The Burden of the Burden of Proof Under Rule 14a-8

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Elizabeth Trower[*]

Rule 14a-8 (the Rule) serves as vehicle for communications between companies and investors. Considered a fixture of the shareholder governance movement, the Rule to some degree amounts to an extension of ownership rights granted under state law. The Rule affords shareholders of a publicly traded company the right to include proposals in the annual proxy materials. The Rule also includes thirteen substantive grounds to omit a proposal.

The burden of establishing an exclusion generally falls on the issuer. The SEC Staff (Staff), however, has provided little guidance on the level of evidence needed to meet the requirement. Indeed, analysis suggests that, in fact, the Staff often does not require that issuers meet this burden by providing empirical support for factual assertions made in no action letter requests.

This Article seeks to examine the history of the company’s burden of proof under Rule 14a-8. Part II of this Article traces the development of the burden from the first mention in 1954 to the eventual inclusion in the language of the rule. Part III focuses on the modern application of the burden. Finally, Part IV argues that the Staff of the Commission has at times required such little evidence as to effectively render the burden of proof meaningless.

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The State of the State Law Exclusion Under Rule 14a-8(i)(1)

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Maureen McIntee[*]

Rule 14a-8 of the Securities Exchange Act of 1934 (Rule) requires public companies to include stockholder proposals in its proxy statements. The Rule, however, contains thirteen substantive grounds for exclusion. Subsection (i)(1) permits exclusion if “the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.”

Regarding the first exclusion inserted into the Rule, the Securities and Exchange Commission (SEC or Commission) originally sought to ensure that the rights of stockholders coincided with state law.  State law, therefore, determined the eligibility of a proposal.  Commonly omitted proposals included those mandating the compensation of officers and directors, infringing on shareholder rights to approve amendments to the articles, and mandating the board take the steps necessary to achieve a sale or merger.  In at least some cases, however, the Commission declined to apply the exclusion to proposals that contained precatory rather than mandatory language.

This article will first examine the administrative history of Rule 14a-8(i)(1).  The next section will focus on staff interpretations through no action letters, particularly those addressing the conflict between mandatory and precatory language in shareholder proposals. The last section will critique the state law exclusion and suggest possible reforms in the SEC staff’s interpretation of the provision.

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Eliminating the Post-Submission Holding Period Under Rule 14a-8

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Megan Herr[*]

Rule 14a-8 (the Rule) allows shareholders to include proposals in the proxy materials of public companies. The Rule, however, also contains a number of eligibility requirements.  Specifically, shareholders must continuously hold “at least $2,000 in market value” or one percent of the company’s voting securities “for at least one year” before submitting a shareholder proposal in a company’s proxy statement.  In addition, the Rule imposes a “post-submission” holding period requiring proponents to continuously retain the shares through the date of the annual meeting.  Violation of the “post-submission” holding period results in a penalty; the proponent cannot submit another proposal to the same company for the following two calendar years.

Initially, the Rule did not contain minimum ownership requirements or mandatory holding periods. The Securities and Exchange Commission (SEC or Commission) added a “post-submission holding period,” first through informal interpretation and later through an amendment to the Rule. In addition, the Commission included a “pre-submission” holding period.  In an effort to ensure that shareholders had “some measured economic stake or investment interest in the corporation” and “curb abuses” in the proxy process, proponents had to own shares for twelve months prior to the submission of the proposal. The two holding periods came into the Rule for related reasons. Yet the Commission never examined the impact of one on the other.

Part I of this Article will discuss the administrative history of the post-submission holding period and the two-year penalty under Rule 14a-8(f)(2). After providing some history on the requirement, Part II will examine the SEC’s interpretation of shareholder eligibility and the obligation to hold shares through the date of the shareholder meeting. Finally, Part III considers the problems presented by the exclusion and suggests some changes to the Rule.

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Limits on the Word Limit Under Rule 14a-8

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Daniel Hamilton[*]

The Securities Exchange Act (Exchange Act or Act) granted the Securities and Exchange Commission (SEC or Commission) the authority to regulate the proxy process.  In exercising that authority, the Commission adopted Rule 14a-8 (Rule).  The Rule requires public companies to include shareholder proposals in their proxy materials.

The original version of the rule imposed a word limitation on supporting statements but not the actual proposal.  As a result, shareholders sometimes submitted excessively long proposals.  Eventually, the Commission imposed a cap of 500-words on the entire submission.  To enforce the requirement, the SEC developed a number of counting rules that addressed the use of numbers, web site addresses, symbols, and hyphenated words.  The counting limit also included words and numbers contained in images and charts.

This article will first review the administrative history of the word limit.  The Commission has amended the word limit on a number of occasions, at least in some instances as a result of issuer complaints.  This article will next analyze the staff’s interpretation of the limit, with a particular focus on the period after 1998.  Finally, the piece will discuss the need for changes to better serve the interests of issuers and investors.

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"Good Cause" for Nonattendance at the Shareholder Meeting Under Rule 14a-8(h)

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Bryston C. Gallegos[*]

Rule 14a-8 grants shareholders of a publicly traded company the right to include their proposals in the annual proxy statements. The Rule, however, also imposes a number of procedural requirements on proponents. Specifically, subsection (h)(1) requires that either the proponent or a “representative who is qualified under state law” attend the meeting and present the proposal. A violation without “good cause” allows the company “to exclude all of [the shareholder’s] proposals from its proxy materials for any meetings held in the following two calendar years.”

The attendance requirement did not appear in the initial version of Rule 14a-8. The Rule assumed that shareholders would attend meetings and personally present their proposals. Eventually, the Commission amended the Rule to require attendance but permitted waiver upon a showing of good cause. In addition, shareholders could appoint a “qualified representative” to present proposals. Administrative interpretations have, however, effectively repealed the good cause exception. Consequently, the failure to present has become a per se ground for exclusion of a shareholder’s proposal in the following two years.

This article will review the administrative history of subsection (h) and the evolution of a procedural requirement that permitted management to omit shareholder proposals for two years following a violation. Next, this article will examine the SEC Staff’s (Staff or Division) interpretation of the requirement through no-action letters (NAL). Finally, the article will analyze the Staff’s interpretation of subsection (h) and explain how the appearance requirement and good cause excuse may be modified to benefit both shareholders and companies.

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Corporate Governance, Shareholder Proposals, and Engagement Between Managers and Owners

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J. Robert Brown, Jr.

In the corporate governance area, few regulations have greater importance than Rule 14a-8. Put in place in 1942, the provision requires companies to include in their proxy statements proposals properly submitted by shareholders. Phrased in precatory language, proposals typically advise rather than command. Rule 14a-8, therefore, provides a cost effective mechanism for obtaining the collective views of shareholders on designated matters.

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Proving Shareholder Eligibility Under Rule 14a-8(b)

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Sophie Fritz

Rule 14a-8 requires management to include a properly submitted shareholder proposal in the company's proxy materials. The Rule, however, limits applicability to owners holding at least $2,000 in market value of the company's securities, or 1%, of the outstanding voting shares for at least one year through the date of the meeting. Beneficial owners must establish their eligibility by submitting a written statement from the record holder. The registrant has fourteen days to provide notification of any deficiency in the required proof and the owner has fourteen days to respond.

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The Untimely Problem of the Timely Submission of Shareholder Proposals

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Ashley Kincaid Lloyd

Rule 14a-8 requires companies to include properly submitted shareholder proposals in their proxy materials. The Rule, however, imposes a number of substantive and procedural requirements. Subsection (e)(2) provides that, in most cases, shareholders must submit a proposal no later than 120 days before the date the company distributed the proxy statement to shareholders the prior year. Failure to do so can result in exclusion.

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The Lack of Adequate Time to Address Deficiencies Under Rule 14a-8(f)

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John Ikard

Rule 14a-8 (the Rule) sought to facilitate "functional corporate democracy" between a company's management and shareholders. The Rule allows shareholders to include proposals in a company's proxy materials. Management can, however, exclude a proposal on a number of substantive and procedural grounds. Subsection (f) requires that companies provide proponents with notice of, and an opportunity to correct, certain procedural deficiencies. Issuers have fourteen days to issue the notice and shareholders have the same period to respond.

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Limiting the Limited Number of Shareholder Proposals under   Rule 14a-8

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Renee Himes

Rule 14a-8 (the Rule) provides shareholders with the opportunity to advise corporate action through inclusion of proposals in a company's proxy statement. The Securities and Exchange Commission (SEC or Commission) qualified the availability of the provision through a number of procedural thresholds for submission as well as substantive grounds for exclusion. These include a limit to a single submission per shareholder to each company.

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What’s in a Name: Rule 14a-8(l) and the Identification of Shareholder Proponents

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Erin Stutz

Section 14(a) of the Securities Exchange Act of 1934 authorizes the Securities and Exchange Commission (SEC) to adopt proxy rules "necessary or appropriate in the public interest or for the protection of investors." Pursuant to this authority, the SEC in 1942 promulgated Rule 14a-8 in order to give shareholders a greater voice in the corporate governance process. Requiring the inclusion of shareholder proposals in a company's proxy statement, the rule also contains a number of procedural conditions and substantive limitations. Specifically, a shareholder may not submit more than one proposal to a single company and proposals cannot exceed 500 words.

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Excluding Proposals in the Absence of Corporate Authority

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Donovan Gibbons

Rule 14a-8 requires inclusion of a properly submitted shareholder proposal in the company's proxy statement. The Rule, however, also includes thirteen substantive grounds for exclusion. Specifically, subsections (i)(6) permits omission of a proposal if "the company would lack the power or authority to implement the proposal."

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Finding the Grievance in the Personal Grievance Exclusion

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Jon Wagner

Rule 14a-8 (the Rule) requires the inclusion of a shareholder proposal in a company's proxy statement. The Rule, however, provides thirteen substantive grounds for exclusion. Subsection (i)(4) allows for the omission of proposals relating to the "redress of a personal claim or grievance against the company or any other person." Originally introduced to prevent "abuse of the [shareholder proposal] rule," the exclusion sought to eliminate proposals intending to "achieve personal ends . . . not necessarily in the common interest of . . . security holders generally."

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