LEGAL
The share ownership requirements of subsection (b) of '34 Act Rule 14a-8 have, historically, been a reliable method for barring shareholder proposals from company proxy materials. Lawyers love minutiae, and issuer's counsel have seized on the rule's intricate proof requirements to exclude proposals by leveraging minor, technical defects. Our analysis of this season's no-action requests demonstrates that, despite instability in the law, 14a-8(b) remains among the most common and successful grounds for excluding shareholder proposals:
| Rule section | Exclusion grounds | Total | Out | In | Exclusion success rate |
| 14a-8(i)(3) | Vague, misleading, unsupported by fact | 64 | 25 | 39 | 39% |
| 14a-8(b) | Inadequate proof of ownership / holding | 48 | 37 | 11 | 77% |
| 14a-8(i)(7) | Relates to ordinary business | 39 | 25 | 12 | 64% |
| 14a-8(i)(10) | Substantially implemented | 34 | 19 | 15 | 56% |
| 14a-8(i)(9) | Conflicts with company proposal | 18 | 17 | 1 | 94% |
| 14a-8(e) | Late | 16 | 9 | 7 | 56% |
| 14a-8(i)(11) | Previously included | 9 | 6 | 3 | 67% |
| 14a-8(i)(4) | Redress of personal grievance | 8 | 2 | 6 | 25% |
| 14a-8(i)(2) | Conflicts with law | 8 | 2 | 6 | 25% |
| 14a-8(i)(12) | Previously voted down | 5 | 4 | 1 | 80% |
| 14a-8(i)(8) | Involves election of directors | 5 | 4 | 1 | 80% |
| 14a-8(i)(13) | Requests specific dividend amount | 4 | 4 | 0 | 100% |
| 14a-8(i)(1) | Not a proper subject for shlder proposal | 4 | 2 | 2 | 50% |
| 14a-8(c) | Proponent made multiple proposals | 3 | 3 | 0 | 100% |
| 14a-8(h) | Failed to present at meeting | 2 | 1 | 1 | 50% |
| 14a-8(i)(6) | Co. lacks power to implement | 2 | 0 | 2 | 0% |
| 14a-8(i)(5) | Involves less than 5% of assets | 1 | 0 | 1 | 0% |
| 14a-8(d) | Exceeds 500 words | 1 | 0 | 1 | 0% |
A closer look at this season's letters under 14a-8(b) reveals that counsel working in this area would do well to stay abreast of developments in the law; during this proxy season both issuers and proponents were ensnared in subsection (b)'s traps. This note will explore the unsettled state of the law and the resulting crop of confused, and sometimes amusing no-action requests.
| # | Argument | Out | In |
| 17 | Broker letter date is not date of submission | 17 | 0 |
| 8 | No proof of ownership provided | 8 | 0 |
| 4 | Holder may not grant proxy | 0 | 4 |
| 3 | Holder proxy was insufficient | 0 | 3 |
| 2 | Other broker letter defects | 2 | 0 |
| 1 | Broker was not DTC-registered | 1 | 0 |
The current version of Rule 14a-8, dating from 1998 (34-40018, 63 FR 29106-01), takes the form of a conversation between the SEC and a hypothetical proponent; "What is a proposal?" The informality of this feigned exchange masks the intricacy of the ownership requirements. "How do I demonstrate to the company that I am eligible" to submit a proposal? asks our aspiring proponent, and the SEC responds with seven paragraphs of explanation.
In fact, the actual ownership requirements are simple. To be eligible to submit a proposal, a shareholder must:
Proving one's eligibility, however, is another story. This portion of subsection (b)(2) lays out how to prove share ownership:
"If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the securities through the date of the meeting of shareholders. However, if like many shareholders you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own ...
... in which case, there are more hoops to be negotiated;
The first way is to submit to the company a written statement from the "record" holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year."
17 C.F.R. § 240.14a-8
Got that? If your name is in the company's shareholder register, all you must provide is a written promise to hold your shares through the meeting. But, because nearly all shares are held in "street name," you are almost certainly not listed in the company's shareholder register. Therefore, you'll need a letter from your broker establishing how many shares you own and how long you've held them.
If the registrant deems proponent's proof inadequate, the registrant must respond with a "notice of defect" and allow the proponent 14 days to submit additional proof.
Over the years, the SEC has attempted to formalize this process by offering suggested language for proofs and notices of defect (Staff Legal Bulletin 14G, 2012 WL 4911039, Oct. 16, 2012; Staff Legal Bulletin 14F, 2011 WL 4957509, Oct. 18, 2011), but lately, spurred by an increase in proposals from small holders, registrants, and at least one SEC commissioner, have made dramatic attempts to upend existing law.
Recent registrant attempts to go over the head of the Division of Corporation Finance and seek court approval for proposal exclusions have seeded the law with uncertainty. Apache Corporation successfully argued - and eventually, in Staff Legal Bulletin 14F, the SEC agreed – that only a letter from a DTC-registered broker constitutes adequate proof of ownership and holding (Apache Corp. v. Chevedden, 669 F.Supp.2d 723 (S.D. Tex. 2010)). Waste Connections had less success arguing that there is no legal basis for the SEC's long-standing practice of allowing a shareholder to grant a non-shareholder the right to make a proposal on the shareholder's behalf, a so-called "proposal by proxy." Waste Connections received summary judgment as a matter of law when proponents failed to submit a motion in opposition, but the SEC has declined to follow the decision (Waste Connections, Inc. v. Chevedden et al, 4:13-CV-00176 (S.D. Tex. 2013); Apple Inc., 2013 WL 5720191 (S.E.C. no-Action Letter Jan. 8, 2014)). In an argument that would have wrought significant change in the shareholder proposal process if successful, National Fuel argued that a form 13F ownership report filed by proponent's broker, and covering proponent's shares, automatically negates proponent's promise to hold the shares through the meeting. The National Fuel case was never decided, because proponent mooted the argument by withdrawing its proposal (National Fuel Gas Co. v. Mass. Pension Rsrvs et al, 1:12-CV-01028 (W.D. Mass. 2012)).
Most recently, SEC Commissioner Daniel M. Gallagher argued for dramatic increases in 14a-8(b) ownership thresholds to bar "[a]ctivist investors and corporate gadflies" who have "hijack[ed] the shareholder proposal system." Gallagher proposed either increasing the value of the required investment to "perhaps $200,000 or even better, $2 million," or dropping the "flat dollar test ... leaving only a percentage test." He also recommended prolonging the holding period, deeming a one-year holding period "hardly a serious impediment to some activists." Finally, he said he would "support banning proposal by proxy" (Gallagher, Federal Preemption of State Corporate Governance, Remarks at the 26th Annual Corporate Law Institute, Tulane University Law School, Mar. 27, 2014). The roiling waters of 14a-8(b) produced a number of unusual no-action requests.
For example, a 60-page exchange of letters between Bank of America, Reinvestment Partners, and the SEC eventually boiled down to an argument over the meaning of "during," complete with quotations from the dictionary. When Bank of America argued that "during" "does not necessarily mean 'continuously throughout'," Reinvestment Partners countered that it had employed "language as commonly understood ... the first entry of The Merriam-Webster dictionary defines the word 'during' as 'throughout the entire time of (an event, period, occurrence, etc.)'." But wait, Bank of America pointed out that, "the same dictionary also defines 'during' to mean 'at some time in the course of (something)'." The SEC agreed with B of A's interpretation, and Reinvestment Partners withdrew its proposal (Bank of Am. Corp., 2014 WL 217730 (S.E.C. No-Action Letter Feb. 28, 2014)).
After sorting out this semantic kerfuffle, the SEC was called on to solve the case of the missing emails. On December 10th, 2013, General Electric sent a no-action request to exclude a proposal advanced by Donald Gilson. General Electric informed the SEC that Gilson had failed to submit any proof of ownership and the SEC granted GE permission to exclude the proposal. On January 13th, Gilson asked the SEC to reconsider its opinion in light of the fact, backed by documentary evidence, that his broker had twice emailed proof of ownership to GE. GE's response: "The Company did not receive the November 25, 2013 or December 31, 2013 emails ... the attorney ... to whom both the November 25, 2013 and December 31, 2013 emails were directed has checked the spam folder in her email account and did not find these emails." Jonathan Ingram, Acting Chief Counsel of the SEC Division of Corporation Finance, responded, "After reviewing the information contained in your letter, the Division grants the reconsideration request. Upon reconsideration, we are unable to concur in GE's view that it may exclude the proposal (Gen. Elec. Co., 2013 WL 6513863 (S.E.C. No-Action Letter Feb. 20, 2014)).
Two issuers found fault with a form proof-of-ownership letter from the Amalgamated Bank of Chicago. The SEC refrained from venturing beyond the arguments raised, rejecting one argument and accepting the other. Amalgamated Bank is co-trustee, bank, and broker for the United Brotherhood of Carpenters Pension Fund, and wrote to support shareholder proposals made by the Fund.
Harley-Davidson's attack on Amalgamated Bank's letter fell victim to the unsettled state of the law. Harley argued that Amalgamated Bank's letter was insufficient proof of ownership because it "did not identify Amalgamated as a Depository Trust Company ("DTC") participant or an affiliate of a DTC participant," and while Harley admits it was aware that "Amalgamated was a DTC participant at the time it submitted its letter ... the Amalgamated Letter does not reference securities deposited with DTC as the basis for confirming the Proponent's beneficial ownership." Harley appears to argue that Staff Legal Bulletin 14F requires a broker letter to establish the broker's membership in the DTC. The SEC did not concur with Harley's interpretation of the rule (Harley-Davidson, Inc., 2013 WL 6830173 (S.E.C. No-Action Letter Feb. 10, 2014)).
Cliffs Natural Resources' successful attack on a virtually identical letter from Amalgamated Bank focused on the letter's assertion that the proponent had held Cliffs shares for a year as of "the date of submission of the shareholder proposal." Cliffs argued that the letter was inadequate proof of ownership because it could not stand on its own – it only made sense read in conjunction with the shareholder proposal: "a third party reading only the verification letter" could not "determine the actual dates of the one-year period for which the Amalgamated Letter is providing confirmation" (Cliffs Natural Res. Inc., 2013 WL 6914389 (S.E.C. No-Action Letter Jan. 30, 2014)). Marathon Petroleum successfully employed the same argument against Amalgamated Bank's form letter (Marathon Petroleum Corp., 2014 WL 556038 (S.E.C. No-Action Letter Jan. 30, 2014)).
The nuances of the law proved challenging for registrants other than Harley-Davidson. Four no-action letters relied, unsuccessfully, on the argument, employed in the Waste Connections case, that 14a-8 does not allow proposals by proxy (Apple Inc., 2013 WL 5720191 (S.E.C. no-Action Letter Jan. 8, 2014); The Coca-Cola Co., 2013 WL 6701957 (S.E.C. No-Action Letter Jan. 15, 2014); The Coca-Cola Co., 2013 WL 6701969 (S.E.C. No-Action Letter Jan. 15, 2014); The Brink's Co., 2014 WL 556034 (S.E.C. No-Action Letter Jan. 17, 2014)).
Don't miss our complimentary in-person lunch & learn events, hosted by Practical Law, Business Law Solutions, and Thomson Reuters. During each 90-minute event, we'll take you through three typical transactional matters – an IPO, public company reporting work and an M&A deal – and show you how leading law firm and in-house practitioners leverage Thomson Reuters tools to tackle them efficiently and accurately. Register here for an event near you. CLE credit is being applied for in California, Georgia, Illinois, New York, Pennsylvania, and Texas.
View more from Craig Eastland on no-action letter requests, proposal letters, and much more on the Legal Solutions Blog.
Craig Eastland spent 12 years working as a law librarian at a number of firms including Sullivan & Cromwell, McCarthy Tetrault, and Fried Frank Harris Shriver & Jacobson, where he was Head of Reference. In 2008 he founded the securities law blog The Speculative Debauch. He has also worked as a research consultant for the Committee on Capital Markets Regulation. Craig studied illustration at the Rhode Island School of Design and law at New York Law School. Craig is currently a member of the Business Law Center Experts On-Call team, dedicated to providing support for those conducting in-depth business law research.
-->
