50682 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

1 15 U.S.C. 78a et seq.

2 17 CFR 240.14a–8.

3 17 CFR 240.14a–4.

4 17 CFR 240.14a–5.

5 17 CFR 240.14a–2.

6 17 CFR 240.13d–5.

7Rule 14a–8(a)(3) [17 CFR 240.14a–8(a)(3)].

8Rule 14a–8(d) [17 CFR 240.14a–8(d)].

9The Division of Corporation Finance has

reviewed approximately 400 submissions under

rule 14a–8 annually. The Division of Investment

Management typically has reviewed fewer than 12

submissions from investment companies in

previous years; shareholder proposals have only

infrequently been submitted to investment

companies, and those submitted have usually

involved closed-end investment companies.

10The procedures on the rendering of staff advice

for shareholder proposals are explained in

Exchange Act Release No. 12599 (July 7, 1976) (41

FR 29989). These proposals do not alter the

procedures set forth in that release.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 240

[Release No. 34–39093; IC–22828; File No.

S7–25–97]

RIN 3235–AH20

Amendments to Rules on Shareholder

Proposals

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange

Commission (‘‘we’’ or ‘‘Commission’’)

proposes revisions to the rule that

opens, and then regulates, a channel of

communication among shareholders,

and between shareholders and the

management of their companies: rule

14a–8, the shareholder proposal rule.

We propose to recast rule 14a–8 into a

Question & Answer format that both

shareholders and companies should

find easier to follow, and to modify the

rule to address concerns raised by both

shareholders and companies. We also

propose revisions to related rules.

DATES: Public comments are due

November 25, 1997.

ADDRESSES: Please send three copies of

the comment letter to Jonathan G. Katz,

Secretary, U.S. Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington D.C. 20549. Comment

letters can be sent electronically to the

following e-mail address: rulecomments@sec.gov. The comment letter

should refer to File No. S7–25–97; if email is used please include the file

number in the subject line. Anyone can

inspect and copy the comment letters in

the SEC’s Public Reference Room, 450

Fifth Street, N.W., Washington, D.C.

20549. We will post comment letters

submitted electronically on our Internet

site

(http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Frank G. Zarb, Jr., Special Counsel,

Office of Chief Counsel, Division of

Corporation Finance, at (202) 942–2900,

or Doretha M. VanSlyke, Division of

Investment Management, at (202) 942–

0721, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission is proposing for comment

amendments to the following rules

under the Securities Exchange Act of

1934 (the ‘‘Exchange Act’’):1 14a–8,2

14a–4,3 14a–5,4 14a–2,5 and 13d–5.6

I. Executive Summary

The shareholder proposal rule

provides an avenue for communication

between shareholders and companies,

and among shareholders themselves.

Like any other well-traveled road,

however, the rule is in need of some

repair. These proposals accordingly are

designed to rectify problems identified

by both shareholders and corporations.

The proposals today would make it

easier for shareholders to include a

broader range of proposals in

companies’ proxy materials, and

provide companies with clearer ground

rules and more flexibility to exclude

proposals that failed to attract

significant shareholder support in prior

years. We are proposing a ‘‘package’’ of

reforms that we believe best

accommodates the concerns of most

participants in the shareholder proposal

process, including proposals to

accomplish the following:

• Recast the rule into a more

understandable Question & Answer

format;

• Reverse the Cracker Barrel policy,

making it easier for shareholders to

include in companies’ proxy materials

employment-related proposals that raise

significant social policy matters;

• Make it more difficult to present

proposals again that received an

insignificant percentage of the votes cast

on earlier submissions, enhancing

shareholders’ ability to decide for

themselves which proposals are

important to the company;

• Introduce an ‘‘override’’ mechanism

permitting 3% of the share ownership to

override a company’s decision to

exclude a proposal under certain of the

bases for exclusion;

• Adopt a new qualified exemption

from the proxy rules under Section 14(a)

of the Exchange Act, and a safe harbor

under Section 13(d) of the Exchange Act

and rule 13d–5, to make it easier for

shareholders to use the new ‘‘override;’’

• Streamline the exclusion for matters

considered irrelevant to corporate

business, to permit companies to

exclude proposals that relate to

economically insignificant portions of

their businesses;

• Streamline our administration of

the rule whereby companies are

permitted to exclude proposals

furthering personal grievances or special

interests; and

• Provide clearer ground rules for

management’s exercise of discretionary

voting authority when a shareholder

notifies the company that it intends to

present a proposal outside the

mechanism of rule 14a–8.

II. Introduction and Background

Rule 14a–8 provides, and then

regulates, a channel of communication

among shareholders, and between

shareholders and companies. It is not

the only avenue for communication,

since a shareholder may undertake an

independent proxy solicitation or may

seek informal discussions with

management or other shareholders

outside the proxy process. Rule 14a–8 is

popular because it provides an

opportunity for any shareholder owning

a relatively small amount of the

company’s shares to have his or her own

proposal placed alongside

management’s proposals in the

company’s proxy materials for

presentation to a vote at an annual or

special meeting of shareholders.

The rule’s operation is fairly simple.

A shareholder must mail a copy of his

or her proposal to the company in time

to meet the deadline imposed by the

rule.7 If the company intends to omit the

proposal from its proxy materials, it

must first submit its reasons to the

Commission.8 The Division of

Corporation Finance or Division of

Investment Management (the

‘‘Division’’) usually issues a written

response either concurring or declining

to concur with the company’s

reasoning.9 The Division’s response is

not legally binding, and does not

necessarily reflect the view of the

Commission.10 Either party may obtain

a legally binding decision on the

excludability of a challenged proposal

from a federal court.

Proposals are considered appropriate

for inclusion in proxy materials under

rule 14a–8 unless the company

demonstrates that the proposal falls

within one of thirteen bases for

exclusion, or that the shareholder
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50683

11Rule 14a–8(c)(1) [17 CFR 240.14a–8(c)(1)].

12Rule 14a–8(a)(1) [17 CFR 240.14a–8(a)(1)].

13See American Society of Corporate Secretaries

(‘‘ASCS’’), Report on Shareholder Proposals, July 1,

1995–June 30, 1996; IRRC Summary of 1996 U.S.

Shareholder Resolutions, Apr. 12, 1997. The IRRC

tracks proposals at approximately 1,500 companies

each year, and the ASCS monitors proposals at

approximately 1,950 public companies. A company

is not required to contact the Commission staff

unless it intends to omit the proposal from its proxy

materials.

14 In response to a questionnaire on shareholder

proposals which we distributed last February (the

‘‘Questionnaire’’), 63% of shareholder respondents

ranked as a top goal of reform expanding the

categories of proposals that companies must

include in their proxy materials. As discussed more

fully below, the Commission staff prepared the

Questionnaire as part of a Congressionallymandated study of the shareholder proposal

process.

15See, e.g., Rulemaking Petition dated July 27,

1995, submitted to the Commission by the Interfaith

Center on Corporate Responsibility, Calvert Group

Ltd., and the Comptroller of the City of New York.

The petition asked that the Commission modify its

position announced in the no-action letter Cracker

Barrel Old Country Store, Inc. (Oct. 13, 1992)

(‘‘Cracker Barrel’’) (proposal that company

implement employment practices related to sexual

orientation). The proposals address the concerns

raised by the petition. See Section III, Part D of this

release.

16Cracker Barrel. The Commission subsequently

upheld the Division’s response. See Letter dated

January 15, 1993 from Jonathan G. Katz, Secretary

to the Commission, to Sue Ellen Dodell, Deputy

Counsel, Office of Comptroller, The City of New

York.

17See e.g., Response of Porter Lavoy & Rose Inc.,

No. 31; The Finova Group, No. 61; Boise Cascade

Corp., No. 163; Allied Signal Inc., No. 184; Intel

Corporation, No. 216; RJR Nabisco, Inc., No. 207;

The Proctor & Gamble Company, No. 264. The

responses are available for inspection and copying

in file number S7–5–97.

18See, e.g., Response of Roanoke Electric Steel

Corp, No. 44; Cooper Industries, No. 174; Carolina

Power and Light Co., No. 156; Eastman Kodak

Company, No. 268.

19 Discretionary voting authority is the ability to

vote proxies that shareholders have executed and

returned to the company, on matters not reflected

on the proxy card, and on which shareholders have

not had an opportunity to vote.

20See, e.g., Response of Gannett Co., Inc., No.

117; Questar Corp., No. 18; Albertson’s Inc., No.

204; CNF Transportation, No. 11; Safety-Kleen

Corp., No. 180; Honeywell Inc., No. 198.

21The American Trucking Associations (‘‘ATA’’),

for instance, recently petitioned the Commission to

amend rule 14a–8(c)(4), the personal grievance

exclusion, to ‘‘prevent labor unions from continuing

to use the shareholder proposal process to advance

union interests not shared by the target company’s

shareholders’ generally.’’ Rulemaking Petition dated

October 13, 1995 submitted to the Commission by

the ATA. The Commission considered the ATA’s

concerns in connection with these proposals.

Section III, Part B, describes proposed

modifications to the way we administer current rule

14a–8(c)(4).

22National Securities Markets Improvement Act

of 1996, Pub. L. No. 104–290, § 510(b), 110 Stat.

3416 (1996). The Commission is required to study

‘‘(A) whether shareholder access to proxy

statements pursuant to section 14 of the Securities

Exchange Act of 1934 has been impaired by recent

statutory, judicial, or regulatory changes; and (B)

the ability of shareholders to have proposals

relating to corporate practices and social issues

included as part of proxy statements.’’

23We received a total of 330 responses, including

172 responses from companies, and 149 from

individual and institutional shareholders. We also

heard from a handful of other types of institutions,

such as a proxy solicitation firm, an investor

relations consulting firm, and an economic

consulting firm. You may inspect and copy

completed Questionnaires in our Public Reference

Room, public file number S7–5–97.

24Rule 14a–8(c)(1).

25Rule 14a–8(c)(7) [17 CFR 240.14a–8(c)(7)].

26States likely do not currently have appropriated

procedures in place to accommodate such an

approach. We could retain rule 14a–8 for a period

of time, such as 3 or 6 years, to permit states to

Continued

proponent is otherwise ineligible to

submit a proposal. A company may, for

example, omit a shareholder proposal

that is not a proper matter for

shareholder action under state law,11 or

if the shareholder fails to demonstrate

that he or she continuously held $1000

worth of the company’s voting securities

for at least one year prior to submitting

a proposal.12

Between 300 and 400 companies

typically receive a total of about 900

shareholder proposals each year.13

Their subjects vary. A majority of the

proposals each year focus on corporate

governance matters—such as proposals

to repeal by laws establishing a

classified board of directors—and on

compensation matters—such as

proposals to eliminate pension plans for

non-employee directors. Social policy

issues, such as environmental matters or

the manufacture of tobacco products,

and other issues, such as extraordinary

business transactions, are also the focus

of a significant number of proposals

each year.

While we believe that the rule works

well overall, some shareholder and

corporate groups have expressed

concerns about certain aspects of the

rule and how it operates. Some

shareholders seek to broaden the subject

matter categories of proposals that

companies are required to include in

their proxy statements,14 focusing in

particular on a 1992 no-action letter

issued to Cracker Barrel Old Country

Store, Inc.15 In the Cracker Barrel letter,

the Division announced a new ‘‘bright

line’’ test for analysis of employmentrelated shareholder proposals that raise

significant social policy issues.16 Some

shareholders want that test changed.

Just as some shareholders have

expressed concern that the rule permits

companies to exclude important

proposals, some companies in turn

believe that the rule and current

interpretations of the rule compel them

to include too many proposals of little

relevance to their businesses.17 Some

companies suggest that the problem be

addressed by an increase in the amount

of stock a shareholder must hold to be

eligible to submit a proposal, or in the

percentage of the vote a proposal must

receive to qualify for re-submission in

future years.18 Among companies

responding to the Questionnaire, 40%

rank as a top reform goal reduction of

the types of proposals that they must

include in their proxy materials.

Companies also seek additional

guidance on their exercise of

discretionary voting authority 19 when a

shareholder notifies them of his or her

intention to present proposals without

invoking rule 14a–8.20 And they raise

other concerns about the operation of

the rules governing shareholder

proposals.21

Congress recently required that we

conduct a comprehensive study of the

shareholder proposal process, and

submit a report on the results of the

study by October 11, 1997.22 We began

the study in February 1997 with the

distribution of a Questionnaire on

shareholder proposals. While we did

not design the Questionnaire to obtain

a scientific sampling, it provided us

with some indication of the views of

interested shareholders and companies,

including those who do not typically

express their views to the

Commission.23 In addition, the

Commission staff has held discussions

with interested groups, and tapped its

own reservoir of experience and

knowledge about the rule.

Although we have considered some

fundamentally different approaches to

regulating the shareholder proposal

process, the proposals today reflect our

belief that most participants would

prefer that we maintain the current

system, with modifications. We request

your comments on whether our view is

correct, and on whether we should

consider some other approach in lieu of

the amendments proposed today.

We could, for instance, withdraw

entirely from the area, leaving it to each

state to adopt its own shareholder

proposal rule to govern what proposals

are appropriate to be included in

companies’ proxy materials. The

shareholder proposal process affects the

internal governance of corporations, and

it is state law—not federal securities

law—which is primarily concerned with

corporate governance matters. In its

current form, rule 14a–8 in fact defers

to state law on the central question of

whether a proposal is a proper matter

for shareholder action.24 The ‘‘ordinary

business’’ exclusion 25 is based in part

on state corporate law establishing

spheres of authority for the board of

directors on one hand, and the

company’s shareholders on the other.26
50684 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

adopt necessary procedures, if we decide to pursue

this approach.

27See Exchange Act Release No. 20091 (Aug. 16,

1983) (the ‘‘1983 Release’’) [48 FR 38218].

28One percent of shareholder respondents and

47% of company respondents favored, and 93% of

shareholders and 49% of companies disfavored,

allowing each company to set up its own

shareholder proposal process. Eighty-nine percent

of shareholders, and an equal percentage of

companies, disfavored replacing rule 14a–8 with

state-adopted systems, while only 8% of companies

and 5% of shareholders favored the approach.

29Sixty-three percent of company respondents

and 9% of shareholder respondents supported the

approach, while 34% of companies and 86% of

shareholders disfavored it.

30Seventy-three percent of company respondents

and 75% of shareholder respondents preferred the

existing system either without reform or with other

reforms. Only 6% of companies and 4% of

shareholders, preferred some other alternative.

31Fifty-four percent of shareholder respondents

and 47% of company respondents indicated that

they believed the Commission’s role would either

increase or stay the same. Twenty-six percent of

shareholders and 49% of companies indicated that

our role should be diminished, and only 1% of

shareholders and 8% of companies thought it

should be eliminated. Additionally, 64% of

shareholder respondents and 74% of companies

indicated their belief that the Commission’s role as

informal ‘‘referee’’ in the shareholder proposal

process is beneficial.

32 17 CFR 240.14a–8(c)(4).

33 17 CFR 240.14a–8(c)(5).

34 17 CFR 240.14a–8(c)(12).

35 15 U.S.C. 78m(d).

36 17 CFR 240.14a–4(c).

37The existing rule may be confusing for

shareholders who may have had little or no prior

experience dealing with our rules. In response to

the Questionnaire, 65% of individual shareholder

respondents indicated that they do not believe that

shareholders generally understand the current

shareholder proposal rule.

In 1982, the Commission proposed for

comment fundamental alternatives to

the existing shareholder proposal rule,

although it did not propose leaving the

matter up to the states. Under one

proposal, the Commission would have

adopted a supplemental rule to permit

a company and its shareholders to adopt

a plan providing their own alternative

procedures governing the process.

Another alternative would have

required companies to include in their

proxy materials all proposals that are

proper under state law and that do not

involve the election of directors, subject

to a numerical maximum. Most of those

who expressed views on the 1982

proposals rejected the proposed

alternatives, and the Commission

adopted revisions that left the rule

essentially in its current form.27

We believe that it is worthwhile to

consider whether there is a workable

alternative approach to the current rule

and process. Among other things, the

current rule in effect places the

Commission and its staff in the role of

informal arbiter between companies and

shareholders submitting a growing

variety of shareholder proposals. In

implementing rule 14a–8, the

Commission and its staff are sometimes

called upon to make difficult judgments

about the proper interpretation of

proposals and about the matters to

which they relate. Should these

judgments be made by institutions other

than the Commission, or by the

shareholders and companies

themselves? Your comments are

welcome on these matters.

Despite these considerations, the

results of the Questionnaire appear to

support the view that most participants

would prefer that we maintain the

current system, possibly with

modifications. The Questionnaire

sought views on a number of different

alternatives to the existing system, none

of which appeared to receive strong

support from respondents. For instance,

the Questionnaire asked about a system

like that discussed above where states

would be urged to adopt their own

shareholder proposal rules in place of

rule 14a–8; and about a system where

each company would be permitted to

adopt its own shareholder proposal rule,

subject to shareholder approval. Neither

shareholders nor companies appeared to

favor these approaches.28

The Questionnaire also asked about

another approach that would have

substantially restricted companies’

ability to exclude proposals, but would

have placed a numerical cap on the total

number of proposals that a company

would be required to include in its

proxy materials. The results were

mixed. Many companies supported the

approach, while most shareholders did

not.29

The Questionnaire also asked whether

respondents would prefer the existing

system, with possible modifications, to

some other alternative not identified in

the Questionnaire. Most preferred

retaining the existing system.30

The results also reflected some

support for the Commission’s continued

involvement in the shareholder

proposal process. Most shareholders

and a number of companies responding

to the Questionnaire indicated that the

Commission’s role should be expanded

or stay the same.31

III. Proposed Amendments

We view the various reforms

proposed today as a ‘‘package’’ designed

to address in a balanced manner the

sometimes conflicting concerns of

different participants. Your comments

should therefore focus not only on

whether we should adopt each proposal

viewed in isolation, but also on whether

we should adopt the proposal as part of

an overall package.

Part A below describes the proposed

Question & Answer format for revised

rule 14a–8, and clarifying language

changes. Part B addresses our proposal

to change the way the Division applies

rule 14a–8(c)(4) 32, which permits

companies to exclude proposals

furthering personal grievances or special

interests. Proposed amendments to rule

14a–8(c)(5) 33, the ‘‘relevance’’

exclusion, are explained in Part C. Part

D describes how we propose to modify

our interpretation of rule 14a–8(c)(7),

which permits companies to exclude

proposals relating to their ‘‘ordinary

business operations.’’ In Part E, we

describe proposed modifications to rule

14a–8(c)(12),34 which permits

companies to exclude proposals that

received less than specified percentages

of voting support on earlier

submissions.

Part F describes a proposed

mechanism to permit shareholders to

‘‘override’’ certain bases for excluding

proposals. Part G addresses a proposed

safe harbor from Section 13(d),35 and a

qualified exemption from the proxy

rules, for shareholders using the

proposed ‘‘override’’ described in Part

F. Part H describes proposed revisions

to rule 14a–4(c) 36 designed to establish

clearer guidelines for the exercise of

discretionary voting authority when a

company receives advance notice that a

shareholder intends to present a

proposal for a vote without invoking

rule 14a–8’s mechanism. Finally, in Part

I, we explain some other proposed

amendments to rules 14a–8 and 14a–5.

A. Plain-English, Question & Answer

Format

We propose to amend and recast Rule

14a–8 into a Question & Answer format

so that the hundreds of shareholders

and companies who refer to the rule

each year can more easily understand its

requirements.37 We request your

comments on whether the proposed

revisions on the whole would make the

rule easier to understand. Should we

instead retain the format and style of the

current rule?

Your comments should also address

each of the proposed revisions

individually. Except as specifically

noted here, or elsewhere in Section III

of this release, most of the proposed

language modifications are intended

solely to make the requirements easier

to understand and follow, and not to

result in substantive modifications.

Some proposed revisions described in

this Part A, however, are intended to

reflect current Division or Commission

interpretations of the rule. Your
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50685

38 17 CFR 240.14a–8(c)(2).

39See, e.g., Firestone (Dec. 8, 1987).

40 17 CFR 240.14a–8(c)(3).

41 17 CFR 240.14a–(c)(6).

42See, e.g., SCECorp (Dec. 20, 1995) (proposal

that third party fiduciary trustees amend

discretionary voting agreements).

43See the summary of the principal

considerations in the application of the ‘‘ordinary

business’’ exclusion in Part D below.

44 17 CFR 240.14a–8(c)(8).

45See, e.g., Cornerstone Properties, Inc. (Mar. 8,

1996) (proposal nominating proponent for election

to company’s board of directors).

46 17 CFR 240.14a–8(c)(9).

47See, e.g., General Electric Corporation (Jan. 28,

1997) (shareholder proposal requiring company to

modify stock option plans conflicted with company

proposal); Northern States Power Co. (July 25, 1995)

(shareholder proposal counter to management’s).

48 17 CFR 240–14a–8(c)(10).

49 1983 Release Consistent with that release, in

order to have been ‘‘substantially implemented,’’

the company must have actually taken steps to

implement the proposal. It is insufficient for the

company to have merely considered the proposal,

unless the proposal clearly seeks only consideration

by the company, and not necessarily

implementation.

50 17 CFR 240.14a–8(c)(11). See, e.g., Detroit

Edison (Jan. 16, 1996).

51See, e.g., Gannett Co. (Feb. 12, 1996).

comments should address whether each

proposed language modification makes

the rule more understandable, whether

some other revision would be more

appropriate, and whether the proposed

modification is consistent with current

interpretations.

Most of the current rule’s procedural

and eligibility requirements would

appear in the answers to Questions 2

through 8, and 12. We also proposed

revisions to some of the thirteen bases

upon which a company may rely for

excluding a proposal, which appear in

paragraph (c) of current rule 14a–8. The

bases would now appear in the answer

to Question 9.

In current paragraph (c)(1), permitting

exclusion of proposals that are not

proper subjects for shareholder action

under state law, the reference to the

‘‘laws of the issuer’s domicile’’ would

be replaced by a reference to ‘‘the laws

of the state of the company’s

incorporation,’’ which we have applied

to have the same meaning. We would

revise the note to the paragraph to

reflect the Division’s current practice of

assuming that a proposal drafted as a

recommendation or request is proper

unless the company demonstrates

otherwise.

We propose to make only minor

plain-English revisions to current

paragraph (c)(2),38 replacing the word

‘‘require’’ with the word ‘‘cause’’ and

moving to a ‘‘note’’ the portion of the

current paragraph discussing the

priority accorded domestic laws. We

request your comments on whether

some other formulation would make

this paragraph easier to understand and

follow, and whether the revisions

appear consistent with current

interpretations.39

Current paragraph (c)(3) 40 would be

amended to eliminate the reference to

‘‘regulations’’ because it is redundant.

We request your comments on whether

this revision would make the rule

clearer, or whether some other revisions

would make the rule easier to

understand and follow.

A proposed modification of the way

we administer current paragraph (c)(4),

and revisions to current paragraph

(c)(5), are described in Parts B and C

below.

As proposed, current paragraph

(c)(6) 41 would be revised to permit

exclusion ‘‘[i]f the company would lack

the power or authority to carry out the

proposal.’’ We believe that the revised

language is clearer, without altering the

meaning of the paragraph, which

currently permits exclusion of proposals

that are ‘‘beyond the registrant’s power

to effectuate.’’ We request your

comments on whether some other

revision would make the rule easier to

understand and follow, and whether the

revision appears consistent with current

interpretations of the rule.42

Current paragraph (c)(7) permits the

exclusion of proposals relating to a

company’s ‘‘ordinary business

operations.’’ We recognize that the term

‘‘ordinary business’’ is a legal term of art

that provides little indication of the

types of matters to which it refers. We

therefore propose to revise the

paragraph to permit exclusion ‘‘if the

proposal relates to specific business

decisions normally left to the discretion

of management.’’ The revised rule

would provide a list of examples, which

is not exclusive, including the way a

newspaper formats its stock tables,

whether a company charges an annual

fee for use of its credit card, the wages

a company pays its non-executive

employees, and the way a company

operates its dividend reinvestment plan.

For an investment company, an example

is a decision whether to invest in the

securities of a specific company.

These proposed revisions are

intended to make the ‘‘ordinary

business’ exclusion easier to

understand, not to modify current

interpretations. We request comments

on whether the examples of excludable

matters provided are helpful and

appropriate, and whether some other

examples than the ones proposed would

be more helpful. We also request your

comments on the degree to which the

proposed formulation would be

consistent with current

interpretations.43

We also request your comments on

whether some other revision would be

preferable. We could, for instance,

retain the existing language, with or

without additional guidance on its

meaning. An example of this approach

would be to revise current paragraph

(c)(7) to permit omission of a proposal

‘‘if it deals with a matter relating to the

conduct of the company’s ordinary

business operations (matters that should

be left to the discretion of the

company’s managers because of their

complexity, impracticability of

shareholder participation, or relative

insignificance).’’ Would this

formulation be preferable to the current

or proposed approach, and be consistent

with current interpretations of the rule?

The proposed revisions to current

paragraph (c)(8) 44 are designed to

reflect the current interpretation that the

rule applies only to proposals on

elections of individuals for membership

to, and removal from, the board of

directors.45 We propose to revise

current paragraph (c)(9) 46 to reflect the

Division’s long-standing interpretation

permitting omission of a shareholder

proposal if the company demonstrates

that its subject matter directly conflicts

with all or part of one of management’s

proposals.47 We request your comments

on whether some other revision would

make these rules easier to understand

and follow, and whether the revisions

appear consistent with current

interpretations of the rules.

Current paragraph (c)(10),48

permitting exclusion of ‘‘moot’’

proposals, would be revised to reflect

the Commission’s interpretation

permitting exclusion of proposals that

have been ‘‘substantially

implemented.’’ 49 Only minor stylistic

revisions would be made to paragraph

(c)(11) 50, which permits omission of

substantially duplicative proposals.

Although we significantly revised

current paragraph (c)912),51 the rule

restricting resubmission of certain

proposals, the only substantive

proposed modifications to the paragraph

are described in Part E below. We

request your comments on whether the

current rules are preferable, or whether

some other revision would make the

rules easier to understand and follow,

and whether the proposed revisions

appear consistent with current

interpretations of the rules.

Finally, the rule as proposed to be

revised would permit both companies

and shareholders to send their rule 14a–

8 submissions to the Commission by
50686 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

52Exchange Act Release No. 19135 (Oct. 14, 1982)

[47 FR 47420].

53 Id.

54See, e.g., Service Corporation Int’l (Feb. 28,

1997) (company pointed to proponent’s history of

harassment as indicative of a personal claim or

grievance); Nortek Inc. (Aug. 13, 1996) (staff did not

concur with company’s view that proposal

requesting recision of a bylaw was excludable

under rule 14a–8(c)(4)).

55Exchange Act Release No. 12999 (Nov. 22,

1976) [49 FR 52994].

56 Id.

57 1983 Release; see also Exchange Act Release

No. 19135 (Oct. 14, 1982).

58The proponent carries the burden of

demonstrating that the proposal is ‘‘otherwise

significantly related.’’ See Exchange Act Release

No. 19135 (Oct. 14, 1982).

59Atlantic Richfield Company (Jan. 28, 1997)

(proposal on company’s operations in Myanmar); La

Jolla Pharmaceutical Company (Feb. 18, 1997)

(proposal on use of human fetal tissue).

electronic mail. That option is not

currently available.

B. Personal Claim or Grievance

Exclusion: Rule 14a–8(c)(4)

We propose to modify the application

of rule 14a–8(c)(4), which permits

companies to exclude proposals relating

to ‘‘a personal claim or grievance against

the registrant or any other person, or if

it is designed to result in a benefit to the

proponent or to further a personal

interest, which benefit or interest is not

shared by the other security holders at

large.’’ The goal of paragraph (c)(4) is

straightforward: to screen out proposals

designed to further a personal grievance

or a special interest, since such

proposals are unlikely to further the

interests of all shareholders at large.52

The Commission has recognized,

however, that the exclusion is

‘‘[p]erhaps the most subjective provision

and definitely the most difficult for the

staff to administer’’ because it ‘‘requires

the staff to make determinations

essentially involving the motivation of

the proponent in submitting the

proposal.’’ 53

Application of the exclusion is

particularly difficult when the proposal

is neutral on its face, meaning that the

proposal itself does not by its terms

relate to a personal grievance or special

interest of the proponent. In those

situations, the Division must make

factual determinations, sometimes

involving the proponent’s or the

company’s credibility, based normally

on circumstantial evidence presented in

the parties’ submissions.54 In practice,

the Division has infrequently concurred

in the exclusion of a ‘‘neutral’’ proposal

under rule 14a–8(c)(4).

We propose to modify the way the

Division applies the rule so that the staff

would concur in the exclusion of a

proposal on this ground only if the

proposal (including any supporting

statement) on its face relates to a

personal grievance or special interest.

While a company would still be

required to make a submission under

rule 14a–8 if it intends to omit a

‘‘neutral’’ proposal under paragraph

(c)(4), the Division would automatically

express ‘‘no view,’’ rather than concur

or decline to concur in its exclusion.

We propose this new approach

because we recognize that the basic

policy underlying paragraph (c)(4) is

equally applicable to proposals that are

neutral on their face. The proposed

modification of the way we administer

the rule merely reflects our appreciation

that the Division’s ability to make the

necessary factual findings is limited in

the context of such a proposal.

Companies receiving ‘‘no view’’

responses could elect to omit the

proposal if they believe they possess

adequate factual records to demonstrate

the personal grievance or interest.

However, the Commission and its staff

would not make that determination.

While this is a change in the

Division’s administration of the rule, we

nevertheless request your comments on

whether we should implement this

change, including whether it would lead

to abuse by either shareholders or

companies.

C. Rule 14a–8(c)(5): The ‘‘Relevance’’

Exclusion

We propose to narrow and clarify the

operation of rule 14a–8(c)(5), which is

often called the ‘‘relevance’’ exclusion

because its primary purpose is to screen

out proposals that are of little or no

economic relevance to the company and

its business. Currently, the rule permits

companies to exclude a proposal

relating to

operations which account for less than 5

percent of the registrant’s total assets at the

end of its most recent fiscal year, and for less

than 5 percent of its net earnings and gross

sales for its most recent fiscal year, and is not

otherwise significantly related to the

registrant’s business.

Since its adoption, the rule has

suffered from the inherently subjective

nature of the ‘‘otherwise significantly

related’’ standard. The Commission has

considered more objective tests. In 1976,

for example, the Commission

considered a purely economic test for

determining a proposal’s relevance, but

rejected the idea largely out of

recognition that some matters, such as

cumulative voting rights or the

ratification of auditors, may be

important to the company despite the

unavailability of a quantifiable

economic value.55 The Commission

nonetheless recognized that there were

‘‘circumstances in which economic data

may indicate a valid basis for omitting

a proposal under this provision.’’ 56

Realizing that the rule continued to

suffer from imprecision, the

Commission revised it in 1983 to add

the specific 5% economic test and to

modify the reference to ‘‘significantly

related’’ matters.57 Thus, if the subject

of the proposal represented less than

5% of total assets, gross sales, and net

earnings, the proponent could avoid

exclusion of a proposal by

demonstrating that the proposal is

‘‘otherwise significantly related’’ to the

company’s business.58

Largely as a result of the subjectivity

of the ‘‘otherwise significantly related’’

language, that portion of the rule

frequently overshadows the 5%

economic standard. Thus, even if a

proposal represents less than 5% of the

company’s total assets, net earnings, and

gross sales, the proponent often can

satisfy the ‘‘otherwise significantly

related’’ part to defeat the company’s

reliance on the rule. In the period

between September 30, 1996, and the

date of this release, only two companies

successfully invoked the rule to exclude

proposals.59

The rule as revised would apply a

purely economic standard. The

exception for proposals that are

‘‘otherwise significantly related’’ would

be deleted. A company would be

permitted to exclude proposals relating

to matters involving the purchase or sale

of services or products that represent

$10 million or less in gross revenue or

total costs, whichever is appropriate, for

the company’s most recently completed

fiscal year. However, an economic

threshold lower than $10 million would

apply if 3% of the company’s revenue

or total assets (whichever is higher), for

its most recently completed fiscal year,

results in a number lower than $10

million.

For instance, assume a proposal

relates to a single retail store operated

by a company with multiple stores, and

the store generated $4 million in gross

revenue for the company’ most recently

completed fiscal year. Because $4

million is less than $10 million, the

company would be permitted to exclude

the proposal unless the exception in the

second part of the rule applies.

However, because the company’s gross

revenue worldwide for the last

completed fiscal year was $500 million,

and its total assets totalled $400 million,

the exception would not apply in this

example. Three percent of the

company’s gross revenue for the

relevant period (the higher number)
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50687

60See Section II above. In addition, of those

responding to the Questionnaire, 59% of

shareholders, and 54% of companies, ranked either

simplification of the shareholder proposal process,

or reduction of the cost and time required to

participate, as a top goal of reform.

61The Questionnaire asked about a reformulation

that would permit companies to exclude proposals

representing less than 5% of assets, earnings, and

sales, unless the proposal relates to corporate

governance. Forty-one percent of shareholder

respondents and 23% of companies indicated that

they would favor such an approach.

amounts to $15 million—a number

greater than $10 million. If it resulted in

a lower number, that number would be

the applicable threshold.

In response to the Questionnaire,

companies stated that rule 14a–8

operates in a manner that requires them

to include too many proposals of little

or no relevance to their businesses.60

We believe that the proposed revisions

address this concern by establishing

clearer, more predictable criteria for

excluding proposals. The proposed

revisions should also make it easier for

companies to exclude economically

insignificant proposals. The approach

would appear to balance the various

competing concerns, since under the

proposed revision companies may also

be unable to exclude some proposals—

with relatively greater economic

significance—that they are currently

permitted to omit under the existing 5%

test.

There would be four safeguards to

prevent the revised rule from precluding

proposals that may be significant to the

company despite a low quantifiable

value. First, the exclusion would apply

only to proposals relating to quantifiable

matters, such as operations in a specific

foreign country, a specific product line,

or a specific retail store or set of stores.

It would not apply to proposals where

quantification is impracticable or

unreliable, such as proposals on

cumulative voting, or the ratification of

auditors.

Second, the economic threshold in

the proposed rule has been reduced

significantly from the threshold in

current rule 14a–8(c)(5) to counterbalance the elimination of the

‘‘otherwise significantly related’’

portion of the current rule. The

economic thresholds that would apply

under the proposed rule would be the

lesser of either $10 million in gross

revenues or total costs (which is

appropriate), or 3% of gross revenues or

total assets (whichever is higher).

We recognize that $10 million may be

economically significant for some

smaller companies. That is why we

propose the alternative 3% test which

would make it more difficult to exclude

proposals at smaller companies. The

alternatives test could operate only to

reduce the $10 million threshold, not to

increase the threshold.

Third, the exclusion would apply

only to proposals relating to the

purchase or sale of products and

services. This qualification is designed

to help ensure that the exclusion is

applied only to distinct operational

matters relating to the company’s

business activities, and not to matters

involving the company’s internal

governance, such as voting procedures

for the board of directors.

Finally, we believe that any

inflexibility that may result from

adoption of a purely economic standard

would be mitigated by the adoption of

the ‘‘override’’ mechanism described in

Part F below. That mechanism would

permit a proponent who obtained

sufficient shareholder support to

override a company’s use of current

paragraph (c)(5) if he or she believed

that it permitted exclusion of an

important proposal.

We request your comments on

whether we should consider some other

modification of current paragraph (c)(5).

For example, instead of eliminating the

‘‘otherwise significantly related’’

portion of the current paragraph, should

we attempt to clarify and narrow that

portion of the rule? Should it refer

instead to specific types of proposals

that would not be subject to the

exclusion, such as corporate governance

proposals and/or proposals relating to

extraordinary transactions? 61 Should

we revise the language to make it less

subjective, to refer for instance to

proposals where the substantiative

action in the resolution relates to

matters that under the applicable

corporate law can be effectuated only by

shareholders or the board of directors,

or both acting together? Or should we

instead retain the ‘‘otherwise

significantly related’’ language?

We also request your comments on

whether the qualification that the

exclusion apply only to matters relating

to purchase or sale of goods or services

is necessary to ensure that the exclusion

is not overly broad? Would some other

formulation work more effectively, such

as limiting application of the exclusion

to matters relating to a company’s assets

or earnings?

In addition, we solicit your comments

on whether economic thresholds other

than $10 million in gross revenues or

total costs, or 3% of gross revenues or

total assets, might be more appropriate.

Should there be only one threshold,

such as the $10 million threshold, or the

3% threshold, or is it appropriate to

have alternative thresholds, as

proposed? The 3% test is intended to

apply to relatively small companies

where the fixed dollar test might be too

high. Is that safeguard unnecessary if

the fixed dollar threshold is set at a

number as low as $10 million? The

alternative 3% percent test would

operate only to reduce the $10 million

threshold, not to increase the threshold.

We request your comments on whether

the alternative test should also operate

to increase the fixed dollar threshold.

Your comments should also address

whether the proposed $10 million

threshold is too low, so that it would

fail to permit omission of economically

insignificant proposals. If so, should the

threshold be higher, such as $15 million

or $25 million? Or would the rule as

proposed permit companies to exclude

too many proposals? If that is so, should

the threshold be lower, such as $1

million, or $5 million? Similarly, should

we adopt a percentage threshold lower

than the proposed 3%, such as 1% or

.5%, or a higher one, such as 5% or 8%?

The proposed $10 million threshold

would be based on total costs or gross

revenues, whichever is appropriate.

Cost appears to be an appropriate

measure for some matters, such as

supply contracts, while revenue appears

more appropriate for others, such as

retail operations. Companies would not

be permitted to choose between the two

measures. For the percentage portion of

the exclusion, we believe that a test

based alternatively on gross revenues or

total assets is warranted because it

would apply in the most consistent and

meaningful manner among different

companies and industries compared to

other possible measures. While

revenues should in most cases be a

consistent measure of size, assets may

be a better measure for some types of

companies, such as banks.

Should we instead adopt some other

basis, or series of bases, for measuring

the fixed dollar amount, such as pre-tax

income, total assets, gross profit and/or

net earnings? Instead of basing the

amount on an alternative between two

measures—such as revenues or cost—

should we base it on only one measure,

such as only cost, revenues, or assets?

Similarly, we request your comments on

whether the percentage portion of the

test should be based on a measure other

than gross revenues or total assets.

Should we instead adopt some other

basis, or series of bases, such as pre-tax

income, gross profit and/or net

earnings?
50688 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

62Exchange Act Release No. 4950 (Oct. 9, 1953)

[18 FR 6646].

63Exchange Act Release No. 12598 (Jul. 7, 1976)

[41 FR 29982].

64Exchange Act Release No. 12999 (Nov. 22,

1976) [41 FR 52994].

65 Id.

66See Pacific Telesis Group (Feb. 2, 1989).

67See Philip Morris Companies, Inc. (Feb. 13,

1990).

68See Reebok Int’l Ltd. (Mar. 16, 1992).

69See Transamerica Corp. (Jan. 10, 1990).

70See Cracker Barrel.

71Shortly after its announcement, the New York

City Employees Retirement System unsuccessfully

challenged the Commission’s authority to adopt the

position. See New York City Employee’s Retirement

System v. SEC, 843 F. Supp. 858, rev’d 45 F.3d 7

(2d Cir. 1995). The Amalgamated Clothing and

Textiles Union successfully challenged Wal-Mart’s

decision to exclude an affirmative action proposal

after the Division concurred that the proposal could

be excluded. See Amalgamated Clothing and

Textile Workers Union v. Wal-Mart Stores, Inc., 821

F. Supp. 877 (S.D.N.Y. 1993). During the last proxy

season, we declined proponents’ requests that we

review three Division no-action responses

implicating the interpretation, and concerning

companies’ affirmative action policies and

practices. Commissioner Wallman dissented, and

issued a dissenting statement.

72 In response to the Questionnaire, 91% of

companies favored excluding employment-related

shareholder proposals raising significant social

policy issues under the Cracker Barrel

interpretation. Eighty-six percent of shareholders

thought such proposals should be included.

73See, e.g., Marion Merrell Dow, Inc. (Mar. 26,

1993) (proposal on the scope of employees’

responsibilities); Eastman Kodak Company (Jan. 30,

1991) (procedures for employee-management

communications); International Business Machines

Corporation (Dec. 28, 1995) (proposal requesting

amendment of terms of employee benefit plans).

74See, e.g., Allied Signal, Inc. (Jan. 8, 1997)

(proposal on company’s Maquiladora operations).

In response to the proponents’ request for

Commission review, we declined to review this noaction response in light of the ongoing

Congressionally-mandated study of the shareholder

proposal process.

75See, e.g., W.R. Grace & Co. (Feb. 29, 1996)

(proposal on matters such as employee training,

quality control).

D. The Interpretation of Rule 14a–

8(c)(7): The ‘‘Ordinary Business’’

Exclusion

When adopted in 1953, the ‘‘ordinary

business’’ exclusion had a fairly

straightforward mission: to ‘‘relieve the

management of the necessity of

including in its proxy material security

holder proposals which relate to matters

falling within the province of

management.’’ 62

That mission became more

complicated with the emergence of

proposals focusing on social policy

issues beginning in the late 1960’s. As

drafted, the rule provided no guidance

on how to analyze proposals relating

simultaneously to both an ‘‘ordinary

business’’ matter and a significant social

policy issue.

In 1976, the Commission considered

revisions to the ‘‘ordinary business’’

exclusion, hoping to fashion more

workable language distinguishing

between ‘‘mundane’’ business matters

and ‘‘important’’ ones.63 It declined to

adopt the new language after

commentators expressed concern that

the new language might be overly

restrictive and difficult to apply.64 In

lieu of adopting revisions, the

Commission stated that it would apply

the exclusion in a ‘‘somewhat more

flexible manner.’’ 65

In applying the ‘‘ordinary business’’

exclusion to proposals relating to social

policy issues, the Division applies the

most well-reasoned standards possible,

given the complexity of the task. From

time to time, in light of experience

dealing with proposals in particular

subject areas, it adjusts its approach.

Over the years, for instance, the

Division has in several instances

reversed its position on the

excludability of proposals involving

plant closings,66 the manufacture of

tobacco products,67 executive

compensation,68 and golden

parachutes.69

Another of these interpretive

adjustments is a subject of today’s

proposals. In a 1992 no-action letter

issued to the Cracker Barrel Old Country

Stores, Inc.,70 the Division announced

that

the fact that a shareholder proposal

concerning a company’s employment

policies and practices for the general

workforce is tied to a social issue will no

longer be viewed as removing the proposal

from the realm of ordinary business

operations of the registrant. Rather,

determinations with respect to any such

proposals are properly governed by the

employment-based nature of the proposal.

As a basis for the interpretive shift,

the Division explained in the letter that

[n]otwithstanding the general view that

employment matters concerning the

workforce of the company are excludable as

matters involving the conduct of day-to-day

business, exceptions have been made in some

cases where a proponent based an

employment-related proposal on ‘social

policy’ concerns. In recent years, however,

the line between includable and excludable

employment-related proposals has been

increasingly difficult to draw. The

distinctions recognized by the staff are

characterized by many as tenuous, without

substance and effectively nullifying the

application of the ordinary business

exclusion to employment-related proposals.

The Cracker Barrel interpretation has

been controversial since it was

announced.71 While the reasons for

adopting the Cracker Barrel

interpretation continue to have some

validity, as well as significant support

in the corporate community,72 we

believe that reversal of the position is

warranted in light of the broader

package of reforms proposed today.

Reversal will require companies to

include proposals in their proxy

materials that some shareholders believe

are important to companies and fellow

shareholders. In place of the 1992

position, the Division would return to

its approach to such proposals

prevailing before it adopted the

position. That is, employment-related

proposals focusing on significant social

policy issues could not automatically be

excluded under the ‘‘ordinary business’’

exclusion.

Under this proposal, the ‘‘bright line’’

approach for employment-related

proposals established by the Cracker

Barrel position would be replaced by

the case-by-case analysis that prevailed

previously. Return to a case-by-case

approach should redress the concerns of

shareholders interested in submitting

for a vote by fellow shareholders

employment-related proposals raising

significant social issues. While this

would be a change in the Commission’s

interpretation of the rule, we

nonetheless request your comments on

whether we should reverse the Cracker

Barrel interpretation. Your comments

should focus on the proposed

interpretive change independently of

other proposals as well as part of the

overall package of reforms proposed

today.

In framing responses, commenters

should bear in mind that the Cracker

Barrel position relates only to

employment-related proposals raising

significant social policy issues. Reversal

of the position would not affect the

Division’s analysis of any other category

of proposals under the exclusion, such

as proposals on general business

operations. Also, the Division would

continue to concur in the exclusion of

straightforward employment proposals

not raising significant social issues.73

Despite return to a case-by-case,

analytical approach, some types of

proposals raising social policy issues

may continue to raise difficult

interpretive questions. For instance,

reversal of the Cracker Barrel position

would not automatically result in the

inclusion of proposals focusing on wage

and other issues for companies’

operations in the Maquiladora region of

Mexico,74 or on ‘‘workplace

practices.’’ 75

Finally, we believe that it would be

useful to summarize the principal

considerations in the Division’s

application of the ‘‘ordinary business’’

exclusion. These considerations would

continue to impact our reasoning even
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50689

76See Testimony of Chairman Armstrong,

Hearings on SEC Enforcement problems Before a

Subcommittee of the Senate Committee on Banking

and Currency, 85th Cong., 1st Sess., pt. 1, at 118

(1957); see also Exchange Act Rel. No. 12999 (Nov.

22, 1976).

77See, e.g., Reebok Int’l Ltd. (Mar. 16, 1992).

78Exchange Act Release No. 12999 (Nov. 22,

1976).

79See, e.g., Capital Cities/ABC, Inc. (Apr. 4, 1991)

(proposal requested detailed information on the

composition of the company’s workforce and other

matters); Templeton Dragon Fund/Newgate

Management Associates (Jun. 11, 1997) (proposal

sought to establish the interval between repurchases

and the amount of the initial repurchase offer for

a fund’s repurchase program); Burlington Northern

Santa Fe Corp. (Jan. 22, 1997) (proposal on

development of new technology for railroad braking

systems); see also, e.g., Roosevelt v. Dupont, 958

F.2d 416, 427 (D.C. Cir. 1992) (proposal sought to

impose earlier timetable for cessation of CFC

production).

80See Section II above.

81For a discussion of the eligibility criteria, see

Part I.2. below.

82See American Bar Association Interpretive

Letter (avail. June 24, 1993) (quotation in footnote

2 of incoming letter describing staff’s position, for

tabulation purposes, on 14a–8(c)(12) resubmission

thresholds; the letter sought staff interpretive advice

on the proper treatment of broker non-votes and

abstentions for purposes of Rule 16b–3).

83 In Exchange Act Release No. 30849 (June 24,

1992) [57 FR 29564], at footnote 67, the

Commission described abstentions and brokerdealer non-votes as follows:

In two instances, a shareholder will be deemed

present at the meeting for quorum purposes, but

will be deemed not to have voted on a particular

matter. First, the shareholder may specifically

abstain from the vote by registering an abstention

vote. Second, a nominee holding shares for

beneficial owners [e.g., a broker-dealer] may have

voted on certain matters at the meeting pursuant to

discretionary authority or instructions from the

beneficial owners, but with respect to other matters

may not have received instructions from the

Continued

if the proposals are adopted. The

general underlying policy of this

exclusion is consistent with the policy

of most state corporate laws: to confine

the resolution of ordinary business

problems to management and the board

of directors since it is impracticable for

shareholders to decide how to solve

such problems.76 Although the policy is

based on state law, it is not completely

guided by it, due in part to an absence

of state authority on many of the issues

we are called upon to address.

The policy underlying the rule

includes two central considerations.

The first relates to the subject matter of

the proposal. Certain tasks are so

fundamental to management’s ability to

run a company on a day-to-day basis

that they could not, as a practical

matter, be subject to direct shareholder

oversight. Examples include the

management of the workforce, such as

the hiring, promotion, and termination

of employees, decisions on production

quality and quantity, and the retention

of suppliers. However, proposals

relating to such matters but focusing on

significant social policy issues generally

would not be considered to be

excludable, because such issues

typically fall outside the scope of

management’s prerogative.77

The second consideration relates to

the degree to which the proposal seeks

to ‘‘micro management’’ the company by

probing too deeply into ‘‘matters of a

complex nature that shareholders, as a

group, would not be qualified to make

an informed judgment on, due to their

lack of business expertise and lack of

intimate knowledge of the [company’s]

business.’’78 This consideration may

come into play in a number of

circumstances, such as where the

proposal seeks intricate detail, or seeks

to impose specific time-frames or

methods for implementing complex

policies.79

E. Rule 14a–8(c)(12): The Resubmission

Thresholds

We propose to increase the

resubmission thresholds under rule

14a–8(c)(12). If a proposal fails to

receive a specified level of support, that

rule permits a company to exclude a

proposal focusing on substantially the

same subject matter for a three-year

period. In order to avoid possible

exclusion, a proposal must receive at

least 3% of the vote on its first

submission, 6% on the second, and 10%

on the third.

We propose to raise the thresholds to

6% on the first submission, 15% on the

second submission, and 30% on the

third. At least for the time frame

contemplated by the rule, we believe

that a proposal that has not achieved

these levels of support has been fairly

tested and stands no significant chance

of obtaining the level of voting support

required for approval. We propose to

increase the second and third thresholds

by relatively larger amounts because the

proposal will have had two or three

years to generate support.

The amendments would also respond

to companies’ concerns that they receive

too many proposals of little or no

relevance to their businesses.80 In

addition, we believe that the

amendments are appropriate to counterbalance other proposals that would

expand the range of proposals

companies must include in their proxy

materials, such as the proposed reversal

of the Cracker Barrel position, and the

‘‘override’’ mechanism described in Part

F below.

The theory of this approach is

consistent with that of the proposed

‘‘override’’ mechanism: in some

circumstances, shareholders may be the

best judge of which rule 14a–8

proposals deserve space on the

company’s proxy card. Even with the

proposed revisions, paragraph (c)(12)

will continue to permit shareholders an

opportunity to see otherwise proper

proposals at least once, and to decide

for themselves which are sufficiently

important and relevant to see on the

proxy card a second, third, or fourth

time. In this respect, we believe that the

proposed approach is preferable to other

suggested alternatives, such as

increasing the eligibility criteria for

initial submissions,81 or further

restricting the types of proposals that

may appear in proxy materials. We

request your comments whether this

approach is preferable to alternatives,

such as increasing eligibility criteria.

We request your comments on

whether the thresholds should remain at

their current levels, or whether they

should be amended to amounts lower or

higher than those proposed. For

instance, instead of increasing the first

threshold of 6%, we could increase it to

5%, or to 8% or 10%. The second

threshold instead could be increased to

10% or 20%, and the third to 15% or

40%. Alternatively, we could increase

only one or two of the thresholds. To

illustrate, we could increase only the

second and third thresholds, for

instance to 15% and 30%, but leave the

first at its current level of 3%.

We also request your comments on

whether the size of the thresholds

should vary in inverse relationship to

the size of the company. Under this

alternative, the percentage vote that a

proposal must receive could be higher

or lower depending on the company’s

total assets, market capitalization,

revenues, profits, earnings, or a

combination of those factors. A smaller

percentage would be sufficient for a

larger company, and a larger percentage

for a smaller company. This approach

would account for the fact that

obtaining a certain percentage of

support may become more difficult as

the size of the shareholder base

increases. If you believe that the

thresholds should vary, your comments

should specify the factors that should be

considered in distinguishing between

companies.

Finally paragraph (c)(12) prescribes a

‘‘votes cast’’ standard for determining

whether a proposal received sufficient

voting support in previous years to bar

its omission in the current year. Under

this standard, which has been

characterized as the ‘‘most favorable to

shareholder proponents,82 abstentions

and broker non-votes 83 are excluded
50690 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

beneficial owner and [therefore] may not exercise

discretionary voting power. Such unvoted shares

are termed ‘‘non-votes.’’

84 In the last quarter of 1996, institutional

investment managers filing Form 13F [17 CFR

249.325] reported holdings in 5,993 listed equity

issues. For 69% (4,166) issues, institutional

holdings are sufficiently high that an investor

would need to contact only one holder to

communicate with at least 3% of the corporation’s

equity ownership.

85Companies are required to provide this

information in the annual report under rule 5–20

of Regulation S–X. The information should also be

available in the company’s annual report on Form

10–K [17 CFR 249.310].

86See discussion in Part G below of proposed

amendments to rules 14a–2 and 13d–5.

from the denominator comprised of the

total number of votes cast ‘‘For’’ and

‘‘Against’’ a given proposal. This figure

in turn is divided into the total number

of favorable votes cast to obtain the

requisite percentage.

The Commission believes that the

staff should continue to apply this

method of vote counting for (c)(12)

purposes, regardless of whether the

existing thresholds are increased.

Comment is sought on whether a

different method should be applied; for

example, including abstentions and/or

broker non-votes as votes cast in the

denominator, and/or treating

abstentions and/or broker non-votes as

votes against a proposal. We note that

treating abstentions and/or non-votes as

votes cast would result in the largest

denominator, requiring the most ‘‘For’’

votes to surmount the (c)(12) thresholds.

F. Proposed Override Mechanism

We propose to revise rule 14a–8 to

permit a shareholder proponent to

override the exclusions under rules

14a–8(c) (5) and (7) if he or she

demonstrates that at least 3% of the

company’s outstanding voting shares

support the submission of the proposal

for a shareholder vote. Current rule 14a–

8 does not include any mechanism for

overriding exclusions currently listed in

any paragraph of rule 14a–8.

The ‘‘override’’ mechanism would

broaden the spectrum of proposals that

may be included in companies’ proxy

materials where a certain percentage of

the shareholder body believes that all

shareholders should have an

opportunity to express a view on the

proposal. The proposed mechanism

would accordingly provide shareholders

an opportunity to decide for themselves

which proposals are sufficiently

important and relevant to all

shareholders—and, therefore, to the

company—to merit space in the

company’s proxy materials.

As an example, companies often rely

on current paragraph (c)(7) in

attempting to exclude shareholder

proposals on a variety of issues. Under

the proposed ‘‘override,’’ a shareholder

obtaining the required level of support

could avoid exclusion under that

paragraph.

The requirement that the proponent

obtain the support of a certain

percentage of his or her fellow

shareholders should serve two

purposes. First, the percentage should

be high enough to ensure that the

proposals receiving that level of support

are likely to be sufficiently relevant and

important to the company to deserve a

space in its proxy materials. Second, the

percentage should not be so high as to

make the ‘‘override’’ unattainable. We

believe that 3% would strike the right

balance, but we request your comments

on whether the percentage should be

higher, such as 5% or 8%, or lower,

such as 1% or 2%. Your comments,

preferably supported by empirical

information, should address the degree

to which a 3% support level is

achievable.

As proposed, the shareholder who

submitted the proposal could include

his or her own shares in calculating the

3% necessary to accomplish an

override. We recognize that, under this

approach, a proponent who holds 3% of

a company’s outstanding voting shares

could accomplish an override without

having to obtain the endorsement of

other shareholders. We request your

comments on whether alternatively the

rule should preclude consideration of

the proponent’s own shares in

calculating the percentage required for

an override.

We request your comments on

whether we should adopt an alternative

mechanism for establishing a

shareholder override in addition to, or

in place of, the 3% requirement. We

could, for instance, permit an override

by a fixed number of shareholders, such

as 200, or 500 holders, either in place

of the 3% threshold, or as an alternative

test. If so, should it be permissible for

the supporters to be members of the

same organization, such as the same

shareholder organization?

We also request your comments on

whether the level of support a

shareholder must obtain should vary in

inverse relationship to the size of the

company. That is, the percentage of

share ownership that a proposal must

receive could be higher or lower

depending on the company’s total

assets, market capitalization, revenues,

profits, earnings , income or a

combination of those factors. A smaller

percentage would be sufficient for a

larger company, and a larger percentage

for a smaller company. This approach

would account for the fact that

obtaining a certain percentage of

support may become more difficult as

the size of the shareholder base

increases. If you believe that the

thresholds should vary, your comments

should specify the factors that should be

considered in distinguishing between

companies.

One method for obtaining the

required support likely could be to

enlist the support of institutions holding

large blocks of the company’s voting

shares. We currently do not have

conclusive information on the extent to

which institutions would actually

support inclusion of social proposals,

and we request your comments on this

question. Our review of institutional

filings on form 13F indicates that in

many cases the support of 3% could be

achieved by enlisting the support of

only one institutional holder,84

although it did not indicate how many

of those holders would as a practical

matter likely be in a position to engage

in shareholder proposal activity.

In calculating the percentage, a

proponent could rely on the number of

voting shares outstanding reported in

the company’s annual report to

shareholders distributed for the prior

year’s annual meeting.85 Proponents

taking advantage of the ‘‘override’’

would be responsible for demonstrating

to the company, not less than 120

calendar days before the date of the

company’s proxy statement released to

shareholders in connection with the

previous year’s annual meeting, that

their proposals had received the

endorsement by the holders of 3% of the

company’s shares entitled to be voted

on the proposal at the meeting. That

would include, from each supporter:

(i) His or her written statement supporting

the inclusion of the proposal in the

company’s proxy materials for a specific

meeting of shareholders. The statement must

be executed and dated as of a date no earlier

than the date of the company’s annual

meeting for the prior year. If the company did

not hold a meeting the prior year, the

statement must be dated no more than one

year before the scheduled date of the meeting

for which the proposal is submitted. Of

course, a shareholder’s support of an

‘‘override’’ effort would not include proxy

authority with respect to the vote on the

proposal if it is ultimately placed in the

company’s proxy materials;86 and

(ii) A written statement from the record

holder of the supporter’s shares, specifying

the number of shares that the supporter held

as of the date of the supporter’s statement

described in (i) of this section.

It would be the proponent’s

responsibility to collect this evidence

from the supporters and provide it to

the company in an organized,
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50691

87See rule 14a–8(d)[17 CFR 240.14a–8(d)].

88Under current rule 14a–8(d), shareholder

proposals must be submitted to the company no

later than 120 calendar days before the date that the

company mailed it proxy materials to shareholders

the prior year. Because the company need not make

its filing until 80 calendar days before the filing of

definitive proxy materials, the current rule in most

instances assures companies approximately 40 days

to consider and respond to the receipt of a proposal.

89Under current rule 14a–8(a)(1), if a proponent

fails to hold his or her securities continuously

through the date of the meeting, the company may

preclude him or her from including another

proposal in its proxy materials for two calendar

years.

understandable form. We request your

comments on these procedures,

including the requirement that

proponents submit the written evidence

no later than 120 calendar days before

the date that the company first mailed

its proxy materials to shareholders for

the prior year’s annual meeting. Would

a deadline set at 60 or 90 calendar days,

or 150 or 180 calendar days, be more

appropriate?

The 120-day deadline has the benefit

of simplicity because it would track the

deadline that currently applies to the

submission of shareholder proposals to

companies, which companies are

already required to publish in their

proxy materials. The 120-day deadline

would also ensure that companies learn

of a potential override sufficiently

before they print and mail their proxies

to review the proponent’s written

support and to discuss any questions on

its sufficiency.

Under current rule 14a–8’s timing

requirements, there is little change that

a proponent would learn whether a

company intends to omit, and may

properly omit, his or her proposal before

invoking the override mechanism.

Under paragraph (d) of current rule 14a–

8, a company intending to omit a

proposal is not required to submit its

reasons to the Commission until 80

calendar days before the date the

company files its definitive copies of its

proxy statement and form of proxy.87

That, of course, is after the proposed

120-day deadline for submitting

‘‘override’’ material to companies. We

accordingly propose to amend rule 14a–

8’s timing requirements to provide a

proponent a chance to learn the

Division’s views on whether the

proposal is properly excludable before

undertaking an override effort.

Under current rule 14a–8(d), the 80-

day deadline applies to companies’

submissions with the Commission

without regard to when the company

receives a copy of the shareholder

proposal. Unless the company submits

early, the Division’s views on the

excludability of the proposal may not be

available until weeks before the date of

the meeting of shareholders. We

propose to amend current paragraph (d)

to require companies to make their

submissions no later than 40 calendar

days after receiving a proposal. Thus,

under proposed Question 12, a company

would be required to submit its reasons

to the Commission no later than 40

calendar days after the date that it

receives a shareholder proposal for

inclusion in its proxy materials, and no

later than 80 calendar days before it files

its definitive proxy statement and form

of proxy with the Commission. Under

this approach, a proponent who submits

his or her proposal to the company early

enough would likely learn whether, in

the Division’s view, the proposal may be

excluded before needing to commence

an override effort.

We request your comments on

whether it is necessary for proponents

to learn of the Division’s position before

undertaking an override effort. We also

request your comments on whether the

proposed modification of rule 14a–8’s

timing requirements would provide

proponents with an adequate

opportunity to learn of the Division’s

response prior to commencing an

override effort. Finally, would the

proposed modification provide

companies with adequate time to

consider shareholder proposals, and to

prepare and submit a rule 14a–8 filing

with the Commission? 88 Should

companies be allowed more time, such

as 50 or 60 days, or less time, such as

30 days?

As proposed, written support for an

override effort must be executed and

dated no earlier than the date of the

company’s annual meeting for the

previous year. The purpose of this

requirement is to ensure that support for

an override is sought and provided as of

a date reasonably close to the date of the

meeting at which the proposal is to be

presented. It is also designed to prevent

a proponent from using the same

override more than once. We request

your comments on whether proponents

should have more time, such as 18

months, to collect override evidence, or

less time, such as 9 months. We also

request your comments on whether we

should consider some other approach,

such as stating that override evidence

may be used only once, without placing

a limitation on how old it can be.

The proposed share ownership

requirements for supporting an override

would be more lenient than the current

eligibility requirements for actually

submitting a proposal to a company.

Paragraph (a) of current rule 14a–8

requires that the actual proponent have

held his or her shares for at least one

year before becoming eligible to submit

a proposal to a company. One purpose

of the one-year requirement is to curtail

abuse of the rule by requiring that those

who put the company and other

shareholders to the expense of including

a proposal in its proxy materials have

had a continuous investment interest in

the company. While we do not propose

a one-year ownership requirement for

supporting the placement of a proposal

in a company’s proxy materials under

the override mechanism, we request

your comments on whether we should

adopt one. If so, your comments should

address whether we should choose one

year, or instead a shorter ownership

period for the purposes of the override,

such as 6 months, or a longer period,

such as 2 years.

In addition, paragraph (a) of the

current rule requires that an actual

proponent state that he or she intends

to hold his or her shares at least through

the date of the meeting. Largely out of

concern that the fiduciary duties of

institutional holders would preclude

them from making such a commitment,

we do not propose that those supporting

an override promise to hold their shares

through the date of the meeting. We

request your comments, however, on

whether we should adopt such a

requirement, and on whether it would,

if adopted, interfere with fiduciary

duties. Alternatively, should we require

a supporter to state that he or she

intends, as of the date of the statement,

to hold his or her shares through the

date of the meeting, without attaching a

penalty to a sale of the shares before the

meeting date? 89

As proposed, the override mechanism

would limit each shareholder to

endorsement of no more than one

proposal sponsored by another

shareholder. That would not, however,

affect the shareholder’s eligibility to

submit a proposal of his or her own. The

purpose of the limit would be to place

a limitation on the number of proposals

that a group of shareholders could force

a company to include in its proxy

materials. We request your comments

on whether the ‘‘one endorsement’’

limit should be more liberal, permitting

each shareholder to endorse two or

three proposals for each company. Or

should it be more restrictive, permitting

each shareholder to either submit one

proposal, or to endorse one proposal, at

each company? Under that approach, a

shareholder who had endorsed a

proposal would be disqualified from

submitting his or her own proposal.

We view the proposed override as a

supplemental, rather than a primary,
50692 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

90 15 U.S.C. 78m(d).

91 15 U.S.C. 78n(a).

92 17 CFR 240.14a–1(l)(1).

93 17 CFR 240.14a–9.

94 17 CFR 240.14a–2(b)(1).

95See Exchange Act Release No. 31326 (Oct. 16,

1992) [57 FR 48276].

96 17 CFR 240.14a–4(c)(4).

97See, e.g., United Mine Workers of America v.

Pittston Company, Fed. Sec. L. Rep. ¶ 94,946

(D.D.C. Nov. 24, 1989); Larkin v. Baltimore

Bancorp, 769 F. Supp. 919, 925 (D.Md. 1991). See

also Union of Needletrades, Industrial and Textile

Employees (‘‘UNITE’’) et al. v. The May Department

Stores Company, 97 Civ. 3120 (SDNY).

98See, e.g., Larkin v. Baltimore Bancorp, 769 F.

Supp. 919, 925 (D.Md. 1991).

99See Section II above.

100See Idaho Power Company (Mar. 13, 1996) and

Borg-Warner Security Corporation (Mar. 14, 1996).

method for including proposals in

companies’ proxy materials.

Accordingly, we are not proposing any

special mechanisms for requiring

companies to provide shareholder lists

or other shareholder information to

proponents seeking to obtain support for

an override. We request your comments

on whether the rule should include any

such mechanisms.

G. Safe Harbor Under Section 13(d);

Qualified Exemption From Proxy Rules

To address concerns that a

proponent’s efforts to gather shareholder

support to avail himself or herself of the

override might be deterred by concerns

about triggering filing and other

obligations under Section 13(d) 90 or

14(a) 91 of the Exchange Act, we also

propose a new safe harbor from the

13(d) ‘‘group’’ beneficial ownership

reporting requirements, and a new

exemption from the proxy rules in rule

14a–2.

Under current rules, there may be a

concern that shareholders cooperating

in an ‘‘override’’ effort, who beneficially

own in aggregate more than 5 percent of

the company’s equity securities, might

be required to file a Schedule 13D or

13G if deemed to have formed a ‘‘group’’

under rule 13d–5. Similarly, there may

be a concern that the shareholder

proponents and others assisting them in

seeking support also could trigger

obligations under the proxy rules if their

cooperation involves any ‘‘solicitation’’

as defined in rule 14a–1(l)(1).92 The

relief afforded by the safe harbor would

be limited to support for the inclusion

of the proposal in the company’s proxy

materials for a shareholder vote. It

would not extend to agreements or

arrangements on how shareholders

would ultimately vote if the proposal

appears in the company’s proxy

materials. Proposed rule 13d–5(b)(3)

would provide that:

Notwithstanding paragraph (b)(1) of this

section, a group formed among the beneficial

owners of a class of equity securities solely

by an understanding, arrangement, or

agreement that a shareholder proposal should

be placed in a registrant’s proxy materials for

a shareholder vote, for the purpose of using

the ‘‘override’’ mechanism provided in

§ 240.14a–8(j) (Question 10), shall be deemed

not to have acquired any equity securities

beneficially owned by the other members of

the group for the purposes of Section 13(d)(1)

of the Act (15 U.S.C. 78m); provided,

however, that such understanding,

arrangement or agreement does not relate to

how the holders will vote on the proposal if

it is ultimately placed in the registrant’s

proxy materials.

We request your comments on

whether this relief is necessary in order

to enable shareholders effectively to

make use of the override, and, if so,

whether it will serve that purpose

adequately. We also request your

comments on whether efforts to obtain

an override for certain types of

proposals (e.g., those affecting control of

the company) should be afforded

protection under the safe harbor, and

more generally on whether the proposed

safe harbor is overly broad.

Proposed new rule 14a–2(b)(2) would

provide an exemption from compliance

with all proxy rules except rule 14a–9,93

for any solicitation made for the sole purpose

of gathering support for placing a shareholder

proposal in a registrant’s proxy materials

pursuant the ‘‘override’’ mechanism

provided in § 240.14a–8(j) (Question 10);

provided that such solicitation does not seek

proxy authority with respect to the vote on

the proposal if it is ultimately placed in the

registrant’s proxy materials;

We request your comments on

whether we should adopt proposed new

rule 14a–2(b)(2), including whether it

would provide adequate relief for

shareholders concerned that their

participation in an ‘‘override’’ effort

could amount to a ‘‘solicitation,’’ or

whether the proposed relief is overly

broad. We also request your comments

on whether, and the extent to which, the

restrictions set forth in current rule 14a–

2(b)(1) (i)–(x) 94 should also apply to

limit the persons who may use the

proposed new exemption. Alternatively,

we have previously made clear that

proponents of rule 14a–8 proposals may

use the exemption provided by rule

14a–2(b)(1);95 instead of adopting the

proposed new rule, should we make

clear that proponents seeking to use the

proposed override mechanism may avail

themselves of that exemption?

H. Rule 14a–4: Discretionary Voting

Authority

If a shareholder submits a proposal

under rule 14a–8 to be included in the

company’s proxy materials, but the

company properly excludes the

proposal, rule 14a–4(c)(4) 96 permits the

company to exercise discretionary

voting authority to vote uninstructed

proxies against that proposal if the

shareholder chooses an alternative route

for its presentation to a vote. The

proponent may, for instance, intend to

present the proposal from the floor of

the company’s annual meeting, or solicit

proxy votes independently by

distributing its own proxy statement

and form of proxy.

Rule 14a–4 does not, however, clearly

address the exercise of discretionary

voting authority if the shareholder

chooses not to use rule 14a–8’s

procedures for placing a proposal in the

company’s proxy materials. This may

occur if the proponent notifies the

company of his or her intention to

present the proposal from the floor of

the meeting, or commences his or her

own proxy solicitation, without ever

invoking rule 14a–8’s procedures.

The availability of discretionary

voting authority on a non-14a–8

proposal has been the subject of

litigation and attendant uncertainty.97

Current rule 14a–4(c)(1) permits a

company to exercise voting authority on

proposals that the company did not

know of a ‘‘reasonable time’’ before the

meeting. The ‘‘reasonable time’’

standard has been the source of some

uncertainty when a company is notified

of a shareholder proposal shortly before

its meeting is scheduled to take place.98

In response to the Questionnaire,

companies indicated that they seek

clearer ground rules and the avoidance

of potential delay and expense when

they are notified of possible proposals

after they have begun to print or even

mail proxy materials to shareholders.99

We accordingly propose to amend rule

14a–4(c) in part to clarify when a

company may exercise discretionary

voting authority on a shareholder

proposal where the proponent has not

invoked rule 14a–8’s procedures.

Last year, the Division provided noaction advice on the ability of a

company to exercise discretionary

voting authority under rule 14a–4(c)(1)

to vote on a matter to be raised at an

annual meeting, when the company

received adequate advance notice of the

proposal.100 Under those no-action

letters, a company that receives

adequate advance notice of a non-rule

14a–8 proposal—such as under its

advance notice bylaw—nevertheless

may preserve its discretionary voting

authority by disclosing in its proxy

materials the nature of any proposal it

has been advised may be presented, and
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50693

101Because the company’s mailing date for the

previous year’s annual meeting may not be

available to shareholders, we propose to amend rule

14a–5(e) [17 CFR 240.14a–5(e)] to require

companies to publish in their proxy materials the

date by which notice would have to be received.

This date will by definition be 75 days after the date

by which shareholder proposals must normally be

received under rule 14a–8 (Question 5). See Part I.4

below.

102Rule 14a–4(a)(3) currently provides that ‘‘[n]o

reference need be made * * * to proposals as to

which discretionary authority is conferred pursuant

to [rule 14a–4(c)].’’

103Recently, for example, some companies have

included shareholder proposals in supplemental

proxy materials with revised forms of proxy, which

they mailed shortly before the date that the annual

meeting is scheduled to take place. Even if the

supplemental proxy contains all material

information necessary to make an informed voting

decision, we understand that the beneficial holders

may not receive the supplemental materials, or may

receive them too late for meaningful review and

Continued

the manner in which the company

intends to exercise its discretion. Under

the no-action letters, the company loses

its voting discretion, however, once the

proponent commences a proxy

solicitation and solicits the percentage

of holders required to carry the

proposal.

Of course, the Division’s no-action

letters provide only informal advice,

and we recognize that the position

outlined in those letters has not

eliminated all uncertainty in situations

where a company has advance

knowledge of a potential proxy contest.

For instance, if the shareholder

proponent files preliminary proxy

materials after the company has filed its

own proxy statement, or even after the

company has mailed its definitive proxy

statement and form of proxy to

shareholders, the company may be

placed in a dilemma of either including

the shareholder’s proposal on its proxy

card, or risking the delay and expense

of a last-minute resolicitation. That is

because the company may not know

whether the shareholder intends to

begin to solicit proxies independently

by circulating his/her own proxy card,

along with the definitive version of his

or her proxy statement, or how many

shareholders will be solicited if such a

solicitation is actually launched.

To address these uncertainties, we

propose to amend paragraph (c)(1) of

rule 14a–4, and to add new paragraph

(c)(2), to provide clearer guidelines in

these circumstances. The proposed

revisions to paragraph (c)(1) would

replace the ‘‘reasonable time’’ standard

with a clear date after which notice of

a possible shareholder solicitation

would not be deemed adequate for

purposes of proposed new paragraph

(c)(2).

Revised paragraph (c)(1) would allow

a company voting discretion where ‘‘the

registrant did not have notice of the

matter more than 45 days before the

date on which the registrant first mailed

its proxy materials for the prior year’s

annual meeting.’’ 101 This approach will

not only provide clearer guidelines for

shareholders and companies, but also

benefit investors by helping to ensure

that companies are notified of proposals

sufficiently in advance of the annual

meeting to provide shareholders a

meaningful opportunity to review

related disclosures in the proxy

statement.

We recognize that the laws of some

states authorize bylaw provisions

requiring shareholders to provide

advance notice of proposals that they

intend to present at a meeting of

shareholders. We do not intend to

interfere with the operation of state law

authorized definitions of advance

notice. Accordingly, an advance notice

bylaw provision ordinarily would

override the 45-day period under rule

14a–4 as proposed to be amended,

resulting in either a longer or shorter

notice period. For example, if a

company properly adopts a bylaw

provision requiring advance notice 60

days before the previous year’s mailing

date, that date would apply instead of

the date specified by the proposed

paragraph 14a–4(c)(1).

We request your comments on

whether it would be more appropriate to

establish a shorter period than 45 days,

such as 30 days or 15 days, or a longer

period, such as 60 or 90 days for revised

paragraph 14a–4(c)(1). We understand

that some companies begin printing

their proxy materials well in advance of

the mailing date. We request your

comments on whether the 45-day period

is adequate to accommodate printing

schedules.

Proposed new paragraph 14a–4(c)(2)

would address a company’s ability to

exercise discretionary voting authority

after it has received timely notice of a

non-14a–8 proposal for the purposes of

paragraph (c)(1). The new rule would

permit the exercise of such authority if

the proxy materials include: (i) In the

proxy statement, a discussion of the

nature of the matters and how the

company intends to exercise its

discretion on each matter, and (ii) on

the proxy card, a cross-reference to the

discussion in the proxy statement and a

box allowing shareholders to withhold

discretionary authority from

management to vote on the same

matter(s).

We believe that the proposed

framework would benefit both

shareholders and companies by

establishing clearer and more

predictable ground rules. The proposed

framework also would provide

shareholders with some control over the

company’s discretionary authority to

vote their shares on matters for which

the company received adequate notice.

Under current rules, a company is not

required to provide shareholders an

opportunity to withhold discretionary

authority on such matters where such

authority properly can be exercised.102

Under proposed new rule 14a–4(c)(2),

the company would be required to

provide shareholders who execute and

return proxies an opportunity to

withhold discretionary authority, albeit

only on those matters for which it

received adequate notice and which it

described in its proxy statement. Should

we provide shareholders greater latitude

to ‘‘grant’’ discretionary voting

authority, or to ‘‘abstain,’’ in addition to

the ability to ‘‘withhold’’?

We request your comments on the

proposed revisions to paragraph (c)(1),

and the adoption of proposed new

paragraph (c)(2). Would some other

approach be more effective? For

example, should we require companies

to place proposals in their proxy

materials if the proponent commences a

formal proxy solicitation, and solicits

the number of shares necessary to carry

the proposal? What impact, if any,

might the proposed revision(s) have on

the conduct of proxy contests generally?

Would the proposed amendments have

the effect of unduly discouraging

insurgent solicitations? Your comments

should address the proposed revisions

individually, together with the other

proposed changes to rule 14a–4(c), and

the broader package of reforms proposed

today.

Although they would provide clearer

guidance on the exercise of

discretionary voting authority under

rule 14a–4(c), the proposed

amendments would not relieve

companies of their obligation under rule

14a–9, the anti-fraud rule. Under that

rule, companies must provide

shareholders with sufficient information

to make informed voting decisions as

well as a meaningful opportunity to

review the information. If the proponent

solicits a large number of his or her

fellow shareholders, for instance, a

company may elect to provide

shareholders with an opportunity to

vote for or against a shareholder’s

proposal. In this and similar

circumstances, the company must

remain mindful of its obligations under

rule 14a–9.103
50694 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

consideration of whether to change or formulate

new voting decisions. Timing considerations often

depend on the facts and circumstances of

individual cases, and the obligation to provide a

meaningful opportunity rests with the company.

104Rule 14a–6 [17 CFR 240.14a–6] addresses

when a company must file its proxy materials in

definitive form, and when it must file in

preliminary form.

105Pacific Gas and Electric Company (Jan. 21,

1997).

106See 1983 Release.

107Of course, consistent with current practice, a

company would not have to follow these

procedures if the deficiency cannot be remedied,

such as if the proponent fails to submit a proposal

by the company’s proper deadline.

108 17 CFR 240.14a–8(a)(1).

109 17 CFR 240.14a–8(a)(4).

110 17 CFR 240.14a–8(a)(2). See, e.g., CoBancorp

Inc. (Feb. 22, 1996); Archer-Daniels-Midland (July

29, 1996).

111See Part H above.

112Current rule 14a–8(a)(3)(i) [17 CFR 240.1a–

8(a)(3)(i)], and proposed rule 14a–8 (Question 5),

require the company to adjust the deadline for

submitting proposals if the date of the annual

meeting is delayed or advanced by more than 30

calender days.

113 17 CFR 249.308a. The new information, if

applicable, would be disclosed under Item 5 of

Form 10–Q or 10–QSB (‘‘Other Information’’).

114 17 CFR 249.308b.

115For investment companies, the proposal

would require the notification to appear in

shareholder reports under 30D–1 [17 CFR 270.30d–

1] of the Investment Company Act.

Finally, during the past proxy season,

the Division permitted several

companies to file proxy materials in

definitive form despite prior notification

of a non-14a–8 shareholder proposal, so

long as they disclosed the nature of the

proposal and how they intended to

exercise discretionary voting authority if

the proposal were to be presented.104 In

light of the proposed amendments to

rule 14a–4, we would reverse that

informal position, so that companies

receiving notice of a non-rule 14a–8

proposal before the filing of their proxy

materials would henceforth be required

to file their materials in preliminary

form, subject to staff review. We request

your comments on this proposed

reversal.

I. Other Proposed Modifications

We propose a few other modifications

to rules 14a–8 and 14a–5:

1. The answer to Question 1 of revised

rule 14a–8 would define a ‘‘proposal’’ as

a request that the company or its board

of directors take an action. The

definition reflects our belief that a

proposal that seeks no specific action,

but merely purports to express

shareholders’ views, is inconsistent

with the purposes of rule 14a–8 and

may be excluded from companies’ proxy

materials. The Division, for instance,

declined to concur in the exclusion of

a ‘‘proposal’’ that shareholders express

their dissatisfaction with the company’s

earlier endorsement of a specific

legislative initiative.105 Under the

proposed rule, the Division would reach

the opposite result, because the

proposal did not request that the

company take an action. We request

your comment on whether this or some

other approach may be preferable.

2. Rule 14a–8(a)(1) currently requires

that a shareholder have held for one

year the lesser of $1,000 in market

value, or 1%, of the company’s voting

shares, at the time he or she submits a

proposal. We propose adjusting the

$1,000 requirement to account for

inflation since first adopted in 1983.106

The amended rule, which would appear

in the answer to Question 2, would

require continuous ownership of $2,000

in market value of the company’s voting

shares. While the actual inflation

adjustment from the date of adoption to

today would increase the existing

requirement by approximately $600, we

propose $2,000 to account for future

inflation, and because it will be easier

to use for calculations. We sought to

avoid increasing the threshold further

out of concern that a more significant

increase could restrict access to

companies’ proxy materials by smaller

shareholders, who equally with other

holders have a strong interest in

maintaining channels of communication

with management and fellow

shareholders. We request your

comments on whether we should adopt

a higher number such as $3,000, $5,000

or $10,000, or a lower number such as

$1,500.

We also request your comments on

whether we should modify or eliminate

the one-year continuous ownership

period. One purpose of the requirement

is to curtail abuse of the rule by

requiring that those who put the

company and other shareholders to the

expense of including a proposal in

proxy materials have had a continuous

investment interest in the company. We

could, for example, permit shareholders

more flexibility to submit proposals

earlier, by adopting a shorter period,

such as 6 months, or less flexibility, by

adopting a longer period, such as 18

months. Alternatively, we could

maintain the current one-year period,

but provide that relatively larger

holders, such as holders of 3% or 6%

of the outstanding voting shares, would

be eligible to submit proposals without

regard to a continuous ownership

period.

3. The answer to Question 6 in

revised rule 14a–8 would describe the

procedures a company must follow if it

intends to omit a proposal on grounds

that the proponent is ineligible or

otherwise failed to comply with the

rule’s procedures. As proposed, the

answer states that a company may omit

a proposal on the grounds only after it

has first noticed the proponent of the

deficiency and gives the proponent 14

calendar days to remedy the

deficiency.107 The proposed language

largely adopts the procedures set forth

in current paragraph (a)(1) 108 and

(a)(4) 109 of the current rule. However,

the proposed 14-day period in which a

shareholder must respond is shorter

than the 21 calendar days allowed by

current paragraph (a)(1), and by some of

the Division’s response letters under

paragraph (a)(2).110 We believe that the

shorter period will be sufficient for

shareholder proponents, and will help

to streamline the rule’s operation by

establishing a single ‘‘shareholder

response period’’ that would apply

under all circumstances that may arise

under the rule. The shorter response

time should expedite the timing of a

company’s filings with the Commission

and, in turn, the Commission’s

responses. We request your comments

on whether we should adopt some other

mechanism, including whether the

proposed time for responding should be

shorter, such as 10 calendar days, or

longer, such as 21 calendar days.

4. Rule 14a–5(e) currently requires a

company to disclose the deadline for

submitting proposals to be included in

proxy materials for the next year’s

annual meeting. We propose to revise

the rule to require companies also to

disclose the date after which proposals

submitted outside the framework of rule

14a–8 are considered untimely for the

purposes of rule 14a–4(c)(1).111 This is

because shareholders may not be aware

of all the information necessary to

calculate the date for themselves.

In addition, current paragraph (e)

requires companies to notify

shareholders of a new meeting date, and

deadline for submitting proposals, if the

date of the next annual meeting is

subsequently advanced by more than 30

days, or delayed by more than 90 days.

For the sake of consistency with other

rules,112 we propose to revise the rule

to require notification of changes in the

meeting date and each of the disclosed

dates if the meeting date is delayed or

advanced more than 30 calendar days.

Finally, the current rule contemplates

notification by ‘‘any means calculated to

so inform’’ shareholders. We propose to

require that such notification of date

changes appear in the company’s

earliest quarterly report on Form

10–Q 113 or 10–QSB,114 if practicable.115

We request your comments on whether

notice in a company’s quarterly report is
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50695

116 17 CFR 249.308. The information would be

included under Item 5 of that form.

117 17 CFR 240.14a–8(e).

118 15 U.S.C. 78m, 78n & 78u.

119 15 U.S.C. 80a–1 et seq.

120We propose related amendments to rule 14a–

5 to require a company to identify in its proxy

statement a date relating to its potential exercise of

discretionary voting authority.

likely to be effective, and whether we

should require notification in some

document other than the company’s

quarterly report, such as Form 8–K.116

5. Current rule 14a–8(e) 117 provides a

mechanism for a shareholder to obtain

staff review of a company’s statement in

opposition to a shareholder proposal

appearing in its proxy materials. In our

experience, only a handful of

shareholders make use of the

mechanism each year, and the staff

review rarely results in modifications to

the company’s statement. In most

instances, the shareholder’s objection

highlight matters that do not constitute

materially false or misleading

statements for the purpose of rule 14a–

9. Accordingly, we propose to eliminate

the mechanism provided by current rule

14a–8(e). We request your comments on

this proposal.

. Current rule 14a–8(a)(2) provides

that a proposal may be presented at a

meeting either by the proponent or by

his or her representative qualified under

state law to present the proposal. It has

been our long-standing interpretation of

this rule that both the proponent and his

or her representative must follow any

procedures for attending the meeting

and/or presenting the proposal that are

authorized or required by state law (e.g.,

possession of a valid proxy). A

proponent who holds his or her shares

in street name may have to obtain from

the record holder (usually a broker or

bank) a proxy to permit attendance at

the meeting and/or presentation of the

proposal. A proponent’s representative

may have to obtain a proxy from the

proponent. A particular state’s law, of

course, may not authorize or require any

such procedures, or the company may

elect not to adopt or enforce them where

permissible under applicable state law.

We added the following advisory in

the answer to Question 8 of the

proposed rule: ‘‘Whether you attend the

meeting yourself or send a qualified

representative to the meeting in your

place, you should make sure that you,

or your representative, follow any

applicable procedures that are proper

under state law for appearing at the

meeting and/or presenting your

proposal.’’ We request your comments

on this revision, including whether our

long-standing interpretation on this

subject is appropriate.

IV. Request for Comments

We request your comments on the

proposals, other matters that may have

an impact on the proposals, and your

suggestions for additional changes. In

addition to the requests for your

comments on each of the specific

proposals, we would like to hear your

comments on the proposals viewed as a

package of reforms, whether they fairly

balance participants’ sometimes

conflicting concerns, and whether they

would bring an overall improvement to

the process whereby shareholders

present proposals to fellow

shareholders.

You should consider whether the

Commission should instead adopt some

fundamentally different approach to the

shareholder proposal system. Some

alternatives, such as encouraging each

company to adopt its own shareholder

proposal rule and process, would

largely remove the Commission from its

role of ‘‘arbiter’’ pursuant to the staff’s

role in issuing response letters. If you

believe that we should adopt an

alternative approach, your comments

should explain the approach in some

detail, including the role that the

Commission should play.

You may also consider the purposes

of the rule, and the degree to which the

rule and the proposed amendments

serve those purposes. We believe that

the purpose of the rule is to ensure

proper disclosure and enhance investor

confidence in the securities markets by

promoting proposals raising significant

issues that are relevant to the company

and its business. You may want to

consider whether this is the proper

purpose of the rule, and if so, what

types of proposals are the most relevant

and important.

We also request comments on the

matters discussed in Sections V through

VIII below, including our initial

regulatory flexibility analysis, our

preliminary analysis of costs and

benefits and effects on competition, and

our obligations under the Paperwork

Reduction Act, and the Small Business

Regulatory Enforcement Fairness Act of

1996.

If you wish to submit written

comments, you should file three copies

with Jonathan G. Katz, Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW,. Washington, D.C.

20549. Comments may also be

submitted electronically at the following

e-mail address: rule-comments@sec.gov.

Comment letters should refer to File No.

S7–25–97; this file number should be

included on the subject line if e-mail is

used. All comments received will be

available for public inspection and

copying in the Commission’s public

reference room at the same address.

Electronically submitted comments will

be posted on the Commission’s Internet

web site (http://www.sec.gov).

V. Initial Regulatory Flexibility

Analysis

We have prepared this Initial

Regulatory Flexibility Analysis under 5

U.S.C. 603 concerning the proposed

amendments to rules 14a–8, 14a–2, 14a–

4, 14a–5, and 13d–5. We will consider

your written comments in the

preparation of a final analysis. The

purpose of the amendments is to

streamline the operation of the rule, and

address concerns raised by both

shareholder and corporate participants.

We propose the amendments pursuant

to Sections 13, 14, and 23 of the

Exchange Act 118 and Section 20(a) of

the Investment Company Act of 1940 119

(‘‘Investment Company Act’’).

The amendments focus primarily on

rule 14a–8, which requires companies to

include shareholder proposals in their

proxy materials, subject to certain bases

for excluding them. We propose to

revise the rule into a more

understandable Question & Answer

format; make it easier for shareholders

to include a broader range of proposals

in companies’ proxy materials; and

provide companies with clearer

guidelines, and more flexibility to

exclude economically insignificant

proposals and proposals that lack

significant shareholder support.

The proposed amendments to rules

14a–2 and 13d–5 are ancillary to the

amendments to rule 14a–8. Proposed

new 14a–2(b)(2) would provide an

exemption from the proxy rules for

shareholders attempting to comply with

a proposed new ‘‘override’’ mechanism

in rule 14a–8. The override would

permit holders of 3% of the company’s

voting shares to override the operation

of two bases for excluding proposals.

Proposed new rule 13d–5 would

provide relief for such holders from

filing obligations under Section 13(d) of

the Exchange Act.

We also propose to amend rule 14a–

4 to further clarify when a company

may exercise discretionary voting

authority on proposals submitted

outside the rubric of rule 14a–8.120 We

believe that the revisions would help to

mitigate the uncertainty that some

companies experience when presented

with such proposals. The revisions

should also decrease a company’s

likelihood of incurring the delay and

expense of rescheduling its meeting of
50696 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

121 17 CFR 240.0–10.

122 17 CFR 240.0–10.

123This average is based on respondents reporting

costs greater than zero. Reported costs ranged from

a low of $200 to a high of nearly $900,000. The

median cost was $10,000.

shareholders, or of resoliciting its

shareholders.

The proposed amendments would

affect small entities that are required to

file proxy materials under the Exchange

Act or the Investment Company Act.

Exchange Act rule 0–10 defines ‘‘small

business’’ as a company whose total

assets on the last day of its most recent

fiscal year were $5 million or less.121

Investment Company Act rule 0–10

defines ‘‘small entity’’ as an investment

company with net assets of $50 million

or less as of that date.122 We are

currently aware of approximately 1,000

reporting companies that are not

investment companies with assets of $5

million or less. There are approximately

800 investment companies that satisfy

the ‘‘small entity’’ definition. Only

approximately one-third of all

investment companies have shareholder

meetings and file proxy materials

annually. Therefore, we believe

approximately 250 small entity

investment companies may be affected

by the proposals.

Not all companies conducting a proxy

solicitation receive shareholder

proposals each year. Furthermore, a

company that receives a proposal has no

obligation to make a submission under

rule 14a–8 unless it intends to exclude

the proposal from its proxy materials. In

the period from September 30, 1996 to

today, we received submissions from a

total of 245 companies, and only 6 were

‘‘small businesses.’’

Some of the proposed amendments to

rule 14a–8 may broaden the range of

proposals that companies must include

in their proxy materials, requiring

companies to include more proposals in

their proxy materials than they have in

the past. This includes the proposal to

reverse the Cracker Barrel position on

employment-related shareholder

proposals raising social policy issues,

and the proposal to permit the holders

of 3% of the company’s voting shares to

override the exclusions under

paragraphs (5) and (7) under Question 9

of the proposed rule. This year, the

Division received approximately 30

submissions, none by ‘‘small business,’’

involving employment-related proposals

tied to social issues. It is likely,

however, that reversal of the Cracker

Barrel position, if implemented, would

lead to an increase in the number of

proposals included in proxy materials

each year. We request your comments

on the potential impact on the number

of employment-related proposals

submitted to companies each year.

Because rule 14a–8 currently does not

include a mechanism like the proposed

override, there is no reliable way to

predict how often shareholders would

in the future take advantage of the

override to force companies to include

proposals that they would otherwise be

permitted to exclude. We request your

comments and supporting empirical

data on the potential impact of the

proposed override on the total number

of proposals companies are required to

include in their proxy materials.

Other proposed revisions, however,

would enhance companies’ ability to

exclude certain proposals that are

economically insignificant to them. As

revised, paragraph (5) under proposed

Question 9 would permit companies to

exclude proposals on matters relating to

the lesser of $10 million in total costs

or gross revenues (whichever is

appropriate), or 3% of total assets or

gross revenues (whichever is higher).

Because companies’ submissions under

current rule 14a–8 have not addressed

these criteria, we presently have no

reliable way to estimate their future

impact on the number of proposals

companies are required to include in

their proxy materials. Unlike the current

paragraph (c)(5), however, the proposed

revision would enable companies to

include companies to exclude proposals

based solely on economic criteria,

which may permit companies to

exclude proposals that they are not

permitted to exclude under the current

rule. On the other hand, because the

proposed economic thresholds are lower

than the current thresholds, if the

revisions are adopted, companies may

be unable to exclude some proposals

that they are currently permitted to

exclude. We request your comments,

preferably supported by empirical data,

on the nature and magnitude of the

potential impact of this proposed

revision.

We expect the proposed increase in

the resubmission thresholds under

Question 9, paragraph (12), to cause a

decrease in the total number of

proposals companies must include in

their proxy materials each year. Current

rule 14a–8(c)(12) permits a company to

exclude a proposal focusing on

substantially the same subject matter as

a prior proposal that failed to receive at

least 3% of the vote on its first

submission, 6% on the second, and 10%

percent on the third. We propose to

increase the thresholds to 6%, 15%, and

30%, respectively. However, because

companies’ submissions under current

rule 14a–8 have not addressed these

criteria, we presently do not have a

reliable way to estimate the future

impact on the number of proposals

companies are required to include in

their proxy materials. We nonetheless

expect that the proposed revisions

would increase the number of proposals

that companies are permitted to

exclude; a proposal would have to

receive a higher percentage of the votes

in order to avoid exclusion if the

revisions are adopted. We request your

comments, preferably supported by

empirical data, on the potential impact

of this proposal.

Rule 14a–8(a)(4) permits companies to

exclude proposals relating to personal

grievances or special interests. We

propose to modify our administration of

the rule to express ‘‘no view’’ if the

proposal does not on its face relate to

the grievance or interest. We request

your comments on the potential impact

of this proposal on the number of

proposals companies are required to

include in their proxy materials each

year.

Your comments should address

whether the proposals will on balance

significantly alter the overall number of

proposals companies are required to

include in their proxy materials.

We do not have empirical data

demonstrating the marginal cost of

including an additional shareholder

proposal in companies’ proxy materials.

However, question 14 of the

Questionnaire asked each company

respondent how much money on

average it spends on printing costs (plus

any directly related costs, such as

additional postage and tabulation

expenses) to include shareholder

proposals in its proxy materials. While

individual responses may have

accounted for the printing of more than

one proposal, the average cost reported

by 67 companies was $49,563.123 We

expect that any additional printing costs

are lower for small entities, since small

entities typically should have to print

fewer copies of their proxy materials

because they have fewer shareholders.

We request your comments, preferably

supported by empirical data, on the

incremental cost that ‘‘small

businesses’’ would incur if required to

include additional proposals in their

proxy materials.

None of the proposed amendments

should increase the time or burden of

preparing individual submissions under

rule 14a–8. Our proposal to reformat the

rule into a more understandable

Question & Answer format should help

decrease the time and expense incurred

by both shareholders and companies
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50697

124This average is based on respondents reporting

costs greater than zero. Reported costs ranged from

a low of $10 to a high of approximately $1,200,000.

The median cost was $10,000.

attempting to comply with its

provisions. Companies frequently

consult with legal counsel in preparing

submissions under rule 14a–8. The

rule’s added clarity may obviate the

need for a shareholder or company to

consult with counsel, depending on the

issues raised by the submission. Under

some circumstances, however,

companies’ submissions must include

supporting opinions of counsel.

In addition, because a company that

includes a proposal is not required to

make a submission under rule 14a–8,

any costs of including an additional

proposal should be offset, at least

partially, by not having to make a rule

14a–8 submission. Under rule 14a–8, a

company is not required to make a

submission to the Commission unless it

intends to exclude the proposal from its

proxy materials. Therefore, a company

would save any costs associated with

the submission if it decides to include

the proposal.

We do not have empirical data

demonstrating how much it costs

companies to consider and prepare an

individual submission under rule 14a–

8. We do not believe, however, that the

cost is likely to vary depending on the

size of the company. That is, the cost to

a small entity is likely to be the same

as the cost to a larger entity. Question

13 of the Questionnaire asked

respondent companies how much

money they spend on average each year

determining whether to include or

exclude shareholder proposals and

following Commission procedures in

connection with any proposal that it

wishes to exclude (including internal

costs as well as any outside legal and

other fees). While responses may have

accounted for consideration of more

than one proposal, the costs reported by

80 companies averaged $36,603.124

The proposed amendments to rule

14a–4 should favorably affect

companies, including ‘‘small business,’’

because they would provide clearer

ground rules when a shareholder

presents a proposal without invoking

rule 14a–8. We do not have empirical

information on the number of ‘‘small

businesses’’ that receive non-rule 14a–8

proposals each year, since non-14a–8

proposals do not necessarily lead to a

submission to the Commission. We

therefore request your comments on the

number of ‘‘small businesses’’ that may

be affected by the proposed

amendments to rule 14a–4.

To the extent they receive such

proposals, we believe that the proposed

amendments to rule 14a–4 would

favorably affect ‘‘small businesses’’ by

reducing uncertainly, and decreasing

the likelihood that the company would

have to incur the delay and expense of

rescheduling its annual meeting, or

resoliciting its shareholders. We request

your comments and empirical data,

however, on any costs or other burdens

that these amendments may impose on

small entities.

Under the proposed revisions to rule

14a–4, a company wishing to preserve

discretionary voting authority on certain

possible proposals may be required to

include in its proxy materials an

additional discussion among other

things describing the proposals. It may

also be required to include an additional

box on its proxy card permitting

shareholders to withhold discretionary

voting authority on the proposals if they

are raised. We request your comments

and empirical data on any incremental

costs resulting from these proposed

requirements. Automatic Data

Processing, Inc. informed the staff that

tabulation of an additional box on the

proxy card permitting shareholders to

withhold discretionary authority would

likely cause no increase in the cost of its

tabulation services. Daniels Financial

Printing informed the staff that in most

cases adding up to three-fourths of a

page in the proxy statement would not

increase the cost to the company. That

is because up to an extra three-fourths

of a page can normally be incorporated

without increasing the page length by

reformatting the document. Daniels

Financial estimated that adding more

than three-fourths of a page could

increase costs by about $1,500 for an

average sized company.

As discussed in section III.I of this

release, the proposed amendment to

rule 14a–5 would require companies to

disclose an additional date in their

proxy statements. Disclosure of the date

should require no more than an

additional sentence, and therefore

should result in no, or negligible,

additional printing costs. Because it is

exemptive, the proposed amendment to

rule 14a–2 should help shareholders

attempting to use the proposed override

mechanism to avoid the expense of

preparing proxy materials, and should

impose no additional costs. Similarly,

because it would provide a safe harbor,

the proposed amendments to rule 13d–

5 should impose no additional costs on

shareholders, which may include small

entities.

Finally, current rule 14a–8(e)

provides a mechanism for a proponent

to challenge a company’s statement in

opposition to a proposal if the

proponent believes that the statement

contains materially false or misleading

statements in violation of rule 14a–9.

The elimination of the rule will likely

save companies, including small

entities, the expense of responding to

challenge under the rule. This proposal

is discussed more fully in section III.I.

We request your comments on these

views.

We considered significant alternatives

to the proposed amendments for small

entities with a class of securities

registered under the Exchange Act. We

could, for instance, exempt small

businesses from any obligation to

include shareholder proposals in their

proxy materials. Such an exemption,

however, would be inconsistent with

the current purpose of the proxy rules,

which is to provide and regulate a

channel of communication among

shareholders and public companies.

Exempting small entities would deprive

their shareholders of this channel of

communication.

We also considered other alternatives

identified in Section 603 of the

Regulatory Flexibility Act to minimize

the economic impact of the amendments

on small entities. We considered the

establishment of different compliance

requirements or timetables that take into

account the resources available to small

entities. Different timetables, however,

may make it difficult for the Division to

issue responses in a timely manner, and

could otherwise impede the efficient

operation of the rule.

We also considered the clarification,

consolidation, or simplification of the

rule’s compliance requirements for

small entities. As explained more fully

in section III.A. of this release, we

propose to recast and reformat rule 14a8 into a more understandable, Question

& Answer format. As described above,

some of the proposed amendments

should enable companies, including

small businesses, to exclude certain

additional proposals from their proxy

materials. As explained in section III.H.,

we also propose clearer guidelines for

companies’ exercise of discretionary

voting authority under rule 14a–4. If

adopted, these modifications should

simplify and facilitate compliance by all

companies, including small entities. We

do not currently believe that there is any

appropriate way to further facilitate

compliance by small entities without

compromising the current purposes of

the proxy rules.

We also considered the use of

performance rather than design

standards. The rules that we propose to

modify are not specifically designed to

achieve certain levels of performance.
50698 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

125See, e.g., Michael P. Smith, Shareholder

Activism by Institutional Investors: Evidence from

CalPERS, The Journal of Finance, Vol. L1, No. 1,

March 1996; Sunil Wahal, Pension Fund Activism

and Firm Performance, Journal of Financial and

Quantitative Analysis, Vol. 31, No. 1, March 1966.

Rather, they are designed to serve other

policies, such as to ensure adequate

disclosure of material information, and

to provide a mechanism for

shareholders to present important and

relevant matters for a vote by fellow

shareholders. Performance standards

accordingly would not directly serve the

policies underlying the rules. We do not

believe that any current federal rules

duplicate, overlap, or conflict with the

rules that we propose to amend.

We request your written comments on

any aspect of this Initial Regulatory

Flexibility Analysis. We particularly

seek comment on: (i) The number of

small entities that would be affected by

the proposed amendments; (ii) the

expected impact of, the proposals as

discussed above; and (iii) how to

quantify the number of small entities

that would be affected by, and how to

quantify the impact of, the proposed

amendments. We ask commenters to

describe the nature of any impact and

provide empirical data supporting the

extent of the impact.

VI. Cost-Benefit Analysis

The proposed rule changes should

improve the efficiency of the process for

determining which shareholder

proposals must be included in proxy

materials distributed by companies.

They should help to ensure that a

company includes shareholder

proposals that are relevant to the

company and likely to receive the

support of a significant percentage of

the company’s shareholders. The

proposed rule changes would also

provide clearer guidelines for a

company’s exercise of discretionary

voting authority when notified that a

shareholder intends to present a

proposal without invoking rule 14a–8’s

mechanisms.

We currently do not believe that the

proposed changes would adversely

affect capital formation, market

efficiency, competition, or investors’

confidence in the integrity of the

securities markets. Rule 14a–8 requires

companies to include shareholder

proposals in their proxy materials,

subject to specific bases for excluding

them. We believe that the rule enhances

investor confidence in the securities

markets by providing a means for

shareholders to communicate with

management and among themselves on

significant matters. By expanding the

range of proposals that companies must

include in their proxy materials, the

proposed amendments to rule 14a–8

could make a company’s managers more

responsible to the shareholders. That, in

turn, could better align the interests of

the company’s management with that of

shareholders, possibly resulting in an

improvement in the company’s

operations and the market price for its

shares. Shareholder proposals could

have a positive or negative impact, or no

impact, on the price of a company’s

securities.125 We are currently

examining this issue, and we invite

comment on the expected shareholder

wealth impact of the rule.

At the same time, other amendments

would improve the integrity and

efficiency of the shareholder proposal

process by increasing companies’ ability

to exclude economically insignificant

proposals, or proposals lacking

significant shareholder support.

We currently do not know whether

the proposed amendments would on

balance significantly affect the cost of

complying with the rules. Not all

companies receive shareholder

proposals each year. And a company

that receives a proposal has no

obligation to make a submission under

rule 14a–8 unless it intends to exclude

the proposal from its proxy materials. In

the period from September 30, 1996 to

today, we received approximately 400

submissions under rule 14a–8.

Some of the proposed amendments to

rule 14a-8 may broaden the range of

proposals that companies must include

in their proxy materials, requiring

companies to include more proposals

than they have in the past. This

includes the proposal to reverse the

Cracker Barrel position on employmentrelated shareholder proposals raising

social policy issues, and the proposal to

permit holders of 3 percent of the

company’s shares to override the

exclusions under paragraphs (5) and (7)

under proposed Question 9.

This year, the Division received

approximately 30 submissions of

proposals implicating the Cracker Barrel

position on employment-related

proposals tied to social issues. Reversal

of that position could encourage more

shareholders to submit these types of

proposals to companies each year, and

we do not know whether the

modification would result in a

significant increase in the number of

such proposals. We request your

comments, including any supporting

empirical information on this question.

Because rule 14a–8 currently does not

include a mechanism like the proposed

‘‘override,’’ we presently have no

reliable means to predict how often

shareholders would in the future take

advantage of the override to force

companies to include proposals that

they would otherwise be permitted to

exclude. During the last proxy season,

the staff concurred in the exclusion of

almost 100 proposals under two

grounds for omitting proposal that

would be subject to the proposed

override (rules 14a–8 (c)(7) and (c)(5)).

We request your comments and

supporting empirical data on the

potential impact of the override on the

total number of proposals companies are

required to include in their proxy

materials.

Other proposed revisions, however,

would enhance companies’ ability to

exclude economically insignificant

proposals. As revised, paragraphs (5)

under proposed Question 9 would

permit companies to exclude proposals

on matter relating to the lesser of $10

million in total costs or gross revenues,

or 3 percent of total assets or gross

revenues (whichever is higher). Because

companies’ submissions under current

rule 14a–8 have not addressed these

criteria, we presently have no reliable

means to estimate their future impact on

the number of proposals companies are

required to include in their proxy

materials. Unlike current rule 14a–

8(c)(5), however, the proposed revision

would enable companies to exclude

proposals based solely on economic

criteria, which may permit companies to

exclude proposals that they are not

permitted to exclude under the current

rule. On the other hand, because the

proposed economic thresholds are

significantly lower than the current

thresholds, if the revisions are adopted

companies may be unable to exclude

some proposals that they are currently

permitted to exclude. We request your

comments, preferably supported by

empirical data, on the nature and

magnitude of the potential impact of

these proposed revisions.

We expect the proposed modifications

to paragraph (12) under proposed

Question 9 to cause a decrease in the

total number of proposals companies

must include in their proxy materials

each year. Current rule 14a–8(c)(12)

permits a company to exclude a

proposal focusing on substantially the

same subject matter as a prior proposal

that failed to receive at least 3 percent

of the vote on its first submission, 6

percent on the second, and 10 percent

on the third. We propose to increase the

thresholds to 6 percent, 15 percent, and

30 percent respectively. Because

companies’ submissions under current

rule 14a–8 have not addressed these

criteria, there is no reliable way to

estimate their future impact on the

number of proposals companies would
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50699

126See note 123 above. 127See note 124 above.

be required to include in their proxy

materials. Nevertheless, we expect that

the revisions will increase the number

of proposals that companies are

permitted to exclude. We request your

comments, preferably supported by

empirical data, on the potential impact

of this proposal.

Rule 14a–8(c)(4) permits companies to

exclude proposals relating to personal

grievances or special interests. We

propose to modify our administration of

the rule to express ‘‘no view’’ if the

proposal does not on its face relate to

the grievance or interest. We request

your comments on the potential impact

of this proposal on the number of

proposals companies are required to

include in their proxy materials each

year.

We do not know whether the

proposed revisions to rule 14a–8 would

significantly alter the overall number of

proposals companies are required to

include each year. We request your

comments, preferably supported by

empirical information, on whether the

proposed amendments, considered

together, would in practice cause a

significant overall increase or decrease

in the number of proposals companies

must include in their proxy materials

each year.

We do not have empirical data

demonstrating the marginal cost of

including an additional shareholder

proposal in companies’ proxy materials.

However, question 14 of the

Questionnaire asked each company

respondent how much money on

average it spends on printing costs (plus

any directly related costs, such as

additional postage and tabulation

expenses) to include shareholder

proposals in its proxy materials. While

individual responses may have

accounted for the printing of more than

one proposal, the average cost reported

by 67 companies was $49,563.126 We

seek comment on whether this

estimated cost is accurate; if not

accurate, we ask commenters to submit

more accurate cost data.

In addition, because a company that

includes a proposal is not required to

make a submission to the Commission

under rule 14a–8, any incremental costs

of including an additional proposal

should be offset by savings on the

submission. We do not know the extent

to which any additional incremental

costs would be offset by savings, and we

therefore request your comments and

empirical data on additional

incremental savings, and the degree to

which they would offset additional

costs. Question 13 of the Questionnaire

asked respondent companies how much

money they spend on average each year

determining whether to include or

exclude shareholder proposals and

following Commission procedures in

connection with any proposal that it

wishes to exclude (including internal

costs as well as any outside legal and

other fees). While individual responses

may have accounted for consideration of

more than one proposal, the costs

reported by 80 companies averaged

$36,603.127 We seek comment on

whether this estimated cost is accurate;

if not accurate, we ask commenters to

submit more accurate cost data.

The proposed amendments to rule

14a–4 would provide clearer ground

rules for companies’ exercise of

discretionary voting authority when a

company receives a shareholder

proposal outside the rubric of rule 14a–

8. We believe that these amendments

would therefore eliminate much of the

uncertainty that some companies

experience in these circumstances, and

decrease the likelihood a company will

have to incur the delay and expense to

resolicit its shareholders, or to

reschedule its meeting of shareholders.

We request your comments and

empirical information on the potential

effects of these proposed revisions to

rule 14a–4.

Under the proposed revisions to rule

14a–4, a company wishing to preserve

discretionary voting authority on certain

possible proposals my be required to

include in its proxy materials an

additional discussion that, among other

things, describes the proposals. It may

also be required to include an additional

box on its proxy card permitting

shareholders to withhold discretionary

voting authority on the proposals if they

are raised. We request your comments

and empirical data on any incremental

cost resulting from these proposed

requirements. Automatic Data

Processing, Inc. informed the staff that

tabulation of an additional box on the

proxy card permitting shareholders to

withhold discretionary authority would

likely cause no increase in the cost of its

tabulation services. Daniels Financial

Printing informed the staff that in most

cases adding up to three-fourths of a

page in the proxy statement would not

increase the cost to the company. That

is because up to an extra three-fourths

of a page can normally be incorporated

without increasing the page length by

reformatting the document. Daniels

reported that adding more than threefourths of a page could increase costs by

about $1,500 for an average sized

company. We seek comment on whether

these estimated costs are accurate, and

on the degree to which such costs may

vary based on timing considerations,

such as the proximity to the company’s

planned mailing date. If you believe that

they are not accurate, we ask you to

submit cost data.

The proposed amendments to rules

14a–2 and 13d–5 are ancillary to the

amendments to rule 14a–8. Proposed

rule 14a–2(b)(2) would provide an

exemption from the proxy rules for

shareholders attempting to comply with

the proposed new ‘‘override’’

mechanism in rule 14a–8. The override

would permit the holders of 3% of the

company’s voting shares to override the

operation of two bases for excluding

proposals. Proposed rule 13d–5 would

provide relief for such shareholders for

the purposes of Section 13(d). Because

these amendments would be exemptive,

we do not expect that they would be

responsible for any additional costs or

other burdens. We nonetheless request

your comments on the accuracy of these

views.

As discussed in section III.I., the

proposed amendment to rule 14a–5

would require companies to disclose an

additional date in their proxy

statements. Disclosure of the date

should require no more than an

additional sentence, and therefore

should result in no, or negligible,

additional printing costs. We

nonetheless request your comments on

the accuracy of this view.

Finally, current rule 14a–8(e)

provides a mechanism for a proponent

to challenge the Division’s statement in

opposition to a proposal if the

proponent believes that the statement

contains materially false or misleading

statements in violation of rule 14a–9.

The elimination of the rule will likely

save companies, including small

entities, the expense of responding to

challenges under the rule. This proposal

is discussed more fully in section III.I.

We request your comments on these

views.

VII. Paperwork Reduction Act

Certain provisions of rules 14a–8,

14a–4, and 14a–5 contain ‘‘collection of

information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995 (44 U.S.C. 3501 et seq.), and

the Commission has submitted

proposed revisions to those rules to the

Office of Management and Budget

(‘‘OMB’’) for review in accordance with

44 U.S.C. 3507(d) and 5 CFR 1320.11.

The titles for the collections of

information are ‘‘Amendments to

Shareholder Proposal Rules.’’
50700 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

128 17 CFR 240.14a–101.

129This reflects an increase from previous

estimates of total compliance burden. The increase

results solely from an increase in the number of

entities filing on Schedule 14A each year. The

increase is not attributable to any of the proposals

described in this release. 130Pub. L. 104–121, Title II, 110 Stat. 857 (1996).

131See note 123 above.

132See note 124 above.

Schedule 14A,128 and the

Commission’s related proxy rules,

including rules 14a–8, 14a–4, and 14a–

5, were adopted pursuant to Section

14(a) of the Exchange Act. Section 14(a)

directs the Commission to adopt rules

‘‘as necessary or appropriate in the

public interest or for the protection of

investors, to solicit or to permit the use

of his name to solicit any proxy or

consent or authorization in respect of

any security (other than an exempted

security) registered pursuant to section

12 of this rule title.’’ Schedule 14A

prescribes information that a company

must include in its proxy statement to

ensure that shareholders are provided

material information relating to voting

decisions.

The Commission currently estimates

that Schedule 14A results in a total

annual compliance burden of 782,964

hours.129 The burden was calculated by

multiplying the estimated number of

entities filing Schedule 14A annually

(approximately 9,321) by the estimated

average number of hours each entity

spends completing the form

(approximately 84 hours). The

Commission staff estimated the number

of entities that would complete and file

the form based on the actual number of

filers during the Commission’s most

recently completed fiscal year. The staff

estimated the average number of hours

each entity spends completing the form

by contacting a number of law firms and

other persons regularly involved in

completing the form.

The amendments to rules 14a–8, 14a–

4(c), and 14a–5, if adopted, would make

it easier for shareholder proponents to

submit a broader range of proposals, and

provide companies subject to the proxy

rules with clearer grounds and more

flexibility to exclude proposals that fail

to attract significant shareholder

support, or that are economically

insignificant. As a result, the

Commission anticipates any additional

burden to be offset by a corresponding

reduction in the number of hours

respondents need to comply with

Schedule 14A.

The amendments focus primarily on

rule 14a–8, which requires companies to

include shareholder proposals in their

proxy materials, subject to certain bases

for excluding them. Not all companies

receive shareholder proposals each year.

Furthermore, a company that receives a

shareholder proposal has no obligation

to make a submission under rule 14a–

8 unless it intends to exclude the

proposal from its proxy materials. In the

period from September 30, 1996 to

today, we received submissions from a

total of 245 companies, concerning

approximately 400 proposals.

Pursuant to 44 U.S.C. 3506(c)(2)(B),

the Commission solicits comments to:

(i) Evaluate whether the proposed

collection of information is necessary

for the proper performance of the

functions of the agency, including

whether the information will have

practical utility; (ii) evaluate the

accuracy of the Commission’s estimate

of the burden of the proposed collection

of information, (iii) determine whether

there are ways to enhance the quality,

utility, and clarity of the information to

be collected; and (iv) evaluate whether

there are ways to minimize the burden

to collection of information on those

who are to respond, including through

the use of automated collection

techniques or other forms of information

technology.

Persons submitting comments on the

collection of information requirements

should direct the comments to the

Office of Management and Budget,

Attention: Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Washington, D.C. 20503, and

should send a copy to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549, with reference

to File No. S7–25–97. The Office of

Management and Budget is required to

make a decision concerning the

collection of information between 30

and 60 days after publication of this

release. Consequently, a comment to

OMB is best assured of having its full

effect if OMB receives it within 30 days

of publication.

VIII. Small Business Regulatory

Enforcement Fairness Act

For purposes of the Small Business

Regulatory Enforcement Fairness Act of

1996 130 (‘‘SBREFA’’), we also are

requesting information on the potential

impact of the proposed amendments on

the economy on an annual basis. You

should provide empirical data to

support your views. Under SBREFA, the

proposals must be submitted to

Congress before they take effect. If they

amount to a ‘‘major rule,’’ then

effectiveness of the rules will be delayed

60 days pending Congressional review.

We have not yet reached a conclusion

on whether the proposals amount to a

‘‘major rule,’’ and we request your

comments, supported by empirical data,

on that issue.

A rule is ‘‘major’’ if it has resulted, or

is likely to result in (i) an annual effect

on the economy of $100 million or

more; (ii) a major increase in costs or

prices for consumers or individual

industries; or (iii) significant adverse

effects on competition, investment, or

innovation.

We presently do not believe that there

is a basis for concluding that the

proposals will result in a major increase

in costs or prices for consumers or

individual industries. The proposals,

which relate to the disclosures in public

companies’ proxy statements, and their

exercise of discretionary voting

authority, are not designed to, and

should not, have any impact on

consumer prices. As noted in the CostBenefit Analysis in section VI above, the

costs associated with including

shareholder proposals in companies’

proxy materials averages less than

$50,000.131 The costs associated with

excluding a proposal under rule 14a–8

averages less than $37,000.132

Similarly, we presently do not believe

the proposals will have any adverse

effects on competition, investment, or

innovation. The proposals should

improve the efficiency and effectiveness

of a channel of communication between

companies and shareholders.

We have not yet reached a conclusion

on whether the proposals will have an

annual effect on the economy of $100

million or more, and we request your

comments, supported by empirical data,

on the proposals’ potential overall

annual effect.

Some of the proposed amendment to

rule 14a–8 may broaden the range of

proposals that companies must include

in their proxy materials, requiring

companies to include more proposals

than they have in the past. This

includes our proposal to reverse the

Cracker Barrel position on employmentrelated shareholder proposals raising

social policy issues, and our proposal to

permit holders of 3% of a company’s

voting shares to override the exclusions

under paragraphs (5) and (7) under

proposed Question 9.

This year, the Division received

approximately 30 submissions on

proposals implicating the Cracker Barrel

position on employment-related

proposals tied to social issues. Reversal

of that position could encourage more

shareholders to submit these types of

proposals to companies each year. We

request your comments, preferably

supported by empirical data, on the
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50701

133See note 123 above. 134See note 124 above.

potential impact on the number of

employment-related proposals

submitted to companies each year, and

any related costs resulting from this

proposal.

Because rule 14a–8 currently does not

include an ‘‘override’’ mechanism, we

have no reliable means to predict how

often shareholders would in the future

take advantage of the mechanism to

force companies to include proposals

that they would otherwise be permitted

to exclude. We request your comments

and supporting empirical data on the

potential impact of the proposed

override on the number of proposals

companies are required to include in

their proxy materials. Although in many

cases garnering sufficient support for

the override may require substantial

efforts, we expect that shareholders will

successfully use the override several

times each year.

Other proposed revisions, however,

would enhance companies’ ability to

exclude economically insignificant

proposals. As revised, paragraph (5)

under proposed Question 9 would

permit companies to exclude proposals

on matters relating to the lesser of $10

million in total costs or gross revenues,

or 3% of total assets or gross revenues

(whichever is higher). Because

companies’ submissions under current

rule 14a–8 have not addressed these

criteria, we have no reliable means to

estimate the future impact of these

proposed amendments on the number of

proposals companies are required to

include in their proxy materials. Unlike

the current rule 14a–8(c)(5), however,

companies would be permitted to

exclude proposals based solely on

economic criteria, which may permit

companies to exclude proposals that

they are not permitted to exclude under

the current rule. On the other hand,

because the proposed economic

thresholds are lower than the current

thresholds, if the revisions are adopted,

companies may be unable to exclude

some proposals that they are currently

permitted to exclude. We request your

comments, preferably supported by

empirical data, on the nature and

magnitude of the potential impact of

this proposed revision.

We expect the proposed modifications

to paragraph (12) under proposed

Question 9 to cause a decrease in the

total number of proposals companies

must include in their proxy materials

each year. Current rule 14a–8(c)(12)

permits a company to exclude a

proposal focusing on substantially the

same subject matter as a prior proposal

that failed to receive at least 3% of the

vote on its first submission, 6% on the

second, and 10% percent on the third.

We propose to increase the thresholds to

6%, 15%, and 30%, respectively.

Because companies’ submissions under

current rule 14a–8 do not address these

proposed increased thresholds, there is

no reliable way to estimate their future

impact on the number of proposals

companies are required to include in

their proxy materials. Nonetheless, we

expect that the revisions will increase

the number of proposals that companies

are permitted to exclude. We request

your comments, preferably supported by

empirical data, on the potential impact

of this proposal.

Rule 14a–8(c)(4) permits companies to

exclude proposals relating to personal

grievances or special interests. We

propose to modify our administration of

the rule to express ‘‘no view’’ if the

proposal does not on its face relate to

the grievance or interest. We request

your comments on the potential impact

of this proposal on the number of

proposals companies are required to

include in their proxy materials each

year.

We do not know whether the

proposed revisions to rule 14a–8 would

on balance significantly alter the overall

number of proposals companies are

required to include in their proxy

materials. We request your comments

and empirical data on this question. We

do not presently have empirical data

demonstrating the marginal cost of

including an additional shareholder

proposal in companies’ proxy materials.

However, question 14 of the

Questionnaire asked each company

respondent how much money on

average it spends on printing costs (plus

any directly related costs, such as

additional postage and tabulation

expenses) to include shareholder

proposals in its proxy materials. While

individual responses may have

accounted for the printing of more than

one proposal, the cost reported by 67

companies averaged $49.563.133

In addition, because a company that

includes a proposal is not required to

make a submission to the Commission

under rule 14a–8, any incremental costs

of including an additional proposal

should be offset by savings on the

submission. We do not know the extent

to which any additional incremental

costs would be offset by savings, and we

therefore request your comments and

empirical data on additional

incremental savings, and the degree to

which they would offset additional

costs. Question 13 of the Questionnaire

asked respondent companies how much

money they spend on average each year

determining whether to include or

exclude shareholder proposals and

following Commission procedures in

connection with any proposal that it

wishes to exclude (including internal

costs as well as any outside legal and

other fees). While individual responses

may have accounted for consideration of

more than one proposal, the costs

reported by 80 companies averaged

$36,603.134

Revised rule 14a–4(c) would provide

companies with clearer guidelines for

the exercise of discretionary voting

authority on proposals presented by

shareholders who do not invoke rule

14a–8’s procedures. We do not know

how many companies subject to our

proxy rules receive such proposals each

year, and request your comments and

supporting empirical data on that

question.

We believe the revisions, if adopted,

will help some companies avoid costs

associated with rescheduling their

annual meetings, and possibly with

resolicitations of proxy materials. We do

not have empirical data to estimate

reliably the scope or magnitude of any

such savings, and we request your

comments, preferably supported by

empirical data, on this question.

Under the proposed revisions to rule

14a–4, a company wishing to preserve

discretionary voting authority on certain

possible proposals may be required to

include in its proxy materials an

additional discussion among other

things describing the proposals. It may

also be required to include an additional

box on its proxy care permitting

shareholders to withhold discretionary

voting authority on the proposals if they

are raised. We request your comments

and empirical data on any incremental

cost resulting from these proposed

requirements. Automatic Data

Processing, Inc. informed the staff that

tabulation of an additional box on the

proxy card permitting shareholders to

withhold discretionary authority would

likely cause no increase in the cost of its

services. Daniels Financial Printing

informed the staff that in most cases

adding up to three-fourths of a page in

the proxy statement would not increase

the cost to the company. That is because

up to an extra three-fourths of a page

can normally be incorporated without

increasing the page length by

reformatting the document. Daniels

Financial reported that adding more

than three-fourths of a page could

increase costs by about $1,500 for an

average sized company.

As discussed in section III.I., the

proposed amendment to rule 14a–5

would require companies to disclose an
50702 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

135See note 125 above.

136See note 13 above.

additional date in their proxy

statements. Disclosure of the date

should require no more than an

additional sentence, and therefore

should result in no, or negligible,,

additional printing costs. Because it is

exemptive, the proposed amendment to

rule 14a–2 should help some

shareholders attempting to use the

proposed override mechanism to avoid

the expense of preparing proxy

materials, and should impose no

additional costs. Similarly, because it

would provide a safe harbor, the

proposed amendments to rule 13d–5

should impose no additional costs. We

request your comments on these views.

Finally, current rule 14a–8(e)

provides a mechanism for a proponent

to challenge a company’s statement in

opposition to a proposal if the

proponent believes that the statement

contains materially false or misleading

statements in violation of rule 14a–9.

The elimination of the rule will likely

save companies, including small

entities, the expense of responding to

challenges under the rule. This proposal

is discussed more fully in section III.I.

We request your comments on these

views.

We also believe that certain

shareholder proposals may have a

positive or negative effect, or no effect,

on shareholder wealth.135 By expanding

the range of proposals that companies

must include in their proxy materials,

the amendments could make a

company’s managers more responsive to

the shareholders. That, in turn, could

better align the interests of the

company’s management with that of

shareholders, possibly resulting in an

improvement in the company’s

operations and the market price for its

shares. We currently lack reliable

empirical data on the magnitude and

frequency of any such effects. We

request your comments supported by

empirical data on the magnitude and

frequency of any such effects. We

request your comments supported by

empirical data.

Relatively few shareholder proposals

are approved by shareholders each year.

Based on information provided to us by

IRRC,136 we understand that in the

period from January 1, 1997 to date, 19

proposals obtained shareholder

approval out of a total of 234 submitted

to shareholder votes. Nine were

proposals to repeal classified boards.

Nine sought redemption of companies’

shareholder rights plans. One focused

on ‘‘golden parachute’’ payments to

executives. Even if a proposal does not

obtain shareholder approval, however, it

may nonetheless influence management,

especially if it receives substantial

shareholder support. A proposal may

also influence management even if it is

not put to a shareholder vote. We

understand that in some instances

management has made concessions to

shareholders in return for the

withdrawal of a proposal.

Proposals addressing corporate

governance matters tend to receive the

most substantial shareholder support,

and, we believe, are most likely to affect

shareholder wealth. Examples are

proposals on voting and nomination

procedures for board members, and

proposals to restrict or eliminate

companies’ shareholder rights plans.

The proposed revisions do not focus on

those types of proposals, and should not

significantly affect shareholders’ ability

to include them in companies’ proxy

materials. As a result, we request your

comments on the degree to which the

proposals would impact shareholder

wealth, viewing the proposals in

isolation and together with other

proposals.

The proposed modification to current

rule 14a–8(c)(12) will affect all

proposals, including corporate

governance proposals. Those

modifications will make it easier for a

company to exclude a proposal that has

failed to receive significant shareholder

support in the recent past. Because we

believe that the revised rule, if adopted,

would operate to exclude only those

proposals on which shareholders have

already voted at least once previously,

and have effectively rejected, we do not

expect that the revisions to current rule

14a–8(c)(12) will have any significant

impact on shareholder wealth. We

request your comments, preferably

supported by empirical data, on the

accuracy of these views.

IX. Statutory Basis and Text of

Amendments

We propose amendments to Rules

14a–8, 14a–4, 14a–2, 14a–5, and 13d–5

under the authority set forth in Sections

13, 14 and 23 of the Securities Exchange

Act of 1934, and Section 20(a) of the

Investment Company Act.

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping

requirements, Securities.

Text of Amendments

In accordance with the foregoing, title

17, chapter II of the Code of Federal

Regulations is proposed to be amended

as follows:

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

1. The authority citation for Part 240

continues to read, in part, as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt,

78c, 78d, 78f, 78i, 78j, 78k, 78k–1, 78l, 78m,

78n, 78o, 78p, 78q, 78s, 78u–5, 78w, 78x,

78ll(d), 79q, 79t, 80a–20, 80a–23, 80a–29,

80a–37, 80b–3, 80b–4, and 80b–11, unless

otherwise noted.

* * * * *

2. By adding paragraph (b)(3) to

§ 240.13d–5 to read as follows:

§ 240.13d–5 Acquisition of securities.

* * * * *

(b) * * *

(3) Notwithstanding paragraph (b)(1)

of this section, a group formed among

the beneficial owners of a class of equity

securities solely by an understanding,

arrangement, or agreement that a

shareholder proposal should be placed

in a registrant’s proxy materials for a

shareholder vote, for the purpose of

using the ‘‘override’’ mechanism

provided in § 240.14a–8(j) (Question

10), shall be deemed not to have

acquired any equity securities

beneficially owned by the other

members of the group for the purposes

of Section 13(d)(1) of the Act (15 U.S.C.

78m); provided, however, that such

understanding, arrangement or

agreement does not relate to how the

holders will vote on the proposal if it is

ultimately placed in the registrant’s

proxy materials.

3. By amending § 240.14a–2 by

redesignating paragraphs (b)(2) through

(b)(4) as paragraphs (b)(3) through (b)(5),

and by adding a new paragraph (b)(2),

to read as follows:

§ 240.14a–2 Solicitations to which

§ 240.14a–3 to § 240.14a–15 apply.

* * * * *

(b) * * *

(2) For any solicitation made for the

sole purpose of gathering support for

placing a shareholder proposal in a

registrant’s proxy materials pursuant the

‘‘override’’ mechanism provided in

§ 240.14a–8(j) (Question 10); provided

that such solicitation does not seek

proxy authority with respect to the vote

on the proposal if it is ultimately placed

in the registrant’s proxy materials;

* * * * *

4. By amending § 240.14a–4 by

removing the last sentence in paragraph

(a)(3) before the note, by revising the

introductory text of paragraph (c) and

paragraph (c)(1), redesignating

paragraphs (c)(2) through (c)(5) as

paragraphs (c)(3) through (c)(6), and
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50703

adding a new paragraph (c)(2), to read

as follows:

§ 240.14a–4 Requirements as to proxy.

* * * * *

(c) A proxy may confer discretionary

authority to vote on any matter

presented by a security holder for a vote

under the following circumstances:

(1) If the registrant did not have notice

of the matter at least 45 days (or such

date specified by an advance notice

bylaw) before the date on which the

registrant first mailed its proxy

materials for the prior year’s annual

meeting of shareholders. If the registrant

did not hold an annual meeting of

shareholders the prior year, or if the

date of the annual meeting has changed

more than 30 days from the prior year,

then notice must be received a

reasonable time before the company

mails its proxy materials for the current

year.

(2) If the registrant includes, in the

proxy statement, a discussion of the

nature of any such matter and how the

registrant intends to exercise its

discretion on each matter, and, in the

proxy card, a cross-reference to the

discussion in the proxy statement and a

box to withhold discretionary authority

on the same matter(s).

5. By amending § 240.14a–5 by

revising paragraph (e), and adding

paragraph (f), to read as follows:

§ 240.14a–5 Presentation of information in

proxy statement.

* * * * *

(e) All proxy statements shall

disclose, under an appropriate caption,

the following dates:

(1) The deadline for submitting

shareholder proposals for inclusion in

the registrant’s proxy statement and

form of proxy for the registrant’s next

annual meeting, calculated in the

manner provided in § 240.14a–8(d)

(Question 4); and

(2) The date after which notice of a

shareholder proposal submitted outside

the rubric of § 240.14a–8 is considered

untimely, calculated in the manner

provided by § 240.14a–4(c)(1).

(f) If the date of the next annual

meeting is subsequently advanced or

delayed by more than 30 calendar days

from the date of the annual meeting to

which the proxy statement relates, the

registrant shall, in a timely manner,

inform security holders of such change,

and the new dates referred to in

paragraphs (e)(1) and (e)(2) of this

section, by including a notice in its

earliest possible quarterly report on

Form 10–Q (§ 249.308a of this chapter)

or Form 10–QSB (§ 249.308b of this

chapter), or, in the case of investment

companies, in a shareholder report

under § 270.30d–1 of this chapter under

the Investment Company Act of 1940,

or, if impracticable, any means

reasonably calculated to inform

shareholders.

6. By revising § 240.14a–8 to read as

follows:

§ 240.14a–8 Shareholder proposals.

This section addresses when a

company must include a shareholder’s

proposal in its proxy materials when it

holds an annual or special meeting of

shareholders. In summary, in order to

have your shareholder proposal

included on a company’s proxy card,

and included along with any supporting

statement in its proxy statement, you

must be eligible and follow certain

procedures. Under a few specific

circumstances, the company is

permitted to exclude your proposal, but

only after submitting its reasons to the

Commission. We structured the section

in a question-and-answer format so that

it is easier to understand. The references

to ‘‘you’’ are to a shareholder seeking to

submit the proposal.

(a) Question 1: What is a proposal? A

shareholder proposal is your

recommendation or requirement that the

company and/or its board of directors

take action. Your proposal should state

as clearly as possible the course of

action that you believe the company

should follow. If your proposal is placed

on the company’s proxy card,

shareholders will have an opportunity

to case their votes either in support of

your proposal or against your proposal.

Unless otherwise indicated, the word

‘‘proposal’’ as used in this section refers

both to your proposal, and to your

corresponding statement in support of

your proposal (if any).

(b) Question 2: Who is eligible to

submit a proposal, and how do I

demonstrate to the company that I am

eligible? (1) In order to be eligible to

submit a proposal, you must have

continuously held at least $2,000 in

market value, or 1% of the company’s

securities entitled to be voted on the

proposal at the meeting for at least one

year by the date you submit the

proposal. You will have to continue to

hold those securities through the date of

the meeting.

(2) If you are the registered holder of

your securities, which means that your

name appears in the company’s records,

the company can verify your eligibility

on its own. However, if like many

shareholders you are not a registered

holder, the company likely does not

know that you are a shareholder, or how

many shares you own. In this case, at

the time you submit your proposal, you

must prove your eligibility to the

company in one of two ways:

(i) The first way is to submit to the

company a written statement from the

‘‘record’’ holder of your securities

(usually a broker or bank) verifying that,

at the time you submitted your

proposal, you continuously held the

securities for at least one year. You must

also include your own written statement

that you intend to continue to hold the

securities through the date of the

meeting of shareholders; or

(ii) The second way to prove

ownership applies only if you have filed

a Schedule 13D (§ 240.13d–101),

Schedule 13G (§ 240.13d–102), Form 3

(§ 249.103 of this chapter), Form 4

(§ 249.104 of this chapter) and/or Form

5 (§ 249.105 of this chapter), or

amendments to those documents,

reflecting your ownership of the shares

as of or before the date on which the

one-year eligibility period begins. If you

have filed one of these documents with

the SEC, you may demonstrate your

eligibility by submitting to the

company:

(A) A copy of the schedule and/or

form, and any subsequent amendments

reporting a change in your ownership

level;

(B) Your written statement that you

continuously held the required number

of shares for the one-year period as of

the date of the statement; and

(C) Your written statement that you

intend to continue ownership of the

shares through the date of the

company’s annual or special meeting.

(c) Question 3: How many proposals

may I submit? Each shareholder may

submit no more than one proposal to a

company for a particular shareholders’

meeting.

(d) Question 4: How long can my

proposal be? The proposal, including

any accompanying supporting

statement, may not exceed 500 words.

(e) Question 5: What is the deadline

for submitting a proposal? (1) If you are

submitting your proposal for the

company’s annual meeting, you can in

most cases find the deadline in last

year’s proxy statement. However, if the

company did not hold an annual

meeting last year, or has changed the

date of its meeting for this year more

than thirty days from last year’s

meeting, you can find the deadline on

one of the company’s quarterly reports

on Form 10–Q (§ 249.308a of this

chapter) or 10–QSB (§ 249.308b of this

chapter), or in shareholder reports of

investment companies under § 270.30d–

1 of this chapter of the Investment

Company Act of 1940. In order to avoid

confusion, shareholders should submit

their proposals by means, including
50704 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

electronic means, that permit them to

prove the date of delivery.

(2) The deadline is calculated in the

following manner if the proposal is

submitted for a regularly scheduled

annual meeting. The proposal must be

received at the company’s principal

executive offices not less than 120

calendar days before the date of the

company’s proxy statement released to

shareholders in connection with the

previous year’s annual meeting.

However, if the company did not hold

an annual meeting the previous year, or

if the date of this year’s annual meeting

has been changed by more than 30 days

from the date of the previous year’s

meeting, then the deadline is a

reasonable time before the company

begins to print and mail its proxy

materials.

(3) If you are submitting your

proposal for a meeting of shareholders

other than a regularly scheduled annual

meeting, the deadline is a reasonable

time before the company begins to print

and mail its proxy materials.

(f) Question 6: What if I fail to follow

one of the eligibility or procedural

requirements explained in answers to

Questions 1 through 4 of this section?

(1) The company may omit your

proposal, but only after it has notified

you of the problem, and you have failed

adequately to correct it. Within 14

calendar days of receiving your

proposal, the company must notify you

in writing of any procedural or

eligibility deficiencies, as well as of the

time frame for your response. Your

response must be postmarked no later

than 14 days from the date you received

the company’s notification.

(2) If you fail in your promise to hold

the required number of securities

through the date of the meeting of

shareholders, then the company will be

permitted to exclude any of your

proposals from its proxy materials for

any meeting held in the following two

calendar years.

(g) Question 7: Who has the burden of

persuading the Commission or its staff

that my proposal can be omitted?

Except as otherwise noted, the burden is

on the company to demonstrate that it

is entitled to omit a proposal.

(h) Question 8: Must I appear

personally at the shareholders meeting

to present the proposal? (1) Either you,

or your representative who is qualified

under state law to present the proposal

on your behalf, must attend the meeting

to present the proposal. Whether you

attend the meeting yourself or send a

qualified representative to the meeting

in your place, you should make sure

that you, or your representative, follow

any applicable procedures that are

proper under state law for attending the

meeting and/or presenting your

proposal.

(2) If the company holds its

shareholder meeting in whole or in part

on the Internet, and the company

permits you or your representative to

present your proposal via the Internet,

then you may appear through the

Internet rather than traveling to the

meeting to appear in person.

(3) If you or your qualified

representative fail to appear and present

the proposal, without good cause, the

company may omit any of your

proposals from its proxy materials for

any meetings held in the following two

calendar years.

(i) Question 9: If I have complied with

the procedural requirements, on what

other bases may a company rely to omit

my proposal?

(1) Improper under state law: If the

proposal is not a proper subject for

action by shareholders under the laws of

the state of the company’s

incorporation;

Note to paragraph (i)(1): Depending on the

subject matter, some proposals are not

considered proper under state law if written

so that they would be binding on the

company if approved by shareholders. In our

experience, most proposals that are cast as

recommendations or requests that the board

of directors take specified action are proper

under state law. Accordingly, we will assume

that a proposal drafted as a recommendation

or suggestion is proper unless the company

demonstrates otherwise.

(2) Violation of law: If the proposal

would, if implemented, cause the

company to violate any state, federal, or

foreign law;

Note to paragraph (i)(2): We will not apply

this basis for exclusion to permit exclusion

of a proposal on grounds that it would violate

foreign law if compliance with the foreign

law would result in a violation of any state

or federal law.

(3) Violation of proxy rules: If the

proposal or supporting statement is

contrary to any of the Commission’s

proxy rules, including § 240.14a–9,

which prohibits materially false or

misleading statements in proxy

soliciting materials;

(4) Personal grievance; special

interest: If the proposal relates to the

redress of a personal claim or grievance

against the company, or any other

person, or if it is designed to result in

a benefit to you, or to further a personal

interest, which benefit or interest is not

shared by the other shareholders at

large;

(5) Relevance: If the proposal relates

to a matter involving the purchase or

sale of services or products which

represents $10 million or less in gross

revenues or total costs, whichever is

appropriate, for the company’s most

recently completed fiscal year.

However, if 3% of the company’s gross

revenue or total assets, whichever is

higher, for the company’s most recently

completed fiscal year, results in a

number less than $10 million, that

number applies instead of $10 million;

(6) Absence of power/authority: If the

company would lack the power or

authority to implement the proposal;

(7) Management functions: If the

proposal relates to specific business

decisions normally left to the discretion

of management;

Note to paragraph (i)(7): Examples of such

matters include the way a newspaper formats

its stock tables, whether a company charges

an annual fee for use of its credit card, the

wages a company pays its non-executive

employees, and the way a company operates

its dividend reinvestment plan. For an

investment company, such matters include

the decision whether to invest in the

securities of a specific company.

(8) Relates to election: If the proposal

relates to an election for membership on

the company’s board of directors;

(9) Conflicts with company’s

proposal: If the proposal directly

conflicts with one of the company’s own

proposals to be submitted to

shareholders at the same meeting;

Note to paragraph (i)(9): A company’s

submission to the Commission under this

section should specify the points of conflict

with the company’s proposal.

(10) Substantially implemented: If the

company has already substantially

implemented the proposal;

(11) Duplication: If the proposal

substantially duplicates another

proposal previously submitted to the

company by another proponent that will

be included in the company’s proxy

materials for the same meeting;

(12) Resubmissions: If the proposal

deals with substantially the same

subject matter as another proposal or

proposals that has or have been

previously included in the company’s

proxy materials within the preceding 5

calendar years, a company may omit it

from its proxy materials for any meeting

held within 3 calendar years of the last

time it was included if the proposal

received:

(i) Less than 6% of the vote if

proposed once within the preceding 5

calendar years;

(ii) Less than 15% of the vote on its

last submission to shareholders if

proposed twice previously within the

preceding 5 calendar years; or

(iii) Less than 30% of the vote on its

last submission to shareholders if

proposed three times or more previously
Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules 50705

within the preceding 5 calendar years;

and

(13) Specific amount of dividends: If

the proposed relates to specific amounts

of cash or stock dividends.

(j) Question 10: If the company

demonstrates that my proposal is

excludable based on the criteria listed

in the answer to Question 9, is there any

other way to have my proposal included

in the company’s proxy materials? (1)

Yes. If enough of the company’s

shareholders support inclusion of your

proposal in the company’s proxy

materials, then you may override certain

of the criteria for excluding your

proposal listed in answer to Question 9.

More specifically, if you demonstrate to

the company that the holders of 3% of

the company’s outstanding shares

entitled to be voted on the proposal at

the meeting agree that your proposal

should be included in the company’s

proxy materials, then the company may

not rely on criteria paragraphs (5) or (7)

under Question 9 of this section to omit

your proposal for that meeting. In

calculating the 3%, you may include

your own shares even if the proposal is

your own. The percentage is based on

the total number of voting shares

outstanding for the year before the year

for which the meeting is held. You

should find that number in the

company’s annual report to

shareholders for that year.

(2) However, it is your obligation to

demonstrate that you have, or have

gathered, the required support for

including your proposal, by providing

the company:

(i) A written statement from each of

your supporters stating his or her

support for the inclusion of your

proposal in the company’s proxy

materials for a specific meeting of

shareholders. The written statement

must be executed and dated as of a date

no earlier than the date of the

company’s annual meeting for the

previous year. If the company did not

hold a meeting the year before, the

statement must be dated no more than

one year before the scheduled date of

the meeting for which the proposal is

submitted; and

(ii) A written statement from the

record holder of each supporter’s shares,

specifying the number of shares that the

supporter held as of the date of the

statement described in paragraph

(j)(2)(i) of this section. It is your

obligation to collect this evidence from

your supporters, and to present it to the

company in an organized,

understandable form. You must provide

the company with copies of the

evidence by the due date for submitting

a proposal.

(k) Question 11: How many proposals

sponsored by other shareholders may I

support under the ‘‘override’’

mechanism described in the answer to

Question 10 of this section? At each

company, you may support no more

than one proposal sponsored by other

shareholders under the ‘‘override’’

mechanism described in the answer to

Question 10 of this section. Of course,

this does not affect your ability to

sponsor your own proposal. If the

proposal is your own proposal, then it

does not count against that limit.

(l) Question 12: What procedures

must the company follow if it intends to

omit my proposal? (1) If the company

intends to omit a proposal from its

proxy materials, it must file its reasons

with the Commission no later than 40

calender days after the date that it

receives your proposal, and no later

than 80 calendar days before it files its

definitive proxy statement and form of

proxy with the Commission. The

company must simultaneously provide

you with a copy of its submission. The

Commission staff may permit the

company to make its submission later

than 40 days after receiving your

proposal, or 80 days before the company

files its definitive proxy statement and

form of proxy, if the company

demonstrates good cause for missing the

deadline.

(2) The company must file six paper

copies (or alternatively file via e-mail to

the following address: shprop@sec.gov)

of the following:

(i) The proposal;

(ii) An explanation of why the

company believes that it may omit the

proposal, which should if possible refer

to the most recent applicable authority,

such as prior Division letters issued

under the rule; and

(iii) A supporting opinion of counsel

when such reasons are based on matters

of state or foreign law.

(m) Question 13: May I submit my

own statement to the Commission

responding to the company’s

arguments? Yes, you may submit a

response, but it is not required. You

should try to submit any response to us,

with a copy to the company, as soon as

possible after the company makes its

submission. This way, the Commission

staff will have time to consider fully

your submission before it issues its

response. You may submit either six

paper copies of your response, or

alternatively, you may make your

submission via e-mail to the following

address: shprop@sec.gov.

(n) Question 14: If the company

includes my shareholder proposal in its

proxy materials, what information about

me must it include along with the

proposal itself? (1) The company’s

proxy statement must include your

name and address, as well as the

number of the company’s voting

securities that you hold. However,

instead of providing that information,

the company may instead include a

statement that it will provide the

information to shareholders promptly

upon receiving an oral or written

request.

(2) The company is not responsible

for the contents of your proposal or

supporting statement.

Dated: September 18, 1997.

By the Commission.

Jonathan G. Katz,

Secretary.

Concurrence of Commissioner Steven

M.H. Wallman

The Commission today (Release No.

S7–25–97) proposes a ‘‘package’’ of

changes to the current process for

submitting shareholder proposals. Not

only does this process preclude valid

shareholder debate on issues of

significant importance to the companies

in which shareholders invest, it also

imposes burdens on corporations and

on this Commission, such as requiring

the Commission to engage in linedrawing for which it is ill-suited. A year

ago I proposed changes to the rules to

make them fairer and to eliminate much

of that line-drawing. And I have

repeatedly called for the reversal of

Cracker Barrel—independent of any

other or more comprehensive reform.

I recognize and appreciate how

difficult it is to craft a solution to the

problems posed by these rules, and I

commend the staff and my colleagues

for their efforts today. As a practical

matter, those who are active participants

in the shareholder proposal process are

small in number—especially when

compared with the number this

Commission regulates or influences in

other activities. But the practical impact

of what can be accomplished through

shareholders appropriately engaged in

their corporations’ affairs is enormous.

Part of what makes our economy strong

and our corporations successful is our

system of active shareholders engaged

in debate over matters of concern. And

those matters consistently have

included issues relating to corporate

governance, workplace practices and

social issues.

Because I believe so strongly in the

benefits that accrue from responsible

shareholders acting responsibly, I am

concerned by this proposed ‘‘package.’’

While I concur in the issuance of this

release so that the debate may begin, I

believe this proposal may not have
50706 Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / Proposed Rules

1The release is unclear on whether new lines will

be drawn and where those lines will fall.

2Since the new proposed economic test under the

relevance exclusion focuses solely on historical

financial statement components, it also excludes

shareholder proposals motivated by far more

important possible material liabilities or

prospective costs, such as boycotts, negative

publicity or lawsuits. The result is that this

exclusion could be even more restrictive than

Cracker Barrel. As an example, if a company

employs slave labor in a small plant in Asia, a

proposal relating to that operation would be

excludable under this test, notwithstanding the

significant potential costs to the company and its

shareholders from the company’s pursuing such a

policy.

3Three percent of the outstanding stock of large

corporations involves dollar amounts in the

billions; it is unclear why the support of such a

large financial stake is necessary before a proposal

may be placed on the ballot.

4Moreover, the proposal does not require access

to shareholder lists (although Rule 14a–7

theoretically may be useful)—and may be

dependent on adequate relief under Sections 13(d)

and 14 of the Securities Exchange Act of 1934.

5 I am also concerned about the specter that the

existence of the override—a concept that I

originally proposed, but in a different context, and

that I still independently support—will be used as

a rationale for the staff’s engaging in overly broad

interpretations of the exclusions under Rule 14a–8

on the grounds that, if shareholders want the

resolutions included, they can avail themselves of

the override.

6 I also am concerned about the extent of the

reliance on the Division’s Questionnaire as a basis

for today’s proposals given the failure to use

scientific sampling in both its design and its

distribution.

7As an additional goal, it would be worthwhile

to reduce as much as possible the staff’s role as linedrawers. One alternative that could accomplish this

goal would be to permit all resolutions to be

included subject to whatever exclusions the states

wished to impose as a matter of internal corporate

affairs—and the release asks questions about this

approach. I suspect that both companies and

shareholders will find this option to be

impracticable. If they do not, I believe the

Commission should give it more thought.

sufficient benefits for the shareholder

community to outweigh the detriments

to that community and, therefore, may

not be balanced. Moreover, I remain

opposed as a matter of principle to the

notion of holding the reversal of Cracker

Barrel hostage to the success or failure

of an overall reform effort. I urge my

colleagues again to consider its

immediate reversal.

I understand this is a complicated

area involving many players with often

divergent interests. Moreover, not all

members of the corporate community,

or the shareholder community, are

affected in the same manner by either

the current or the proposed process.

Some companies have never received a

shareholder proposal, while others

receive a multitude on a yearly basis.

Likewise, some proponents have no

difficulty in placing their resolutions in

the company’s proxy statement, while

others face a yearly battle to avert

exclusion.

Under today’s proposal, if it is

adopted, the proponent community will

obtain some benefit from the reversal, at

least in form, of Cracker Barrel, as well

as a lower economic standard under the

relevance exclusion, and the availability

for the first time of a shareholder

override. From a practical perspective

though, these benefits will primarily

assist those proponents who currently

have potential difficulty obtaining

access to the proxy statement—such as

social groups sponsoring social policy

proposals related to employment. Since

most shareholder proposals are not so

characterized, this package provides

little for all other proponents.

And with regard to social proposals,

it remains to be seen whether the

proposed changes will result in any

increased access to the proxy statement.

While Cracker Barrel may be reversed in

form if the proposals are adopted, it is

unclear from the release whether it will

be reversed in substance. Although

social policy proposals related to

employment will no longer be

automatically excludable, neither will

they be automatically included.1 The

return to subjective line-drawing by the

staff, coupled with the shift to a purely

economic test under the relevance

exclusion, leaves open the possibility of

continued attempts to exclude many

social proposals (whether related to

employment or not).2 While

theoretically proponents of social

proposals could be helped by the

availability of a shareholder override,

the burdens of the currently proposed

override—a threshold set at the high

level of 3%3 combined with the

practical difficulties of soliciting or

doing a major publicity campaign 4—

will constrain its practical

effectiveness.5

As to detriments, all members of the

proponent community will be adversely

impacted by the increased resubmission

thresholds—thresholds that, as

proposed, will rise to the very high level

of 30% in the third year—without any

practical benefits being provided in

return to a large percentage of the

proponents. Likewise, for those

members of the proponent community

who might use Rule 14a–4 in lieu of

rule 14a–8, the proposed tightening of

Rule 14a–4 will be troublesome. And to

the extent that any part of the package

is changed to decrease the benefits or

increase the burdens on the proponent

community, the lack of balance may

well become intolerable.

Although I have strong reservations

about this package as a whole and about

specific provisions,6 I vote today to

issue this release to ensure that debate

will ensue on this matter. In its current

form, I agree that the release can be used

to frame the issues and I believe it is in

the best interests of all of those involved

in the shareholder proposal process for

change to be commenced as soon as

possible. My hope would be that any

changes ultimately adopted will, in fact,

properly balance the interests of

companies and shareholders.7

In any event, I must stress my dismay

at the failure of this Commission to

reverse Cracker Barrel. The continuation

of Cracker Barrel over the past four

years has been a terrible mistake—not

from a practical perspective but rather

from a policy perspective. As I have

stated previously, Cracker Barrel has

had little practical effect—most

proponents of the types of proposals

excludable under Cracker Barrel either

succeed in having the companies

include their proposals anyway, or

otherwise have their concerns addressed

and withdraw their proposals

voluntarily. Nevertheless, Cracker Barrel

is bad public policy because the wrong

message is sent as to what the

Commission believes is important. I fail

to understand why its reversal can only

be considered as part of any broader

reform—after all Cracker Barrel was

imposed on the proponent community

without any reforms for their benefit

and has tilted the balance, as a matter

of principle, over these last four years in

an unacceptable manner.

Finally, stepping back from the issue

of whether Cracker Barrel should be

reversed only as part of overall reform

or on its own, the practical realities are

that this reform proposal, with or

without Cracker Barrel, likely cannot be

adopted in time for the 1998 proxy

season. The specter of continuing

Cracker Barrel for yet another proxy

season should simply be unacceptable.

I strongly urge my colleagues to do the

right thing—reverse Cracker Barrel now,

in time for the 1998 proxy season.

I respectfully concur in the issuance

of this release.

[FR Doc. 97–25448 Filed 9–25–97; 8:45 am]

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