I see this blog as something of a collective work, since it started out as an internet site that simply shared a bunch of bookmarks and corporate governance items that needed attention. This post continues in that tradition and mainly goes out to those of you who have been submitting shareowner proposals for many years. It comes as a result of a review I am conducting with Glyn Holton of the United States Proxy Exchange and shareowner activist John Chevedden. Has the SEC changed its interpretation of when broker letters should be dated?
We all know what happened in the 2006 case of AFSCME v AIG. The court found the SEC had reinterpreted its own proxy rules without going out to public notice on the change or even informing the public. People had known about this for years. I mentioned it in a 5/26/2003 comment letter on the first recent proxy access proposal. Jane Barnard mentioned it in 1990 in her seminal paper, “Shareholder Access to the Proxy Revisited” (Catholic University Law Review, Volume 40, Fall 1990, Number 1). So, here’s another issue entirely, that I’d like readers to put to your memory banks. Was there a similar reinterpretation by the SEC regarding the date of broker letters supporting shareowner proposals? If so, when did it occur?
I started submitting proposal sporadically beginning 1999. Frankly, I don’t recall that submitting a broker letter dated a couple of days before the date of my proposal was an issue. However, earlier this year when I was reviewing Apache’s Brief on the Merits in Apache v Chevedden, they listed 30 no-action letters with what they claimed was “near unanimous support … both before and after the staff’s issuance of the Hain Celestial no-action letter” for their position that documentation of beneficial share ownership must come from DTC or some other party listed on the stock ledger.
My review of the no-action letters cited by Apache found no indication that proof must come directly from DTC or another party listed on the stock ledger, either before or after Hain Celestial. More germane to this post, I also found that in fully one-third of the no-actions — EQT Corp, Microchip Tech, Rentech, McGraw Hill (2008), Verizon, and IBM — proponents submitted broker letters that evidenced ownership prior to the date of the proposal. No-action was granted because Rule 14a-8(b) was interpreted as requiring verification from the proponent’s broker or bank “at the time you submitted your proposal,” not before. The same may also have been true of MeadWestvac and McGraw Hill (2007) but I could not verify through Westlaw because of missing exhibits.
A recent ISS report indicates that 28 proposals this year, according to theCorporateCounsel.net, were omitted on grounds that investors failed to provide sufficient evidence of eligibility. I would bet that a good portion of those involved broker letters dated before the proposal. Rule 14a-8(b)(2) imposes conflicting requirements on proponents. One is
… at the time you submit your proposal, you must prove your eligibility to the company …
The other is
… submit to the company a written statement from the “record” holder … verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year …
The first appears to require that a letter be obtained from the proponent’s bank or broker on or before the date on which a proposal is submitted — so that documentation is available “at the time” of the submission. The second requires that the letter be obtained from the bank or broker on or after the date of submission — so it documents that the proponent satisfied the ownership requirement “at the time” of the submission.
Since the language has some degree of ambiguity, I’m wondering if the SEC’s interpretation, the broker letters be dated the same day or after the proposal, is a recent one. Any recollection from readers, especially with supporting evidence, would be helpful. I see that on July 13, 2001, the Division of Corporation Finance issued Staff Legal Bulletin No. 14, which included the following:
In the event that the shareholder is not the registered holder, the shareholder is responsible for proving his or her eligibility to submit a proposal to the company. To do so, the shareholder must do one of two things. He or she can submit a written statement from the record holder of the securities verifying that the shareholder has owned the securities continuously for one year as of the time the shareholder submits the proposal…
If a shareholder submits his or her proposal to the company on June 1, does a statement from the record holder verifying that the shareholder owned the securities continuously for one year as of May 30 of the same year demonstrate sufficiently continuous ownership of the securities as of the time he or she submitted the proposal?
No. A shareholder must submit proof from the record holder that the shareholder continuously owned the securities for a period of one year as of the time the shareholder submits the proposal.
The Bulletin seems less ambiguous than the rule. Was this July 13 2001 substantively different than previous interpretations? Please e-mail me or leave a comment. Either way, any requirement that the broker letter be dated on or very close to the date of the proposal seems to me to be rather arbitrary… but that’s the subject of a future post.