# 62 FR 50682: Amendments to Rules on Shareholder Proposals > Federal · Regulations · In force URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_97-25448 ## Section - **Citation:** 62 FR 50682 - **Heading:** Amendments to Rules on Shareholder Proposals - **Jurisdiction:** Federal - **Kind:** Regulations - **Status:** In force - **Text as of:** August 14, 2026 - **Source:** Compiled text - **Location:** Federal Register / Vol. 62 / 62 FR 50682 ## Text 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. ----------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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)]. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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)]. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \27\ See Exchange Act Release No. 20091 (Aug. 16, 1983) (the ``1983 Release'') [48 FR 38218]. --------------------------------------------------------------------------- n the 1982 proposals rejected the proposed alternatives, and the Commission adopted revisions that left the rule essentially in its current form.\27\ --------------------------------------------------------------------------- \27\ See Exchange Act Release No. 20091 (Aug. 16, 1983) (the ``1983 Release'') [48 FR 38218]. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- ers disfavored it. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \32\ 17 CFR 240.14a-8(c)(4). \33\ 17 CFR 240.14a-8(c)(5). \34\ 17 CFR 240.14a-8(c)(12). --------------------------------------------------------------------------- ule 14a-8(c)(12),\34\ which permits companies to exclude proposals that received less than specified percentages of voting support on earlier submissions. --------------------------------------------------------------------------- \32\ 17 CFR 240.14a-8(c)(4). \33\ 17 CFR 240.14a-8(c)(5). \34\ 17 CFR 240.14a-8(c)(12). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \35\ 15 U.S.C. 78m(d). \36\ 17 CFR 240.14a-4(c). --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \38\ 17 CFR 240.14a-8(c)(2). \39\ See, e.g., Firestone (Dec. 8, 1987). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- ------------------------------------ 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. --------------------------------------------------------------------------- \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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \52\ Exchange Act Release No. 19135 (Oct. 14, 1982) [47 FR 47420]. \53\ Id. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \77\ See, e.g., Reebok Int'l Ltd. (Mar. 16, 1992). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \80\ See Section II above. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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.'' --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \86\ See discussion in Part G below of proposed amendments to rules 14a-2 and 13d-5. --------------------------------------------------------------------------- (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. --------------------------------------------------------------------------- \87\ See rule 14a-8(d)[17 CFR 240.14a-8(d)]. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- 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]. --------------------------------------------------------------------------- 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]. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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, 199 [Text truncated at 120,000 characters. 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Check the current official text before relying on it. Not legal advice.