Corporate Practice Series Portfolio No. 83-3rd, Shareholder Proposals, examines the mechanics of Securities Exchange Act Rule 14a-8, the rule that is triggered when a shareholder submits a proposal to a corporation seeking to have it included in the corporation's proxy materials and voted on at the annual meeting of shareholders. The portfolio discusses who is eligible to submit a shareholder proposal and what the procedures are for doing so. The portfolio then discusses the process whereby the corporation can request a no-action letter and the procedural and substantive grounds corporations may rely on when seeking to exclude a proposal from its proxy materials. The portfolio also discusses the organizations and individuals that are the most active concerning shareholder proposals.

Portfolio 83-3rd: Shareholder Proposals

I. Introduction and History
    A. Introduction
    B. The Early Years
    C. The First Test: ‘SEC v. Transamerica'
    D. Rule 14a-8 After ‘Transamerica'
    E. Focus on Social Policy Considerations
    F. Refinements to the Rule
    G. The Current Debate
        1. Shareholder-proposed bylaw amendments
        2. Shareholder access

II. Submission Issues
    A. What Is a Proposal?
    B. 500-Word Limit
    C. Who Is Eligible to Submit a Proposal?
         1. $2,000 or 1 percent requirement
         2. Shares entitled to be voted
         3. Holding period
              a. Two common errors
              b. Ownership in merged entities
    D. Proof of Ownership
         1. In general
         2. Determining who the record holder is
    E. One-Proposal Rule
    F. Deadline for Submitting Proposals
    G. Deficient Submissions
         1. Deficiency unable to be overcome
         2. Proponent’s failure to satisfy request for information deadline
    H. Co-Sponsorship
    I. Failure to Appear at Shareholders' Meeting to Present the Proposal

III. Preparation of the Proxy Statement
    A. Introduction
    B. Disclosure of the Deadline for Rule 14a-8 Proposals
         1. Regularly-scheduled meetings
         2. Non-regularly-scheduled meetings
    C. Advance Notice Provision of a Company's Bylaws
         1. Disclosure of deadlines for Rule 14a-8 proposals and non-14a-8 matters
         2. Disclosure of non-14a-8 matters to be brought from the floor of the meeting
    D. Identification of Proponent
    E. Statement in Opposition

IV. SEC Staff No-Action Process
    A. What Is a No-Action Letter?
    B. Division of Corporation Finance—Shareholder Proposal Taskforce
    C. Deadline for the Company to Submit Its No-Action Request
    D. Form and Substance of Request
         1. Form
         2. Substance
    E. Shareholder Responses
    F. Withdrawal of Request
    G. Challenging the Staff’s Decision
         1. Reconsideration of the staff’s determination
         2. Appeal to the full Commission
         3. Litigation
              a. Judicial review under the Administrative Procedure Act
              b. The ‘arbitrary and capricious' basis for judicial review
              c. Section 25 of the Exchange Act
              d. Lawsuits to enforce or resist enforcement of an SEC no-action letter

V. Substantive Bases for Exclusion
    A. In General
    B. Specific Bases for Exclusion
         1. Rule 14a-8(i)(1)—Improper under state law
              a. Arguments under state and international law must be accompanied by an opinion of counsel
              b. The proposal concerns an improper subject for shareholder action under state law
                   (1). Shareholder proposals that mandate board action are excludable under 14a-8(i)(1) unless rephrased as a request or recommendation
                   (2). Mandatory bylaw proposals
                        (a). The lack of clear state law regarding shareholder mandatory bylaw amendments
                        (b). Validity of mandatory bylaw amendments relating to poison pills under ‘Fleming'
                        (c). Changes in staff approaches to mandatory bylaw amendments
                        (d). The staff’s previous ‘agnostic' approach to requests concerning unsettled matters of state law
                        (e). The staff’s current approach to unsettled matters of state law—denying relief on burden grounds
                   (3). Proposals requesting action on matters that require amendments to the articles of incorporation
         2. Rule 14a-8(i)(2)—If implemented, the proposal would cause the company to violate applicable state, federal, or international law
              a. Bylaw amendments under Rule 14a-8(i)(2)
                   (1). In general
                   (2). Bylaw amendments that would conflict with a company's certificate of incorporation
                   (3). Shareholder proposals that would bind the board to adopt, maintain, or redeem poison pills
              b. Shareholder proposals that would cause the company to violate an existing contract
              c. Shareholder proposals that would cause the company to lose benefits under the law
              d. Shareholder proposals requesting corporate actions that would require that other steps be taken in order to be implemented
              e. Shareholder proposals that would cause the company to violate state or federal anti-discrimination laws
              f. Shareholder proposals that would require that votes be tabulated in a manner that is inconsistent with state law
              g. Election-related shareholder proposals
                   (1). Proposals seeking the annual election of directors
                   (2). Proposals seeking the nomination of two persons for every open board position
                   (3). Proposals seeking to institute majority voting for directors
              h. Foreign law
              i. Regulations
         3. Rule 14a-8(i)(3)—Violation of proxy rules
              a. In general
              b. Staff Legal Bulletin No. 14G and references to external materials
         4. Rule 14a-8(i)(4)—Personal grievance; special interest
              a. In general
              b. Demonstration of facts tying the submission of the proposal to a personal grievance
              c. Shareholder proposals that clearly relate to a personal claim or grievance against the company or any person
              d. Special circumstances under Rule 14a-8(i)(4)
                   (1). ‘Cabot' relief
                   (2). Shareholder proposals concerning topics in which a shareholder is emotionally or personally committed
                   (3). Corporate governance proposals
                   (4). ‘Alter ego' arguments
         5. Rule 14a-8(i)(5)—Relevance
              a. Background of Rule 14a-8(i)(5)
              b. ‘Lovenheim v. Iroquois Brands'
              c. Staff interpretations under Rule 14a-8(i)(5)
                   (1). Proposals that are economically insignificant but are of ethical or social significance and are meaningfully related to the company’s business
                   (2). Proposals that are economically insignificant and are of no ethical or social significance
                   (3). Proposals that are not meaningfully related to the company’s business
                        (a). Conduct in which the company does not engage
                        (b). Proposals relating to discontinued operations
                        (c). Platform proposals—proposals relating to general social policy matters with no relationship to the company’s operations
         6. Rule 14a-8(i)(6)—Absence of power/authority
              a. In general
              b. Contracts
              c. Proposals relating to the board of directors
                   (1). Board qualifications generally
                   (2). Independent boards and committees
         7. Rule 14a-8(i)(7)—Management functions
              a. The ‘significant policy consideration' exception to the rule
                   (1). Examples of proposals that raise significant policy considerations
                   (2). How to determine whether a proposal raises significant policy considerations
              b. Employment-related proposals
                   (1). Executive compensation vs. general employee compensation
                   (2). Shareholder proposals linking executive compensation to other issues
                   (3). Shareholder proposals relating to employee benefits
                   (4). Shareholder proposals relating to terms of employment, including hiring, termination, and wages
                   (5). Shareholder proposals relating to labor unions and collective bargaining agreements
              c. Shareholder proposals relating to human rights
              d. Shareholder proposals relating to particular products or services
              e. Corporate transactions
              f. General business operations
              g. Shareholder proposals relating to the environment
              h. Shareholder proposals relating to the environment and evaluation of risk
              i. Shareholder proposals that ‘micromanage'
              j. Reports that request intricate detail
         8. Rule 14a-8(i)(8)—Relates to elections
              a. Rule 14a-8(i)(8) and shareholder access
                   (1). Background of the shareholder access controversy
                   (2). Recent attempts to propose a shareholder access rule
                        (a). 2003 shareholder access rule proposal
                        (b). Interpretive approach to access proposals
                        (c). Shareholder challenges to SEC approach to shareholder access
                        (d). SEC response to ‘AFSCME v. AIG'
                   (3). The Proxy Access Rules
              b. Proposals seeking to nominate persons to the board of directors
                   (1). Proposals that explicitly seek to nominate a person to the board of directors
                   (2). Proposals that would create general election procedures and policies
                        (a). Proposals requesting additional information from directors
                        (b). Proposals requesting the nomination of more than one nominee for every open board seat
              c. Proposals that would influence votes against current nominees to the board
                   (1). Proposals that impugn management nominees
                   (2). Proposals seeking no confidence votes for members of the board of directors
              d. Proposals seeking the removal or resignation of a current member of the board of directors
              e. Proposals that would disqualify current board members or nominees to the board
                   (1). Annual election of directors
                   (2). Age limits
                   (3). Minimum ownership requirements
         9. Rule 14a-8(i)(9)—Conflicts with company's proposal
              a. Proposals regarding stock compensation plans
              b. Proposals relating to election matters
              c. Both proposals must be for the same meeting
              d. Company proposal prepared in response to shareholder proposal
              e. Proposals that companies may submit for shareholder approval
         10. Rule 14a-8(i)(10)—Substantially implemented
              a. Background
              b. In general
              c. Poison pill proposals
                   (1). Bylaw or charter amendment versus a policy
                   (2). The ‘fiduciary out'
                   (3). Time period in which a poison pill must be submitted to a vote
                   (4). Proposals requesting redemption of a non-existent poison pill
              d. Policies versus bylaw or charter amendments
              e. Majority voting
                   (1). Policy versus bylaw or charter amendment
                   (2). Director resignation policies versus majority voting standards
         11. Rule 14a-8(i)(11)—Duplication
              a. Substantially duplicative
              b. Previously submitted to company
         12. Rule 14a-8(i)(12)—Resubmissions
              a. Mechanics of Rule 14a-8(i)(12)
              b. Rule 14a-8(i)(12) standard
                   (1). ‘Substantially the same subject matter'
                   (2). Calendar years
                   (3). Mechanics of counting votes
         13. Rule 14a-8(i)(13)—Specific amount of dividends
              a. Background
              b. What is a dividend?
              c. Specific amount of dividend
              d. Formulas
              e. Proposals to begin paying dividends or to eliminate dividends
              f. Stock splits
              g. Poison pills
              h. Proposals tied to executive compensation
                   (1). Proposals to reduce executive compensation and raise dividends
                   (2). Proposals concerning certain action on executive compensation until dividends are increased
                   (3). Proposals to tie the rate of increase, or decrease, in the dividends to the rate of increase, or decrease, in executive compensation
              i. Charitable contributions

VI. Special Meetings and Other Issues     
    A. Proposals Submitted for Special Meetings
    B. Shareholder Proposals Raised at Meetings    

Portfolio 83-3rd: Shareholder Proposals

Wks. 1 Section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a))

Wks. 2 Shareholder Proposals (17 C.F.R. §240.14a-8)

Wks. 3 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, §510(b)

Wks. 4 Report on Shareholder Proposals Under Section 510(b) of the National Securities Markets Improvement Act of 1996

Wks. 5 Frequently Asked Questions Regarding Rule 14a-8

Wks. 6 General Motors Corp., SEC No-Action Letter (Feb. 19, 2008) [Corporation May Exclude Shareholder Proposal from Its Proxy Materials]

Wks. 7 ExxonMobil Corp., SEC No-Action Letter (March 19, 2008) [Corporation May Not Exclude Shareholder Proposal from Its Proxy Materials]

Wks. 8 Examples of Procedural Deficiency Letters

Wks. 9 Schedule of Actions for Annual Meeting Concerning Shareholder Proposals

Wks. 10 Sample Bylaw Provision That Requires Advance Notice of Shareholder Proposals

Wks. 11 Exchange Act Release No. 12,599 (July 7, 1976)

Wks. 12 Exchange Act Release No. 12,999 (Nov. 22, 1976)

Wks. 13 Exchange Act Release No. 40,018 (May 21, 1998)

Wks. 14 Exchange Act Release No. 48,626 (Oct. 14, 2003)

Wks. 15 Exchange Act Release No. 56,160 (July 27, 2007)

Wks. 16 Exchange Act Release No. 56,161 (July 27, 2007)

Wks. 17 Exchange Act Release No. 56,914 (Dec. 6, 2007)

Wks. 18 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14 (July 13, 2001)

Wks. 19 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14A (July 12, 2002)

Wks. 20 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14B (Sept. 15, 2004)

Wks. 21 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14C (June 28, 2005)

Wks. 22 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14D (Nov. 7, 2008)

Wks. 23 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14E (Oct. 27, 2009)

Wks. 24 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14F (Oct. 18, 2011)

Wks. 25 U.S. Securities and Exchange Commission, Division of Corporation Finance: Staff Legal Bulletin No. 14G (Oct. 16, 2012)

Wks. 26 SEC v. Transamerica Corp., 67 F. Supp. 326 (D. Del. 1946)

Wks. 27 SEC v. Transamerica Corp., 163 F.2d 511 (3d Cir. 1947)

Wks. 28 New York City Employees' Ret. Sys. v. SEC, 843 F. Supp. 858 (S.D.N.Y. 1994)

Wks. 29 New York City Employees’ Ret. Sys. v. SEC, 45 F.3d 7 (2d Cir. 1995)

Wks. 30 American Federation of State County and Municipal Employees, Employees Pension Plan v. American International Group, Inc., 361 F. Supp. 2d 344 (S.D.N.Y. 2005)

Wks. 31 American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., 462 F.3d 121 (2d Cir. 2006)

Wks. 32 CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008) (including Securities and Exchange Commission Certification of Questions of Law to the Supreme Court of the State of Delaware dated June 27, 2008)

Wks. 33 Amalgamated Clothing and Textile Workers Union v. Wal-Mart Stores, Inc., 54 F.3d 69 (2d Cir. 1995)

Wks. 34 Amalgamated Clothing and Textile Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877 (S.D.N.Y. 1993)

Wks. 35 Dyer v. SEC, 290 F.2d 541 (8th Cir. 1961)

Wks. 36 Gen. DataComm Indus., Inc. v. State of Wisconsin Inv. Bd., 731 A.2d 818 (Del. Ch. 1999)

Wks. 37 Grimes v. Centerior Energy Corp., 909 F.2d 529 (D.C. Cir. 1990)

Wks. 38 New York City Employees’ Ret. Sys. v. Dole Food Co., Inc., 969 F.2d 1430 (2d Cir. 1992)

Wks. 39 Peck v. Greyhound Corp., 97 F. Supp. 679 (S.D.N.Y 1951)

Wks. 40 Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416 (D.C. Cir. 1992)

Wks. 41 SEC v. Med. Comm. for Human Rights, 404 U.S. 403 (1972)

Wks. 42 Other Cases Dealing with Shareholder Proposals

Keir D. Gumbs 
Covington & Burling LLP
Washington, D.C.

Neel Maitra, Esq. 
Covington & Burling LLP
Washington, D.C.