Other changes needed in shareholder proposals process? SEC Div. of Corp. Finance to discuss no action letters on Monday, July 12

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Permalink Reply by Tracy Stewart on July 12, 2010 at 7:43pm

Thanks Sanford, this is good news. I'd like clarification on the requirements concerning documentation for proof of ownership. There are a few bad apple companies out there that try to subvert the process by making multiple no action challenges for legitimate owners and proposals. Proof of ownership is a murky issue when you get down to it, due to street name holding, and some companies have challenged broker letters. This does happen more often than it seems, in addition to the public cases we've heard about. And some companies make "proper presentation" of the proposal at company meetings purposely difficult to ascertain in an attempt to deem the proposal and ensuing vote invalid and therefore they can withhold the results.

I'd also like companies to present the beginning and ending filing deadlines in actual dates, in addition to the typical "120 later than X, no earlier than 90 days before X" language.

There are several worrisome techniques that some companies are beginning to implement that threaten the integrity of this process. One additional action that is needed is for the SEC to establish ongoing feedback with investors who have been wrongfully challenged during the process. Some companies will throw everything in the book at you to try to harass you into withdrawing the proposal. The SEC should know what is going on and pay close attention to the experience of these investos.

Looking forward to your update...

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Permalink Reply by Sanford Lewis on July 16, 2010 at 8:31am

I wrote about some of the most difficult and controversial issues from the meeting in a new blog post here on shareowners.org http://www.shareowners.org/profiles/blogs/should-shareholder-proposals. In addition, in the meeting, the SEC staff promised that there would be clarifications about documenting proof of ownership forthcoming this fall. There is also a possibility that the staff will offer clarification about when they will allow shareholders to modify a proposal that has been challenged.

I offered my take on the issue of modifications of proposals. Staff Legal Bulletins 14 and 14B note that staff has a tradition of “issuing no-action responses that permit shareholders to make revisions that are minor in nature and do not alter the substance of the proposal.” SLB 14 described minor changes – for example changing from binding to advisory or clarifying that it applies only to senior compensation – but if these are examples of “minor” changes not altering the substance of the proposal, then so would be changing a “shall” to a “may” or clarifying an undefined term with a commonly available definition.

In apparent contrast with the vague language on “minor changes,” both 14 and 14 B also say that exclusion is appropriate if a proposal or supporting statement would “require detailed and extensive editing in order to bring it into compliance with the proxy rules.”

If avoiding “detailed and extensive editing” were made a bright line rule between a minor and major revision then many proposals could easily be modified to overcome management objections – changing a single word, adding a sentence of clarification or striking a vague passage for instance. I would propose that the staff in a new SLB actually clarify that it will allowing shareholders in response to no action letters to provide proposed modifications to proposals that “avoid detailed and extensive editing” and don’t change the substance to a greater degree than the examples in SLB 14. This could greatly streamline and simplify the no action letters process.

Tracy Stewart said:

Thanks Sanford, this is good news. I'd like clarification on the requirements concerning documentation for proof of ownership. There are a few bad apple companies out there that try to subvert the process by making multiple no action challenges for legitimate owners and proposals. Proof of ownership is a murky issue when you get down to it, due to street name holding, and some companies have challenged broker letters. This does happen more often than it seems, in addition to the public cases we've heard about. And some companies make "proper presentation" of the proposal at company meetings purposely difficult to ascertain in an attempt to deem the proposal and ensuing vote invalid and therefore they can withhold the results.

I'd also like companies to present the beginning and ending filing deadlines in actual dates, in addition to the typical "120 later than X, no earlier than 90 days before X" language.

There are several worrisome techniques that some companies are beginning to implement that threaten the integrity of this process. One additional action that is needed is for the SEC to establish ongoing feedback with investors who have been wrongfully challenged during the process. Some companies will throw everything in the book at you to try to harass you into withdrawing the proposal. The SEC should know what is going on and pay close attention to the experience of these investos.

Looking forward to your update...

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