On October 18, 2011, in response to two court decisions and a barrage of no-action letter requests from companies questioning the sufficiency and authenticity of proof of ownership documentation submitted by prolific shareholder proponents, the Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) issued Staff Legal Bulletin No. 14F (“SLB 14F”) in which it reversed its position on whether a statement from an introducing broker satisfies the proof of ownership requirements for submitting shareholder proposals under Rule 14a-8. SLB 14F also clarifies certain procedural matters relating to the shareholder proposal and related no-action letter processes.
Proof of ownership requirement
Rule 14a-8(b)(1) requires a shareholder submitting a proposal to have owned a specified amount of securities for at least one year as of the date the shareholder submits the proposal as a condition to being eligible to submit the proposal. The shareholder must also continue to hold the specified amount of securities through the date of the meeting and provide the company with a written statement of his or her intent to do so. When the shareholder is not the registered holder of the securities, the shareholder must prove his or her eligibility to submit a proposal by submitting a written statement from the “record” holder verifying that the shareholder has beneficially owned the specified amount of securities over the course of the requisite period.
Historical treatment of introducing brokers
Who constitutes a “record” owner for purposes of satisfying the proof of ownership requirements under Rule 14a-8? This question has generated controversy for some time and will take on increased importance now that director election procedures (such as “shareholder access” proposals) may be the subject of shareholder proposals. In The Hain Celestial Group, Inc. (Oct. 1, 2008), the Division adopted the position that an introducing broker, i.e., a broker who engages in securities transactions with or on behalf of customers but does not maintain custody of customer funds or securities, is considered a “record” holder for purposes of Rule 14a-8 even though the introducing broker does not hold the securities. Based on its position announced in Hain Celestial, the Division has refused to grant no-action relief to companies seeking to exclude shareholder proposals on the basis that a statement of ownership from an introducing broker does not satisfy Rule 14a-8.
In Apache Corp. v. Chevedden, 696 F. Supp. 2d 723 (S.D. Tex. 2010) (“Apache”), Apache Corp. sought judicial authority to exclude a shareholder proposal based on insufficient proof of ownership and argued that the ownership statement must come from the Depository Trust Company or its nominee Cede & Co. (collectively, “DTC”) because DTC was reflected as the holder of the relevant shares on Apache Corp.’s stock ledger. The Apache court held that a statement from DTC was not required but that the proof submitted by the proponent (which was from an introducing broker) did not satisfy Rule 14a-8. Earlier this year in KBR Inc. v. Chevedden, No. Civ.A.H-11-0196, 2011 U.S. Dist. LEXIS 23600 (S.D. Tex. Mar. 9, 2011) (“KBR”), the same court that decided the Apache case described its holding in Apache by stating that “this court . . . declined to accept [the proponent’s] position that would require companies to accept any letter purporting to come from an introducing broker that had named a DTC-participating member allegedly having a position in the company.” KBR at *44. The KBR court noted that the letter submitted in the KBR case was “the same type of letter from [an introducing broker that] this court found insufficient in Apache” and that the proponent did not timely submit a statement from the carrying broker who was a DTC participant. Id. at *45. The court concluded that “[u]nder Apache, KBR may exclude [the] proposal from its 2011 proxy materials.” Id. at *45. While the Division’s position in the Hain Celestial letter is difficult to reconcile with the Apache and KBR decisions, the court in Apache and KBR neither invalidated the Hain Celestial letter nor defined exactly what proof was required to satisfy Rule 14a-8 in the context of an introducing broker. Based on the Apache and KBR decisions, many companies sought no-action relief permitting them to exclude proposals where the only proof submitted was from an introducing broker. The Division continued to refuse to grant relief in those situations.
The Division’s new position
In SLB 14F, the Division reversed its position in Hain Celestial and confirmed that only banks or brokers who are participants in DTC should be viewed as “record” holders of securities that have been deposited with DTC. In light of this reversal, a shareholder seeking to prove eligibility is now required to submit a statement of ownership from a DTC participant, even if the shareholder does not have a direct relationship with the DTC participant. Thus, where a shareholder has purchased shares through an introducing broker, the shareholder would be required to submit a statement from the introducing broker and the DTC participant holding the shares for the account of the introducing broker. The information required to be submitted by the Division’s new position will allow companies to trace share ownership from the shareholder proponent to a DTC participant, whose ownership the company can then confirm through a DTC position listing. Consistent with the Apache court’s holding, SLB 14F specifically notes that a shareholder is not required to obtain proof of ownership directly from DTC.
Additional procedural guidance
In addition to clarifying how to satisfy the proof of ownership requirements where an introducing broker is involved, SLB 14F also provides additional procedural guidance concerning the following matters:
- Common defects in statements of ownership:
- failure of a letter to verify a shareholder’s ownership up to and including the date the proposal is submitted; and
- failure to clearly state that the securities have been held continuously for the requisite period.
- Treatment of revised proposals:
- where a revised proposal is submitted before the company’s deadline for receiving proposals has passed, the company must accept the revised proposal and the one-proposal rule of 14a-8(c) is not violated because the shareholder is deemed to have withdrawn the initial proposal;
- where a revised proposal is submitted after the company’s deadline has passed, the company is not required to accept the revisions, but in order to exclude the revised proposal the company must submit a notice stating its intention to exclude the revised proposal as a second proposal pursuant to Rule 14a-8(j); and
- a shareholder is not required to provide additional proof of ownership when submitting a revised proposal.
- Withdrawing no-action requests for proposals submitted by multiple proponents—the Division will now process a withdrawal request when the company provides a letter from the lead filer that includes a representation that the lead filer is authorized to withdraw the proposal on behalf of each proponent.
- Use of e-mail for no-action responses—the Division encouraged companies and proponents to include e-mail contact information in no-action correspondence and announced that the Division will transmit responses solely by e-mail where e-mail contact information is provided.
As illustrated by SLB 14F and prior staff legal bulletins regarding the shareholder proposal process, the proof of ownership requirement involves technical issues and is strictly enforced. It is important for companies seeking to exclude shareholder proposals to be familiar with the technical aspects of the proof of ownership requirement to position themselves to provide an effective notice of defect within the fourteen-day period required by Rule 14a-8(e)(i). In the context of a shareholder submitting an ownership statement from a non-DTC participant, the Division expressly noted that it will grant no-action relief to a company only if the company’s notice of defect describes the required proof of ownership in a manner that is consistent with the guidance contained in SLB 14F.
- If the account is established with the DTC participant on a “fully-disclosed” basis where the shareholder has an account directly with the DTC participant, a statement of the DTC participant alone would be sufficient.[Back to reference]