On October 16, 2012, the SEC published another “Staff Legal Bulletin” with guidance on shareowner proposals submitted to public companies pursuant to Rule 14a-8. SLB No. 14G provides the Division of Finance’s views regarding:
- Proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal;
- the manner in which companies should notify proponents of a failure to provide proof of ownership; and
- the use of website references in proposals and supporting statements.
Proof of Ownership
In last year’s SLB No. 14F (October 18, 2011), the Division “clarified” its view that only securities intermediaries that are participants in the Depository Trust Company (“DTC”) should be viewed as “record” holders of securities deposited at DTC for purposes of Rule 14a-8(b)(2)(i). Even though there has never been a documented case of a broker or bank issuing a letter evidencing ownership of stock that a proposal proponent didn’t own and even though the issuance of such letters would be fraud and would likely result in large litigation awards, the SEC’s guidance essentially appeared to require shareowners to provide documentation from both their broker/bank and the clearing bank that holds rights to instruments at the DTC.
Companies had questioned the sufficiency of proof of ownership letters from entities that were not themselves DTC participants, but were affiliates of DTC participants. They sought to force shareowners to obtain letters from the DTC itself, knowing that would be impossible, since the DTC doesn’t know the ultimate shareowners when shares are held in “street name.” Division staff compromised in SLB No. 14F, with a directive that could have been interpreted as requiring two letters, one from the broker/bank; the other from the broker’s clearing bank.
If the DTC participant knows the shareholder’s broker or bank’s holdings, but does not know the shareholder’s holdings, a shareholder could satisfy Rule 14a-8(b)(2)(i) by obtaining and submitting two proof of ownership statements verifying that, at the time the proposal was submitted, the required amount of securities were continuously held for at least one year – one from the shareholder’s broker or bank confirming the shareholder’s ownership, and the other from the DTC participant confirming the broker or bank’s ownership.
I dutifully asked my brokers for two letters, one from the broker and one from their clearinghouse bank. It was a nightmare. Providing evidence of ownership for purposes of submitting a shareowner proposal is something which comes up so infrequently at most brokers that it isn’t covered by any of the drop down menus and most of those working in client services will never see such a request. It might have been nice to deal directly with the clearing banks, but of course, they don’t know who I am. Their customer relationship is with the broker, not with me. I closed my account at two firms because they just couldn’t comply with my requests within a reasonable period of time.
I’d finally gotten the process to near routine with TDAmeritrade when the SEC issued SLB No. 14G, which contains the following
…for purposes of Rule 14a-8(b)(2)(i), a proof of ownership letter from an affiliate of a DTC participant satisfies the requirement to provide a proof of ownership letter from a DTC participant.
So, now I simply tell my broker to include the clearinghouse number of their DTC participant affiliate. It still seems like a lot of nonsense for nothing but it is a lot less hassle than shareowners faced last year.
In reviewing “no-action” letters from the SEC, providing proof of ownership is probably the biggest technical “gotcha” that leaves submissions in the dust. Most of us will remember we need proof we have owned the stock for at least a year prior to submitting the proposal, so that usually isn’t an issue if we obtain the letter after our submission. The real problem I’ve seen is that shareowners sometimes get the letter a day or two before submitting the proposal or they put it in the mail and it doesn’t get postmarked until the following day.
Even though you have pledged to meet Rule 14a-8 requirements, including continuous ownership of the required stock value until after the date of the respective shareholder meeting, which is usually several months, neither the company nor the SEC appear willing to trust that if you get a broker letter dated two days before you submitted your proposal, you didn’t sell it during those intervening couple of days. We’re trusted for months, based on our pledge to hold through the meeting, but not trusted for a couple of days prior to submitting the proposal. That doesn’t make sense to me. I was hoping the SEC would provide a two or three day of grace.
Instead, the Division clarified the need for a company’s notice of deficiency to provide the shareowner proponent an opportunity to cure the proof of ownership defect(s) by identifying the specific date on which the proposal was submitted; and explaining the need for a new proof of ownership letter verifying continuous ownership of the required amount of securities for the one-year period preceding and including the date on which the proposal was submitted.
The Division stated its view that the date of a proposal’s submission is “the date the proposal is postmarked or transmitted electronically.” Where a company seeks a no-action letter to exclude a proposal because of the proponent’s failure to adequately prove sufficient ownership for the required one-year period, the Division reminded companies to include copies of the postmark or evidence of electronic transmission with their no-action requests.
…we will not concur in the exclusion of a proposal under Rules 14a-8(b) and 14a-8(f) on the basis that a proponent’s proof of ownership does not cover the one-year period preceding and including the date the proposal is submitted unless the company provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect. We view the proposal’s date of submission as the date the proposal is postmarked or transmitted electronically.
The Division clarified that a website address counts as one word. The Division also addressed company attempts to claim, under Rule 14a-8(i)(3), a proposal is “vague and indefinite.” They provided a reminder that proposals must be complete by themselves and that website addresses can only provide unnecessary supplemental information.
If a proposal or supporting statement refers to a website that provides information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, then we believe the proposal would raise concerns under Rule 14a-9 and would be subject to exclusion under Rule 14a-8(i)(3) as vague and indefinite.
The more important clarification was that website addresses that are not yet operation or fully loaded cannot simply be excluded under Rule 14a-8(i)(3) as irrelevant if the proponent
at the time the proposal is submitted, provides the company with the materials that are intended for publication on the website and a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.
On the other side, the Division also stated that when a company seeks to exclude a website address for material changes made after it has been submitted, even though Rule 14a-8(j) requires an 80 day notification period to the SEC, they would “concur that the changes to the referenced website constitute ‘good cause'” and would waive the 80 time period.