Shareholder activism has become a fixture of the annual meeting season for many public companies, as shareholders have sought to use the annual meeting process as a vehicle for advancing particular interests, such as environmental, social and corporate governance issues. Shareholders have effectively used the shareholder proposal process created by SEC rules to include a proposal in a company’s proxy statement, and thereby subject to a shareholder vote. While these proposals have been prevalent at the largest public companies for some time, shareholder activists have increasingly turned their attention to public companies with medium-sized market capitalizations. Given the ongoing threat of shareholder activism through the proposal process, public companies must have a plan to quickly respond when a shareholder proposal is received.
SEC Proxy Rule 14a-8
Under the SEC Rule 14a-8, a company must include a shareholder’s proposal in its proxy materials unless the proposal or the proponent is not in compliance with one of the rule’s procedural requirements, or the proposal may be excluded under one of 13 substantive bases outlined in the rule.
Rule 14a-8 imposes several procedural requirements on shareholders who rely on the rule.
- The shareholder may only submit one proposal per meeting
- The shareholder must own at least $2,000 or 1 percent of securities entitled to vote on its proposal
- The shareholder must limit its proposal to 500 words
- The shareholder must submit the proposal at least 120 days before the date of the company's proxy statement for the previous year’s annual meeting (or a reasonable time before the company begins to print and mail its proxy materials, if the company did not have an annual meeting during the previous year, or if the date of the annual meeting has been changed by more than 30 days from the date of the previous year's annual meeting).
A company that intends to rely on the rule to exclude a proposal must submit its no-action request 80 days in advance of the date that it proposes to file its definitive proxy materials.
Under paragraph (i) of Rule 14a-8, a company may exclude a shareholder proposal from its proxy materials if the proposal falls into one of thirteen substantive bases for exclusion. These substantive bases for exclusion address situations where a proposal, among other things, is inconsistent with applicable laws, cannot be implemented by the company, duplicates another proposal, has been substantially implemented, or relates to ordinary business operations. In order to exclude a proposal, a company must first notify the SEC, which is typically done through a request for a “no-action” letter. In the no-action letter request, a company may argue that the subject proposal can be excluded under more than one basis for exclusion.
The no-action letter process
A no-action letter is a letter from the staff of the SEC that provides the staff’s informal view regarding whether it would recommend enforcement action to the SEC if the company takes the course of action described in the no-action request. No-action letters reflect the staff’s views concerning the application of the securities laws to a particular set of facts. In the context of Rule 14a-8, no-action letters often serve as a key hurdle for shareholders that hope to include a proposal in a company’s proxy materials. While the SEC staff’s no-action letters typically address whether or not the company has a basis to exclude the proposal, there also may be times when the SEC staff will say that there appears to be some basis for the company’s objection, but the problem can be cured if, for example the shareholder makes a mandatory proposal into a nonbinding proposal, or deletes certain words or sentences in the proposal to avoid vagueness.
Getting ready—the intake checklist
Given the specific deadlines and requirements outlined in Rule 14a-8, companies must be prepared to quickly address shareholder proposals even if they have never received a proposal in the past. Ideally, a company should have a detailed intake checklist ready to assess any incoming proposal, and the checklist should address the following key areas:
- Ownership verification: Companies must quickly determine whether the shareholder submitting the proposal is a holder of record or a beneficial owner of the required amount of securities, and whether she has provided an appropriate proof of ownership, along with a statement of continuous ownership for the prior year and through the annual meeting.
- Multiple proposals: Companies must determine whether the shareholder is seeking to impermissibly submit more than one proposal.
- 500 word limit: Companies must evaluate the proposal and supporting statement to determine if they collectively violate the 500 word limit specified in Rule 14a-8.
- Late submission: Companies must determine if the proposal was submitted after the deadline published in the proxy statement.
- Failure to present a prior proposal: If a proponent has submitted a proposal in the past and did not present the proposal at the annual meeting, subsequent proposals may be excludable.
If a proposal meets the procedural requirements (including after a shareholder has remedied a deficiency within the specified timeframes), a company needs to carefully consider whether to seek to exclude the proposal under one of the substantive bases, whether to negotiate with the proponent or whether to run the proposal and argue why shareholders should not support the proposal. The company should make the determination after carefully considering the nature of the proposal, the shareholder proponent and the company’s own circumstances.