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The SEC Has Issued New Guidance On Shareholder Proposals And Updated The Rule 14a-8 No-Action Letter Process

On November 3, 2021, the SEC Division of Corporation Finance (“Corp Fin”) issued Staff Legal Bulletin 14L (“SLB 14L”) related to Rule 14a-8, rescinding prior Bulletins 14I, 14J and 14K and effectively destroying four years of interpretative guidance related to the exclusion of ESG related shareholder proposals from proxy statements.  SLB 14L also provides interpretative guidance on the use of images in shareholder proponents’ supporting statements, proof of ownership, and the use of email for notices.

Following the issuance of Bulletin 14L, the SEC announced that it was reversing a 2019 policy change related to providing written responses to no-action letter requests in accordance with Rule 14a-8 in the proxy process.  The earlier 2019 policy change provided that the SEC no longer had to provide written responses to company’s that sought to exclude a shareholder proposal.  Rather, the SEC could inform the company and the proponent of its position (concurs, disagrees or declines to state a view) orally or in writing.  The SEC now believes that written responses will provide greater transparency and certainty to shareholder proponents and companies.  The SEC will post its written responses on its website.

Background – Rule 14a-8

The regulation of corporate law rests primarily within the power and authority of the states. However, for public companies, the federal government imposes various corporate law mandates including those related to matters of corporate governance. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies. Federal proxy regulations give effect to existing state law rights to receive notice of meetings and for shareholders to submit proposals to be voted on by fellow shareholders.

All companies with securities registered under the Exchange Act are subject to the Exchange Act proxy regulations found in Section 14 and its underlying rules. Section 14 of the Exchange Act and its rules govern the timing and content of information provided to shareholders in connection with annual and special meetings with a goal of providing shareholders meaningful information to make informed decisions, and a valuable method to allow them to participate in the shareholder voting process without the necessity of being physically present. As with all disclosure documents, and especially those with the purpose of evoking a particular active response, such as buying stock or returning proxy cards, the SEC has established robust rules governing the procedure for, and form and content of, the disclosures.

Rule 14a-8 No-Action Letter even if contrary to the position of the board of directors.  Rule 14a-8 has been the source of considerable contention and after years of debate, was amended on September 23, 2020.  Rule 14a-8 allows a qualifying shareholder to submit proposals that, subject to substantive and procedural requirements, must be included in the company’s proxy materials for annual and special meetings, and provides a method for companies to either accept or attempt to exclude such proposals.  SLB 14L has the effect of minimizing some of the amendments implemented in the September 2020 rule change.

State laws in general allow a shareholder to attend a meeting in person and at such meeting, to make a proposal to be voted upon by the shareholders at large. In adopting Rule 14a-8, the SEC provides a process and parameters for which these proposals can be made in advance and included in the proxy process.  By giving shareholders an opportunity to have their proposals included in the company proxy, it enables the shareholder to present the proposal to all shareholders, with little or no cost to themselves.  It has been challenging for regulators to find a balance between protecting shareholder rights by allowing them to utilize company resources and preventing an abuse of the process to the detriment of the company and other shareholders.

The rule itself is written in “plain English” in a question-and-answer format designed to be easily understood and interpreted by shareholders relying on and using the rule. Other than based on procedural deficiencies, if a company desires to exclude a particular shareholder process, it must have substantive grounds for doing so.  Under Rule 14a-8, to qualify to submit a proposal, a shareholder must:

  • Shareholders that met the eligibility requirement to submit a proposal as of September 23, 2020 would continue to be eligible under the old criteria for meetings held prior to January 1, 2023 – the old criteria being that the shareholder continuously hold a minimum of $2,000 in market value or 1% of the company’s securities entitled to vote on the subject proposal, for at least one year prior to the date the proposal, is submitted and through the date of the annual meeting;
  • Satisfy one of three eligibility levels: (a) continuous ownership of at least $2,000 of the company’s securities for at least three years (updated from one year); (b) continuous ownership of at least $15,000 of the company’s securities for at least two years; or (c) continuous ownership of at least $25,000 of the company’s securities for at least one year;
  • If the securities are not held of record by the shareholder, such as if they are in street name in a brokerage account, the shareholder must prove its ownership by either providing a written statement from the record owner (i.e., brokerage firm or bank) or by submitting a copy of filed Schedules 13D or 13G or Forms 3, 4 or 5 establishing such ownership for the required period of time;
  • If the shareholder does not hold the requisite number of securities through the date of the meeting, the company can exclude any proposal made by that shareholder for the following two years;
  • Provide a written statement to the company that the submitting shareholder intends to continue to hold the securities through the date of the meeting;
  • Clearly state the proposal and course of action that the shareholder desires the company to follow;
  • Submit no more than one proposal for a particular annual meeting;
  • Submit the proposal prior to the deadline, which is 120 calendar days before the anniversary of the date on which the company’s proxy materials for the prior year’s annual meeting were delivered to shareholders, or if no prior annual meeting or if the proposal relates to a special meeting, then within a reasonable time before the company begins to print and send its proxy materials;
  • Attend the annual meeting or arrange for a qualified representative to attend the meeting on their behalf – provided, however, that attendance may be in the same fashion as allowed for other shareholders such as in person or by electronic media;
  • If a shareholder decides to use a representative to submit their proposal, they must provide documentation that the representative is authorized to act on their behalf and clear evidence of the shareholder’s identity, role and interest in the proposal including a signed statement by the shareholder;
  • If the shareholder or their qualified representative fail to attend the meeting without good cause, the company can exclude any proposal made by that shareholder for the following two years;
  • Shareholders may not aggregate ownership with other shareholders to meet the threshold for submittal.  Shareholders may co-file or co-sponsor proposals, but each one must meet the eligibility threshold;
  • The proposal, including any accompanying supporting statement, cannot exceed 500 words. If the proposal is included in the company’s proxy materials, the statement submitted in support thereof will also be included; and
  • Require that each shareholder that submits a proposal state that they are able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal (regardless of prior communications on the subject), and provide contact information (of the shareholder, not its representative) as well as business days and specific times (i.e., more than one date and time) that the shareholder is available to discuss the proposal with the company.

Moreover, under the rules, a shareholder may only submit one proposal.  The one-proposal rule applies per person such that a shareholder would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.

A proposal that does not meet the substantive and procedural requirements may be excluded by the company. To exclude the proposal on procedural grounds, the company must notify the shareholder of the deficiency within 14 days of receipt of the proposal and allow the shareholder to cure the problem. The shareholder has 14 days from receipt of the deficiency notice to cure and resubmit the proposal. If the deficiency could not be cured, such as because it was submitted after the 120-day deadline, no notice or opportunity to cure must be provided.

Upon receipt of a shareholder proposal, a company has many options. The company can elect to include the proposal in the proxy materials. In such case, the company may make a recommendation to vote for or against the proposal, or not take a position at all and simply include the proposal as submitted by the shareholder. If the company intends to recommend a vote against the proposal (i.e., Statement of Opposition), it must follow specified rules as to the form and content of the recommendation. A copy of the Statement of Opposition must be provided to the shareholder no later than 30 days prior to filing a definitive proxy statement with the SEC.  If included in the proxy materials, the company must place the proposal on the proxy card with check-the-box choices for approval, disapproval or abstention.

As noted above, the company may seek to exclude the proposal based on procedural deficiencies, in which case it will need to notify the shareholder and provide a right to cure. The company may also seek to exclude the proposal based on substantive grounds, in which case it must file its reasons with the SEC which is usually done through a no-action letter seeking confirmation of its decision and provide a copy of the letter to the shareholder.

Substantive grounds for exclusion include:

  • The proposal is not a proper subject for shareholder vote in accordance with state corporate law;
  • The proposal would bind the company to take a certain action as opposed to recommending that the board of directors or company take a certain action;
  • The proposal would cause the company to violate any state, federal or foreign law, including other proxy rules;
  • The proposal would cause the company to publish materially false or misleading statements in its proxy materials;
  • The proposal relates to a personal claim or grievance against the company or others or is designed to benefit that particular shareholder to the exclusion of the rest of the shareholders;
  • The proposal relates to immaterial operations or actions by the company in that it relates to less than 5% of the company’s total assets, earnings, sales or other quantitative metrics;
  • The proposal requests actions or changes in ordinary business operations, including the termination, hiring or promotion of employees – provided, however, that proposals may relate to succession planning for a CEO;
  • The proposal requests that the company take action that it is not legally capable of or does not have the legal authority to perform;
  • The proposal seeks to disqualify a director nominee or specifically include a director for nomination;
  • The proposal seeks to remove an existing director whose term is not completed;
  • The proposal questions the competence, business judgment or character of one or more director nominees;
  • The company has already substantially implemented the requested action;
  • The proposal is substantially similar to another shareholder proposal that will already be included in the proxy materials;
  • The proposal is substantially similar to a proposal that was included in the company proxy materials within the last five years and received fewer than a specified number of votes;
  • The proposal seeks to require the payment of a dividend; or
  • The proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.

The rules also set forth resubmission thresholds.  Under certain circumstances, Rule 14a-8(i)(12) allows companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years.” In addition, under Rule 14a-8, in order to be eligible to resubmit a proposal, a proposal must achieve 5%, 15% and 25% shareholder approval on matters voted on once, twice or three or times in the last five years.

Staff Legal Bulletin 14L (SLB 14L)

On November 3, 2021, the SEC issued SLB 14L rescinding SLB Nos 14I, 14J and 14K and confirming that to the extent any other bulletin’s contain views contrary to new SLB 14L, SLB 14L controls.  See here for my blog on SLB 14H – HERE.

SLB 14L focuses on Corp Fin’s views on Rule 14a-8(i)(7), which is the exception that allows a company to exclude proposals that come under ordinary operations, and Rule 14a-8(i)(5), the economic relevance exception.  SLB 14L also addresses the use of graphics and images, proof of ownership letters and the use of e-mail for submission of proposals, delivery of notice of defects, and responses to those notices.

Ordinary Business Exception

The purpose of the ordinary business exception is “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 at an annual shareholders meeting.”  Over the years, the SEC has taken a company-by-company facts and circumstances approach in analyzing whether a specific proposal fell within the ordinary course of business exception.

Going forward in analyzing whether a proposal falls within the ordinary course of business exception, the SEC will no longer consider company specific facts and circumstances but rather will consider the significance of the broader social policy behind a proposal.  The SEC will consider whether a proposal raises issues with a broad societal impact, such that it transcends the ordinary business of the company.  The SEC will allow shareholders “to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters.”

Obviously, the new approach is directed as ESG matters (for more on ESG, see HERE) and SLB 14L specifically lists human capital management as an example of a topic with significant social impact, even if it isn’t a significant issue for a particular company.

SLB 14L also backtracks on concerns that proposals can result in the micromanagement of a company or interfere with board discretion.  Under the new guidance, the SEC intends to take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not, per se, constitute micromanagement. Instead, the SEC will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management.  The SEC will expect the level of detail included in a shareholder proposal to be consistent with that is needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.  As an example, a proposal could request that company management set targets covering the greenhouse gas emissions of the company’s operations and products but not impose specific methods for reaching those goals.

Historically, a concern with such proposals has been that the matters are too complex for shareholders as a group to make an informed judgment.  In that regard, the SEC will now consider the sophistication of the shareholders and the availability of public information on the topic, including well-established national or international frameworks.  Hammering home that the SEC has a completely different view, SLB 14L states, “[W]hile the analysis in this bulletin may apply to any subject matter, many of the proposals addressed in the rescinded SLBs requested companies adopt timeframes or targets to address climate change that the staff concurred were excludable on micromanagement grounds. Going forward we would not concur in the exclusion of similar proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.”

Economic Relevance Exception

The “economic relevance” exception permits a company to exclude a proposal that “relates to operations which account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.  Under SLB 14L, proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds of Rule 14a-8.

Use of Images in Shareholder Proposals

Rule 14a-8 limits the word count of a shareholder proposal but does not mention the use of graphics. The SEC is of the view that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals.  However, to avoid any abuse, the SEC states that graphics could be excluded if: (i) they make the proposal materially false or misleading; (ii) they render the proposal so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing it, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires; (iii) they directly or indirectly impugn character, integrity or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation; or (iv) they are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which he or she is being asked to vote.

Proof of Ownership Letter

In relevant part, Rule 14a-8(b) provides that a proponent must prove eligibility to submit a proposal by offering proof that it “continuously held” the required amount of securities for the required amount of time.  The SEC has recognized two common errors that shareholders make in providing proof of ownership and thus SLB 14L provides a suggested format to avoid such errors.  In particular, the SEC suggests the following format for proof of ownership letters:

“As of [date the proposal is submitted], [name of shareholder] held, and has held continuously for at least [one year] [two years] [three years], [number of securities] shares of [company name] [class of securities].”

However, the SEC notes that the exact format is not required and failure to follow the exact format cannot be a basis for exclusion of a proposal as long as sufficient documentary support is provided to evidence the ownership.

Use of Email

Over the past few years, and particularly during the pandemic, both proponents and companies have increasingly relied on the use of emails to submit proposals and make other communications.  However, proof of delivery of an email can be difficult.  The SEC suggests that to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply e-mail from the recipient in which the recipient acknowledges receipt of the e-mail. Since Rule 14a-8 provides for specific deadlines, care should be taken to ensure that email communications provide the proper evidence of timely action.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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