October 16, 2012
On October 16, 2012, the staff of the Securities and Exchange Commission (the "Staff") issued Staff Legal Bulletin No. 14G (Oct. 16, 2012) ("SLB 14G"), which provides guidance on three issues relating to shareholder proposals: (1) the entities that can provide sufficient proof of a shareholder’s beneficial ownership; (2) the content of deficiency notices when a proponent fails to provide adequate proof of ownership; and (3) the use of website addresses in shareholder proposals and supporting statements.
Much of the guidance contained in SLB 14G addresses issues that arose in no-action requests during the 2012 proxy season. It will be important for companies to carefully follow the guidance in SLB 14G when sending out deficiency notices and making both procedural and substantive arguments for the exclusion of shareholder proposals during the 2013 proxy season.
Verifying a Shareholder’s Beneficial Ownership
Rule 14a-8(b) requires a shareholder proponent to provide proof of ownership from the "record" holder of the securities unless the proponent is the registered holder of his or her securities or has filed a Schedule 13D, Schedule 13G, Form 3, Form 4 and/or Form 5 demonstrating ownership of the securities. At the beginning of the 2012 shareholder proposal season, the Staff issued Staff Legal Bulletin No. 14F (Oct. 18, 2011) ("SLB 14F"), which states that "only [Depository Trust Company (‘DTC’)] participants should be viewed as ‘record’ holders of securities that are deposited at DTC." As a result of this interpretation, only those firms that are DTC participants (and not introducing brokers) can provide valid Rule 14a-8(b) proof of ownership for proponents whose shares are held in street name.
During the 2012 proxy season, some companies submitted no-action requests seeking to exclude shareholder proposals where the proponent submitted proof of ownership letters provided by entities that were not themselves DTC participants but were affiliated with a DTC participant and had a name that was similar to that of the DTC participant. The Staff did not permit exclusion of these proposals, noting that "the proof of ownership statement was provided by a broker or bank that provides proof of ownership statements on behalf of its affiliated DTC participant."
SLB 14G confirms the position the Staff took during the 2012 season, stating: "By virtue of the affiliate relationship, we believe that a securities intermediary holding shares through its affiliated DTC participant should be in a position to verify its customers’ ownership of securities." As we noted in an earlier client alert, located here, the Staff’s position focuses on the relationship between the DTC participant and the entity providing the proof of ownership, not on any similarities that may exist in the entities’ names.
Accordingly, as we have advised in the past, in evaluating proof of ownership letters submitted by shareholders from entities that are not DTC participants, companies should seek to assess whether the entity is affiliated with a DTC participant before expending the resources to draft and send a deficiency notice to the shareholder proponent.
Content of Deficiency Notices
Rule 14a-8(b) requires a shareholder proponent’s proof of ownership to verify that, at the time the shareholder proposal was submitted, the shareholder proponent continuously held his or her securities for at least one year. One common problem with proof of ownership letters submitted by shareholders is that the letter fails to confirm ownership of company securities for the full one-year period preceding and including the date the shareholder proposal was submitted. As noted in SLB 14G, this problem can occur when a proof of ownership letter is dated either before the date the proposal is submitted or after such date.
SLB 14G provides guidance to companies in: (1) drafting deficiency notices to shareholder proponents whose proof of ownership letters contain these date-related procedural deficiencies; and (2) submitting no-action requests when shareholders fail to correct such deficiencies. It states that the Staff will concur in the exclusion of a shareholder proposal "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" only if the company’s deficiency notice: (1) identifies the specific date on which the proposal was submitted; and (2) 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. The SLB also clarifies that the date of submission of a shareholder proposal is "the date the proposal is postmarked or transmitted electronically." And, when companies submit no-action requests based on this type of procedural deficiency, SLB 14G states that such requests "should include copies of the postmark or evidence of electronic transmission."
Use of Website Addresses in Proposals and Supporting Statements
SLB 14G also addresses several issues related to shareholder proposals and supporting statements that include website addresses:
What Companies Should Do Now
SLB 14G provides helpful guidance regarding the Staff’s application of Rule 14a-8. Companies should use care in drafting their deficiency notices to shareholder proponents, such that they adequately identify the proponent’s procedural deficiency. Companies should also be mindful of the views expressed by the Staff in SLB 14G in evaluating a proponent’s proof of ownership and shareholder proposals that contain website addresses.
 See, e.g., Merck & Co., Inc. (avail. Feb. 29, 2012); compare with Johnson & Johnson (avail. Mar. 2, 2012) (concurring in the exclusion of a proposal when the shareholder’s proof of ownership was from an entity that was not a DTC participant and was not affiliated with a DTC participant).
 The list of DTC participants is available at http://www.dtcc.com/downloads/membership/directories/dtc/alpha.pdf.
 See, e.g., Wells Fargo & Company (avail. Mar. 7, 2012).
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