[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Rules and Regulations]
[Pages 29106-29121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14121]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40018; IC-23200; File No. S7-25-97]
RIN 3235-AH20


Amendments To Rules On Shareholder Proposals

AGENCY: Securities and Exchange Commission.

ACTION: Final Rule.

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SUMMARY: The Securities and Exchange Commission (``we'' or 
``Commission'') is adopting amendments to its rules on shareholder 
proposals. The amendments recast rule 14a-8 into a Question & Answer 
Format that both shareholders and companies should find easier to 
follow, and make other modifications to existing interpretations of the 
rule. We are also amending rule 14a-4 to provide clearer ground rules 
for companies' exercise of discretionary voting authority, and making 
related amendments to rule 14a-5.

EFFECTIVE DATE: The amendments are effective June 29, 1998.

FOR FURTHER INFORMATION CONTACT:
Frank G. Zarb, Jr., of Sanjay M. Shirodkar, Division of Corporation 
Finance, (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 adopting amendments to 
rules 14a-8,\1\ 14a-4,\2\ and 14a-5 \3\ under the Securities Exchange 
Act of 1934 (the ``Exchange Act'').\4\
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    \1\ 17 CFR 240.14a-8.
    \2\ 17 CFR 240.14a-4.
    \3\ 17 CFR 240.14a-5.
    \4\ 15 U.S.C. 78a et seq.
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I. Executive Summary

    With modifications, we are adopting some of the amendments to our 
rules on shareholder proposals that we initially proposed on September 
18, 1997.\5\ As explained more fully in this release, we modified our 
original proposals based on our consideration of the more than 2,000 
comment letters we received from the public.\6\
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    \5\ See our Proposing Release, Exchange Act Release No. 29093 
(Sept. 18, 1997) [62 Fed. Reg. 50682].
    \6\ The comment letters are available for inspection and copying 
in the Commission's Public Reference Room in file number S7-25-97. 
Comments that were submitted electronically are available on the 
Commission's website (www.sec.gov).
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    Our proposed changes evoked considerable public controversy, as 
have our earlier efforts to reform these rules. Some shareholders and 
companies expressed overall support for our proposals.\7\ Certain of 
our proposals, however, were viewed as especially controversial, and 
generated strong comments in favor, as well as heavy opposition.\8\
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    \7\ See, e.g., Comment Letters From Teachers Insurance and 
Annuity Assoc./College Retirement Equities Fund, Nov. 19, 1997 
(``TIAA-CREF Letter''); California Public Employees' Retirement 
System, Nov. 10, 1997 (``CALPERS Letter''); American Society of 
Corporate Secretaries, Dec. 8, 1997 (``ASCS Letter''); the Business 
Roundtable, Dec. 9, 1997 (``BRT Letter''); Barclays Global 
Investors, Dec. 4, 1997; Georgeson & Company Inc., Dec. 31, 1997 
(``Georgeson Letter'').
    \8\ See, e.g., New York City Employees Retirement System, Nov. 
5, 1997 (``NYCERS Letter''); Interfaith Center on Corporate 
Responsibility, Dec. 23, 1997 (``ICCR Letter''); American Bar Ass'n, 
Dec. 23, 1997 (``ABA Letter''); Labor Policy Ass'n, Nov. 17, 1997 
(``LPA Letter'').
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    The amendments adopted today:
    <bullet> Recast rule 14a-8 into a Question & Answer format that is 
easier to read;
    <bullet> Reverse the Cracker Barrel no-action letter on employment-
related proposals raising social policy issues;
    <bullet> Adopt other less significant amendments to rule 14a-8; and
    <bullet> Amend rule 14a-4 to provide shareholders and companies 
with clearer guidance on companies' exercise of discretionary voting 
authority.
    These reforms, in our view, will help to improve the operation of 
the rules governing shareholder proposals and will address some of he 
concerns raised by shareholders and companies over the last several 
years on the operation of the proxy process.
    We have decided not to adopt other elements of our original 
proposals, due in part to strong concerns expressed by commenters. We 
are not adopting our original proposals to increase the percentage of 
the vote a proposal needs before it can be resubmitted in future years; 
\9\ to streamline the exclusion for matters considered irrelevant to 
corporate business;\10\ or to modify our administration of the rule 
that permits companies to exclude proposals that further personal 
grievances or special interests.\11\ We are also not adopting the 
proposed ``override'' mechanism that would have permitted 3% of the 
shareownership to override a company's decision to exclude proposals 
under certain of the bases for exclusion set forth under Question 9 of 
amended rule 14a-8.\12\
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    \9\ See paragraph (12) under Question 9, formerly rule 14a-
8(c)(12) [17 CFR 240.14a-8(c)(12)].
    \10\ Paragraph (5) under Question 9, former rule 14a-8(c)(5)[17 
CFR 240.14a-8(c)(5)].
    \11\ Paragraph (4) under Question 9, former rule 14a-8(c)(4)[17 
CFR 240.14a-8(c)(4)].
    \12\ The mechanism had been included in Paragraph 10 of rule 
14a-8 as proposed to be amended. See Proposing Release.
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    Some of the proposals we are not adopting share a common theme: to 
reduce the Commission's and its staff's role in the process and to 
provide shareholders and companies with a greater opportunity to decide 
for themselves which proposals are sufficiently important and relevant 
to the company's business to justify inclusion in its proxy materials. 
However, a number of commenters resisted the idea of significantly 
decreasing the role of the Commission and its staff as informal 
arbiters through the administration of the no-action letter process. 
Consistent with these views, commenters were equally unsupportive of 
fundamental alternatives to the existing rule and process that, in 
different degrees, would have decreased the Commission's overall 
participation.
    While we have tried to provide the most fair, predictable, and 
efficient system possible, these rules, even as amended, will continue 
to require us to make difficult judgments about interpretations of 
proposals, the motives of those submitting them, and the policies to 
which they relate. We will continue to explore ways to improve the 
process as opportunities present themselves.

II. Plain-English Question & Answer Format

    We had proposed to recast rule 14a-8 into a more plain-English 
Question & Answer format.\13\ We are adopting that proposal, and the 
amended rule will be

[[Page 29107]]

the Commission's first in question and answer format. Most commenters 
who addressed this proposal expressed favorable views, believing that 
it would make the rule easier for shareholders and companies to 
understand and follow.\14\
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    \13\ Unless specifically indicated otherwise, none of these 
revisions are intended to signal a change in our current 
interpretations.
    \14\ See, e.g., CALPERS Letter; State Teachers' Retirement Sys. 
(California), Jan. 12, 1998; Ethics in Investment Committee of the 
Sisters of Charity of Saint Elizabeth Station, Nov. 19, 1997; Mr. H. 
Carl McCall, Comptroller of the State of New York, Dec. 24, 1997; 
American Corporate Counsel Assoc., Dec. 31, 1997 (``ACCA Letter''); 
ASCS Letter; Eastman Kodak Co., Nov. 25, 1997; Banc One Corp., Dec. 
9, 1998. Some commenters, however, did not believe that the new 
format would significantly improve the rule's operation. See, e.g., 
ABA Letter; New York State Bar Assoc., Dec. 10, 1997 (``New York 
State Bar Letter'').
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    In addition to the other amendments described in this release, we 
have made some minor revisions to the language we had proposed to 
conform with the new plain English format. For example, on the proposed 
revisions to paragraph (1) under Question 9, which is former rule 14a-
8(c)(1),\15\ commenters stated, and we agree, that the reference to 
``the state of the company's incorporation'' may appear narrower than 
the actual scope of the rule because some entities that may be subject 
to the rule, such as partnerships, are not ``incorporated.'' \16\ 
Accordingly, the rule as adopted refers to ``the laws of the 
jurisdiction of the company's organization.''
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    \15\ Rule 14-8(c)(1) [17 CFR 240.14a-8(c)(1)].
    \16\ See ABA Letter; ICCR Letter; Investment Company Institute, 
Dec. 30, 1997 (``ICI Letter'').
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    We are adopting minor plain--English revisions to paragraphs (2), 
(3), and (4) under Question 9, former rules 14a-8(c)(2),\17\ 
(c)(3),\18\ and (c)(4). Because we are not adopting the proposed 
substantive amendments to paragraph (5), former rule 14a-8(c)(5), we 
are making only minor, non-substantive modifications to the language of 
that rule so that it conforms to the new plain-English approach.
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    \17\ Rule 14a-8(c)(2) [17 CFR 240.14a-8(c)(2)].
    \18\ Rule 14a-8(c)(3) [17 CFR 240.14a-8(c)(3)].
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    We are adopting the revisions to former rule 14a-8(c)(6),\19\ now 
paragraph (6) under Question 9, as proposed.\20\
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    \19\ Rule 14a-8(c)(6) [17 CFR 240.14a-8(c)(6)].
    \20\ One commenter thought the proposed language could be read 
as precluding companies from excluding proposals that companies lack 
power to implement. See ABA Letter. To the contrary, the revised 
rule continues to refer to situations where a company lacks 
``power'' to implement the proposal. Thus, for example, exclusion 
may be justified where implementing the proposal would require 
intervening actions by independent third parties. See, e.g., SCEcorp 
(Dec. 20, 1995) (proposal that unaffiliated fiduciary trustees amend 
voting agreements). Under current staff interpretations, however, 
exclusion would not normally be justified if the proposal merely 
requires the company to ask for cooperation from a third party. See, 
e.g., Northeast Utilities System (Nov. 7, 1996) (proposal that the 
company ask a third party to coordinate annual meetings held by 
public companies).
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    While we are making minor conforming changes to the language of 
paragraph (7) under Question 9, formerly rule 14a-8(c)(7),\21\ we have 
decided not to adopt the proposed language changes to this rule, or the 
list of illustrative examples, other than to replace the reference to 
``registrant'' with ``company.'' \22\ We had proposed to revise the 
rule's language because we thought that the legal term-of-art 
``ordinary business'' might be confusing to some shareholders and 
companies. The term refers to matters that are not necessarily 
``ordinary'' in the common meaning of the word, and is rooted in the 
corporate law concept providing management with flexibility in 
directing certain core matters involving the company's business and 
operations. Several companies and shareholders nonetheless objected to 
the proposed revisions, particularly the elimination of the ``ordinary 
business'' language, on the ground that most participants in the 
shareholder proposal process are now so familiar with the ``ordinary 
business'' language that they might misconstrue the revisions as 
signaling an interpretive change.\23\ Indeed, since the meaning of the 
phrase ``ordinary business'' has been developed by the courts over the 
years through costly litigation and essentially has become a term-0f-
art in the proxy area, we recognize the possibility that the adoption 
of a new term could inject needless costs and other inefficiencies into 
the shareholder proposal process.
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    \21\ Rule 14a-8(c)(7) [17 CFR 240.14a-8(c)(7)].
    \22\ Two commenters suggested that we include a non-exclusive 
list of examples of matters particular to investment companies that 
would be excludable per se under the ordinary business exception. 
See ICI Letter; Gordon Altman Butowsky Weitzen Shalov & Wein, Dec. 
16, 1997. We have not followed the suggestion. We believe that 
investment companies are not sufficiently different from other types 
of issuers to make it appropriate for us to designate a predefined 
set of topics that would be excepted from the shareholder proposal 
process established under Rule 14a-8.
    \23\ See, e.g., ICCR Letter; Jessie Smith Noyes Foundation, Nov. 
14, 1997 (``Jessie Smith Noyes Letter''); Long View Collective 
Investment Fund, Jan. 5, 1998 (``Long View Letter''); ABA Letter; 
The Chase Manhattan Corp., Jan. 14, 1998 (``Chase Manhattan 
Letter'').
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    We are adopting with one modification the proposed language changes 
to paragraph (8) under Question 9, formerly rule 14a-8(c)(8).\24\ The 
rule as proposed would have permitted companies to exclude a proposal 
that ``relates to an election for membership on the company's board of 
directors.'' Based on a suggestion from one commenter, in order to 
account for non-corporate entities with principal governing bodies 
bearing names other than the ``board of directors,'' the rule as 
adopted refers explicitly to elections to an ``analogous governing 
body.'' \25\
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    \24\ Rule 14a-8(c)(8) [17 CFR 240.14a-8(c)(8)].
    \25\ See ABA Letter.
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    We are adopting as proposed our revisions to paragraph (9) under 
Question 9, formerly rule 14a-8(c)(9).\26\ As amended, the rule permits 
a company to exclude a proposal that ``directly conflicts with one of 
the company's own proposals to be submitted to shareholders at the same 
meeting.'' \27\
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    \26\ Rule 14a-8(c)(9) [17 CFR 240.14a-8(c)(9)].
    \27\ One commenter thought that the word ``directly'' may appear 
to signal a narrowing of the exclusion. See ABA Letter. We believe 
that the revisions accurately convey our current interpretations of 
the rule; of course, by revising the rule we do not intend to imply 
that proposals must be identical in scope or focus for the exclusion 
to be available. See, e.g., SBC Communications (Feb. 2, 1996) 
(shareholder proposal on calculation of non-cash compensation 
directly conflicted with company's proposal on a stock and incentive 
plan).
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    We are adopting as proposed the revisions to paragraphs (10) and 
(11) under Question 9, formerly rules 14a-8(c)(10) \28\ and 14a-
8(c)(11).\29\ The revisions to paragraph (10) reflect an interpretation 
that we adopted in 1983.\30\
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    \28\ Rule 14a-8(c)(10) [17 CFR 240.14a-8(c)(10)].
    \29\ Rule 14a-8(c)(11) [17 CFR 240.14a-8(c)(11)].
    \30\ In Exchange Act Release No. 20091 (Aug. 16, 1983) [48 FR 
38218], we stated that a proposal may be excluded under the rule if 
it has been ``substantially implemented.''
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    Although we are not adopting proposed substantive revisions to 
paragraph (12), formerly rule 14a-8(c)(12),\31\ we are adopting non-
substantive revisions to conform the rule to the new plain-English 
approach.
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    \31\ As explained in Section VI below, we have decided not to 
modify the percentage of the shareholder vote that a proposal must 
receive in order to be entitled to re-submission in future years.
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    The Commission, through the Division of Corporation Finance (the 
``Division''), anticipates establishing a special electronic mailbox 
only for rule 14a-8 correspondence through which both shareholders and 
companies will be permitted to make electronic submissions under this 
rule, including follow-up correspondence.

III. The Interpretation of Rule 14a-8(c)(7): The ``Ordinary 
Business'' Exclusion

    We proposed to reverse the position announced in the 1992 Cracker 
Barrel no-action letter concerning the Division's approach to 
employment-related shareholder proposals raising social policy 
issues.\32\ In that letter, the Division announced that

    \32\ See Cracker Barrel Old Country Stores, Inc. (Oct. 13, 
1992).
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    The fact that a shareholder proposal concerning a company's 
employment

[[Page 29108]]

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 
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governed by the employment-based nature of the proposal.

    We are adopting our proposal to reverse the Cracker Barrel 
position, which provided that all employment-related shareholder 
proposals raising social policy issues would be excludable under the 
``ordinary business'' exclusion.\33\ The Division will return to its 
case-by-case approach that prevailed prior to the Cracker Barrel no-
action letter.
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    \33\ The reversal is effective as of May 21, 1998, and will 
apply to future Division no-action responses. It will apply to any 
rule 14a-8 no-action submission that the Division has received 
before May 21, 1998 if the Division has not issued a corresponding 
no-action response by the close of business on May 20, 1998.
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    In applying the ``ordinary business'' exclusion to proposals that 
raise social policy issues, the Division seeks to use the most well-
reasoned and consistent standards possible, given the inherent 
complexity of the task. From time to time, in light of experience 
dealing with proposals in specific subject areas, and reflecting 
changing societal views, the Division adjusts its view with respect to 
``social policy'' proposals involving ordinary business. Over the 
years, the Division has reversed its position on the excludability of a 
number of types of proposals, including plant closings,\34\ the 
manufacture of tobacco products,\35\ executive compensation,\36\ and 
golden parachutes.\37\
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    \34\ See Pacific Telesis Group (Feb. 2, 1989).
    \35\ See Phillip Morris Companies, Inc.  (Feb. 13, 1990).
    \36\ See Reebok Int'l Ltd. (Mar. 16, 1992).
    \37\ See Transamerica Corp. (Jan. 10, 1990).
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    We believe that reversal of the Division's Cracker Barrel no-action 
letter, which the Commission had subsequently affirmed,\38\ is 
warranted. Since 1992, the relative importance of certain social issues 
relating to employment matters has reemerged as a consistent topic of 
widespread public debate.\39\ In addition, as a result of the extensive 
policy discussions that the Cracker Barrel position engendered, and 
through the rulemaking notice and comment process, we have gained a 
better understanding of the depth of interest among shareholders in 
having an opportunity to express their views to company management on 
employment-related proposals that raise sufficiently significant social 
policy issues.
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    \38\ See Letter dated January 15, 1993 from Jonathan G. Katz, 
Secretary to the Commission, to Sue Ellen Dodell, Deputy Counsel, 
Office of Comptroller, City of New York.
    \39\ See e.g., Investors Focus on Diversity at Texaco Annual 
Meeting: Company Faces 94 Discrimination Filings, The Washington 
Post, May 14, 1997; Shareholders Press Shoney's on Bias Issue, The 
New York Times, Dec. 26, 1976).
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    Reversal of the Cracker Barrel no-action position will result in a 
return to a case-by-case analytical approach. In making distinctions in 
this area, the Division and the Commission will continue to apply the 
applicable standard for determining when a proposal relates to 
``ordinary business.'' The standard, originally articulated in the 
Commission's 1976 release, provided an exception for certain proposals 
that raise significant social policy issues.\40\
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    \40\ See Exchange Act Release No. 12999 (Nov. 22, 1976) [41 FR 
52994].
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    While we acknowledge that there is no bright-line test to determine 
when employment-related shareholder proposals raising social issues 
fall within the scope of the ``ordinary business'' exclusion, the staff 
will make reasoned distinctions in deciding whether to furnish ``no-
action'' relief. Although a few of the distinctions made in those cases 
may be somewhat tenuous, we believe that on the whole the benefit to 
shareholders and companies in providing guidance and informal 
resolutions will outweigh the problematic aspects of the few decisions 
in the middle ground.
    Nearly all commenters from the shareholder community who addressed 
the matter supported the reversal of this position.\41\ Most commenters 
from the corporate community did not favor the proposal to reverse 
Cracker Barrel, though many indicated that the change would be 
acceptable as part of a broader set of reforms.\42\
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    \41\ See e.g., Calvert Group, Nov. 26, 1997 (``Calvert 
Letter''); Center for Responsible Investing, Rec'd Nov. 3, 1997; 
Captains Endowment Assoc., Rec'd Nov. 6, 1997; Social Investment 
Forum, Jan. 2, 1998 (``Social Investment Forum Letter'').
    \42\ See, e.g., ASCS Letter; ACCA Letter; BRT Letter; 
AlliedSignal Inc., Nov. 24, 1997; Ashland Inc., Nov. 21, 1997; LPA 
Letter; Sullivan & Cromwell, Dec. 29, 1997 (``Sullivan & Cromwell 
Letter'').
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    Going forward, companies and shareholders should bear in mind that 
the Cracker Barrel position related only to employment-related 
proposals raising certain social policy issues. Reversal of the 
position does not affect the Division's analysis of any other category 
of proposals under the exclusion, such as proposals on general business 
operations.
    Finally, we believe that it would be useful to summarize the 
principal considerations in the Division's application, under the 
Commission's oversight, of the ``ordinary business'' exclusion. 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 at an annual shareholders meeting.
    The policy underlying the ordinary business exclusion rests on 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 sufficiently significant social policy issues 
(e.g., significant discrimination matters) generally would not be 
considered to be excludable, because the proposals would transcend the 
day-to-day business matters and raise policy issues so significant that 
it would be appropriate for a shareholder vote.\43\
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    \43\ See, e.g., Reebok Int'l Ltd. (Mar. 16, 1992) (noting that a 
proposal concerning senior executive compensation could not be 
excluded pursuant to rule 14a-8(c)(7)).
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    The second consideration relates to the degree to which the 
proposal seeks to ``micro-manage'' the company by probing too deeply 
into matters of a complex nature upon which shareholders, as a group, 
would not be in a position to make an informed judgment.\44\ This 
consideration may come into play in a number of circumstances, such as 
where the proposal involves intricate detail, or seeks to impose 
specific time-frames or methods for implementing complex policies.
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    \44\ Exchange Act Release No. 12999 (Nov. 22, 1976).
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    A similar discussion in the Proposing Release of the primary 
considerations underlying our interpretation of the ``ordinary 
business'' exclusion as applied to such proposals raised some questions 
and concerns among some of the commenters. Because of that concern, we 
are providing clarification of that position.\45\ One aspect of that

[[Page 29109]]

discussion was the basis for some commenters' concern that the reversal 
of Cracker Barrel might be only a partial one. More specifically, in 
the Proposing Release we explained that one of the considerations in 
making the ordinary business determination was the degree to which the 
proposal seeks to micro-manage the company. We cited examples such as 
where the proposal seeks intricate detail, or seeks to impose specific 
time-frames or to impose specific methods for implementing complex 
policies. Some commenters thought that the examples cited seemed to 
imply that all proposals seeking detail, or seeking to promote time-
frames or methods, necessarily amount to ``ordinary business.'' \46\ We 
did not intend such an implication. Timing questions, for instance, 
could involve significant policy where large differences are at stake, 
and proposals may seek a reasonable level of detail without running 
afoul of these considerations.\47\
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    \45\ The exclusion has been interpreted previously by the 
Commission. See, e.g., Exchange Act Release No. 20091 (Aug. 16, 
1983) [48 FR 38218]; Exchange Act Release No. 12999 (Nov. 22, 1976) 
[41 FR 52994]; Exchange Act Release No. 4950 (Oct. 9, 1953) [18 FR 
6646]. It has also been interpreted by the courts. See, e.g., Grimes 
v. Ohio Edison Co., 992 F.2d 455 (2d Cir. 1993); Roosevelt v. E.I. 
Du Pont De Nemours & Co., 958 F.2d 416 (D.C. Cir. 1992); Medical 
Committee for Human Rights v. SEC, 432 F.2d 659 (D.C. Cir. 1970); 
New York City Employee's Retirement Sys. v. SEC, 843 F. Supp. 858, 
rev'd 45 F.3d 7 (2d Cir. 1995); Amalgamated Clothing and Textile 
Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 891 
(S.D.N.Y. 1993).
    \46\ See, e.g., ICCR Letter; LongView Letter; Letter from 
Professor Harvey J. Goldschmid of Columbia University School of Law, 
and Ira M. Millstein, Senior Partner, Weil, Gotshal & Manges LLP, 
Dec. 23, 1997 (``Goldschmid and Millstein Letter''). Compare Chase 
Manhattan Letter.
    \47\ See, e.g., Roosevelt v. E.I. Du Pont De Nemours & Co., 958 
F.2d at 424-427 (one-year difference in timing of CFC production 
phase-out does not implicate significant policy, but longer period 
might implicate significant policy). In Amalgamated Clothing and 
Textile Workers Union, 821 F. Supp. at 891, the court required Wal-
Mart to include a proposal in its proxy materials that sought 
information on the company's affirmative action policies and 
practices, although it also required the proponents to make certain 
revisions designed to ensure that the proposal did not seek 
excessive detail.
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    Further, in a footnote to the same sentence citing examples of 
``micromanagement,'' we included a citation to Capital Cities/ABC, 
Inc., (Apr. 4, 1991) involving a proposal on the company's affirmative 
action policies and practices.\48\ Some commenters were concerned that 
the citation might imply that proposals similar to the Capital Cities 
proposal today would automatically be excludable under ``ordinary 
business'' on grounds that they seek excessive detail. Such a position, 
in their view, might offset the impact of reversing the Cracker Barrel 
position. However, we cited Capital Cities/ABC, Inc. only to support 
the general proposition that some proposals may intrude unduly on a 
company's ``ordinary business'' operations by virtue of the level of 
detail that they seek. We did not intend to imply that the proposal 
addressed in Capital Cities, or similar proposals, would automatically 
amount to ``ordinary business.'' Those determinations will be made on a 
case-by-case basis, taking into account factors such as the nature of 
the proposal and the circumstances of the company to which it is 
directed.
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    \48\ See Proposing Release, Footnote 79.
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IV. Rule 14a-4: Discretionary Voting Authority

    We had proposed amendments to rule 14a-4, and related amendments to 
rule 14a-5, to provide clearer guidelines for companies' exercise of 
discretionary voting authority in connection with annual shareholder 
meetings.\49\ We are adopting our proposals with some modifications.
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    \49\ Discretionary voting authority is the ability to vote 
proxies that shareholders have executed and returned to the company, 
on matters not specifically reflected on the proxy card, and on 
which shareholders have not had an opportunity to vote by proxy. 
While not necessarily limited to annual meetings involving the 
election of directors, this has been the context in which companies 
have expressed concerns about proponents' attempts to ``end run'' 
around the rule 14a-8 process.
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    As we explained in the Proposing Release, rule 14a-4 did not 
clearly address the exercise of discretionary voting authority if a 
shareholder proponent chooses not to use rule 14a-8's procedures for 
placing his or her proposal in the company's proxy materials. This may 
occur if the proponent notifies the company in advance of the meeting 
of his or her intention to present the proposal from the floor of the 
meeting, and commences his or her own proxy solicitation, without ever 
invoking rule 14a-8's procedures. Our amendments to rule 14a-4(c)(1), 
and new paragraphs 14a-4 (c)(2) and (c)(3), are designed to provide 
companies with clearer guidance on the scope of permissible 
discretionary voting power in the context of a non-14a-8 proposal.

A. Rule 14a-4(c)(1)

    We are adopting essentially as proposed new rule 14a-4(c)(1), which 
replaces a ``reasonable time'' standard with a clear date after which 
notice to the company of a possible shareholder proposal would not 
jeopardize a company's ability to exercise discretionary voting 
authority on that new matter when and if raised at the annual meeting. 
Most commenters who addressed this proposal expressed favorable 
views.\50\ Amended paragraph 14a-4(c)(1) allows a company voting 
discretionary authority where the company did not have notice of the 
matter by a date more than 45 days before the month and day in the 
current year corresponding to the date on which the company first 
mailed its proxy materials for the prior year's annual meeting of the 
shareholders, or by a date established by an overriding advance notice 
provision.\51\
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    \50\ See, e.g., ICCR Letter; TIAA-CREF Letter; LongView Letter, 
BRT Letter; ACCA Letter; Barclays Global Investors, Dec. 4, 1997; 
United Brotherhood of Carpenters and Joiners of America 
(``Carpenters Letter''); International Union of Operating Engineers, 
Dec. 29, 1997 (``Engineers Letter''); International Brotherhood of 
Teamsters, Dec. 23, 1997 (``Teamsters Letter''). A few commenters 
did not favor the proposal. See e.g., Gannett Corp., Nov. 20, 1997; 
CALPERS Letter; Union of Needletrades, Industrial and Textile 
Employees, Jan. 2, 1998 (``UNITE Letter'').
    \51\ An advance notice provision is a requirement in a company's 
charter or bylaws that a shareholder proponent notify the company of 
his/her intention to present a proposal a certain number of days or 
weeks prior to the shareholders' meeting or the mailing of proxies.
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    As an example, assume a company mailed this year's proxy materials 
on March 31, 1998 for an annual meeting on May 1, 1998. Next year, the 
company also schedules an early May annual meeting. The notice date 
established by new rule 14a-4(c)(1) for non-14a-8 proposals is 45 days 
before March 31, or February 14. Thus February 14, 1999 would represent 
the notice date for the purposes of amended rule 14a-4(c)(1) unless a 
different date is established by an overriding advance notice provision 
in the company's charter or bylaws.\52\
---------------------------------------------------------------------------

    \52\ As amended, rule 14a-5(e) requires companies to disclose 
this date in each annual meeting proxy statement or its equivalent. 
See Section V below.
---------------------------------------------------------------------------

    A few commenters thought that advance notice of 45 days might 
provide an insufficient amount of time for some companies with longer 
printing and mailing schedules.\53\ However, we do not believe that it 
is necessary to extend the 45-day advance notice period, since most 
companies should have some flexibility under state law to prolong the 
period through advance notice provisions. We stated in the Proposing 
Release that we did not intend to interfere with the operations of 
state law authorized definitions of advance notice set forth in 
corporate bylaws and/or articles of incorporation, and a number of 
commenters supported this approach.\54\ Accordingly, an advance notice 
provision would override the 45-day period under rule 14a-4, resulting

[[Page 29110]]

in a shorter \55\ or longer period.\56\ The rule continues to require 
inclusion of a specific statement, in either the proxy statement or 
proxy card, of an intent to exercise discretionary voting authority in 
these circumstances.
---------------------------------------------------------------------------

    \53\ See, e.g., ACCA Letter; Citicorp, Dec. 23, 1997 (``Citicorp 
Letter'').
    \54\ See, e.g., Air Products and Chemicals, Inc., Dec. 22, 1997; 
NationsBank, Nov. 21, 1997; BRT Letter; Sullivan & Cromwell Letter. 
Other commenters who generally supported proposed new paragraph 14a-
4(c)(1) did not note an objection to this aspect of the rules 
operation. See e.g., Carpenters Letter, Longview Letter; Engineers 
Letter; ICCR Letter; TIAA-CREF Letter.
    \55\ A company that mails its proxy materials before the 
expiration of the period established by an advance notice bylaw 
would continue to be subject to the notice even though it has 
already mailed its proxies.
    \56\ One commenter suggested that we move the parenthetical 
referring to the effect of advance notice provisions from the middle 
of the first sentence of paragraph 14a-4(c)(1) as proposed to the 
end of that sentence in order to clarify that an advance notice 
provision would override the 45-day period established by the rule 
whether the provision runs from the meeting date or from the mailing 
date. See Sullivan & Cromwell Letter. We agree and have made the 
revision.
---------------------------------------------------------------------------

    Paragraph 14a-4(c)(1) as adopted continues to incorporate a 
``reasonable time'' standard if the company did not hold an annual 
meeting of shareholders during the prior year, or if the date of the 
annual meeting has changed by more than 30 days from the prior year. 
While one commenter suggested an alternative mechanism designed to 
provide a more specific ``default'' date, we were concerned that such 
an alternative approach might make the rule unjustifiable complex.\57\
---------------------------------------------------------------------------

    \57\ See Sullivan & Cromwell Letter.
---------------------------------------------------------------------------

B. Rule 14a-4(c)(2)

    Proposed new paragraph 14a-4(c)(2) addressed a company's ability to 
exercise discretionary voting authority for an annual shareholders' 
meeting notwithstanding its receipt of ``timely'' advance notice of a 
non-14a-8 shareholder proposal as defined by paragraph 14a-4(c)(1).\58\ 
We are adopting new paragraph (c)(2), but with some modifications of 
the original proposal.
---------------------------------------------------------------------------

    \58\ A few commenters also thought that we should further 
clarify that new paragraph 14a-4(c)(2) comes into play only if the 
company receives timely notice of a non-14a-8 proposal for the 
purposes of paragraph (c)(1). We added clarifying language to the 
end of paragraph (c)(1) and the beginning of paragraph (c)(2) in 
response to these comments.
---------------------------------------------------------------------------

    As originally proposed, paragraph 14a-4(c)(2) would have permitted 
the exercise of discretionary voting authority by company management if 
the company's proxy materials were to include: (i) in the proxy 
statement, a discussion of the nature of the matters as to which 
adequate advance notice has been received, and how the company intends 
to exercise its discretion to vote on each such matter should it be 
presented to shareholders at the meeting, 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 designated matter(s). The pre-conditions to 
reliance on the rule are discussed below.
1. Proxy Statement Disclosure
    On the first pre-condition of the proposed rule, requiring 
disclosure of the nature of potential non-14a-8 shareholder proposals, 
a number of commenters objected to our use of the word ``discussion.'' 
\59\ In their view, the word ``discussion'' appears to signal a 
departure from the Division's current position expressed in its Idaho 
Power and Borg-Warner no action letter responses.\60\ Under those no-
action responses, companies must only ``advise'' shareholders of, 
rather than ``discuss,'' the nature of proposals that may be raised. 
Because we intended no departure from the disclosure element of the 
Division's no-action position, paragraph (c)(2) as adopted replaces the 
word ``discussion'' with ``advice.'' We remind you that the disclosure 
prescribed by amended rule 14a-4(c)(2), as with any disclosure item, 
must take into account the disclosure requirements of the proxy anti-
fraud rule.\61\
---------------------------------------------------------------------------

    \59\ See e.g., Chevron Corp, Nov. 25, 1997; USX Corp., Dec. 18, 
1997.
    \60\ Idaho Power Co. (Mar 13, 1996); Borg-Warner Security Corp. 
(Mar. 14, 1996).
    \61\ See rule 14a-9 [17 CFR 240.14a-9].
---------------------------------------------------------------------------

2. No Separate Voting Box
    On the second pre-condition of proposed paragraph 14a-4(c)(2), a 
number of commenters objected to the inclusion of a separate voting 
``box'' permitting shareholders to withhold discretionary authority 
from management on a non-14a-8 shareholder proposal as to which 
adequate advance notice had been received in the context of an annual 
meeting or its equivalent. Some stated that a voting box permitting 
shareholders to withhold discretionary voting authority in some 
circumstances may be confusing if shareholders are also independently 
solicited by the proponent in support of the same proposal.\62\ We 
agree that inclusion of the proposed box on companies' proxy cares may 
be confusing in some circumstances.\63\
---------------------------------------------------------------------------

    \62\ See, e.g., Georgeson Letter; ICCR Letter; UNITE Letter; 
Davis, Cowell & Bowe, LLP, Jan. 2, 1998. One commenter gave the 
following example. An insurgent sends out a proxy card seeking 
shareholder votes on its shareholder resolution. A shareholder who 
receives the insurgent's card votes in favor of the proposal, and 
executes and returns the insurgent's card. But then the company 
either solicits, or resolicits, the same shareholder, and includes a 
``withhold'' box on management's proxy card relating to the same 
non-14a-8 proposal. Since the shareholder does not wish to grant 
management discretionary voting authority on the proposal, it checks 
the box. But then, in the commenter's view, it may be unclear 
whether the shareholder has executed a subsequent proxy that revokes 
the shareholder's execution of the insurgent's card under applicable 
state law. See ICCR Letter at 32-33.
    \63\ A few commenters from the shareholder community suggested 
that we overcome possible confusion by requiring companies to permit 
shareholders to vote ``for'' or ``against'' non-14a-8 proposals. 
Commenters from the corporate community that addressed the matter 
opposed such an approach, and we believe that the amendments adopted 
today adequately accomplish our goal of providing clearer guidelines 
in this area. Contrary to the statements by some commenters, it is 
not necessarily a precondition for the exercise of discretionary 
voting authority under the Division's current no-action letters that 
companies include an extra item on their proxy cards permitting 
shareholders to vote ``for'' or ``against'' non-14a-8 proposals. See 
Idaho Power and Borg-Warner.
---------------------------------------------------------------------------

    Other commenters objected to the separate voting box because they 
believe that the potential availability of the box would in effect 
create a new system for submitting shareholder proposals without having 
to comply with the restrictions under rule 14a-8.\64\ In their view, 
the prospect of obtaining a voting box with a cross-reference to 
disclosure of the nature of the potential proposal in the proxy 
statement would encourage the submission of more shareholder proposals 
outside rule 14a-8's mechanisms.
---------------------------------------------------------------------------

    \64\ See, eg., BRT Letter; ASCS Letter; J.C. Penny Company, Dec. 
19, 1997; Champion Int'l Corp., Dec. 18, 1997; International Paper, 
Nov. 19, 1997.
---------------------------------------------------------------------------

    Accordingly, we have decided not to include the new voting box as 
part of new rule 14a-4(c)(2). A shareholder's execution of a proxy card 
will confer discretionary voting authority if the requirements of the 
rule are satisfied.
3. Percentage of Shareholders to be Solicited
    Several commenters also objected to proposed new paragraph 14a-
4(c)(2) on grounds that it would permit a company to exercise 
discretionary voting authority at an annual shareholders meeting even 
if the shareholder proponent had independently solicited the percentage 
of shareholders required to carry the proposal.\65\ These commenters 
believe that a company should not be permitted to vote uninstructed 
proxies if the proponent has put the proposal ``in play'' by providing 
a proxy statement and form of proxy to a significant percentage of the 
company's sharehownership. On this point, proposed paragraph 14a-
4(c)(2) represented a departure from the

[[Page 29111]]

``percentage of shares solicited'' standard articulated in the 
Division's Idaho Power and Borg-Warner no-action positions.
---------------------------------------------------------------------------

    \65\ See, e.g., Mr. Jack Sheinkman, Vice-Chair Amalgamated Bank 
of New York, and President Emeritus Amalgamated Clothing and Textile 
Workers Union AFL-CIO, CLC, Nov. 7, 1997; Service Employees Int'l 
Union, Dec. 31, 1997; Engineers Letter; Carpenters Letter; National 
Electrical Benefit Fund, Dec. 22, 1997 (``NEBF Letter'').
---------------------------------------------------------------------------

    In response to these comments, and in light of our decision not to 
adopt the proposal to require that the Company include an additional 
box on its proxy cards for withholding discretionary voting authority, 
we have decided to codify the ``percentage of shares solicited'' 
standard of the Division's current no-action positions. The final rule 
therefore precludes a company from exercising discretionary voting 
authority on matters as to which it has received adequate advance 
notice if the proponent provides the company as part of that notice 
with a statement that it intends to solicit the percentage of 
shareholder votes required to carry the proposal, followed with 
specified evidence that the stated percentage had actually been 
solicited.
    As we explained in the Proposing Release, this aspect of the 
Division's no-action position had been the source of uncertainty for 
companies. A company may not know whether a shareholder intends to 
begin to solicit proxies independently, or how many shareholders will 
be solicited if a solicitation is actually commenced. We understand 
that in a number of instances companies were forced to guess whether 
its ability to exercise discretionary authority had been restricted. A 
number of commenters from both the corporate and shareholder 
communities suggested that we overcome the potential for uncertainty by 
requiring proponents to provide advance written notice if they intend 
to deliver a proxy statement and form of proxy to holders of at least 
the minimum number of the company's voting shares that is required to 
carry the proposal, including measures to help ensure that such notice 
is bona fide.\66\
---------------------------------------------------------------------------

    \66\ See, e.g., NEBF Letter, Carpenters Letter; UNITE Letter, 
Engineers Letter; Long View Letter; Citicorp Letter; Questar Corp., 
Dec. 31, 1997; Harrah's Entertainment, Inc., Dec. 31, 1997; see also 
Goldschmid and Millstein Letter.
---------------------------------------------------------------------------

    We have revised new paragraph (c)(2) to reflect these comments, and 
the rule as adopted requires a shareholder proponent to provide the 
company with written notice within the timeframe established by 
paragraph 14a-4(c)(1), that is, earlier than 45 days or in compliance 
with advance notice provisions. In order to help ensure that the notice 
has been provided in good faith, paragraph 14a-4(c)(2) as adopted also 
requires the proponent to repeat the statement (that it intends to 
solicit proxies to prevail) in its proxy materials to underscore the 
applicability of rule 14a-9, the anti-fraud rule. To further emphasize 
this point, and to provide interested parties with the ability to 
proceed against a proponent that does not fulfill its good faith 
promise to solicit the required number of shareholders, the rule 
requires the proponent to provide the company with a statement from the 
solicitor or other person with knowledge indicating that the proponent 
has taken the steps necessary to solicit the percentage of the 
company's shareownership required to approve the proposal. A statement 
executed by the shareholder insurgent will satisfy this requirement 
only to the extent that it was actually involved in carrying out the 
solicitation.

C. Rule 14a-4(c)(3)

    We are also adopting a new paragraph 14a-4(c)(3) to further clarify 
the rule's operation in connection with special shareholders' meetings 
and other solicitations. Rules 14a-4(c)(1) and 14a-4(c)(2) as proposed 
to be amended, and as adopted, establish a clearer framework for 
companies' exercise of discretionary voting authority for annual 
shareholder meetings or their functional equivalents. We did not intend 
for that framework to apply to other solicitations, or to solicitations 
by persons other than management, such as special meetings or consent 
solicitations unrelated to the election of directors, which would 
continue to be governed by the ``reasonable time'' standard that had 
applied to all solicitations under former rule 14a-4(c)(1). Although 
there does not appear to have been confusion among commenters on this 
point, new paragraph (c)(3), and new introductory language to new 
paragraphs (c)(1) and (c)(2), should help clarify the point.
    Tracking much of the language of former paragraph 14a-4(c)(1), new 
paragraph (c)(3) provides for the exercise of discretionary voting 
authority ``[f]or solicitations other than for annual meetings or for 
solicitations by persons other than the registrant, [on] matters which 
the persons making the solicitation do not know, a reasonable time 
before the solicitation, are to be presented at the meeting, if a 
specific statement to that effect is made in the proxy statement or 
form of proxy.'' \67\
---------------------------------------------------------------------------

    \67\ See United Mine Workers versus Pittston Co., [1989-1990 
Transfer Binder] Fed. Sec. L. Rep. (CCH) P 94,946 (D.D.C. Nov. 24, 
1989); and Larkin versus Baltimore Bancorp, 769 F. Supp. 919 (D. Md. 
1991).
---------------------------------------------------------------------------

D. Filing in Preliminary Form

    Finally, in the Proposing Release, we stated that during the 1996 
proxy season the Division permitted several companies to avoid filing 
proxy materials in preliminary form despite receipt of adequate advance 
notification of a non-14a-8 shareholder proposal, so long as these 
companies disclosed in their proxy statements the nature of the 
proposal and how management intended to exercise discretionary voting 
authority if the proposal were actually to be presented to a vote at 
the meeting. We also stated that, in light of the proposed amendments 
to rule 14a-4, we might reverse that informal position, so that 
companies receiving notice of a non-14a-8 proposal before the filing of 
their proxy materials would be required to file their materials in 
preliminary form to preserve discretionary voting authority under rule 
14a-4(c)(2). A number of commenters opposed reversal of the position, 
stating that in ordinary circumstances little would be gained by staff 
review of this material, and that potential delays resulting from 
preliminary filings could unjustifiably interfere with companies' 
mailing schedules.\68\ The Division has decided not to reverse its 
position at this time, but may evaluate the position again in the 
future after monitoring proxy filings under the amended rules.
---------------------------------------------------------------------------

    \68\ See, e.g., ABA Letter; BRT Letter; ASCS Letter; Goldschmid 
and Millstein Letter. A few commenters within the shareholder 
community supported reversal of the position. See, e.g., Engineers 
Letter; Carpenters Letter.
---------------------------------------------------------------------------

V. Other Amendments

    We are adopting other modifications to rules 14a-8 and 14a-5.
    We are adopting as proposed the answer to Question 1 of the amended 
rule defining a proposal as a request or requirement that the board of 
directors take an action.\69\ One commenter objected to the proposal on 
grounds that the definition appeared to preclude all shareholder 
proposals seeking information.\70\ In formulating the definition, it 
was not our intention to preclude proposals merely because they seek 
information, and the fact that a proposal seeks only information will 
not alone justify exclusion under the definition.
---------------------------------------------------------------------------

    \69\ For favorable comments, see, e.g., TIAA-CREF Letter; ABA 
Letter; GE Stockholders' Alliance, Oct. 16, 1997. But see, e.g., 
ICCR Letter.
    \70\ See Calvert Letter.
---------------------------------------------------------------------------

    Also as proposed, we are increasing the dollar value of a company's 
voting shares that a shareholder must own in order to be eligible to 
submit a shareholder proposal--from $1,000 to $2,000--to adjust for the 
effects of inflation since the rule was last revised.\71\ There was 
little opposition to

[[Page 29112]]

the proposed increase among commenters, although several do not believe 
the increase is great enough to be meaningful, especially in light of 
the overall increase in stock prices over the last few years.\72\ 
Nonetheless, we have decided to limit the increase to $2,000 for now, 
in light of rule 14a-8's goal of providing an avenue of communication 
for small investors. There was no significant support for any 
modifications to the rule's other eligibility criteria, such as the 
one-year continuous ownership requirement.
---------------------------------------------------------------------------

    \71\ See The answer to Question 2.
    \72\ See, e.g., ASCS Letter; ABA Letter; BRT Letter; see also 
ICCR Letter.
---------------------------------------------------------------------------

    A number of commenters supported, and few opposed, our proposal to 
establish a uniform 14-day period in which shareholders would be 
required to respond to a company's notification that the shareholder 
has failed to comply with one or more procedures under rule 14a-8, such 
as the submission deadlines and the rule's for establishing proponent 
eligibility.\73\ We are adopting the 14-day period as proposed. In 
response to one commenter's suggestion, we have added a sentence to the 
rule clarifying that a company need not provide notice of a deficiency 
that cannot be remedied. If the company intends to exclude the 
proposal, it nonetheless would later have to make a submission under 
rule 14a-8, and provide a copy to the proponent.\74\
---------------------------------------------------------------------------

    \73\ See, e.g., ABA Letter; ASCS Letter; TIAA-CREF Letter; GE 
Stockholders' Alliance, Oct. 16, 1997. But see ICCR Letter; 
Carpenters Letter.
    \74\ See Rule 14a-8(j)(Question10).
---------------------------------------------------------------------------

    We are also adopting amendments to rule 14a-5(e), with a few 
modifications from our proposals. As proposed to be amended, that rule 
would require companies to disclose the date after which proposals 
submitted outside the framework of rule 14a-8 are considered untimely 
for the purposes of amended rule 14a-4(c)(1).\75\
---------------------------------------------------------------------------

    \75\ See Section IV above. The new information, if applicable, 
would be disclosed under Item 5 of Form 10-Q or 10-QSB (``Other 
Information'').
---------------------------------------------------------------------------

    Two commenters objected to our proposal to amend rule 14a-5(e) to 
require disclosure of the date by which shareholders must notify the 
company of any non-14a-8 proposals under amended rule 14a-4(c)(1).\76\ 
They were concerned that disclosure of the date would appear to 
formalize a new system for submitting shareholder proposals in 
competition with the mechanisms of rule 14a-8, and would encourage the 
submission of proposals outside of that process. We do not agree that 
mere disclosure of the date would likely have that effect, and we 
believe that disclosure is necessary because shareholders often would 
not have enough information to deduce the date reliably on their own. 
We are also adopting the other proposed modifications to rule 14a-5(e) 
designed to streamline the rule's operation.
---------------------------------------------------------------------------

    \76\ See ABA Letter; New York State Bar Letter.
---------------------------------------------------------------------------

    One commenter pointed out that it is unclear from the rule as 
drafted whether the new disclosure in the company's proxy statement 
should reflect the ``default'' date under amended rule 14a-4(c)(1), or 
instead the date established by an overriding advance notice provision, 
if any.\77\ We have revised the rule to clarify that companies should 
disclose the date established by an overriding advance notice 
provision, and in the absence of such a provision, the ``default'' date 
for submitting non-14a-8 proposals, which normally would be 45 days 
before the date the company mailed its proxy materials for the prior 
year. Because the rule also requires companies to disclose the deadline 
for submitting rule 14a-8 proposals, companies' disclosure should 
clearly distinguish between the two dates.
---------------------------------------------------------------------------

    \77\ See W.R. Grace & Co., Oct. 28, 1997.
---------------------------------------------------------------------------

    Finally, in the answer to Question 8 of amended rule 14a-8, we 
proposed to include an advisory that the proponent or the proponent's 
representative make sure that he/she follows applicable procedures 
proper under state law for appearing at the meeting and/or presenting 
the proposal. Most commenters who addressed the proposal viewed the 
advisory as a helpful aid.\78\ We have included the advisory as 
proposed.
---------------------------------------------------------------------------

    \78\ See, e.g., CALPERS Letter; ICCR Letter; ASCS Letter.
---------------------------------------------------------------------------

VI. Proposals Not Adopted

    We have decided not to adopt some of our original proposals, due in 
part to concerns expressed by some commenters. These proposals 
generally received support from some commenters, but equally strong 
opposition from others.

Personal Grievance Exclusion

    Paragraph (4) under Question 9, formerly rule 14a-8(c)(4), permits 
companies to exclude proposals furthering personal grievances or 
special interests. We had proposed to modify the way the Division 
administers the rule so that the staff would concur in the exclusion of 
a proposal on this ground only if the proposal on its face were to 
relate to a personal grievance or special interest. In other 
circumstances, under our proposal, the Division would express ``no 
view'' in its no-action response. The proposal reflected our view that 
the Division's ability to make the necessary factual findings is 
limited in the context of evaluating an otherwise ``facially neutral'' 
proposal, and that companies and shareholders themselves possess much 
of the factual information relevant to the applicability of the 
``personal grievance'' exclusion.
    Shareholders expressed serious concerns about this proposal.\79\ A 
number of commenters from the shareholder community were concerned that 
companies might use the increased flexibility provided by a ``no view'' 
no-action response to exclude proposals that do not in actuality 
further personal grievances of special interests. In their view, a 
shareholder, in these circumstances, might be forced to incur the 
expense of litigation to prevent exclusion of the proposal. Some 
shareholders, for instance, were concerned that companies might rely on 
the rule to exclude proposals focusing on social policy matters.\80\ We 
agree that the proposal might increase the likelihood of disputes 
between shareholders and companies. We have therefore decided not to 
implement the proposal, and will continue to administer the rule 
consistently with our current practice of making case-by-case 
determinations on whether the rule permits exclusion of particular 
proposals.
---------------------------------------------------------------------------

    \79\ See e.g., ICCR Letter; Teamsters Letter; Captains Endowment 
Ass'n, rec'd Nov. 6, 1997; Davis, Cowell & Bowe LLP, Jan. 2, 1998 
(``Davis, Cowell & Bowe Letter'').
    \80\ Social issue proposals are generally not excludable under 
paragraph (4). In 1983, we amended the rule to clarify that it would 
not apply, without other factors, to exclude a proposal ``relating 
to an issue in which proponent was personally committed or 
intellectually and emotionally interested.'' Exchange Act Release 
No. 20091 (Aug. 16, 1983)[48 FR 38218].
---------------------------------------------------------------------------

Resubmission Thresholds

    If a proposal fails to receive a specified level of support, 
paragraph (12) under Question 9, formerly rule 14a-8(c)(12), 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 had proposed to 
raise the percentage thresholds respectively to 6%, 15%, and 30%.
    Many commenters from the shareholder community expressed serious 
concerns about this proposal.\81\

[[Page 29113]]

We have decided not to adopt the proposal, and to leave the thresholds 
at their current levels.
---------------------------------------------------------------------------

    \81\ See, e.g., ICCR Letter; NYCERS Letter; Calvert Letter; 
Social Investment Forum Letter; the School Sisters of Notre Dame, 
Oct. 20, 1997; the Conference on Corporate Responsibility of Indiana 
and Michigan, Oct. 14, 1997; CALPERS Letter (indicating that it 
might support more modest increases in the thresholds); but see 
TIAA-CREF Letter (supporting the increases at the levels proposed). 
These commenters were concerned that the increases would operate to 
exclude too great a percentage of proposals--particularly those 
focusing on social policy issues which tend to receive lower 
percentages of the shareholder vote.
---------------------------------------------------------------------------

Proposed Override Mechanism

    We had proposed a new mechanism that would have permitted 3% of a 
company's shareownership to override the ``ordinary business'' 
exclusion and the ``relevance'' exclusion, paragraphs (7) and (5) under 
Question 9.
    Several commenters opposed the proposal.\82\ Other commenters 
supported the override concept as proposed, but expressed concerns 
about specific aspects, including whether the proposed 3% threshold may 
be too low and lead to erosion of the ``ordinary business'' and 
``relevance'' exclusions that would be subject to an override.\83\ Some 
shareholders thought the opposite, that 3% support of a company's 
shareownership would be too difficult for a shareholder proponent to 
obtain.
---------------------------------------------------------------------------

    \82\ Former paragraphs (c)(7) and (c)(5) of rule 14a-8. See, 
e.g., ABA Letter; ACCA Letter; LPA Letter; AT&T, Dec. 24, 1997; 
Household Int'l, Inc., Jan. 6, 1998; Federal Express Corp., Jan. 2, 
1998; ICI Letter (concerned that proposal if adopted might be costly 
and disruptive for investment companies).
    \83\ See, e.g., ASCS Letter; BRT Letter; FMC Corp., Dec. 5, 
1997; Ford Motor Company, Dec. 23, 1997; New York State Bar Letter.
---------------------------------------------------------------------------

    We have decided not to adopt the proposed ``override'' mechanism. 
Because we are not adopting the ``override,'' we also are not adopting 
ancillary amendments designed to help implement the mechanism, 
including the proposed qualified exemption under the proxy rules, the 
proposed safe harbor from the beneficial ownership reporting 
requirements under section 13(d) of the Exchange Act, and the proposed 
shortening of companies' deadlines for making their rule 14a-8 no-
action submissions to the Division.

The ``Relevance'' Exclusion

    Paragraph (5) under Question 9 permits companies to exclude 
proposals

    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.

    We had proposed to revise the rule to apply a purely economic 
standard. Under the proposal, the exception for proposals that are 
``otherwise significantly related'' would have be deleted. A company 
would have been 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.
    Few commenters indicated strong support for the proposed 
amendments, and we are not making any substantive changes to the rule. 
Many commenters within the corporate community agreed in concept with 
our proposal to base the rule on an objective economic standard, and to 
eliminate the subjective ``not otherwise significantly related'' part 
of the rule.\84\ But most of those commenters thought that the proposed 
$10 million threshold was so low that companies would too infrequently 
be in a position to rely on the exclusion. Comments from the 
shareholder community were mixed.\85\ Some shareholders opposed the 
elimination of the ``not otherwise significantly related'' part of the 
rule, while other shareholders expressed varying degrees of support for 
the approach, with some expressing concern that companies might apply 
the rule to exclude proposals on subjects that are difficult to 
quantify, despite the ``safeguards'' that we included as part of the 
proposed amendments.
---------------------------------------------------------------------------

    \84\ See, e.g., ASCS Letter; BRT Letter; Unocal Corp., Nov. 24, 
1997.
    \85\ See, e.g., TIAA-CREF Letter; CALPERS Letter; Carpenters 
Letter; Jessie Smith Noyes Letter; NYCERS Letter; ICCR Letter.
---------------------------------------------------------------------------

Statements in Opposition: Commission Review

    Finally, we had proposed eliminating rule 14a-8(e), which requires 
a company to provide a proponent with an advance copy of any statement 
in opposition to the proposal that it intends to include in its proxy 
materials. This provision also provides a mechanism for shareholders to 
bring materially false or misleading statements to the Division's 
attention. A number of commenters from the shareholder community 
opposed elimination of these procedures because they believed that the 
potential for proponent objections deters companies from making 
materially false or misleading statements, and encourages negotiation 
between the company and proponent.\86\ We have decided not to adopt 
that proposal, and are retaining the mechanisms of former rule 14a-8(e) 
in the context of the answer to Question 13 of amended rule 14a-8.
---------------------------------------------------------------------------

    \86\ See, e.g., ICCR Letter; LongView Letter. See also ICI 
Letter.
---------------------------------------------------------------------------

VII. Final Regulatory Flexibility Analysis

    We have prepared this Final Regulatory Flexibility Analysis under 5 
U.S.C. 603 concerning the amendments to rules 14a-8, 14a-4, and 14a-5 
as a follow-up to the Initial Regulatory Flexibility Analysis 
(``IRFA'') that we prepared in connection with the Proposing 
Release.\87\ We received few comments, and no significant empirical 
data, in response to the requests for further information included in 
the IRFA.
---------------------------------------------------------------------------

    \87\ See Proposing Release, Section V.
---------------------------------------------------------------------------

    The purpose of the amendments is to streamline the operation of the 
rule, and address concerns raised by both shareholder and corporate 
participants. We are adopting the amendments pursuant to Sections 14 
and 23 of the Exchange Act \88\ and Section 20(a) of the Investment 
Company Act of 1940 \89\ (Investment Company Act'').
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78m, 78n, & 78u.
    \89\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

    Specifically, we are:
    <bullet> Recasting rule 14a-8 into a more plain-English Question & 
Answer format;
    <bullet> Reversing the Craker Barrel interpretive position on 
employment-related proposals raising significant social policy issues; 
and
    <bullet> Amending rule 14a-4 to provide shareholders and companies 
with clearer guidance on companies' exercise of discretionary voting 
authority.
    We have decided not to adopt other elements of our original 
proposals. We are not adopting  our original proposals to:
    <bullet> Increase the percentage of the vote a proposal must 
receive before it can be resubmitted in future years if it is not 
approved;
    <bullet> Streamline the exclusion for matters considered irrelevant 
to corporate business,\90\
---------------------------------------------------------------------------

    \90\ Paragraph (5) under Question 9, former rule 14a-8(c)(5).
---------------------------------------------------------------------------

    <bullet> Modify our administration of the rule permitting companies 
to exclude proposals furthering personal grievances of special 
interests; or
    <bullet> Implement an ``override'' mechanism that would have 
permitted 3% of the share ownership to override a company's decision to 
exclude a proposal under certain of the bases for exclusion set forth 
under Question 9 of amended rule 14a-8.\91\
---------------------------------------------------------------------------

    \91\ Because we are not adopting the proposed ``override'', we 
also are not adopting certain measures, designed to enable 
shareholders to use it, including the proposed qualified exemption 
from the proxy rules, and safe harbor from beneficial ownership 
reporting obligations under Section 13(d) of the Exchange Act.

---------------------------------------------------------------------------

[[Page 29114]]

    The amendments will 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.\92\ 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.\93\ 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.
---------------------------------------------------------------------------

    \92\ 17 CFR 240.0-10.
    \93\ 17 CFR 270.0-10.
---------------------------------------------------------------------------

    Therefore, we believe approximately 250 small entity investment 
companies may be affected by the amendments.

Plain-English Question & Answer Format

    Our revision of rule 14a-8 to create a more understandable Question 
& Answer format should help decrease the time and expense incurred by 
both shareholders and companies attempting to comply with its 
provisions companies frequently consult with legal counsel in preparing 
no-action 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.
    No comments submitted empirical data demonstrating how much it 
costs companies to consider and prepare an individual no-action 
submission under rule 14a-8. Question 13 of a Questionnaire that we 
made available in February 1997 \94\ 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 they wish 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 of making a determination whether to include a 
proposal reported by 80 companies averaged approximately $37,000.\95\ 
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, depending on the 
number of proposals received and how many the company seeks to exclude 
under the staff no-action letter process.
---------------------------------------------------------------------------

    \94\ See Proposing Release, Footnote 14.
    \95\ This 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.
---------------------------------------------------------------------------

    Because the rule's added clarity may make it easier for 
shareholders to understand the procedures for submitting shareholder 
proposals, the amendments may encourage shareholders to submit more 
shareholder proposals to companies each year. In turn, companies may be 
required to make more rule 14a-8 no-action submissions to the 
Commission.
    In the period from September 30, 1996 to September 30, 1997, we 
received submissions from a total of 245 companies, and only 6 (i.e., 
2%) were ``small businesses.'' While we received no empirical data on 
the number of small businesses that receive shareholder proposals each 
year, one commenter with substantial experience submitting shareholder 
proposals to companies reported that small companies seldom receive 
shareholder proposals.\96\
---------------------------------------------------------------------------

    \96\ ICCR Letter at 9.
---------------------------------------------------------------------------

    We also received no empirical information in response to our 
request for data on the marginal cost of including an additional 
shareholder proposal in companies' proxy materials. However, the 
Questionnaire asked each company respondent how much money on average 
it spends in the aggregate 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 approximately 
$50,000.\97\ By contrast, one commenter noted that the cost for 
companies, excluding the largest corporations, should average about 
$10,000 per proposal.\98\ 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.
---------------------------------------------------------------------------

    \97\ This 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.
    \98\ See ICCR Letter at 9-10.
---------------------------------------------------------------------------

    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. Accordingly, any costs of including an 
additional proposal should be offset, at least partially, by not having 
to make a rule 14a-8 submission. No commenters responded to our request 
for empirical data on the potential cost savings.

Reversal of Cracker Barrel

    In the 1992 Cracker Barrel no-action letter, the Division stated 
that henceforth it would concur in the exclusion of all employment-
related shareholder proposals raising social policy issues under rule 
14a-8(c)(7), the ``ordinary business'' exclusion. Before the 
announcement of the position, the Division analyzed employment related 
proposals tied to social issues on a case-by-case basis, concurring in 
the exclusion of some, but not others. Reversal of the position will 
result in a return to the case-by-case analysis that prevailed before 
the position was announced.
    Our decision to reverse the Cracker Barrel position on employment-
related shareholder proposals may therefore result in an increase in 
the number of employment-related proposals tied to social issues that 
are submitted to companies each year, and that companies must include 
in their proxy materials. During the 1997 proxy season, the Division 
received approximately 30 submissions involving employment-related 
proposals tied to social issues, none from ``small businesses.'' \99\
---------------------------------------------------------------------------

    \99\ No commenters provided information on the likely impact 
reversal of the position will have on the number of shareholder 
proposals submitted to companies each year.
---------------------------------------------------------------------------

    While it is unclear whether the number of proposals submitted to 
small businesses and included in their proxy statements will increase 
as a result of the reversal of Cracker Barrel, we have analyzed under 
``Plain English Question & Answer Format'' above the potential costs to 
companies of considering and including additional proposals in their 
proxy materials.

Discretionary Voting Authority

    The amendments to rule 14a-4 should favorably affect companies, 
including ``small businesses,'' because they would provide clearer 
ground rules as to the ability to exercise discretionary voting power 
when a shareholder presents a proposal without invoking rule 14a-8. We 
do not routinely record information on the number of ``small 
businesses'' that receive non-rule 14a-8 proposals

[[Page 29115]]

each year, since non-14a-8 proposals do not necessarily lead to a 
submission to the Commission. The Investor Responsibility Research 
Center (``IRRC'') has reported to the Commission staff, however, that 
it is aware of a total of 19 independent proxy solicitations during 
calendar years 1996 and 1997 in support of non-14a-8 proposals, and 
none appear to have involved ``small businesses.'' In addition, one 
commenter indicated that, since 1991, there have been 66 independent 
shareholder solicitations in support of shareholder resolutions.\110\ 
None of the companies subject to the 66 solicitations appear to have 
been ``small businesses.''
---------------------------------------------------------------------------

    \100\ UNITE Letter.
---------------------------------------------------------------------------

    To the extent that ``small businesses'' receive such proposals, we 
believe that the amendments to rule 14a-4 will favorably affect them by 
reducing uncertainty, and decreasing the likelihood that such companies 
would have to incur the delay and expense of rescheduling the 
shareholders meeting, or resoliciting shareholders. Some commenters 
thought that the proposal to require companies wishing to preserve 
voting authority to include an extra voting box on their proxy cards 
might encourage the submission of more non-14a-8 shareholder proposals. 
We have decided not to adopt that aspect of our original proposal. Some 
shareholders thought that the amendments as proposed might effectively 
inhibit independent proxy solicitations because they would have 
permitted companies to retain voting authority even if the shareholder 
solicited the percentage of shareownership required to carry the 
proposal. We also have decided not to adopt that aspect of our original 
proposal.
    Under our amendments to rule 14a-4, a company wishing to preserve 
discretionary voting authority on certain proposals that might be 
presented to a vote may be required to advise shareholders of the 
nature of such proposals. We note, however, that this precondition is 
consistent with the Division's no-action positions predating the 
adoption of the amendments. No commenters provided empirical data on 
incremental costs likely to result from this amendment to rule 14a-4. 
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, and that adding more than three-fourths of a 
page could increase costs by about $1,500 for an average sized company.
    Under our amendments to rule 14a-4, a shareholder undertaking an 
independent proxy solicitation would be required to provide a company 
with advance written notice of its intention to solicit the percentage 
of the company's shareownership to carry the proposal, followed by 
other measures to help ensure that the notice has been provided in good 
faith. These amendments would impose no additional costs on companies 
receiving such notice, since no action by them is required. The 
amendments should impose only de minimis additional costs on 
shareholders who undertake independent proxy solicitations.\101\
---------------------------------------------------------------------------

    \101\ In order to comply, an insurgent is required to send to 
the company advance written notice of its intention to solicit the 
percentage of a company's shareownership required to carry the 
proposal, followed by evidence of the solicitation, and to include 
what should in most cases amount to little more than an additional 
sentence in the insurgent's proxy statement.
---------------------------------------------------------------------------

    Our 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 considered significant alternatives to the proposed amendments 
for small entities with a class of securities registered under the 
Exchange Act. We considered, for instance, exempting 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 II of this release, we are 
recasting and reformatting rule 14a-8 into a more understandable, 
Question & Answer format. As explained in Section IV above, we are 
adopting clearer guidelines for companies' exercise of discretionary 
voting authority under rule 14a-4. These modifications should simplify 
and facilitate compliance by all companies, including small entities. 
We do not believe that there is any appropriate way further to 
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 are amending are not specifically designed 
to achieve certain levels of performance. 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.

VIII. Cost-Benefit Analysis

    This cost-benefit analysis follows a preliminary analysis request 
for comments and empirical information included in the Proposing 
Release.\102\ We received few comments and no significant empirical 
data, in response to our requests for further information.
---------------------------------------------------------------------------

    \102\ See Proposing Release, Section VI.
---------------------------------------------------------------------------

    The amendments to the rules on shareholder proposals 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 make the rule understandable to the numerous 
shareholders and companies that refer to the rule each year, ensure 
that companies include certain employment-related proposals raising 
significant social policy issues in their proxy materials, and 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.
    Specifically, we are:
    <bullet> Recasting rule 14a-8 into a more plain-English Question & 
Answer format;
    <bullet> Reversing the Cracker Barrel interpretive position on 
employment-related proposals raising significant social policy issues; 
and
    <bullet> Amending rule 14a-4 to provide shareholders and companies 
with clearer guidance on companies' exercise of discretionary voting 
authority.

[[Page 29116]]

    We have decided not to adopt other elements of our original 
proposals. We are not adopting our original proposals to:
    <bullet> Increase the percentage of the vote a proposal must 
receive before it can be resubmitted in future years if it is not 
approved;
    <bullet> Streamline the exclusion for matters considered irrelevant 
to corporate business;\103\
---------------------------------------------------------------------------

    \103\ Paragraph (5) under Question 9, former rule 14a-8(c)(5).
---------------------------------------------------------------------------

    <bullet> Modify our administration of the rule permitting companies 
to exclude proposals furthering personal grievances of special 
interests; or
    <bullet> Implement an ``override'' mechanism that would have 
permitted 3% of the share ownership to override a company's decision to 
exclude a proposal under certain of the bases for exclusion set forth 
under Question 9 of amended rule 14a-8.\104\
---------------------------------------------------------------------------

    \104\ Because we are not adopting the proposed ``override'', we 
also are not adopting certain measures designed to enable 
shareholders to use it, including the proposed qualified exemption 
from the proxy rules, and safe harbor from beneficial ownership 
reporting obligations under Section 13(d) of the Exchange Act.
---------------------------------------------------------------------------

    We have considered whether the amendments we are adopting would 
promote efficiency, competition and capital formation. 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.

Plain-English Question & Answer Format

    Our revision of the rule to create a more understandable Question & 
Answer format should help decrease the time and expense incurred by 
both shareholders and companies attempting to comply with its 
provisions. Companies frequently consult with legal counsel in 
preparing no-action 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.
    No commenters submitted empirical data demonstrating how much it 
costs companies to consider and prepare an individual no-action 
submission under rule 14a-8. 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 
they wish 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 approximately $37,000.\105\
---------------------------------------------------------------------------

    \105\ This 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.
---------------------------------------------------------------------------

    Because the revised rule's added clarity may make it easier for 
shareholders to understand the procedures for submitting shareholder 
proposals, the amendments may encourage shareholders to submit more 
shareholder proposals to companies each year. In turn, companies may be 
required to make more rule 14a-8 no-action submissions to the 
Commission. A study conducted by one commenter reports that, each year, 
shareholder proposals come to a vote at 226 companies from among the 
1,500 largest U.S. companies.\106\
---------------------------------------------------------------------------

    \106\ See Shareholder Rights Analysis: The Impact of Proposed 
SEC Rules on Resubmission of Shareholder Resolutions, Social 
Investment Forum Foundation, Dec. 10, 1997.
---------------------------------------------------------------------------

    We also received no information in response to our request for data 
on the marginal cost of including an additional shareholder proposal in 
companies' proxy materials. However, the Questionnaire asked each 
company respondent how much money on average it spends in the aggregate 
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 approximately $50,000.\107\ By contrast, one commenter 
thought that this estimate is too high, although large companies in his 
view would incur relatively higher costs.\108\
---------------------------------------------------------------------------

    \107\ This 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.
    \108\ See ICCR Letter at 9-10.
---------------------------------------------------------------------------

    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.\109\ Accordingly, any costs of including an 
additional proposal should be offset, at least partially, by not having 
to make a rule 14a-8 submission. No commenters responded to our request 
for empirical data on the potential cost savings.
---------------------------------------------------------------------------

    \109\ In the period from September 30, 1996 to September 30, 
1997, we received approximately 400 submissions under rule 14a-8.
---------------------------------------------------------------------------

Reversal of Cracker Barrel

    In the 1992 Cracker Barrel no-action letter, the Division stated 
that henceforth it would concur in the exclusion of all employment-
related shareholder proposals raising social policy issues under rule 
14a-8(c)(7), the ``ordinary business'' exclusion. Before the 
announcement of the position, the Division analyzed employment related 
proposals tied to social issues on a case-by-case basis, concurring in 
the exclusion of some, but not others. Reversal of the position will 
result in a return to the case-by-case analysis that prevailed before 
the position was announced.
    Our decision to reverse the Cracker Barrel position on employment-
related shareholder proposals may therefore result in an increase in 
the number of employment-related proposals tied to social issues that 
are submitted to companies each year, and that companies must include 
in their proxy materials. During the 1997 proxy season, the Division 
received approximately 30 submissions involving employment-related 
proposals tied to social issues.\110\
---------------------------------------------------------------------------

    \110\ No commenters provided information on the likely impact 
reversal of the position will have on the number of shareholder 
proposals submitted to companies each year.
---------------------------------------------------------------------------

    We have analyzed under ``Plain English Question & Answer Format'' 
above the potential costs to companies of considering and including 
additional proposals in their proxy materials.
    Shareholder proposals could have a positive or negative impact, or 
no impact, on the price of a company's securities.\111\ Relatively few 
shareholder proposals are approved by shareholders each year, and the 
few that are approved typically focus on corporate governance matters 
rather than social issues.\112\ Based on information provided to us by 
IRRC, we understand that for calendar year 1997, 22 proposals obtained

[[Page 29117]]

shareholder approval out of a total of 376 proposals submitted to 
shareholder votes. Ten were proposals to repeal classified boards 
(i.e., boards with staggered terms). Ten sought redemption of 
companies' shareholder rights plans. One focused on ``golden 
parachute'' payments to executives (i.e., large payments typically 
contingent upon corporate change of control). One sought to restrict 
director pension benefits.
---------------------------------------------------------------------------

    \111\ See, e.g., Michael P. Smith, Shareholder Activism by 
Institutional Investors: Evidence from CalPERS, The Journal of 
Finance, Vol. LI, No. 1, March 1996; Sunil Wahal, Pension Fund 
Activism and Firm Peformance, Journal of Financial and Quantitative 
Analysis, Vol. 31, No. 1, March 1996.
    \112\ 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 may have an identifiable 
impact on shareholder wealth. Examples are proposals on voting and 
nomination procedures for board members, and proposals to restrict or 
eliminate companies' shareholder rights plans (i.e., ``posion pills''). 
The amendments we are adopting do not focus on those type of proposals, 
and should not affect shareholders' ability to include them in 
companies proxy materials. Additionally, shareholder proposals on 
social issues may improve investor confidence in the securities markets 
by providing investors with a sense that as shareholders they have a 
means to express their views to the management of the companies in 
which they invest.

Discretionary Voting Authority

    The amendments to rule 14a-4 should favorably affect companies 
because they should provide clearer ground rules as to the ability to 
exercise discretionary voting power when a shareholder presents a 
proposal without invoking rule 14a-8.
    We do not collect information on the number of companies that 
receive non-rule 14a-8 proposals each year, since such proposals do not 
necessarily lead to a submission to the Commission. However, IRRC has 
reported to the Commission staff that, during the 1997 calendar year, 
it is aware of only two independent solicitations in support of non-
14a-8 shareholder resolutions, down from 17 solicitations for calendar 
year 1996. In addition, one commenter indicated that, since 1991, there 
have been 66 independent shareholder solicitations in support of 
shareholder resolutions.\113\
---------------------------------------------------------------------------

    \113\ UNITE Letter.
---------------------------------------------------------------------------

    To the extent ``small businesses'' receive such proposals, we 
believe that the amendments to rule 14a-4 will favorably affect them by 
reducing uncertainty, and decreasing the likelihood of incurring the 
delay and expense of rescheduling the shareholders meeting and/or 
resoliciting shareholders. Reducing the potential for uncertainty 
should also help to decrease the likelihood of related litigation.
    One company estimated the cost of sending supplemental proxy 
material to its shareholders at about $170,000.\114\ Thus, if the 
amendments permit companies to avoid resolicitations on five occasions, 
the savings would amount to about $850,000.\115\
---------------------------------------------------------------------------

    \114\ See Harrah's Entertainment, Inc., Dec. 31, 1997
    \115\ We have no basis for estimating reliably how many 
resolicitations, if any, are likely to be avoided in any given year 
as a result of the amendments.
---------------------------------------------------------------------------

    Another commenter submitted information on the legal costs of 
representing insurgent shareholders in connection with court actions 
under the proxy rules.\116\ According to that commenter, attorneys' 
fees and costs incurred by the insurgent ranged from $17,517 to 
$75,421. It is not clear whether these actions involved rule 14a-5 or 
discretionary voting authority, and they do not include the legal costs 
of other parties or any other associated expenses.
---------------------------------------------------------------------------

    \116\ Davis, Cowell & Bowe Letter at 4.
---------------------------------------------------------------------------

    Some commenters thought that the proposal to require companies 
wishing to preserve voting authority to include an extra voting box on 
their proxy cards might encourage the submission of more non-14a.8 
shareholder proposals, as well as confusion among shareholders. We have 
decided not to adopt that aspect of our original proposal. Other 
commenters thought that the proposals might effectively inhibit 
independent proxy solicitations because they would have provided 
companies with a means to retain voting authority even if the 
shareholder solicited the percentage of shareownership required to 
carry the proposal. We also have decided not to adopt that aspect of 
our original proposal.
    Under our amendments to rule 14a-4, a company, wishing to preserve 
discretionary voting authority on certain proposals that might be 
presented to a vote, may be required to advise shareholders of the 
nature of such proposals. We note, however, that this precondition is 
consistent with the Division's no-action positions predating the 
adoption of these amendments. No commenters provided empirical data on 
incremental costs likely to result from these amendments to rule 14a-4. 
Daniels Financial Printing informed the staff that is most cases adding 
up to three-fourths of a page in the proxy statement would not increase 
the cost to the company, and that adding more than three-fourths of a 
page could increase costs by about $1,500 for an average sized company.
    Under our amendments to rule 14a-4, a shareholder undertaking an 
independent proxy solicitation would be required to provide a company 
with advance written notice of its intention to solicit the percentage 
of the company's shareownership to carry the proposal, followed by 
other measures to help ensure that the notice has been provided in good 
faith. These amendments would impose no additional costs on companies 
receiving such notice, since no action by them is required. The 
amendments should impose only de minimis additional costs on a 
shareholder undertaking an independent proxy solicitation.\117\
---------------------------------------------------------------------------

    \117\ In order to comply, an insurgent is required to send to 
the company advance written notice of its intention to solicit the 
percentage of a company's shareownership required to carry the 
proposal, followed by evidence of the solicition, and to include 
what should in most cases amount to little more than an additional 
sentence in the insurgent's proxy statement.
---------------------------------------------------------------------------

    Our amendment to rule 14a-5 would require companies to disclose an 
additional data 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.
    Section 23(a) of the Exchange Act \118\ requires the Commission to 
consider any anti-competitive effects of any rules it adopts thereunder 
and the reasons for its determination that any burden on competition 
imposed by such rules is necessary or appropriate to further the 
purposes of the Exchange Act. The Commission has considered the impact 
this rulemaking will have on competition and believes that the 
amendments will not impose a significant burden on competition.
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 78w(a)
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    Regulation 14A \119\ 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 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.
---------------------------------------------------------------------------

    \119\ 17 CFR 240.14a-101.

---------------------------------------------------------------------------

[[Page 29118]]

    The amendments to rules 14a-8, 14a-4(c), and 14a-5 should make it 
easier for shareholder proponents to include in companies' proxy 
materials employment-related shareholder proposals raising significant 
social policy matters, and provide companies subject to the proxy rules 
with clearer ground rules for the exercise of discretionary voting 
authority. The amendments should also make rule 14a-8 easier to 
understand the follow. 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 
received no Paperwork Reduction Act comments relating to the 
amendments.
    As set forth in the Proposing Release,\120\ 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. Sec. 3501 et seq.). The Commission had submitted the 
amendments to those rules to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. Sec. 3507(d) and 5 
CFR. 1320.11. The title for the collection of information is 
``Regulation 14A.'' Except as explained below, the amendments should 
have no impact on the total estimated burden hours for Regulation 
14A.\121\
---------------------------------------------------------------------------

    \120\ See Proposing Release, Section VII.
    \121\ 17 CFR 240.14a-101.
---------------------------------------------------------------------------

    As originally proposed, amended rule 14a-4 would have in some 
circumstances required companies to include an extra voting box in 
their proxy cards in order to preserve discretionary voting authority. 
We are not, however, adopting that requirement, which we believe would 
have increased the total annual burden by only a negligible amount, or 
not at all.\122\ We are adopting a requirement under rule 14a-4 that a 
shareholder insurgent in some circumstances provide a company with 
advance written notice of its intention to solicit the percentage of a 
company's shareownership necessary to approve the proposal, followed by 
evidence of the solicitation, and by negligible additional disclosures 
in the insurgent's proxy statement.\123\ We estimate that these 
additional requirements, in the context of other amendments adopted 
today, will increase the annual burden under Regulation 14A for a 
shareholder insurgent by approximately one hour per shareholder 
proponent, and that approximately 10 proponents will have to comply 
each year. Accordingly, we have increased our estimated total 
compliance burden for Regulation 14A by a total of 10 hours, to 810,935 
hours.
---------------------------------------------------------------------------

    \122\ See Section IV above.
    \123\ Id.
---------------------------------------------------------------------------

    Providing the information required by Regulation 14A is mandatory 
under Section 14(a) of the Exchange Act. The information will not be 
kept confidential. Unless a currently valid OMB control number is 
displayed on the Schedule 14A, the Commission may not sponsor or 
conduct or require response to an information collection. The OMB 
control number is 3235-0059. The collection is in accordance with 44 
U.S.C. Sec. 3507.

X. Statutory Basis And Text of Amendments

    We are adopting amendments to Rules 14a-8, 14a-4, and 14a-5 under 
the authority set forth in Sections 13, 14 and 23 of the Securities 
Exchange Act of 1943, 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 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, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *
    a. By amending Sec. 240.14a-4 by revising the introductory text 
of paragraph (c) and paragraph (c)(1), redesignating paragraphs 
(c)(2) through (c)(5) as paragraphs (c)(4) through (c)(7), and 
adding new paragraphs (c)(2) and (c)(3), to read as follows:


Sec. 240.14a-4  Requirements as to proxy.

* * * * *
    (c) A proxy may confer discretionary authority to vote on any of 
the following matters:
    (1) For an annual meeting of shareholders, if the registrant did 
not have notice of the matter at least 45 days before the date on which 
the registrant first mailed its proxy materials for the prior year's 
annual meeting of shareholders (or date specified by an advance notice 
provision), and a specific statement to that effect is made in the 
proxy statement or form of proxy. If during the prior year the 
registrant did not hold an annual meeting, or if the date of the 
meeting has changed more than 30 days from the prior year, then notice 
must not have been received a reasonable time before the registrant 
mails its proxy materials for the current year.
    (2) In the case in which the registrant has received timely notice 
in connection with an annual meeting of shareholders (as determined 
under paragraph (c)(1) of this section), if the registrant includes, in 
the proxy statement, advice on the nature of the matter and how the 
registrant intends to exercise its discretion to vote on each matter. 
However, even if the registrant includes this information in its proxy 
statement, it may not exercise discretionary voting authority on a 
particular proposal if the proponent:
    (i) Provides the registrant with a written statement, within the 
time-frame determined under paragraph (c)(1) of this section, that the 
proponent intends to deliver a proxy statement and form of proxy to 
holders of at least the percentage of the company's voting shares 
required under applicable law to carry the proposal;
    (ii) Includes the same statement in its proxy materials filed under 
Sec. 240.14a-6; and
    (iii) Immediately after soliciting the percentage of shareholders 
required to carry the proposal, provides the registrant with a 
statement from any solicitor or other person with knowledge that the 
necessary steps have been taken to deliver a proxy statement and form 
of proxy to holders of at least the percentage of the company's voting 
shares required under applicable law to carry out the proposal.
    (3) For solicitations other than for annual meetings or for 
solicitations by persons other than the registrant, matters which the 
persons making the solicitation do not know, a reasonable time before 
the solicitation, are to be presented at the meeting, if a specific 
statement to that effect is made in the proxy statement or form of 
proxy.
    3. By amending Sec. 240.14a-5 by revising paragraph (e), and adding 
paragraph (f), to read as follows:


Sec. 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

[[Page 29119]]

form of proxy for the registrant's next annual meeting, calculated in 
the manner provided in Sec. 240.14a-8(d)(Question 4); and
    (2) The date after which notice of a shareholder proposal submitted 
outside the processes of Sec. 240.14a-8 is considered untimely, either 
calculated in the manner provided by Sec. 240.14a-4(c)(1) or as 
established by the registrant's advance notice provision, if any, 
authorized by applicable state law.
    (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 shareholders of such change, and the new dates 
referred to in paragraphs (e)(1) and (e)(2) of this section, by 
including a notice, under Item 5, in its earliest possible quarterly 
report on Form 10-Q (Sec. 249.308a of this chapter) or Form 10-QSB 
(Sec. 249.308b of this chapter), or, in the case of investment 
companies, in a shareholder report under Sec. 270.30d-1 of this chapter 
under the Investment Company Act of 1940, or, if impracticable, any 
means reasonably calculated to inform shareholders.
    4. By revising Sec. 240.14a-8 to read as follows:


Sec. 240.14a-8  Shareholder proposals.

    This section addresses when a company must include a shareholder's 
proposal in its proxy statement and identify the proposal in its form 
of proxy when the company 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 this 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, which you intend to present at a meeting of the 
company's shareholders. 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, the 
company must also provide in the form of proxy means for shareholders 
to specify by boxes a choice between approval or disapproval, or 
abstention. 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 must 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 as a shareholder, 
the company can verify your eligibility on its own, although you will 
still have to provide the company with a written statement that you 
intend to continue to hold the securities through the date of the 
meeting of shareholders. 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 (Sec. 240.13d-101), Schedule 13G (Sec. 240.13d-
102), Form 3 (Sec. 249.103 of this chapter), Form 4 (Sec. 249.104 of 
this chapter) and/or Form 5 (Sec. 249.105 of this chapter), or 
amendments to those documents or updated forms, 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 30 days 
from last year's meeting, you can usually find the deadline in one of 
the company's quarterly reports on Form 10-Q (Sec. 249.308a of this 
chapter) or 10-QSB (Sec. 249.308b of this chapter), or in shareholder 
reports of investment companies under Sec. 270.30d-1 of this chapter of 
the Investment Company Act of 1940. In order to avoid controversy, 
shareholders should submit their proposals by means, including 
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

[[Page 29120]]

Questions 1 through 4 of this section? (1) The company may exclude 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, or transmitted 
electronically, no later than 14 days from the date you received the 
company's notification. A company need not provide you such notice of a 
deficiency if the deficiency cannot be remedied, such as if you fail to 
submit a proposal by the company's properly determined deadline. If the 
company intends to exclude the proposal, it will later have to make a 
submission under Sec. 240.14a-8 and provide you with a copy under 
Question 10 below, Sec. 240.14a-8(j).
    (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 all 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 excluded? Except as otherwise noted, 
the burden is on the company to demonstrate that it is entitled to 
exclude 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 the proper state law procedures for attending 
the meeting and/or presenting your proposal.
    (2) If the company holds it shareholder meeting in whole or in part 
via electronic media, and the company permits you or your 
representative to present your proposal via such media, then you may 
appear through electronic media 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 will be permitted 
to exclude all 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 exclude my 
proposal? (1) Improper under state law: If the proposal is not a proper 
subject for action by shareholders under the laws of the jurisdiction 
of the company's organization;

    Note to paragraph (i)(1): Depending on the subject matter, some 
proposals are not considered proper under state law if 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 to which it 
is subject;

    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 could 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 
Sec. 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 is not shared by the other 
shareholders at large;
    (5) Relevance: If the proposal relates to operations which account 
for less than 5 percent of the company's total assets at the end of its 
most recent fiscal year, and for less than 5 percent of its net earning 
sand gross sales for its most recent fiscal year, and is not otherwise 
significantly related to the company's business;
    (6) Absence of power/authority: If the company would lack the power 
or authority to implement the proposal;
    (7) Management functions: If the proposal deals with a matter 
relating to the company's ordinary business operations;
    (8) Relates to election: If the proposal relates to an election for 
membership on the company's board of directors or analogous governing 
body;
    (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 exclude 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 3% of the vote if proposed once within the preceding 
5 calendar years;
    (ii) Less than 6% of the vote on its last submission to 
shareholders if proposed twice previously within the preceding 5 
calendar years; or
    (iii) Less than 10% of the vote on its last submission to 
shareholders if proposed three times or more previously within the 
preceding 5 calendar years; and
    (13) Specific amount of dividends: If the proposal relates to 
specific amounts of cash or stock dividends.
    (j) Question 10: What procedures must the company follow if it 
intends to exclude my proposal? (1) If the company intends to exclude a 
proposal from its proxy materials, it must file its reasons with the 
Commission 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 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 of the following:
    (i) The proposal;
    (ii) An explanation of why the company believes that it may exclude 
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.

[[Page 29121]]

    (k) Question 11: 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 should submit six paper copies of 
your response.
    (l) Question 12: 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.
    (m) Question 13: What can I do if the company includes in its proxy 
statement reasons why it believes shareholders should not vote in favor 
of my proposal, and I disagree with some of its statements?
    (1) The company may elect to include in its proxy statement reasons 
why it believes shareholders should vote against your proposal. The 
company is allowed to make arguments reflecting its own point of view, 
just as you may express your own point of view in your proposal's 
supporting statement.
    (2) However, if you believe that the company's opposition to your 
proposal contains materially false or misleading statements that may 
violate our anti-fraud rule, Sec. 240.142-9, you should promptly send 
to the Commission staff and the company a letter explaining the reasons 
for your view, along with a copy of the company's statements opposing 
your proposal. To the extent possible, your letter should include 
specific factual information demonstrating the inaccuracy of the 
company's claims. Time permitting, you may wish to try to work out your 
differences with the company by yourself before contacting the 
Commission staff.
    (3) We require the company to send you a copy of its statements 
opposing your proposal before it mails its proxy materials, so that you 
may bring to our attention any materially false or misleading 
statements, under the following timeframes:
    (i) If our no-action response requires that you make revisions to 
your proposal or supporting statement as a condition to requiring the 
company to include it in its proxy materials, then the company must 
provide you with a copy of its opposition statements no later than 5 
calendar days after the company receives a copy of your revised 
proposal; or
    (ii) In all other cases, the company must provide you with a copy 
of its opposition statements no later than 30 calendar days before its 
files definitive copies of its proxy statement and form of proxy under 
Sec. 240.14a-6.

    Dated: May 21, 1998.

    By the Commission.
Margaret McFarland,
Deputy Secretary.
[FR Doc. 98-14121 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-P