------------------
Under this proposal, the ``bright line'' approach for employment-
related proposals established by the Cracker Barrel position would be
replaced by the case-by-case analysis that prevailed previously. Return
to a case-by-case approach should redress the concerns of shareholders
interested in submitting for a vote by fellow shareholders employment-
related proposals raising significant social issues. While this would
be a change in the Commission's interpretation of the rule, we
nonetheless request your comments on whether we should reverse the
Cracker Barrel interpretation. Your comments should focus on the
proposed interpretive change independently of other proposals as well
as part of the overall package of reforms proposed today.
In framing responses, commenters should bear in mind that the
Cracker Barrel position relates only to employment-related proposals
raising significant social policy issues. Reversal of the position
would not affect the Division's analysis of any other category of
proposals under the exclusion, such as proposals on general business
operations. Also, the Division would continue to concur in the
exclusion of straightforward employment proposals not raising
significant social issues.\73\
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es. Reversal of the position
would not affect the Division's analysis of any other category of
proposals under the exclusion, such as proposals on general business
operations. Also, the Division would continue to concur in the
exclusion of straightforward employment proposals not raising
significant social issues.\73\
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\73\ See, e.g., Marion Merrell Dow, Inc. (Mar. 26, 1993)
(proposal on the scope of employees' responsibilities); Eastman
Kodak Company (Jan. 30, 1991) (procedures for employee-management
communications); International Business Machines Corporation (Dec.
28, 1995) (proposal requesting amendment of terms of employee
benefit plans).
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Despite return to a case-by-case, analytical approach, some types
of proposals raising social policy issues may continue to raise
difficult interpretive questions. For instance, reversal of the Cracker
Barrel position would not automatically result in the inclusion of
proposals focusing on wage and other issues for companies' operations
in the Maquiladora region of Mexico,\74\ or on ``workplace practices.''
\75\
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\74\ See, e.g., Allied Signal, Inc. (Jan. 8, 1997) (proposal on
company's Maquiladora operations). In response to the proponents'
request for Commission review, we declined to review this no-action
response in light of the ongoing Congressionally-mandated study of
the shareholder proposal process.
\75\ See, e.g., W.R. Grace & Co. (Feb. 29, 1996) (proposal on
matters such as employee training, quality control).
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Finally, we believe that it would be useful to summarize the
principal considerations in the Division's application of the
``ordinary business'' exclusion. These considerations would continue to
impact our reasoning even
.R. Grace & Co. (Feb. 29, 1996) (proposal on
matters such as employee training, quality control).
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Finally, we believe that it would be useful to summarize the
principal considerations in the Division's application of the
``ordinary business'' exclusion. These considerations would continue to
impact our reasoning even
if the proposals are adopted. The general underlying policy of this
exclusion is consistent with the policy of most state corporate laws:
to confine the resolution of ordinary business problems to management
and the board of directors since it is impracticable for shareholders
to decide how to solve such problems.\76\ Although the policy is based
on state law, it is not completely guided by it, due in part to an
absence of state authority on many of the issues we are called upon to
address.
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\76\ See Testimony of Chairman Armstrong, Hearings on SEC
Enforcement problems Before a Subcommittee of the Senate Committee
on Banking and Currency, 85th Cong., 1st Sess., pt. 1, at 118
(1957); see also Exchange Act Rel. No. 12999 (Nov. 22, 1976).
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The policy underlying the rule includes two central considerations.
The first relates to the subject matter of the proposal. Certain tasks
are so fundamental to management's ability to run a company on a day-
to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight. Examples include the management of the
workforce, such as the hiring, promotion, and termination of employees,
decisions on production quality and quantity, and the retention of
suppliers
atter of the proposal. Certain tasks
are so fundamental to management's ability to run a company on a day-
to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight. Examples include the management of the
workforce, such as the hiring, promotion, and termination of employees,
decisions on production quality and quantity, and the retention of
suppliers. However, proposals relating to such matters but focusing on
significant social policy issues generally would not be considered to
be excludable, because such issues typically fall outside the scope of
management's prerogative.\77\
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\77\ See, e.g., Reebok Int'l Ltd. (Mar. 16, 1992).
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The second consideration relates to the degree to which the
proposal seeks to ``micro management'' the company by probing too
deeply into ``matters of a complex nature that shareholders, as a
group, would not be qualified to make an informed judgment on, due to
their lack of business expertise and lack of intimate knowledge of the
[company's] business.''\78\ This consideration may come into play in a
number of circumstances, such as where the proposal seeks intricate
detail, or seeks to impose specific time-frames or methods for
implementing complex policies.\79\
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on, due to
their lack of business expertise and lack of intimate knowledge of the
[company's] business.''\78\ This consideration may come into play in a
number of circumstances, such as where the proposal seeks intricate
detail, or seeks to impose specific time-frames or methods for
implementing complex policies.\79\
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\78\ Exchange Act Release No. 12999 (Nov. 22, 1976).
\79\ See, e.g., Capital Cities/ABC, Inc. (Apr. 4, 1991)
(proposal requested detailed information on the composition of the
company's workforce and other matters); Templeton Dragon Fund/
Newgate Management Associates (Jun. 11, 1997) (proposal sought to
establish the interval between repurchases and the amount of the
initial repurchase offer for a fund's repurchase program);
Burlington Northern Santa Fe Corp. (Jan. 22, 1997) (proposal on
development of new technology for railroad braking systems); see
also, e.g., Roosevelt v. Dupont, 958 F.2d 416, 427 (D.C. Cir. 1992)
(proposal sought to impose earlier timetable for cessation of CFC
production).
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E. Rule 14a-8(c)(12): The Resubmission Thresholds
We propose to increase the resubmission thresholds under rule 14a-
8(c)(12). If a proposal fails to receive a specified level of support,
that rule permits a company to exclude a proposal focusing on
substantially the same subject matter for a three-year period. In order
to avoid possible exclusion, a proposal must receive at least 3% of the
vote on its first submission, 6% on the second, and 10% on the third.
We propose to raise the thresholds to 6% on the first submission,
15% on the second submission, and 30% on the third. At least for the
time frame contemplated by the rule, we believe that a proposal that
has not achieved these levels of support has been fairly tested and
stands no significant chance of obtaining the level of voting support
required for approval
second, and 10% on the third.
We propose to raise the thresholds to 6% on the first submission,
15% on the second submission, and 30% on the third. At least for the
time frame contemplated by the rule, we believe that a proposal that
has not achieved these levels of support has been fairly tested and
stands no significant chance of obtaining the level of voting support
required for approval. We propose to increase the second and third
thresholds by relatively larger amounts because the proposal will have
had two or three years to generate support.
The amendments would also respond to companies' concerns that they
receive too many proposals of little or no relevance to their
businesses.\80\ In addition, we believe that the amendments are
appropriate to counter-balance other proposals that would expand the
range of proposals companies must include in their proxy materials,
such as the proposed reversal of the Cracker Barrel position, and the
``override'' mechanism described in Part F below.
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\80\ See Section II above.
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The theory of this approach is consistent with that of the proposed
``override'' mechanism: in some circumstances, shareholders may be the
best judge of which rule 14a-8 proposals deserve space on the company's
proxy card. Even with the proposed revisions, paragraph (c)(12) will
continue to permit shareholders an opportunity to see otherwise proper
proposals at least once, and to decide for themselves which are
sufficiently important and relevant to see on the proxy card a second,
third, or fourth time. In this respect, we believe that the proposed
approach is preferable to other suggested alternatives, such as
increasing the eligibility criteria for initial submissions,\81\ or
further restricting the types of proposals that may appear in proxy
materials
once, and to decide for themselves which are
sufficiently important and relevant to see on the proxy card a second,
third, or fourth time. In this respect, we believe that the proposed
approach is preferable to other suggested alternatives, such as
increasing the eligibility criteria for initial submissions,\81\ or
further restricting the types of proposals that may appear in proxy
materials. We request your comments whether this approach is preferable
to alternatives, such as increasing eligibility criteria.
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\81\ For a discussion of the eligibility criteria, see Part I.2.
below.
---------------------------------------------------------------------------
We request your comments on whether the thresholds should remain at
their current levels, or whether they should be amended to amounts
lower or higher than those proposed. For instance, instead of
increasing the first threshold of 6%, we could increase it to 5%, or to
8% or 10%. The second threshold instead could be increased to 10% or
20%, and the third to 15% or 40%. Alternatively, we could increase only
one or two of the thresholds. To illustrate, we could increase only the
second and third thresholds, for instance to 15% and 30%, but leave the
first at its current level of 3%.
We also request your comments on whether the size of the thresholds
should vary in inverse relationship to the size of the company. Under
this alternative, the percentage vote that a proposal must receive
could be higher or lower depending on the company's total assets,
market capitalization, revenues, profits, earnings, or a combination of
those factors. A smaller percentage would be sufficient for a larger
company, and a larger percentage for a smaller company. This approach
would account for the fact that obtaining a certain percentage of
support may become more difficult as the size of the shareholder base
increases
ending on the company's total assets,
market capitalization, revenues, profits, earnings, or a combination of
those factors. A smaller percentage would be sufficient for a larger
company, and a larger percentage for a smaller company. This approach
would account for the fact that obtaining a certain percentage of
support may become more difficult as the size of the shareholder base
increases. If you believe that the thresholds should vary, your
comments should specify the factors that should be considered in
distinguishing between companies.
Finally paragraph (c)(12) prescribes a ``votes cast'' standard for
determining whether a proposal received sufficient voting support in
previous years to bar its omission in the current year. Under this
standard, which has been characterized as the ``most favorable to
shareholder proponents,\82\ abstentions and broker non-votes \83\ are
excluded
from the denominator comprised of the total number of votes cast
``For'' and ``Against'' a given proposal. This figure in turn is
divided into the total number of favorable votes cast to obtain the
requisite percentage.
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\82\ See American Bar Association Interpretive Letter (avail.
June 24, 1993) (quotation in footnote 2 of incoming letter
describing staff's position, for tabulation purposes, on 14a-
8(c)(12) resubmission thresholds; the letter sought staff
interpretive advice on the proper treatment of broker non-votes and
abstentions for purposes of Rule 16b-3).
\83\ In Exchange Act Release No. 30849 (June 24, 1992) [57 FR
29564], at footnote 67, the Commission described abstentions and
broker-dealer non-votes as follows:
In two instances, a shareholder will be deemed present at the
meeting for quorum purposes, but will be deemed not to have voted on
a particular matter. First, the shareholder may specifically abstain
from the vote by registering an abstention vote
Act Release No. 30849 (June 24, 1992) [57 FR
29564], at footnote 67, the Commission described abstentions and
broker-dealer non-votes as follows:
In two instances, a shareholder will be deemed present at the
meeting for quorum purposes, but will be deemed not to have voted on
a particular matter. First, the shareholder may specifically abstain
from the vote by registering an abstention vote. Second, a nominee
holding shares for beneficial owners [e.g., a broker-dealer] may
have voted on certain matters at the meeting pursuant to
discretionary authority or instructions from the beneficial owners,
but with respect to other matters may not have received instructions
from the beneficial owner and [therefore] may not exercise
discretionary voting power. Such unvoted shares are termed ``non-
votes.''
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The Commission believes that the staff should continue to apply
this method of vote counting for (c)(12) purposes, regardless of
whether the existing thresholds are increased. Comment is sought on
whether a different method should be applied; for example, including
abstentions and/or broker non-votes as votes cast in the denominator,
and/or treating abstentions and/or broker non-votes as votes against a
proposal. We note that treating abstentions and/or non-votes as votes
cast would result in the largest denominator, requiring the most
``For'' votes to surmount the (c)(12) thresholds.
F. Proposed Override Mechanism
ld be applied; for example, including
abstentions and/or broker non-votes as votes cast in the denominator,
and/or treating abstentions and/or broker non-votes as votes against a
proposal. We note that treating abstentions and/or non-votes as votes
cast would result in the largest denominator, requiring the most
``For'' votes to surmount the (c)(12) thresholds.
F. Proposed Override Mechanism
We propose to revise rule 14a-8 to permit a shareholder proponent
to override the exclusions under rules 14a-8(c) (5) and (7) if he or
she demonstrates that at least 3% of the company's outstanding voting
shares support the submission of the proposal for a shareholder vote.
Current rule 14a-8 does not include any mechanism for overriding
exclusions currently listed in any paragraph of rule 14a-8.
The ``override'' mechanism would broaden the spectrum of proposals
that may be included in companies' proxy materials where a certain
percentage of the shareholder body believes that all shareholders
should have an opportunity to express a view on the proposal. The
proposed mechanism would accordingly provide shareholders an
opportunity to decide for themselves which proposals are sufficiently
important and relevant to all shareholders--and, therefore, to the
company--to merit space in the company's proxy materials.
As an example, companies often rely on current paragraph (c)(7) in
attempting to exclude shareholder proposals on a variety of issues.
Under the proposed ``override,'' a shareholder obtaining the required
level of support could avoid exclusion under that paragraph.
The requirement that the proponent obtain the support of a certain
percentage of his or her fellow shareholders should serve two purposes.
First, the percentage should be high enough to ensure that the
proposals receiving that level of support are likely to be sufficiently
relevant and important to the company to deserve a space in its proxy
materials
ld avoid exclusion under that paragraph.
The requirement that the proponent obtain the support of a certain
percentage of his or her fellow shareholders should serve two purposes.
First, the percentage should be high enough to ensure that the
proposals receiving that level of support are likely to be sufficiently
relevant and important to the company to deserve a space in its proxy
materials. Second, the percentage should not be so high as to make the
``override'' unattainable. We believe that 3% would strike the right
balance, but we request your comments on whether the percentage should
be higher, such as 5% or 8%, or lower, such as 1% or 2%. Your comments,
preferably supported by empirical information, should address the
degree to which a 3% support level is achievable.
As proposed, the shareholder who submitted the proposal could
include his or her own shares in calculating the 3% necessary to
accomplish an override. We recognize that, under this approach, a
proponent who holds 3% of a company's outstanding voting shares could
accomplish an override without having to obtain the endorsement of
other shareholders. We request your comments on whether alternatively
the rule should preclude consideration of the proponent's own shares in
calculating the percentage required for an override.
We request your comments on whether we should adopt an alternative
mechanism for establishing a shareholder override in addition to, or in
place of, the 3% requirement. We could, for instance, permit an
override by a fixed number of shareholders, such as 200, or 500
holders, either in place of the 3% threshold, or as an alternative
test. If so, should it be permissible for the supporters to be members
of the same organization, such as the same shareholder organization?
We also request your comments on whether the level of support a
shareholder must obtain should vary in inverse relationship to the size
of the company
of shareholders, such as 200, or 500
holders, either in place of the 3% threshold, or as an alternative
test. If so, should it be permissible for the supporters to be members
of the same organization, such as the same shareholder organization?
We also request your comments on whether the level of support a
shareholder must obtain should vary in inverse relationship to the size
of the company. That is, the percentage of share ownership that a
proposal must receive could be higher or lower depending on the
company's total assets, market capitalization, revenues, profits,
earnings , income or a combination of those factors. A smaller
percentage would be sufficient for a larger company, and a larger
percentage for a smaller company. This approach would account for the
fact that obtaining a certain percentage of support may become more
difficult as the size of the shareholder base increases. If you believe
that the thresholds should vary, your comments should specify the
factors that should be considered in distinguishing between companies.
One method for obtaining the required support likely could be to
enlist the support of institutions holding large blocks of the
company's voting shares. We currently do not have conclusive
information on the extent to which institutions would actually support
inclusion of social proposals, and we request your comments on this
question. Our review of institutional filings on form 13F indicates
that in many cases the support of 3% could be achieved by enlisting the
support of only one institutional holder,\84\ although it did not
indicate how many of those holders would as a practical matter likely
be in a position to engage in shareholder proposal activity.
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view of institutional filings on form 13F indicates
that in many cases the support of 3% could be achieved by enlisting the
support of only one institutional holder,\84\ although it did not
indicate how many of those holders would as a practical matter likely
be in a position to engage in shareholder proposal activity.
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\84\ In the last quarter of 1996, institutional investment
managers filing Form 13F [17 CFR 249.325] reported holdings in 5,993
listed equity issues. For 69% (4,166) issues, institutional holdings
are sufficiently high that an investor would need to contact only
one holder to communicate with at least 3% of the corporation's
equity ownership.
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In calculating the percentage, a proponent could rely on the number
of voting shares outstanding reported in the company's annual report to
shareholders distributed for the prior year's annual meeting.\85\
Proponents taking advantage of the ``override'' would be responsible
for demonstrating to the company, not less than 120 calendar days
before the date of the company's proxy statement released to
shareholders in connection with the previous year's annual meeting,
that their proposals had received the endorsement by the holders of 3%
of the company's shares entitled to be voted on the proposal at the
meeting. That would include, from each supporter:
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\85\ Companies are required to provide this information in the
annual report under rule 5-20 of Regulation S-X. The information
should also be available in the company's annual report on Form 10-K
[17 CFR 249.310].
's shares entitled to be voted on the proposal at the
meeting. That would include, from each supporter:
---------------------------------------------------------------------------
\85\ Companies are required to provide this information in the
annual report under rule 5-20 of Regulation S-X. The information
should also be available in the company's annual report on Form 10-K
[17 CFR 249.310].
(i) His or her written statement supporting the inclusion of the
proposal in the company's proxy materials for a specific meeting of
shareholders. The statement must be executed and dated as of a date
no earlier than the date of the company's annual meeting for the
prior year. If the company did not hold a meeting the prior year,
the statement must be dated no more than one year before the
scheduled date of the meeting for which the proposal is submitted.
Of course, a shareholder's support of an ``override'' effort would
not include proxy authority with respect to the vote on the proposal
if it is ultimately placed in the company's proxy materials;\86\ and
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\86\ See discussion in Part G below of proposed amendments to
rules 14a-2 and 13d-5.
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(ii) A written statement from the record holder of the
supporter's shares, specifying the number of shares that the
supporter held as of the date of the supporter's statement described
in (i) of this section.
It would be the proponent's responsibility to collect this evidence
from the supporters and provide it to the company in an organized,
------------------------------------------------
(ii) A written statement from the record holder of the
supporter's shares, specifying the number of shares that the
supporter held as of the date of the supporter's statement described
in (i) of this section.
It would be the proponent's responsibility to collect this evidence
from the supporters and provide it to the company in an organized,
understandable form. We request your comments on these procedures,
including the requirement that proponents submit the written evidence
no later than 120 calendar days before the date that the company first
mailed its proxy materials to shareholders for the prior year's annual
meeting. Would a deadline set at 60 or 90 calendar days, or 150 or 180
calendar days, be more appropriate?
The 120-day deadline has the benefit of simplicity because it would
track the deadline that currently applies to the submission of
shareholder proposals to companies, which companies are already
required to publish in their proxy materials. The 120-day deadline
would also ensure that companies learn of a potential override
sufficiently before they print and mail their proxies to review the
proponent's written support and to discuss any questions on its
sufficiency.
Under current rule 14a-8's timing requirements, there is little
change that a proponent would learn whether a company intends to omit,
and may properly omit, his or her proposal before invoking the override
mechanism. Under paragraph (d) of current rule 14a-8, a company
intending to omit a proposal is not required to submit its reasons to
the Commission until 80 calendar days before the date the company files
its definitive copies of its proxy statement and form of proxy.\87\
That, of course, is after the proposed 120-day deadline for submitting
``override'' material to companies
g the override
mechanism. Under paragraph (d) of current rule 14a-8, a company
intending to omit a proposal is not required to submit its reasons to
the Commission until 80 calendar days before the date the company files
its definitive copies of its proxy statement and form of proxy.\87\
That, of course, is after the proposed 120-day deadline for submitting
``override'' material to companies. We accordingly propose to amend
rule 14a-8's timing requirements to provide a proponent a chance to
learn the Division's views on whether the proposal is properly
excludable before undertaking an override effort.
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\87\ See rule 14a-8(d)[17 CFR 240.14a-8(d)].
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Under current rule 14a-8(d), the 80-day deadline applies to
companies' submissions with the Commission without regard to when the
company receives a copy of the shareholder proposal. Unless the company
submits early, the Division's views on the excludability of the
proposal may not be available until weeks before the date of the
meeting of shareholders. We propose to amend current paragraph (d) to
require companies to make their submissions no later than 40 calendar
days after receiving a proposal. Thus, under proposed Question 12, a
company would be required to submit its reasons to the Commission no
later than 40 calendar days after the date that it receives a
shareholder proposal for inclusion in its proxy materials, and no later
than 80 calendar days before it files its definitive proxy statement
and form of proxy with the Commission. Under this approach, a proponent
who submits his or her proposal to the company early enough would
likely learn whether, in the Division's view, the proposal may be
excluded before needing to commence an override effort
eholder proposal for inclusion in its proxy materials, and no later
than 80 calendar days before it files its definitive proxy statement
and form of proxy with the Commission. Under this approach, a proponent
who submits his or her proposal to the company early enough would
likely learn whether, in the Division's view, the proposal may be
excluded before needing to commence an override effort.
We request your comments on whether it is necessary for proponents
to learn of the Division's position before undertaking an override
effort. We also request your comments on whether the proposed
modification of rule 14a-8's timing requirements would provide
proponents with an adequate opportunity to learn of the Division's
response prior to commencing an override effort. Finally, would the
proposed modification provide companies with adequate time to consider
shareholder proposals, and to prepare and submit a rule 14a-8 filing
with the Commission? \88\ Should companies be allowed more time, such
as 50 or 60 days, or less time, such as 30 days?
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\88\ Under current rule 14a-8(d), shareholder proposals must be
submitted to the company no later than 120 calendar days before the
date that the company mailed it proxy materials to shareholders the
prior year. Because the company need not make its filing until 80
calendar days before the filing of definitive proxy materials, the
current rule in most instances assures companies approximately 40
days to consider and respond to the receipt of a proposal.
---------------------------------------------------------------------------
that the company mailed it proxy materials to shareholders the
prior year. Because the company need not make its filing until 80
calendar days before the filing of definitive proxy materials, the
current rule in most instances assures companies approximately 40
days to consider and respond to the receipt of a proposal.
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As proposed, written support for an override effort must be
executed and dated no earlier than the date of the company's annual
meeting for the previous year. The purpose of this requirement is to
ensure that support for an override is sought and provided as of a date
reasonably close to the date of the meeting at which the proposal is to
be presented. It is also designed to prevent a proponent from using the
same override more than once. We request your comments on whether
proponents should have more time, such as 18 months, to collect
override evidence, or less time, such as 9 months. We also request your
comments on whether we should consider some other approach, such as
stating that override evidence may be used only once, without placing a
limitation on how old it can be.
The proposed share ownership requirements for supporting an
override would be more lenient than the current eligibility
requirements for actually submitting a proposal to a company. Paragraph
(a) of current rule 14a-8 requires that the actual proponent have held
his or her shares for at least one year before becoming eligible to
submit a proposal to a company. One purpose of the one-year requirement
is to curtail abuse of the rule by requiring that those who put the
company and other shareholders to the expense of including a proposal
in its proxy materials have had a continuous investment interest in the
company
that the actual proponent have held
his or her shares for at least one year before becoming eligible to
submit a proposal to a company. One purpose of the one-year requirement
is to curtail abuse of the rule by requiring that those who put the
company and other shareholders to the expense of including a proposal
in its proxy materials have had a continuous investment interest in the
company. While we do not propose a one-year ownership requirement for
supporting the placement of a proposal in a company's proxy materials
under the override mechanism, we request your comments on whether we
should adopt one. If so, your comments should address whether we should
choose one year, or instead a shorter ownership period for the purposes
of the override, such as 6 months, or a longer period, such as 2 years.
In addition, paragraph (a) of the current rule requires that an
actual proponent state that he or she intends to hold his or her shares
at least through the date of the meeting. Largely out of concern that
the fiduciary duties of institutional holders would preclude them from
making such a commitment, we do not propose that those supporting an
override promise to hold their shares through the date of the meeting.
We request your comments, however, on whether we should adopt such a
requirement, and on whether it would, if adopted, interfere with
fiduciary duties. Alternatively, should we require a supporter to state
that he or she intends, as of the date of the statement, to hold his or
her shares through the date of the meeting, without attaching a penalty
to a sale of the shares before the meeting date? \89\
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nd on whether it would, if adopted, interfere with
fiduciary duties. Alternatively, should we require a supporter to state
that he or she intends, as of the date of the statement, to hold his or
her shares through the date of the meeting, without attaching a penalty
to a sale of the shares before the meeting date? \89\
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\89\ Under current rule 14a-8(a)(1), if a proponent fails to
hold his or her securities continuously through the date of the
meeting, the company may preclude him or her from including another
proposal in its proxy materials for two calendar years.
---------------------------------------------------------------------------
As proposed, the override mechanism would limit each shareholder to
endorsement of no more than one proposal sponsored by another
shareholder. That would not, however, affect the shareholder's
eligibility to submit a proposal of his or her own. The purpose of the
limit would be to place a limitation on the number of proposals that a
group of shareholders could force a company to include in its proxy
materials. We request your comments on whether the ``one endorsement''
limit should be more liberal, permitting each shareholder to endorse
two or three proposals for each company. Or should it be more
restrictive, permitting each shareholder to either submit one proposal,
or to endorse one proposal, at each company? Under that approach, a
shareholder who had endorsed a proposal would be disqualified from
submitting his or her own proposal.
We view the proposed override as a supplemental, rather than a
primary,
method for including proposals in companies' proxy materials.
Accordingly, we are not proposing any special mechanisms for requiring
companies to provide shareholder lists or other shareholder information
to proponents seeking to obtain support for an override. We request
your comments on whether the rule should include any such mechanisms.
override as a supplemental, rather than a
primary,
method for including proposals in companies' proxy materials.
Accordingly, we are not proposing any special mechanisms for requiring
companies to provide shareholder lists or other shareholder information
to proponents seeking to obtain support for an override. We request
your comments on whether the rule should include any such mechanisms.
G. Safe Harbor Under Section 13(d); Qualified Exemption From Proxy
Rules
To address concerns that a proponent's efforts to gather
shareholder support to avail himself or herself of the override might
be deterred by concerns about triggering filing and other obligations
under Section 13(d) \90\ or 14(a) \91\ of the Exchange Act, we also
propose a new safe harbor from the 13(d) ``group'' beneficial ownership
reporting requirements, and a new exemption from the proxy rules in
rule 14a-2.
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\90\ 15 U.S.C. 78m(d).
\91\ 15 U.S.C. 78n(a).
---------------------------------------------------------------------------
Under current rules, there may be a concern that shareholders
cooperating in an ``override'' effort, who beneficially own in
aggregate more than 5 percent of the company's equity securities, might
be required to file a Schedule 13D or 13G if deemed to have formed a
``group'' under rule 13d-5. Similarly, there may be a concern that the
shareholder proponents and others assisting them in seeking support
also could trigger obligations under the proxy rules if their
cooperation involves any ``solicitation'' as defined in rule 14a-
1(l)(1).\92\ The relief afforded by the safe harbor would be limited to
support for the inclusion of the proposal in the company's proxy
materials for a shareholder vote. It would not extend to agreements or
arrangements on how shareholders would ultimately vote if the proposal
appears in the company's proxy materials. Proposed rule 13d-5(b)(3)
would provide that:
\92\ 17 CFR 240.14a-1(l)(1).
l)(1).\92\ The relief afforded by the safe harbor would be limited to
support for the inclusion of the proposal in the company's proxy
materials for a shareholder vote. It would not extend to agreements or
arrangements on how shareholders would ultimately vote if the proposal
appears in the company's proxy materials. Proposed rule 13d-5(b)(3)
would provide that:
\92\ 17 CFR 240.14a-1(l)(1).
Notwithstanding paragraph (b)(1) of this section, a group formed
among the beneficial owners of a class of equity securities solely
by an understanding, arrangement, or agreement that a shareholder
proposal should be placed in a registrant's proxy materials for a
shareholder vote, for the purpose of using the ``override''
mechanism provided in Sec. 240.14a-8(j) (Question 10), shall be
deemed not to have acquired any equity securities beneficially owned
by the other members of the group for the purposes of Section
13(d)(1) of the Act (15 U.S.C. 78m); provided, however, that such
understanding, arrangement or agreement does not relate to how the
holders will vote on the proposal if it is ultimately placed in the
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registrant's proxy materials.
We request your comments on whether this relief is necessary in
order to enable shareholders effectively to make use of the override,
and, if so, whether it will serve that purpose adequately. We also
request your comments on whether efforts to obtain an override for
certain types of proposals (e.g., those affecting control of the
company) should be afforded protection under the safe harbor, and more
generally on whether the proposed safe harbor is overly broad.
Proposed new rule 14a-2(b)(2) would provide an exemption from
compliance with all proxy rules except rule 14a-9,\93\
---------------------------------------------------------------------------
\93\ 17 CFR 240.14a-9.
---------------------------------------------------------------------------
otection under the safe harbor, and more
generally on whether the proposed safe harbor is overly broad.
Proposed new rule 14a-2(b)(2) would provide an exemption from
compliance with all proxy rules except rule 14a-9,\93\
---------------------------------------------------------------------------
\93\ 17 CFR 240.14a-9.
---------------------------------------------------------------------------
for any solicitation made for the sole purpose of gathering support
for placing a shareholder proposal in a registrant's proxy materials
pursuant the ``override'' mechanism provided in Sec. 240.14a-8(j)
(Question 10); provided that such solicitation does not seek proxy
authority with respect to the vote on the proposal if it is
ultimately placed in the registrant's proxy materials;
We request your comments on whether we should adopt proposed new
rule 14a-2(b)(2), including whether it would provide adequate relief
for shareholders concerned that their participation in an ``override''
effort could amount to a ``solicitation,'' or whether the proposed
relief is overly broad. We also request your comments on whether, and
the extent to which, the restrictions set forth in current rule 14a-
2(b)(1) (i)-(x) \94\ should also apply to limit the persons who may use
the proposed new exemption. Alternatively, we have previously made
clear that proponents of rule 14a-8 proposals may use the exemption
provided by rule 14a-2(b)(1);\95\ instead of adopting the proposed new
rule, should we make clear that proponents seeking to use the proposed
override mechanism may avail themselves of that exemption?
---------------------------------------------------------------------------
\94\ 17 CFR 240.14a-2(b)(1).
\95\ See Exchange Act Release No. 31326 (Oct. 16, 1992) [57 FR
48276].
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H. Rule 14a-4: Discretionary Voting Authority
roponents seeking to use the proposed
override mechanism may avail themselves of that exemption?
---------------------------------------------------------------------------
\94\ 17 CFR 240.14a-2(b)(1).
\95\ See Exchange Act Release No. 31326 (Oct. 16, 1992) [57 FR
48276].
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H. Rule 14a-4: Discretionary Voting Authority
If a shareholder submits a proposal under rule 14a-8 to be included
in the company's proxy materials, but the company properly excludes the
proposal, rule 14a-4(c)(4) \96\ permits the company to exercise
discretionary voting authority to vote uninstructed proxies against
that proposal if the shareholder chooses an alternative route for its
presentation to a vote. The proponent may, for instance, intend to
present the proposal from the floor of the company's annual meeting, or
solicit proxy votes independently by distributing its own proxy
statement and form of proxy.
---------------------------------------------------------------------------
\96\ 17 CFR 240.14a-4(c)(4).
---------------------------------------------------------------------------
Rule 14a-4 does not, however, clearly address the exercise of
discretionary voting authority if the shareholder chooses not to use
rule 14a-8's procedures for placing a proposal in the company's proxy
materials. This may occur if the proponent notifies the company of his
or her intention to present the proposal from the floor of the meeting,
or commences his or her own proxy solicitation, without ever invoking
rule 14a-8's procedures.
The availability of discretionary voting authority on a non-14a-8
proposal has been the subject of litigation and attendant
uncertainty.\97\ Current rule 14a-4(c)(1) permits a company to exercise
voting authority on proposals that the company did not know of a
``reasonable time'' before the meeting
or commences his or her own proxy solicitation, without ever invoking
rule 14a-8's procedures.
The availability of discretionary voting authority on a non-14a-8
proposal has been the subject of litigation and attendant
uncertainty.\97\ Current rule 14a-4(c)(1) permits a company to exercise
voting authority on proposals that the company did not know of a
``reasonable time'' before the meeting. The ``reasonable time''
standard has been the source of some uncertainty when a company is
notified of a shareholder proposal shortly before its meeting is
scheduled to take place.\98\
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\97\ See, e.g., United Mine Workers of America v. Pittston
Company, Fed. Sec. L. Rep. para. 94,946 (D.D.C. Nov. 24, 1989);
Larkin v. Baltimore Bancorp, 769 F. Supp. 919, 925 (D.Md. 1991). See
also Union of Needletrades, Industrial and Textile Employees
(``UNITE'') et al. v. The May Department Stores Company, 97 Civ.
3120 (SDNY).
\98\ See, e.g., Larkin v. Baltimore Bancorp, 769 F. Supp. 919,
925 (D.Md. 1991).
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In response to the Questionnaire, companies indicated that they
seek clearer ground rules and the avoidance of potential delay and
expense when they are notified of possible proposals after they have
begun to print or even mail proxy materials to shareholders.\99\ We
accordingly propose to amend rule 14a-4(c) in part to clarify when a
company may exercise discretionary voting authority on a shareholder
proposal where the proponent has not invoked rule 14a-8's procedures.
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\99\ See Section II above.
---------------------------------------------------------------------------
.\99\ We
accordingly propose to amend rule 14a-4(c) in part to clarify when a
company may exercise discretionary voting authority on a shareholder
proposal where the proponent has not invoked rule 14a-8's procedures.
---------------------------------------------------------------------------
\99\ See Section II above.
---------------------------------------------------------------------------
Last year, the Division provided no-action advice on the ability of
a company to exercise discretionary voting authority under rule 14a-
4(c)(1) to vote on a matter to be raised at an annual meeting, when the
company received adequate advance notice of the proposal.\100\ Under
those no-action letters, a company that receives adequate advance
notice of a non-rule 14a-8 proposal--such as under its advance notice
bylaw--nevertheless may preserve its discretionary voting authority by
disclosing in its proxy materials the nature of any proposal it has
been advised may be presented, and
the manner in which the company intends to exercise its discretion.
Under the no-action letters, the company loses its voting discretion,
however, once the proponent commences a proxy solicitation and solicits
the percentage of holders required to carry the proposal.
---------------------------------------------------------------------------
\100\ See Idaho Power Company (Mar. 13, 1996) and Borg-Warner
Security Corporation (Mar. 14, 1996).
---------------------------------------------------------------------------
g discretion,
however, once the proponent commences a proxy solicitation and solicits
the percentage of holders required to carry the proposal.
---------------------------------------------------------------------------
\100\ See Idaho Power Company (Mar. 13, 1996) and Borg-Warner
Security Corporation (Mar. 14, 1996).
---------------------------------------------------------------------------
Of course, the Division's no-action letters provide only informal
advice, and we recognize that the position outlined in those letters
has not eliminated all uncertainty in situations where a company has
advance knowledge of a potential proxy contest. For instance, if the
shareholder proponent files preliminary proxy materials after the
company has filed its own proxy statement, or even after the company
has mailed its definitive proxy statement and form of proxy to
shareholders, the company may be placed in a dilemma of either
including the shareholder's proposal on its proxy card, or risking the
delay and expense of a last-minute resolicitation. That is because the
company may not know whether the shareholder intends to begin to
solicit proxies independently by circulating his/her own proxy card,
along with the definitive version of his or her proxy statement, or how
many shareholders will be solicited if such a solicitation is actually
launched.
To address these uncertainties, we propose to amend paragraph
(c)(1) of rule 14a-4, and to add new paragraph (c)(2), to provide
clearer guidelines in these circumstances. The proposed revisions to
paragraph (c)(1) would replace the ``reasonable time'' standard with a
clear date after which notice of a possible shareholder solicitation
would not be deemed adequate for purposes of proposed new paragraph
these uncertainties, we propose to amend paragraph
(c)(1) of rule 14a-4, and to add new paragraph (c)(2), to provide
clearer guidelines in these circumstances. The proposed revisions to
paragraph (c)(1) would replace the ``reasonable time'' standard with a
clear date after which notice of a possible shareholder solicitation
would not be deemed adequate for purposes of proposed new paragraph
(c)(2).
Revised paragraph (c)(1) would allow a company voting discretion
where ``the registrant did not have notice of the matter more than 45
days before the date on which the registrant first mailed its proxy
materials for the prior year's annual meeting.'' \101\ This approach
will not only provide clearer guidelines for shareholders and
companies, but also benefit investors by helping to ensure that
companies are notified of proposals sufficiently in advance of the
annual meeting to provide shareholders a meaningful opportunity to
review related disclosures in the proxy statement.
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\101\ Because the company's mailing date for the previous year's
annual meeting may not be available to shareholders, we propose to
amend rule 14a-5(e) [17 CFR 240.14a-5(e)] to require companies to
publish in their proxy materials the date by which notice would have
to be received. This date will by definition be 75 days after the
date by which shareholder proposals must normally be received under
rule 14a-8 (Question 5). See Part I.4 below.
---------------------------------------------------------------------------
se to
amend rule 14a-5(e) [17 CFR 240.14a-5(e)] to require companies to
publish in their proxy materials the date by which notice would have
to be received. This date will by definition be 75 days after the
date by which shareholder proposals must normally be received under
rule 14a-8 (Question 5). See Part I.4 below.
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We recognize that the laws of some states authorize bylaw
provisions requiring shareholders to provide advance notice of
proposals that they intend to present at a meeting of shareholders. We
do not intend to interfere with the operation of state law authorized
definitions of advance notice. Accordingly, an advance notice bylaw
provision ordinarily would override the 45-day period under rule 14a-4
as proposed to be amended, resulting in either a longer or shorter
notice period. For example, if a company properly adopts a bylaw
provision requiring advance notice 60 days before the previous year's
mailing date, that date would apply instead of the date specified by
the proposed paragraph 14a-4(c)(1).
We request your comments on whether it would be more appropriate to
establish a shorter period than 45 days, such as 30 days or 15 days, or
a longer period, such as 60 or 90 days for revised paragraph 14a-
4(c)(1). We understand that some companies begin printing their proxy
materials well in advance of the mailing date. We request your comments
on whether the 45-day period is adequate to accommodate printing
schedules.
Proposed new paragraph 14a-4(c)(2) would address a company's
ability to exercise discretionary voting authority after it has
received timely notice of a non-14a-8 proposal for the purposes of
paragraph (c)(1)
companies begin printing their proxy
materials well in advance of the mailing date. We request your comments
on whether the 45-day period is adequate to accommodate printing
schedules.
Proposed new paragraph 14a-4(c)(2) would address a company's
ability to exercise discretionary voting authority after it has
received timely notice of a non-14a-8 proposal for the purposes of
paragraph (c)(1). The new rule would permit the exercise of such
authority if the proxy materials include: (i) In the proxy statement, a
discussion of the nature of the matters and how the company intends to
exercise its discretion on each matter, and (ii) on the proxy card, a
cross-reference to the discussion in the proxy statement and a box
allowing shareholders to withhold discretionary authority from
management to vote on the same matter(s).
We believe that the proposed framework would benefit both
shareholders and companies by establishing clearer and more predictable
ground rules. The proposed framework also would provide shareholders
with some control over the company's discretionary authority to vote
their shares on matters for which the company received adequate notice.
Under current rules, a company is not required to provide shareholders
an opportunity to withhold discretionary authority on such matters
where such authority properly can be exercised.\102\ Under proposed new
rule 14a-4(c)(2), the company would be required to provide shareholders
who execute and return proxies an opportunity to withhold discretionary
authority, albeit only on those matters for which it received adequate
notice and which it described in its proxy statement. Should we provide
shareholders greater latitude to ``grant'' discretionary voting
authority, or to ``abstain,'' in addition to the ability to
``withhold''?
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opportunity to withhold discretionary
authority, albeit only on those matters for which it received adequate
notice and which it described in its proxy statement. Should we provide
shareholders greater latitude to ``grant'' discretionary voting
authority, or to ``abstain,'' in addition to the ability to
``withhold''?
---------------------------------------------------------------------------
\102\ Rule 14a-4(a)(3) currently provides that ``[n]o reference
need be made * * * to proposals as to which discretionary authority
is conferred pursuant to [rule 14a-4(c)].''
---------------------------------------------------------------------------
We request your comments on the proposed revisions to paragraph
(c)(1), and the adoption of proposed new paragraph (c)(2). Would some
other approach be more effective? For example, should we require
companies to place proposals in their proxy materials if the proponent
commences a formal proxy solicitation, and solicits the number of
shares necessary to carry the proposal? What impact, if any, might the
proposed revision(s) have on the conduct of proxy contests generally?
Would the proposed amendments have the effect of unduly discouraging
insurgent solicitations? Your comments should address the proposed
revisions individually, together with the other proposed changes to
rule 14a-4(c), and the broader package of reforms proposed today.
Although they would provide clearer guidance on the exercise of
discretionary voting authority under rule 14a-4(c), the proposed
amendments would not relieve companies of their obligation under rule
14a-9, the anti-fraud rule. Under that rule, companies must provide
shareholders with sufficient information to make informed voting
decisions as well as a meaningful opportunity to review the
information. If the proponent solicits a large number of his or her
fellow shareholders, for instance, a company may elect to provide
shareholders with an opportunity to vote for or against a shareholder's
proposal
ti-fraud rule. Under that rule, companies must provide
shareholders with sufficient information to make informed voting
decisions as well as a meaningful opportunity to review the
information. If the proponent solicits a large number of his or her
fellow shareholders, for instance, a company may elect to provide
shareholders with an opportunity to vote for or against a shareholder's
proposal. In this and similar circumstances, the company must remain
mindful of its obligations under rule 14a-9.\103\
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\103\ Recently, for example, some companies have included
shareholder proposals in supplemental proxy materials with revised
forms of proxy, which they mailed shortly before the date that the
annual meeting is scheduled to take place. Even if the supplemental
proxy contains all material information necessary to make an
informed voting decision, we understand that the beneficial holders
may not receive the supplemental materials, or may receive them too
late for meaningful review and consideration of whether to change or
formulate new voting decisions. Timing considerations often depend
on the facts and circumstances of individual cases, and the
obligation to provide a meaningful opportunity rests with the
company.
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Finally, during the past proxy season, the Division permitted
several companies to file proxy materials in definitive form despite
prior notification of a non-14a-8 shareholder proposal, so long as they
disclosed the nature of the proposal and how they intended to exercise
discretionary voting authority if the proposal were to be
presented.\104\ In light of the proposed amendments to rule 14a-4, we
would reverse that informal position, so that companies receiving
notice of a non-rule 14a-8 proposal before the filing of their proxy
materials would henceforth be required to file their materials in
preliminary form, subject to sta
nd how they intended to exercise
discretionary voting authority if the proposal were to be
presented.\104\ In light of the proposed amendments to rule 14a-4, we
would reverse that informal position, so that companies receiving
notice of a non-rule 14a-8 proposal before the filing of their proxy
materials would henceforth be required to file their materials in
preliminary form, subject to staff review. We request your comments on
this proposed reversal.
---------------------------------------------------------------------------
\104\ Rule 14a-6 [17 CFR 240.14a-6] addresses when a company
must file its proxy materials in definitive form, and when it must
file in preliminary form.
---------------------------------------------------------------------------
I. Other Proposed Modifications
We propose a few other modifications to rules 14a-8 and 14a-5:
1. The answer to Question 1 of revised rule 14a-8 would define a
``proposal'' as a request that the company or its board of directors
take an action. The definition reflects our belief that a proposal that
seeks no specific action, but merely purports to express shareholders'
views, is inconsistent with the purposes of rule 14a-8 and may be
excluded from companies' proxy materials. The Division, for instance,
declined to concur in the exclusion of a ``proposal'' that shareholders
express their dissatisfaction with the company's earlier endorsement of
a specific legislative initiative.\105\ Under the proposed rule, the
Division would reach the opposite result, because the proposal did not
request that the company take an action. We request your comment on
whether this or some other approach may be preferable.
---------------------------------------------------------------------------
\105\ Pacific Gas and Electric Company (Jan. 21, 1997).
---------------------------------------------------------------------------
ion would reach the opposite result, because the proposal did not
request that the company take an action. We request your comment on
whether this or some other approach may be preferable.
---------------------------------------------------------------------------
\105\ Pacific Gas and Electric Company (Jan. 21, 1997).
---------------------------------------------------------------------------
2. Rule 14a-8(a)(1) currently requires that a shareholder have held
for one year the lesser of $1,000 in market value, or 1%, of the
company's voting shares, at the time he or she submits a proposal. We
propose adjusting the $1,000 requirement to account for inflation since
first adopted in 1983.\106\ The amended rule, which would appear in the
answer to Question 2, would require continuous ownership of $2,000 in
market value of the company's voting shares. While the actual inflation
adjustment from the date of adoption to today would increase the
existing requirement by approximately $600, we propose $2,000 to
account for future inflation, and because it will be easier to use for
calculations. We sought to avoid increasing the threshold further out
of concern that a more significant increase could restrict access to
companies' proxy materials by smaller shareholders, who equally with
other holders have a strong interest in maintaining channels of
communication with management and fellow shareholders. We request your
comments on whether we should adopt a higher number such as $3,000,
$5,000 or $10,000, or a lower number such as $1,500.
---------------------------------------------------------------------------
\106\ See 1983 Release.
---------------------------------------------------------------------------
in maintaining channels of
communication with management and fellow shareholders. We request your
comments on whether we should adopt a higher number such as $3,000,
$5,000 or $10,000, or a lower number such as $1,500.
---------------------------------------------------------------------------
\106\ See 1983 Release.
---------------------------------------------------------------------------
We also request your comments on whether we should modify or
eliminate the one-year continuous ownership period. One purpose of the
requirement is to curtail abuse of the rule by requiring that those who
put the company and other shareholders to the expense of including a
proposal in proxy materials have had a continuous investment interest
in the company. We could, for example, permit shareholders more
flexibility to submit proposals earlier, by adopting a shorter period,
such as 6 months, or less flexibility, by adopting a longer period,
such as 18 months. Alternatively, we could maintain the current one-
year period, but provide that relatively larger holders, such as
holders of 3% or 6% of the outstanding voting shares, would be eligible
to submit proposals without regard to a continuous ownership period.
3. The answer to Question 6 in revised rule 14a-8 would describe
the procedures a company must follow if it intends to omit a proposal
on grounds that the proponent is ineligible or otherwise failed to
comply with the rule's procedures. As proposed, the answer states that
a company may omit a proposal on the grounds only after it has first
noticed the proponent of the deficiency and gives the proponent 14
calendar days to remedy the deficiency.\107\ The proposed language
largely adopts the procedures set forth in current paragraph (a)(1)
\108\ and (a)(4) \109\ of the current rule
failed to
comply with the rule's procedures. As proposed, the answer states that
a company may omit a proposal on the grounds only after it has first
noticed the proponent of the deficiency and gives the proponent 14
calendar days to remedy the deficiency.\107\ The proposed language
largely adopts the procedures set forth in current paragraph (a)(1)
\108\ and (a)(4) \109\ of the current rule. However, the proposed 14-
day period in which a shareholder must respond is shorter than the 21
calendar days allowed by current paragraph (a)(1), and by some of the
Division's response letters under paragraph (a)(2).\110\ We believe
that the shorter period will be sufficient for shareholder proponents,
and will help to streamline the rule's operation by establishing a
single ``shareholder response period'' that would apply under all
circumstances that may arise under the rule. The shorter response time
should expedite the timing of a company's filings with the Commission
and, in turn, the Commission's responses. We request your comments on
whether we should adopt some other mechanism, including whether the
proposed time for responding should be shorter, such as 10 calendar
days, or longer, such as 21 calendar days.
---------------------------------------------------------------------------
\107\ Of course, consistent with current practice, a company
would not have to follow these procedures if the deficiency cannot
be remedied, such as if the proponent fails to submit a proposal by
the company's proper deadline.
\108\ 17 CFR 240.14a-8(a)(1).
\109\ 17 CFR 240.14a-8(a)(4).
\110\ 17 CFR 240.14a-8(a)(2). See, e.g., CoBancorp Inc. (Feb.
22, 1996); Archer-Daniels-Midland (July 29, 1996).
---------------------------------------------------------------------------
llow these procedures if the deficiency cannot
be remedied, such as if the proponent fails to submit a proposal by
the company's proper deadline.
\108\ 17 CFR 240.14a-8(a)(1).
\109\ 17 CFR 240.14a-8(a)(4).
\110\ 17 CFR 240.14a-8(a)(2). See, e.g., CoBancorp Inc. (Feb.
22, 1996); Archer-Daniels-Midland (July 29, 1996).
---------------------------------------------------------------------------
4. Rule 14a-5(e) currently requires a company to disclose the
deadline for submitting proposals to be included in proxy materials for
the next year's annual meeting. We propose to revise the rule to
require companies also to disclose the date after which proposals
submitted outside the framework of rule 14a-8 are considered untimely
for the purposes of rule 14a-4(c)(1).\111\ This is because shareholders
may not be aware of all the information necessary to calculate the date
for themselves.
---------------------------------------------------------------------------
\111\ See Part H above.
---------------------------------------------------------------------------
In addition, current paragraph (e) requires companies to notify
shareholders of a new meeting date, and deadline for submitting
proposals, if the date of the next annual meeting is subsequently
advanced by more than 30 days, or delayed by more than 90 days. For the
sake of consistency with other rules,\112\ we propose to revise the
rule to require notification of changes in the meeting date and each of
the disclosed dates if the meeting date is delayed or advanced more
than 30 calendar days. Finally, the current rule contemplates
notification by ``any means calculated to so inform'' shareholders. We
propose to require that such notification of date changes appear in the
company's earliest quarterly report on Form 10-Q \113\ or 10-QSB,\114\
if practicable.\115\ We request your comments on whether notice in a
company's quarterly report is
ed or advanced more
than 30 calendar days. Finally, the current rule contemplates
notification by ``any means calculated to so inform'' shareholders. We
propose to require that such notification of date changes appear in the
company's earliest quarterly report on Form 10-Q \113\ or 10-QSB,\114\
if practicable.\115\ We request your comments on whether notice in a
company's quarterly report is
likely to be effective, and whether we should require notification in
some document other than the company's quarterly report, such as Form
8-K.\116\
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\112\ Current rule 14a-8(a)(3)(i) [17 CFR 240.1a-8(a)(3)(i)],
and proposed rule 14a-8 (Question 5), require the company to adjust
the deadline for submitting proposals if the date of the annual
meeting is delayed or advanced by more than 30 calender days.
\113\ 17 CFR 249.308a. The new information, if applicable, would
be disclosed under Item 5 of Form 10-Q or 10-QSB (``Other
Information'').
\114\ 17 CFR 249.308b.
\115\ For investment companies, the proposal would require the
notification to appear in shareholder reports under 30D-1 [17 CFR
270.30d-1] of the Investment Company Act.
\116\ 17 CFR 249.308. The information would be included under
Item 5 of that form.
---------------------------------------------------------------------------
5. Current rule 14a-8(e) \117\ provides a mechanism for a
shareholder to obtain staff review of a company's statement in
opposition to a shareholder proposal appearing in its proxy materials.
In our experience, only a handful of shareholders make use of the
mechanism each year, and the staff review rarely results in
modifications to the company's statement. In most instances, the
shareholder's objection highlight matters that do not constitute
materially false or misleading statements for the purpose of rule 14a-
9. Accordingly, we propose to eliminate the mechanism provided by
current rule 14a-8(e)
only a handful of shareholders make use of the
mechanism each year, and the staff review rarely results in
modifications to the company's statement. In most instances, the
shareholder's objection highlight matters that do not constitute
materially false or misleading statements for the purpose of rule 14a-
9. Accordingly, we propose to eliminate the mechanism provided by
current rule 14a-8(e). We request your comments on this proposal.
---------------------------------------------------------------------------
\117\ 17 CFR 240.14a-8(e).
---------------------------------------------------------------------------
. Current rule 14a-8(a)(2) provides that a proposal may be
presented at a meeting either by the proponent or by his or her
representative qualified under state law to present the proposal. It
has been our long-standing interpretation of this rule that both the
proponent and his or her representative must follow any procedures for
attending the meeting and/or presenting the proposal that are
authorized or required by state law (e.g., possession of a valid
proxy). A proponent who holds his or her shares in street name may have
to obtain from the record holder (usually a broker or bank) a proxy to
permit attendance at the meeting and/or presentation of the proposal. A
proponent's representative may have to obtain a proxy from the
proponent. A particular state's law, of course, may not authorize or
require any such procedures, or the company may elect not to adopt or
enforce them where permissible under applicable state law
in from the record holder (usually a broker or bank) a proxy to
permit attendance at the meeting and/or presentation of the proposal. A
proponent's representative may have to obtain a proxy from the
proponent. A particular state's law, of course, may not authorize or
require any such procedures, or the company may elect not to adopt or
enforce them where permissible under applicable state law.
We added the following advisory in the answer to Question 8 of the
proposed rule: ``Whether you attend the meeting yourself or send a
qualified representative to the meeting in your place, you should make
sure that you, or your representative, follow any applicable procedures
that are proper under state law for appearing at the meeting and/or
presenting your proposal.'' We request your comments on this revision,
including whether our long-standing interpretation on this subject is
appropriate.
IV. Request for Comments
We request your comments on the proposals, other matters that may
have an impact on the proposals, and your suggestions for additional
changes. In addition to the requests for your comments on each of the
specific proposals, we would like to hear your comments on the
proposals viewed as a package of reforms, whether they fairly balance
participants' sometimes conflicting concerns, and whether they would
bring an overall improvement to the process whereby shareholders
present proposals to fellow shareholders.
You should consider whether the Commission should instead adopt
some fundamentally different approach to the shareholder proposal
system. Some alternatives, such as encouraging each company to adopt
its own shareholder proposal rule and process, would largely remove the
Commission from its role of ``arbiter'' pursuant to the staff's role in
issuing response letters. If you believe that we should adopt an
alternative approach, your comments should explain the approach in some
detail, including the role that the Commission should play
alternatives, such as encouraging each company to adopt
its own shareholder proposal rule and process, would largely remove the
Commission from its role of ``arbiter'' pursuant to the staff's role in
issuing response letters. If you believe that we should adopt an
alternative approach, your comments should explain the approach in some
detail, including the role that the Commission should play.
You may also consider the purposes of the rule, and the degree to
which the rule and the proposed amendments serve those purposes. We
believe that the purpose of the rule is to ensure proper disclosure and
enhance investor confidence in the securities markets by promoting
proposals raising significant issues that are relevant to the company
and its business. You may want to consider whether this is the proper
purpose of the rule, and if so, what types of proposals are the most
relevant and important.
We also request comments on the matters discussed in Sections V
through VIII below, including our initial regulatory flexibility
analysis, our preliminary analysis of costs and benefits and effects on
competition, and our obligations under the Paperwork Reduction Act, and
the Small Business Regulatory Enforcement Fairness Act of 1996.
If you wish to submit written comments, you should file three
copies with Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW,. Washington, D.C. 20549. Comments may
also be submitted electronically at the following e-mail address: rule-
[email protected]. Comment letters should refer to File No. S7-25-97;
this file number should be included on the subject line if e-mail is
used. All comments received will be available for public inspection and
copying in the Commission's public reference room at the same address.
Electronically submitted comments will be posted on the Commission's
Internet web site (http://www.sec.gov).
V. Initial Regulatory Flexibility Analysis
ld refer to File No. S7-25-97;
this file number should be included on the subject line if e-mail is
used. All comments received will be available for public inspection and
copying in the Commission's public reference room at the same address.
Electronically submitted comments will be posted on the Commission's
Internet web site (http://www.sec.gov).
V. Initial Regulatory Flexibility Analysis
We have prepared this Initial Regulatory Flexibility Analysis under
5 U.S.C. 603 concerning the proposed amendments to rules 14a-8, 14a-2,
14a-4, 14a-5, and 13d-5. We will consider your written comments in the
preparation of a final analysis. The purpose of the amendments is to
streamline the operation of the rule, and address concerns raised by
both shareholder and corporate participants. We propose the amendments
pursuant to Sections 13, 14, and 23 of the Exchange Act \118\ and
Section 20(a) of the Investment Company Act of 1940 \119\ (``Investment
Company Act'').
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\118\ 15 U.S.C. 78m, 78n & 78u.
\119\ 15 U.S.C. 80a-1 et seq.
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The amendments focus primarily on rule 14a-8, which requires
companies to include shareholder proposals in their proxy materials,
subject to certain bases for excluding them. We propose to revise the
rule into a more understandable Question & Answer format; make it
easier for shareholders to include a broader range of proposals in
companies' proxy materials; and provide companies with clearer
guidelines, and more flexibility to exclude economically insignificant
proposals and proposals that lack significant shareholder support.
The proposed amendments to rules 14a-2 and 13d-5 are ancillary to
the amendments to rule 14a-8. Proposed new 14a-2(b)(2) would provide an
exemption from the proxy rules for shareholders attempting to comply
with a proposed new ``override'' mechanism in rule 14a-8
ines, and more flexibility to exclude economically insignificant
proposals and proposals that lack significant shareholder support.
The proposed amendments to rules 14a-2 and 13d-5 are ancillary to
the amendments to rule 14a-8. Proposed new 14a-2(b)(2) would provide an
exemption from the proxy rules for shareholders attempting to comply
with a proposed new ``override'' mechanism in rule 14a-8. The override
would permit holders of 3% of the company's voting shares to override
the operation of two bases for excluding proposals. Proposed new rule
13d-5 would provide relief for such holders from filing obligations
under Section 13(d) of the Exchange Act.
We also propose to amend rule 14a-4 to further clarify when a
company may exercise discretionary voting authority on proposals
submitted outside the rubric of rule 14a-8.\120\ We believe that the
revisions would help to mitigate the uncertainty that some companies
experience when presented with such proposals. The revisions should
also decrease a company's likelihood of incurring the delay and expense
of rescheduling its meeting of
shareholders, or of resoliciting its shareholders.
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\120\ We propose related amendments to rule 14a-5 to require a
company to identify in its proxy statement a date relating to its
potential exercise of discretionary voting authority.
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eeting of
shareholders, or of resoliciting its shareholders.
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\120\ We propose related amendments to rule 14a-5 to require a
company to identify in its proxy statement a date relating to its
potential exercise of discretionary voting authority.
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The proposed amendments would affect small entities that are
required to file proxy materials under the Exchange Act or the
Investment Company Act. Exchange Act rule 0-10 defines ``small
business'' as a company whose total assets on the last day of its most
recent fiscal year were $5 million or less.\121\ Investment Company Act
rule 0-10 defines ``small entity'' as an investment company with net
assets of $50 million or less as of that date.\122\ We are currently
aware of approximately 1,000 reporting companies that are not
investment companies with assets of $5 million or less. There are
approximately 800 investment companies that satisfy the ``small
entity'' definition. Only approximately one-third of all investment
companies have shareholder meetings and file proxy materials annually.
Therefore, we believe approximately 250 small entity investment
companies may be affected by the proposals.
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\121\ 17 CFR 240.0-10.
\122\ 17 CFR 240.0-10.
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of all investment
companies have shareholder meetings and file proxy materials annually.
Therefore, we believe approximately 250 small entity investment
companies may be affected by the proposals.
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\121\ 17 CFR 240.0-10.
\122\ 17 CFR 240.0-10.
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Not all companies conducting a proxy solicitation receive
shareholder proposals each year. Furthermore, a company that receives a
proposal has no obligation to make a submission under rule 14a-8 unless
it intends to exclude the proposal from its proxy materials. In the
period from September 30, 1996 to today, we received submissions from a
total of 245 companies, and only 6 were ``small businesses.''
Some of the proposed amendments to rule 14a-8 may broaden the range
of proposals that companies must include in their proxy materials,
requiring companies to include more proposals in their proxy materials
than they have in the past. This includes the proposal to reverse the
Cracker Barrel position on employment-related shareholder proposals
raising social policy issues, and the proposal to permit the holders of
3% of the company's voting shares to override the exclusions under
paragraphs (5) and (7) under Question 9 of the proposed rule. This
year, the Division received approximately 30 submissions, none by
``small business,'' involving employment-related proposals tied to
social issues. It is likely, however, that reversal of the Cracker
Barrel position, if implemented, would lead to an increase in the
number of proposals included in proxy materials each year. We request
your comments on the potential impact on the number of employment-
related proposals submitted to companies each year
none by
``small business,'' involving employment-related proposals tied to
social issues. It is likely, however, that reversal of the Cracker
Barrel position, if implemented, would lead to an increase in the
number of proposals included in proxy materials each year. We request
your comments on the potential impact on the number of employment-
related proposals submitted to companies each year.
Because rule 14a-8 currently does not include a mechanism like the
proposed override, there is no reliable way to predict how often
shareholders would in the future take advantage of the override to
force companies to include proposals that they would otherwise be
permitted to exclude. We request your comments and supporting empirical
data on the potential impact of the proposed override on the total
number of proposals companies are required to include in their proxy
materials.
Other proposed revisions, however, would enhance companies' ability
to exclude certain proposals that are economically insignificant to
them. As revised, paragraph (5) under proposed Question 9 would permit
companies to exclude proposals on matters relating to the lesser of $10
million in total costs or gross revenues (whichever is appropriate), or
3% of total assets or gross revenues (whichever is higher). Because
companies' submissions under current rule 14a-8 have not addressed
these criteria, we presently have no reliable way to estimate their
future impact on the number of proposals companies are required to
include in their proxy materials. Unlike the current paragraph (c)(5),
however, the proposed revision would enable companies to include
companies to exclude proposals based solely on economic criteria, which
may permit companies to exclude proposals that they are not permitted
to exclude under the current rule
estimate their
future impact on the number of proposals companies are required to
include in their proxy materials. Unlike the current paragraph (c)(5),
however, the proposed revision would enable companies to include
companies to exclude proposals based solely on economic criteria, which
may permit companies to exclude proposals that they are not permitted
to exclude under the current rule. On the other hand, because the
proposed economic thresholds are lower than the current thresholds, if
the revisions are adopted, companies may be unable to exclude some
proposals that they are currently permitted to exclude. We request your
comments, preferably supported by empirical data, on the nature and
magnitude of the potential impact of this proposed revision.
We expect the proposed increase in the resubmission thresholds
under Question 9, paragraph (12), to cause a decrease in the total
number of proposals companies must include in their proxy materials
each year. Current rule 14a-8(c)(12) permits a company to exclude a
proposal focusing on substantially the same subject matter as a prior
proposal that failed to receive at least 3% of the vote on its first
submission, 6% on the second, and 10% percent on the third. We propose
to increase the thresholds to 6%, 15%, and 30%, respectively. However,
because companies' submissions under current rule 14a-8 have not
addressed these criteria, we presently do not have a reliable way to
estimate the future impact on the number of proposals companies are
required to include in their proxy materials. We nonethel
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