Opinion ID: 2814625
Heading Depth: 2
Heading Rank: 4

Heading: Exclusion of Shareholder Proposals

Text: Though the Rule 14a-8 option is financially advantageous, it does not “create an open forum for shareholder communication.” Palmiter at 886. Rule 14a-8 restricts the company-subsidy to “shareholders who offer ‘proper’ proposals.” Id. at 879; see also 17 C.F.R. § 240.14a- 8 (“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.”). A “proper” proposal is one that doesn’t fit within one of Rule 14a-8’s exclusionary grounds—which are both substantive and procedural. The procedural exclusions of the rule “protect the solicitation process without regard to a proposal’s content[.]” Palmiter at 886. For example, the proponent “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 [it] submit[s] the proposal.” 17 C.F.R. § 240.14a-8(b)(1). It can “submit no more than one proposal to a company for a particular shareholders’ meeting.” Id. at § 240.14a-8(b)(2)(i). And the 28 “proposal, including any accompanying supporting statement, may not exceed 500 words.” Id. at § 240.14a-8(d). The rule’s substantive exclusions, by contrast, are “the most frequently used (and most litigated).” Palmiter at 890. They include (1) the “proper subjects” exclusion, which exists “[i]f the proposal is not a proper subject for action by shareholders under the law of the jurisdiction of the company’s organization,” 17 C.F.R. § 240.14a-8(i)(1); (2) the “false or misleading” exclusion, which allows companies to bar proposals that are too vague, id. at § 240.14a-8(i)(3); (3) the “substantially related” exclusion, which says that a proposal is excludable if it “relates to operations which account for less than 5 percent of the company’s total assets [and net earnings and gross sales] at the end of its most recent fiscal year . . . , and is not otherwise significantly related to the company’s business,” id. at § 240.14a-8(i)(5); and, most relevant for purposes of this opinion, (4) the “ordinary business” exclusion, which disallows a proposal that “deals with a matter relating to the company’s ordinary business operations,” id. at § 240.14a-8(i)(7). See Palmiter 890. If a company wants to invoke one of these grounds to exclude a proposal, the process is as follows. First, it must notify the shareholder in writing of the problem with the proposal within 14 days of receiving it and inform the shareholder that it has 14 days to respond. Id. at § 240.14a- 8(f)(1). If the company finds the shareholder’s response unpersuasive and still wants to exclude the proposal, it then must file with the Corp. Fin. staff the reasons why it believes the proposal is excludable no later than 80 days before the company files its proxy materials with the SEC. Id. at § 240.14a-8(j)(1). In this letter, the company may also ask the staff for a no-action letter to support the exclusion of a proposal. See Donna M. Nagy, Judicial Reliance on Regulatory Interpretation in S.E.C. No-Action Letters: 29 Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921, 939 (1998) (“Although Rule 14a-8 merely prescribes notification and filing requirements, virtually all companies that decide to omit a shareholder proposal seek a no-action letter in support of their decision.”). If the shareholder wants to respond, it can file a submission noting why exclusion would be improper. 17 C.F.R. § 240.14a-8(k). The staff will respond in one of two ways: (1) with a no-action letter, specifying that the company may omit the shareholder proposal under the exclusion(s) it relied on; or (2) that it is “unable to concur” with the company.7 A shareholder dissatisfied with the staff’s response can, as Trinity did here, pursue its rights against the company in federal court.8 7 “[B]efore the SEC staff makes a decision on Rule 14a-8 noaction requests, there are at least three levels of attorney review by a ‘task force’ dedicated to reviewing Rule 14a-8 no-action requests[.]” See Wal-Mart Br. 37–38 (outlining layers of review); see also Apache Corp. v. New York City Emps.’ Ret. Sys., 621 F. Supp. 2d 444, 448 n.3 (S.D. Tex. 2008) (describing no-action review process) (citing Thomas P. Lenke, The SEC No-Action Letter Process, 42 Bus. Law. 1019, 1027–28 (1987)). 8 Although rare, the Commission itself may choose to review a no-action letter. Even then, its determination would become a final order only if it “impose[d] an obligation, den[ied] a right or fix[ed] some legal relationship as a consummation of the administrative process.” Amalgamated Clothing & Textile Workers Union v. S.E.C., 15 F.3d 254, 257 (2d Cir. 1994) (citations & internal quotation marks omitted); see also 30