[Federal Register: August 3, 2007 (Volume 72, Number 149)]
[Proposed Rules]
[Page 43465-43488]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au07-28]
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Part V
Securities and Exchange Commission
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17 CFR Part 240
Shareholder Proposals; Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR PART 240
[Release No. 34-56160; IC-27913; File No. S7-16-07]
RIN 3235-AJ92
Shareholder Proposals
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to the rules under the Securities
Exchange Act of 1934 concerning shareholder proposals and electronic
shareholder communications, as well as to the disclosure requirements
of Schedule 14A and Schedule 13G. Proposed amendments to Exchange Act
Rule 14a-8 would enable shareholders to include in company proxy
materials their proposals for bylaw amendments regarding the procedures
for nominating candidates to the board of directors. Schedule 14A and
Schedule 13G would be amended to provide shareholders with additional
information about the proponents of these proposals, as well as any
shareholders that nominate a candidate under such an adopted procedure.
Included in these nominating shareholder disclosures would be the
disclosure requirements that currently apply to traditional proxy
contests. Finally, the proposed amendments would revise the proxy rules
to clarify that participation in an electronic shareholder forum that
may constitute a solicitation would be generally exempt from the proxy
rules. This release accompanies a second release, Shareholder Proposals
Relating to the Election of Directors, in which we publish an
interpretation and propose a rule change to affirm the staff of the
Division of Corporation Finance's historical application of Rule 14a-
8(i)(8).
DATES: Comments should be received by October 2, 2007.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-16-07 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-16-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Lillian Brown, Steven Hearne, or
Tamara Brightwell, at (202) 551-3700, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-3010.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 14a-
2,\1\ Rule 14a-6,\2\ Rule 14a-8,\3\ Schedule 14A,\4\ and Schedule 13G
\5\ under the Securities Exchange Act of 1934,\6\ and proposing new
Rule 14a-17 and Rule 14a-18 under the Exchange Act.
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\1\ 17 CFR 240.a-2.
\2\ 17 CFR 240.14a-6.
\3\ 17 CFR 240.14a-8.
\4\ 17 CFR 240.14a-100.
\5\ 17 CFR 240.13d-102.
\6\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Overview
A. Federal Regulation of the Proxy Process
B. The Shareholder Proposal Process
C. Commission Review of the Proxy Process
II. Proposed Amendments to the Proxy Rules and Related Disclosure
Requirements
A. Proposed Amendments Concerning Bylaw Proposals for
Shareholder Nominations of Directors
1. Background Regarding the Election Exclusion in Rule 14a-
8(i)(8)
2. Proposed Amendment to Rule 14a-8(i)(8) Concerning Bylaw
Amendments on Procedures for Shareholder Nominations of Directors
3. Proposed Disclosure Requirements Related to Shareholder
Proponents and Nominating Shareholders
a. Overview of Requirements Applicable to Shareholder Proponents
b. Proposed New Item 8B of Schedule 13G
c. Proposed New Item 8C of Schedule 13G
d. Proposed New Item 24 to Schedule 14A
e. Disclosure by Nominating Shareholder--Proposed New Rule 14a-
17
f. Liability for, and Incorporation by Reference of, Information
Provided by the Nominating Shareholder
g. Filing Requirements
h. Proposed New Rule 14a-17(b)-(c) and Item 25 of Schedule 14A
B. Electronic Shareholder Forums
1. Background
2. Proposed Amendment to Facilitate the Use of Electronic
Shareholder Forums
C. Request for Comment on Proposals Generally
1. Bylaw Amendments Concerning Non-Binding Shareholder Proposals
2. Other Requests for Comment
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposed Amendments
I. Overview
A. Federal Regulation of the Proxy Process
Regulation of the proxy process is a core function of the
Commission and is one of the original responsibilities that Congress
assigned to the agency in 1934. Section 14(a) of the Exchange Act \7\
stemmed from a Congressional belief that ``fair corporate suffrage is
an important right that should attach to every equity security bought
on a public exchange.'' \8\ The Congressional committees recommending
passage of Section 14(a) proposed that ``the solicitation and issuance
of proxies be left to regulation by the Commission.'' \9\ Congress
intended that Section 14(a) give the Commission the ``power to control
the conditions under which proxies may be solicited'' \10\ and that
this power be exercised ``as necessary or appropriate in the public
interest or for the protection of investors.'' \11\ Because the
Commission's authority under Section 14(a) encompasses both
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disclosure and proxy mechanics,\12\ the proxy rules have long governed
not only the information required to be disclosed to ensure that
shareholders receive full disclosure of all information that is
material to the exercise of their voting rights under state law and the
corporation's charter, but also the procedure for soliciting
proxies.\13\
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\7\ 15 U.S.C. 78n(a).
\8\ Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381 (1970),
quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess., at 13 (1934). See
also J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964).
\9\ S. Rep. No. 792, 73d Cong., 2d Sess., at 12 (1934).
\10\ H.R. Rep. No. 1383, 73d Cong., 2d Sess., at 14 (1934). The
same report demonstrated a congressional intent to prevent
frustration of the ``free exercise of the voting rights of
stockholders.'' Id.
\11\ 15 U.S.C. 78n(a).
\12\ See Business Roundtable v. SEC, 905 F.2d 406, 411 (D.C.
Cir. 1990) (``We do not mean to be taken as saying that disclosure
is necessarily the sole subject of Sec. 14''); Roosevelt v. E.I. du
Pont de Nemours & Co., 958 F.2d 416, 421-22 (D.C. Cir. 1992)
(Congress ``did not narrowly train section 14(a) on the interest of
stockholders in receiving information necessary to the intelligent
exercise of their'' state law rights); SEC v. Transamerica Corp.,
163 F.2d 511, 518 (3d Cir. 1947) (upholding the Commission's
authority to promulgate Exchange Act Rule 14a-8), cert. denied, 332
U.S. 847 (1948). See also John C. Coffee Jr., Federalism and the
SEC's Proxy Proposals, New York Law Journal 5 (March 18, 2004)
(Section 14(a) ``does not focus exclusively on disclosure; rather,
it contemplates SEC rules regulating procedure in order to grant
shareholders a `fair' right of corporate suffrage''); Louis Loss &
Joel Seligman, Securities Regulation 1936-37 (3d ed. 1990) (The
Commission's ``power under Sec. 14(a) is not necessarily limited to
ensuring full disclosure. The statutory language is considerably
more general than it is under the specific disclosure philosophy of
the Securities Act of 1933'').
\13\ E.g., Exchange Act Rule 14a-4 (17 CFR 240.14a-4), Exchange
Act Rule 14a-7 (17 CFR 240.14a-7) and Exchange Act Rule 14a-8 (17
CFR 240.14a-8). Each specifies procedural requirements that
companies must observe in soliciting proxies. Exchange Act Rule 14a-
4(b)(2) requires that the form of proxy furnish the security holder
with the means to withhold approval for the election of a director.
Exchange Act Rule 14a-7 provides a procedure under which a security
holder may be able to obtain a list of security holders. Exchange
Act Rule 14a-8 provides a procedure under which a qualifying
security holder can obligate the company to include certain types of
proposals, along with statements in support of those proposals, in
the company's proxy statement.
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In assigning this responsibility to the Commission, Congress
demonstrated its ``intent to bolster the intelligent exercise of
shareholder rights granted by state corporate law.'' \14\ To identify
the rights that the proxy process should protect, the Commission has
taken as its touchstone the rights of security holders guaranteed to
them under state corporate law. As Chairman Ganson Purcell explained to
a committee of the House of Representatives in 1943:
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\14\ Roosevelt, 958 F.2d at 421.
The rights that we are endeavoring to assure to the stockholders
are those rights that he has traditionally had under State law to
appear at the meeting; to make a proposal; to speak on that proposal
at appropriate length; and to have his proposal voted on.\15\
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\15\ Securit[ies] and Exchange Commission Proxy Rules: Hearings
on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. on
Interstate and Foreign Commerce, 78th Cong., 1st Sess., at 172
(1943) (testimony of SEC Chairman Ganson Purcell).
Thus, the federal proxy authority is not intended to supplant state
law, but rather to reinforce state law rights with a sturdy federal
disclosure and proxy solicitation regime. To that end, the Commission
has sought to use its authority in a manner that does not conflict with
the primary role of the states in establishing corporate governance
rights. For example, Rule 14a-8, the shareholder proposal rule,
explicitly provides that a shareholder proposal is not required to be
included in a company's proxy materials if it ``is not a proper subject
for action by shareholders under the laws of the jurisdiction of the
company's organization.'' \16\
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\16\ 17 CFR 240.14a-8(i)(1).
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One of the key rights that shareholders have under state law is the
right to appear in person at an annual or special meeting and, subject
to compliance with applicable state law requirements and the
requirements contained in the company's charter and bylaws, such as an
advance notice bylaw, present their own proposals for a vote by
shareholders at that meeting.\17\ These proposals can relate to a wide
variety of matters, including the nomination of the shareholders' own
candidates for the election of directors.\18\ Most shareholders,
however, vote through the grant of a proxy before the meeting instead
of attending the meeting to vote in person. Therefore, an important
function of the proxy rules is to provide a mechanism for shareholders
to present their proposals to other shareholders, and to permit
shareholders to instruct their proxy how to vote on these proposals.
Our regulations have been designed to facilitate the corporate proxy
process so that it functions, as nearly as possible, as a replacement
for an actual, in-person gathering of security holders, thus enabling
security holders ``to control the corporation as effectively as they
might have by attending a shareholder meeting.'' \19\
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\17\ For example, Section 211(b) of the Delaware General
Corporation Law permits any ``proper business,'' in addition to the
election of directors, to be conducted at an annual meeting of
shareholders. In order to provide for an orderly period of
solicitation before a meeting, many corporations have included
provisions in their charter or bylaws to require advance notice of
any shareholder resolutions, including nominations for director, to
be presented at a meeting. See R. Franklin Balotti & Jesse A.
Finkelstein, Delaware Law of Corporations & Business Organizations
Sec. 7.9 (4th ed. 2006).
\18\ Id.
\19\ Business Roundtable, 905 F.2d at 410.
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The Commission's proxy rules provide a means for shareholders to
propose matters to other shareholders for a vote at an annual or
special meeting. For example, under Rule 14a-8 a company must include
in its proxy materials some proposals that shareholders could present
at the annual or special meeting under state law. Other proposals can
be included in proxy materials prepared by the shareholders themselves.
In this regard, the proxy rules permit any shareholder to solicit votes
for the election of a nominee to the board through a proxy solicitation
by that shareholder. The proxy rules do not, however, require a company
to include a shareholder's nominee for director in its proxy materials.
Conversely, the proxy rules require the company to include in its proxy
materials non-binding resolutions of eligible shareholders on subjects
unrelated to the company's ordinary business unless the proposals fall
within one of the substantive bases for exclusion in Rule 14a-8. The
proposed amendments to the proxy rules discussed below address these
matters.
B. The Shareholder Proposal Process
Rule 14a-8 creates a procedure under which shareholders, subject to
certain requirements, may present in the company's proxy materials a
broad range of binding and non-binding proposals, including non-binding
proposals regarding matters that traditionally are within the province
of the board and management. The rule permits a shareholder owning a
relatively small amount of the company's shares \20\ to submit his or
her proposal to the company, and the rule requires the company to
include the proposal alongside management's proposals in the company's
proxy materials. For example, a proposal concerning a matter that under
state law would not be a proper subject for shareholder action alone if
it were cast as a binding proposal, may nonetheless be included in the
company's proxy materials under Rule 14a-8 if it is cast as a
recommendation or request that the board take specified action.\21\ In
all cases, the proposal may be excluded by the company if it fails to
satisfy the rule's procedural requirements or falls within one of the
rule's thirteen substantive categories of proposals that may be
excluded.
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\20\ Exchange Act Rule 14a-8(b)(1) (17 CFR 240.14a-8(b)(1))
provides that a holder of at least $2,000 in market value, or 1% of
the company's securities entitled to be voted, may submit a
shareholder proposal subject to other procedural requirements and
substantive bases for exclusion under the rule.
\21\ State corporation statutes generally provide that the
business of the corporation shall be managed by, or under the
direction of, the board of directors.
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Because the proxy process is meant to serve, as nearly as possible,
as a
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replacement for an actual, in-person meeting of shareholders, it should
facilitate proposals concerning only those subjects that could properly
be brought before a meeting under the corporation's charter or bylaws
and under state law. Most state corporation codes specify certain items
of business that are required to be presented to the shareholders for a
vote, such as the election of directors, and others that may or may not
be brought to a vote, either in the discretion of the chair or as
specified by the corporation's charter or bylaws.
With respect to the chair's discretion, in general state law
provides that the order of business at a meeting of shareholders and
the rules for the conduct of the meeting are determined by the chair,
who is usually appointed as provided in the bylaws, or in the absence
of such provision, by the board of directors.\22\ In order to reinforce
the state law rights and responsibilities of shareholders, therefore,
the proxy rules should be neutral with respect to the manner in which
meetings of shareholders are conducted, and should not interfere with
the chair's ability to conduct the meeting in accordance with the
requirements of state law and the corporation's governing documents.
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\22\ See, e.g., Section 7.08, Model Business Corporation Act.
The Comment to this Section states that it is expected that the
chair will not misuse the power to determine the order of business
and to establish rules for the conduct of the meeting so as to
unfairly foreclose the right of shareholders--subject to state law
and the corporation's charter and bylaws--to raise items which are
properly a subject for shareholder discussion or action at some
point in the meeting prior to adjournment.
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With respect to subjects and procedures for shareholder votes that
are specified by the corporation's governing documents, most state
corporation laws provide that a corporation's charter or bylaws can
specify the types of binding or non-binding proposals that are
permitted to be brought before the shareholders for a vote at an annual
or special meeting. Rule 14a-8(i)(1) supports these determinations by
providing that a proposal that is violative of the corporation's
governing documents may be excluded from the corporation's proxy
materials.
Rule 14a-8 specifies that companies must notify the Commission when
they intend to exclude a shareholder's proposal from their proxy
materials. This notice goes to the staff of the Division of Corporation
Finance. In the notice, the company provides the staff with a
discussion of the basis or bases upon which the company intends to
exclude the proposal and requests that the staff not recommend
enforcement action if the company excludes the proposal. A shareholder
proponent may respond to the company's notice, but is not required to
do so. Generally, the staff responds to each notice with a ``no-
action'' letter to the company, a copy of which is provided to the
shareholder, in which the staff either concurs or declines to concur
with the company's view that there is a basis for excluding the
proposal.\23\
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\23\ The staff's response is an informal expression of its
views, and does not necessarily reflect the view of the Commission.
Either the shareholder proponent or the company may obtain a
decision on the excludability of a challenged proposal from a
federal court.
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Each proxy season, the Division of Corporation Finance responds to
hundreds of these no-action requests.\24\ Although the Commission
itself is not directly involved in responding to no-action requests,
where a matter involves ``substantial importance and where the issues
are novel or highly complex,'' the Division may present an issue to the
Commission for review--either at the Division's own instance or at the
request of the company or the shareholder proponent.\25\ Rule 14a-8
thus places the Commission's staff at the center of frequent disputes
over whether a proposal must be included in the company's proxy
materials.
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\24\ During the 2006-2007 proxy season, the Division of
Corporation Finance responded to approximately 360 Exchange Act Rule
14a-8 no-action requests. To respond to these requests, each proxy
season the Division assembles a task force of attorneys who work
full-time on the project from approximately January through April of
each year.
\25\ 17 CFR 202.1(d).
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C. Commission Review of the Proxy Process
In meeting the Commission's statutory obligation under Section
14(a) of the Exchange Act, this agency has monitored the development of
the proxy process closely since 1934. Over the decades, we have made
numerous improvements and refinements to the proxy rules based upon
practical experience and the needs of investors.\26\ This ongoing
evaluation of the proxy process leads us to consider changes whenever
it appears that the process can be improved to better promote the
interests of investors, the efficient functioning of the capital
markets, and the health of capital formation.
In 2003, the Commission directed the Division of Corporation
Finance to review the proxy rules regarding procedures for the election
of corporate directors and provide the Commission with recommendations
regarding possible changes to the proxy rules. Following the Division's
review of the proxy rules, the Commission proposed a comprehensive new
set of rules, based on the Division's recommendations, which would have
governed shareholder director nominations that are not control-
related.\27\ In connection with the rulemaking concerning shareholder
director nominations, the Commission held a roundtable regarding the
topic of shareholder director nominations generally, and more
specifically, the shareholder director nominations release.\28\ The
Commission also proposed and adopted a new set of disclosure standards
concerning director nominations and communications between shareholders
and companies.\29\
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\26\ As long ago as 1940, observers noted that ``[t]he history
of [C]ommission regulation pursuant to authority granted in Section
14 of the Securities Exchange Act has been one of careful expansion
based upon experience and demonstrated needs.'' Sheldon E. Bernstein
& Henry G. Fischer, The Regulation of the Solicitation of Proxies:
Some Reflections on Corporate Democracy, 7 U. Chi. L. Rev. 226, 228
(1940).
\27\ Exchange Act Release 34-48626 (Oct. 14, 2003).
\28\ Security Holder Director Nominations Roundtable (March 10,
2004).
\29\ Exchange Act Release 34-48825 (Nov. 24, 2003).
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More recently, the Commission held three roundtables in May 2007.
This series of roundtables began with a re-examination of the
fundamental principles of federalism that provide the context for our
role under Section 14(a) of the Exchange Act. Specifically, the
roundtables focused on the relationship between the federal proxy rules
and state corporation law,\30\ proxy voting mechanics,\31\ and the
evolution of both binding and non-binding shareholder proposals within
the framework of the federal proxy rules.\32\
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\30\ Roundtable on the Federal Proxy Rules and State Corporation
Law (May 7, 2007). Materials related to the roundtable, including an
archived broadcast and a transcript of the roundtable, are available
on-line at http://www.sec.gov/spotlight/proxyprocess.htm.
\31\ Roundtable on Proxy Voting Mechanics (May 24, 2007).
Materials related to the roundtable, including an archived broadcast
and a transcript of the roundtable, are available on-line at http://www.sec.gov/spotlight/proxyprocess.htm
.
\32\ Roundtable on Proposals of Shareholders (May 25, 2007).
Materials related to the roundtable, including an archived broadcast
and a transcript of the roundtable, are available on-line at http://www.sec.gov/spotlight/proxyprocess.htm
.
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Roundtable participants argued that, in contrast to the current
operation of the federal proxy rules, the federal role should be to
facilitate shareholders' exercise of their fundamental state law and
company ownership rights to elect the board of directors.\33\ Some
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participants also observed that recent technological developments may
provide promising possibilities for additional, complementary means for
shareholders to interact and communicate with the management and the
board of directors of the company that could be more effective and more
efficient.\34\ Participants generally agreed that enhanced disclosure
should accompany any changes the Commission might propose so that
shareholders can make fully informed voting decisions.\35\
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\33\ See, e.g., R. Franklin Balotti, Director, Richards, Layton
& Finger, P.A, Transcript of Roundtable on the Federal Proxy Rules
and State Corporation Law, May 7, 2007, at 14-17; Leo E. Strine,
Jr., Vice Chancellor, Court of Chancery of the State of Delaware,
Transcript of Roundtable on the Federal Proxy Rules and State
Corporation Law, May 7, 2007, at 18-23; Stanley Keller, Edwards
Angell Palmer & Dodge LLP, Transcript of Roundtable on the Federal
Proxy Rules and State Corporation Law, May 7, 2007, at 142-143.
\34\ See, e.g., Stanley Keller, Edwards Angell Palmer & Dodge
LLP, Transcript of Roundtable on the Federal Proxy Rules and State
Corporation Law, May 7, 2007, at 152-154.
\35\ See, e.g., Roberta Romano, Yale Law School, Transcript of
Roundtable on the Federal Proxy Rules and State Corporation Law, May
7, 2007, at 26-27; Stephen P. Lamb, Vice Chancellor, Court of
Chancery of the State of Delaware, Transcript of Roundtable on the
Federal Proxy Rules and State Corporation Law, May 7, 2007, at 123-
125.
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In light of these issues and developments, the Commission is
proposing that the current proxy rules and related disclosure
requirements be revised and updated to more effectively serve the
essential purpose of facilitating the exercise of shareholders' rights
under state law.
II. Proposed Amendments to the Proxy Rules and Related Disclosure
Requirements
We are proposing changes to Rule 14a-8 that would facilitate
shareholders' exercise of their state law rights to propose bylaw
amendments concerning shareholder nominations of directors.
Additionally, we are proposing amendments to the proxy rules to make
clear that director nominations made pursuant to any such bylaw
provisions would be subject to the disclosure requirements currently
applicable to proxy contests. These proposed amendments are intended to
align the Commission's shareholder proposal rule more closely with the
underlying state law rights of shareholders.
As discussed above, in addition to governing the procedure for
soliciting proxies, a primary purpose of the federal proxy rules is to
provide shareholders with full disclosure of all information for the
exercise of their voting rights under state law and the corporation's
charter. The amendments we propose today are designed to provide
shareholders with additional disclosure to allow for better-informed
voting decisions. This additional disclosure is of great importance to
informed voting decisions both when shareholders are presented with
proposed bylaw amendments and when shareholders are presented with
nominees for director submitted under the company's bylaws. As such, we
are proposing amendments to Schedule 13G and Schedule 14A that would
enhance the disclosure of information about the proponents of bylaw
amendments concerning the nomination of directors, about any
shareholders that submit director nominees under any adopted bylaw, and
about any director nominee that is submitted by a shareholder under
such a bylaw.
A. Proposed Amendments Concerning Bylaw Proposals for Shareholder
Nominations of Directors
1. Background Regarding the Election Exclusion in Rule 14a-8(i)(8)
Rule 14a-8(i)(8) sets forth one of several substantive bases upon
which a company may exclude a shareholder proposal from its proxy
materials. Specifically, it provides that a company need not include a
proposal that ``relates to an election for membership on the company's
board of directors or analogous governing body.'' The purpose of this
provision is to prevent the circumvention of other proxy rules that are
carefully crafted to ensure that investors receive adequate disclosure
and an opportunity to make informed voting decisions in election
contests. Last year, the U.S. Court of Appeals for the Second Circuit,
in American Federation of State, County and Municipal Employees,
Employees Pension Plan v. American International Group, Inc.,\36\ held
that AIG could not rely on Rule 14a-8(i)(8) to exclude a shareholder
bylaw proposal under which the company would be required, under
specified circumstances, to include shareholder nominees for director
in the company's proxy materials at subsequent meetings.
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\36\ 462 F.3d 121 (2d Cir. 2006) (AFSCME).
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The effect of the AFSCME decision was to permit both the bylaw
proposal and, had the bylaw been adopted, subsequent election contests
conducted under it, to be included in the company's proxy materials,
but without compliance with the disclosure requirements of Rule 14a-12
solicitations. Because of the importance that we attach to the
provision of meaningful disclosure to investors in election contests,
we are revisiting the provisions of Rule 14a-8 in light of the AFSCME
decision with a proposal that is designed to ensure that this objective
is consistently achieved.
Since the AFSCME case was decided last year, the Commission has
undertaken a thorough review of the proxy process. That review,
including three recent roundtables on the topic, has led us to conclude
that the federal proxy rules can be better aligned with shareholders'
fundamental state law rights to nominate and elect directors. At the
same time, the vindication of these state law rights must be
accomplished in a way that accommodates the abiding federal interest in
the full and fair disclosure to shareholders of information that is
material to a contested election. This is the policy interest, grounded
firmly in Section 14 of the Securities Exchange Act of 1934, that
underlies the election exclusion of Rule 14a-8(i)(8).
To achieve the mutually reinforcing objectives of vindicating
shareholders' state law rights to nominate directors, on the one hand,
and ensuring full disclosure in election contests, on the other hand,
we are proposing revisions to Rule 14a-8(i)(8) that would permit a
shareholder who makes full disclosure in connection with a bylaw
proposal for director nomination procedures, including a proposal such
as that in the AFSCME case, to have that proposal included in the
company's proxy materials.\37\ The basis for the disclosure that we are
proposing is the familiar Schedule 13G regime, under which certain
passive investors that beneficially own more than 5% of a company's
securities, report their ownership of a company's securities. We
believe that using this well-understood system of disclosure should
reduce compliance costs for companies and shareholders. In addition,
because shareholders eligible to file under Schedule 13G must not have
acquired or held their securities for the purpose of or with the effect
of changing or influencing the control of the company, the opportunity
to use Rule 14a-8 to inappropriately circumvent the disclosure and
procedural regulations that are intended to apply in contested
elections should be minimized.
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\37\ See proposed revision to Exchange Act Rule 14a-8(i)(8).
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Under the proposed amendments, if the proponents of a bylaw to
establish a procedure for shareholder nominations of directors do not
meet both the threshold for required filing on Schedule 13G, and the
eligibility requirements to file on Schedule 13G, the proposal could
then be excluded
[[Page 43470]]
from the company's proxy materials under Rule 14a-8(i)(8). In this way,
shareholders will be guaranteed the disclosure necessary to evaluate
such proposals.
In light of the need for full disclosure where the possibility of
control over a company is present, we believe that our decision to link
the ability to include a bylaw proposal for director nominations in a
company's proxy materials to the 5% threshold set by Section 13(d) of
the Exchange Act addresses the basic policy concerns previously
articulated by both Congress and the Commission. Moreover, because the
proposed expansion of shareholders' ability to submit proposals under
Rule 14a-8 would be limited to specific situations in which
shareholders would be assured of appropriate disclosure and procedural
protections, if the proposal did not meet the eligibility requirements
of the amended rule, the Commission's staff would continue to interpret
the rule to permit companies to exclude the proposal.
We believe that the amendments we are proposing today, including
the amendments to the language of the election exclusion, will provide
clarity and certainty in this area. We also believe they will
facilitate shareholders' exercise of their state law rights to propose
amendments to company bylaws concerning director nominations.
2. Proposed Amendment to Rule 14a-8(i)(8) Concerning Bylaw Amendments
on Procedures for Shareholder Nominations of Directors
We are proposing an amendment to Rule 14a-8(i)(8) \38\ that would
enable shareholders to have their proposals for bylaw amendments
regarding the procedures for nominating directors included in the
company's proxy materials. Such a bylaw proposal would be required to
be included in the company's proxy materials if:
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\38\ See proposed revision to paragraph (i)(8) of Exchange Act
Rule 14a-8.
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The shareholder (or group of shareholders) that submits
the proposal is eligible to file a Schedule 13G and files a Schedule
13G that includes specified public disclosures regarding its background
and its interactions with the company; \39\
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\39\ The eligibility to file a Schedule 13G generally is
available only for persons who have acquired and continue to hold
the securities beneficially owned without ``a purpose or effect of
changing or influencing the control of the issuer, or in connection
with or as a participant in any transaction having that purpose or
effect.'' See Rule 13d-1(e). Although proposing a bylaw amendment
pursuant to proposed Rule 14a-8(i)(8) would not on its own eliminate
the ability to file a Schedule 13G, a determination of whether a
proposing shareholder is eligible to file a Schedule 13G will
continue to be based on the specific facts and circumstances
accompanying the activities of the proposing shareholder. See
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854].
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The proposal is submitted by a shareholder (or group of
shareholders) that has continuously beneficially owned more than 5% of
the company's securities entitled to be voted on the proposal at the
meeting for at least one year by the date the shareholder submits the
proposal; \40\ and
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\40\ The one-year holding requirement would apply individually
to each member of a group that is aggregating its security holdings
to make a proposal.
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The proposal otherwise satisfies the requirements of Rule
14a-8.\41\
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\41\ To require a company to include the proposal in its proxy
materials, the proposal would have to satisfy the procedural
requirements of Exchange Act Rule 14a-8 and not fall within one of
the other substantive bases for exclusion included in Exchange Act
Rule 14a-8.
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As amended, Rule 14a-8 would allow proponents of bylaw proposals to
offer shareholder nomination procedures as they see fit. The only
substantive limitations on such procedures would be those imposed by
state law or the company's charter and bylaws. For example, the
procedure could specify a minimum level of share ownership for those
making director nominations that would be included in the company's
proxy materials; it could specify the number of director slots subject
to the procedure; or it could prescribe a method for the allocation of
any costs--so long as both the form and substance of any such
requirements were consistent with applicable state law and the
company's charter and existing bylaw provisions. Likewise, the voting
threshold required in order to adopt the bylaw would be determined by
the thresholds set forth by state law or in the company's charter and
bylaws with respect to the adoption of bylaws or bylaw amendments.\42\
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\42\ In the event the charter or bylaws are silent as to the
voting threshold required, a company and its shareholders should
look to the governing state corporation law. The staff of the
Commission would not become involved in determining what this
threshold is or whether it had been achieved. Interpretation and
enforcement of any bylaw provision setting forth a procedure for
shareholder director nominees to be included in the company's proxy
materials would be the province of the appropriate state court since
it would be a question of state law, not federal law. The staff of
the Commission would not become involved in determining the correct
interpretation or application of an adopted bylaw provision. In
addition, the staff of the Commission would not become involved in
determining whether a bylaw provision was properly adopted.
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The disclosure requirements and anti-fraud provisions of the
federal proxy rules would, of course, apply to any solicitation of
proxies conducted pursuant to a bylaw provision proposed and approved
by shareholders. A shareholder proposal to establish bylaw procedures
for shareholder nominations of directors would also be subject to any
substantive bases for exclusion currently provided for in Rule 14a-8
that do not relate to an election for membership on the company's board
of directors.
Shareholder proposals to amend the company's bylaws to establish a
procedure for shareholder nominations of directors by proponents that
do not meet the eligibility requirements of the proposed amendment to
Rule 14a-8(i)(8)--including the requirements that the shareholder
proponents have been more than 5% owners for at least one year and have
filed a Schedule 13G--would be subject to exclusion.
We believe that the amendments we are proposing today will not only
provide consistency and certainty in this area of Rule 14a-8, but also
will provide shareholders the ability to have a greater voice in their
company's corporate governance, consistent with their rights under
state law.
Request for Comment
As proposed, a bylaw proposal may be submitted by a
shareholder (or group of shareholders) that is eligible to and has
filed a Schedule 13G that includes specified public disclosures
regarding its background and its interactions with the company, that
has continuously held more than 5% of the company's securities for at
least one year, and that otherwise satisfies the procedural
requirements of Rule 14a-8 (e.g., holding the securities through the
date of the annual meeting). Are these disclosure-related requirements
for who may submit a proposal, including eligibility to file on
Schedule 13G, appropriate? If not, what eligibility requirements and
what disclosure regime would be appropriate?
[cir] For example, should the 5% ownership threshold be higher or
lower, such as 1%, 3%, or 10%? Is the 5% level a significant barrier to
shareholders making such proposals? Does the impediment imposed by this
threshold depend on the size of the company? Should the ownership
percentage depend on the size of the company? For example, should it be
1% for large accelerated filers, 3% for accelerated filers and 5% for
all others? Should an ownership threshold be applicable at all?
[cir] If the eligibility requirement should be different from 5%,
should we nonetheless require the filing of a Schedule 13G or otherwise
require disclosure equivalent to a Schedule 13G?
[[Page 43471]]
[cir] The proposed one-year holding requirement is consistent with
the existing holding period in Rule 14a-8(b)(1) to submit a shareholder
proposal. Is it appropriate to limit use of the proposed rules to
shareholder proponents that have held their securities for any length
of time? If so, is the one-year period that we have proposed
appropriate, or should the holding period be longer (e.g., two years or
three years) or shorter than proposed (e.g., six months)? Why? With
regard to the one-year holding requirement, is it appropriate to
require that each member of a group of shareholders individually
satisfy this holding requirement?
[cir] Shareholders of some companies, e.g., open-end management
investment companies, are not eligible to file Schedule 13G because the
securities of those companies are not defined as ``equity securities''
for purposes of Rule 13d-1, which governs the filing of Schedule 13G by
beneficial owners of equity securities. Should we permit security
holders of such companies to file a Schedule 13G for the purpose of
relying upon proposed Rule 14a-8(i)(8) if the holder otherwise would be
eligible to file a Schedule 13G but for the exclusion of the company's
securities from the definition of ``eligible security?'' If we were to
do this, what, if any, amendments would be required to Schedule 13G?
Should we instead use an eligibility requirement, other than
eligibility to file Schedule 13G, in Rule 14a-8(i)(8) for shareholders
of companies whose securities are not ``equity securities?''
If a shareholder acquires shares with the intent to
propose a bylaw amendment, could that be deemed to constitute an intent
to influence control of the company and thus potentially bar them from
filing on 13G? If so, should the Commission provide an exemption that
would enable such a shareholder to file on Schedule 13G?
Proposals to establish a procedure for shareholder
nominees would be subject to the existing limit under Rule 14a-8 of 500
words in total for the proposal and supporting statement. Is this
existing word limit sufficient for such a proposal? If not, what
increased word limit would be appropriate?
In seeking to form a group of shareholders to satisfy the
5% threshold, shareholders may seek to communicate with one another,
thereby triggering application of the proxy rules. In order not to
impose an undue burden on such shareholders, should such communications
be exempt from the proxy rules? If so, what should the parameters of
any such exemption be?
Is there any tension between the requirement in Schedule
13G that the securities not be acquired or held for the purpose of
changing or influencing control of the company and the desire of the
holder of such shares to propose a bylaw amendment seeking to establish
procedures for including shareholder-nominated candidates to the board?
Does the answer to this question depend on the number of candidates
sought to be included in the proposal? If there is tension, should we
establish a safe harbor of some kind?
3. Proposed Disclosure Requirements Related to Shareholder Proponents
and Nominating Shareholders
a. Overview of Requirements Applicable to Shareholder Proponents
Under the revisions to Rule 14a-8 that we are proposing today, a
company would be required to include in its proxy materials bylaw
proposals to establish procedures governing shareholder nominations for
director so long as the bylaw is consistent with state law and the
company's charter and bylaws. To trigger that requirement, an essential
element is that the shareholder (or group of shareholders) proposing
the bylaw provide disclosure about its own background, intentions, and
course of dealings with the company to enable other shareholders to
vote intelligently on the proposal. This disclosure requirement is
being implemented through proposed amendments to existing Schedule 13G
and a new reporting requirement under proposed Item 24 of Regulation
14A.
The already significant role that full disclosure plays in our
proxy rules is rendered still more important when individual
shareholders or groups of shareholders, who do not owe a fiduciary duty
to the company or to other shareholders, use company assets and
resources to propose changes in the company's governing documents. Our
proposed amendments would require that certain information concerning
proposals that could cause a fundamental change in the relationship
between the company and its shareholders be placed before all
shareholders entitled to vote. This information, in this context,
includes background information on the shareholder proponent that other
shareholders ordinarily would find to be important and relevant to a
decision when asked to consider a proposed bylaw amendment setting
forth procedures for director nominations. In addition, we believe that
the use of such a proposal, or the possibility of such a proposal, to
influence the company's management or board of directors to take or not
to take other related or unrelated actions should be rendered
transparent. It would be useful to the company's shareholders to know
of any course of dealing between the shareholder proponent and the
company when they are deciding how they will vote on the proposal. The
additional Schedule 13G and Regulation 14A disclosure requirements that
we are proposing address these concerns.
Therefore, we propose to require disclosure on Schedule 13G of
significant background information regarding the shareholder proponent,
as well as an extensive description of the course of dealing between
the shareholder proponent and the company. In addition, we propose to
require the company to disclose similar information with regard to the
nature and extent of its relationships with the shareholder proponent.
We believe that this additional disclosure will provide transparency to
shareholders voting on such bylaw amendments.
Specifically, we are proposing that any shareholder (or group of
shareholders) that forms any plans or proposals regarding an amendment
to the company's bylaws \43\ concerning shareholder director
nominations, file or amend Schedule 13G to include the following
information that would be required by new Item 8A, Item 8B, and Item
8C:
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\43\ In this regard, the formation of any plans or proposals
regarding an amendment to the company's bylaws would include the
submission of a proposal to amend the company's bylaws, and
discussions in which the shareholder indicated to management an
intent to submit such a proposal or indicated an intent to refrain
from submitting such a proposal conditioned on the taking or not
taking of an action by the company. See proposed Note to Item 8A of
Schedule 13G. In the proposed disclosure requirements, and in the
following discussion of those proposed requirements, the term
``shareholder proponent'' refers to a person that has formed any
plans or proposals regarding an amendment to the company's bylaws
for a shareholder director nomination procedure; any affiliate,
executive officer or agent acting on behalf of that person with
respect to the plans or proposals; and anyone acting in concert
with, or who has agreed to act in concert with, that person with
respect to the plans or proposals. See proposed Item 8A(a) of
Schedule 13G.
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The shareholder proponent's relationships with the
company; and
Additional relevant background information on the
shareholder proponent. The shareholder proponent also would be required
to amend its Schedule 13G to update this information as necessary.
To permit reliance on the existing disclosure scheme set forth in
Regulation 13D, the proposed amendments to Rule 14a-8 will require
shareholder bylaw proposals to be
[[Page 43472]]
included in a company's proxy materials only if the shareholder
proponent is subject to Regulation 13D and eligible to file on Schedule
13G.\44\ Regulation 13D, which requires the disclosure of specified
information in filings with the Commission on Schedule 13D, applies to
persons that directly or indirectly beneficially own more than 5% of a
class of voting equity securities registered pursuant to Section 12 of
the Exchange Act.\45\ Schedule 13G requires less disclosure than
Schedule 13D and is available for use by persons who beneficially own
more than 5% of a class of equity securities registered with the
Commission pursuant to Section 12(g) of the Exchange Act and who meet
the criteria for one of three types of Schedule 13G filers.\46\
Generally, persons, including groups and others who file on Schedule
13G must certify that the securities have not been acquired with the
purpose nor with the effect of changing or influencing control of the
company.\47\
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\44\ See proposed revisions to paragraph (i)(8) of Rule 14a-8.
\45\ See 17 CFR 240.13d-1.
\46\ Regulation 13D permits filing on Schedule 13G for a
specified list of qualified institutional investors who have
acquired the securities in the ordinary course of their business and
not with the purpose nor the effect of changing or influencing
control of the company. See Exchange Act Rule 13d-1(b) (17 CFR
240.13d-1(b)). In addition, persons who are beneficial owners of
more than 5% of a class of equity securities may file Schedule 13G,
if they have not acquired the securities with the purpose nor with
the effect of changing or influencing control of the company, and if
they are not directly or indirectly the beneficial owner of 20% or
more of the class of securities. See Exchange Act Rule 13d-1(c) (17
CFR 240.13d-1(c)). Finally, certain persons may file a Schedule 13G,
in lieu of Schedule 13D, if they qualify under Exchange Act Section
13(d)(6) or Rule 13d-1(d) (17 CFR 240.13d-1(d)).
\47\ Reports of beneficial ownership filed on Schedule 13G
pursuant to Rule 13d-1(d) are not required to make this
certification.
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The proposed amendments to Rule 14a-8 and Schedule 13G, which would
enable a shareholder that had provided specified disclosures to propose
a bylaw amendment, would apply to a shareholder (or group of
shareholders) that:
Has continuously held more than 5% of the company's shares
entitled to be voted on the proposal for at least one year as of the
date of submitting the proposal;
Was eligible to file a report of beneficial ownership on
Schedule 13G; and
Has filed a report of beneficial ownership on Schedule
13G, or an amendment thereto, that includes information about the
shareholder or group's background and relationships with the company.
The requirement that a shareholder or group of shareholders hold
more than 5% of the company's shares entitled to be voted on the
proposal corresponds with the filing requirement on Schedule 13G for
beneficial owners of more than 5% of a company's shares, and
facilitates the provision of the additional disclosures concerning the
shareholder proponent that the amendments to Rule 14a-8 would require.
The proposed requirement that the shares be continuously held for at
least one year as of the date of submitting the proposal has the
additional benefit of ensuring that proposals are made by shareholders
with a significant long-term stake in the company, and it is consistent
with the current requirement in Rule 14a-8 that has worked well
historically. The proposed requirement that the shareholder (or group
of shareholders) be eligible to report on Schedule 13G would not only
ensure that they are subject to the disclosure requirements of the
Williams Act, but also that their shares were not acquired and are not
held with the purpose or effect of changing or influencing control of
the company.
b. Proposed New Item 8B of Schedule 13G
A shareholder proponent may have a variety of relationships with
the company. Because these relationships will often be relevant to an
informed decision by other shareholders as to whether to vote in favor
of a proposed bylaw amendment, disclosure of information concerning the
proposal should include information about such relationships.
Accordingly, we are proposing to add a new Item 8B to Schedule 13G
concerning the nature and extent of relationships between the
shareholder proponent and the company.\48\ As proposed, new Item 8B
disclosure would include:
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\48\ In proposed Item 8A of Schedule 13G we define a shareholder
proponent to include a person or group that has formed any plans or
proposals with regard to the amendment, any affiliate, executive
officer, or agent of such shareholder proponent, or anyone acting in
concert with, or who has agreed to act in concert with such
shareholder proponent with respect to the proposed bylaw amendment.
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Any direct or indirect interest of the shareholder
proponent in any contract with the company or any affiliate of the
company (including any employment agreement, collective bargaining
agreement, or consulting agreement);
Any pending or threatened litigation in which the
shareholder proponent is a party or a material participant, involving
the company, any of its officers or directors, or any affiliate of the
company; and
Any other material relationship between the shareholder
proponent and the company or any affiliate of the company not otherwise
disclosed.\49\
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\49\ A material relationship between the proponent and the
company or an affiliate of the company may include, but is not
limited to, a current or prior employment relationship, including
consulting arrangements.
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Additionally, Item 8B would require a shareholder proponent to
describe the following items that occurred during the 12 months prior
to the formation of any plans or proposals, or during the pendency of
any proposal or nomination:
Any material transaction of the shareholder proponent with
the company or any affiliate of the company; and
Any discussion regarding the proposal between the
shareholder proponent and a proxy advisory firm.
As proposed, new Item 8B also would require disclosure of any
holdings of more than 5% of the securities of any competitor of the
company, including the number and percentage of securities owned, as of
the date the shareholder proponent first formed a plan or proposal
regarding an amendment to the company bylaws in accordance with Rule
14a-8(i)(8).\50\ The shareholder proponent also would be required to
disclose any material relationship with any competitor other than as a
security holder, as of the date the shareholder proponent first formed
a plan or proposal regarding an amendment to the company bylaws in
accordance with Rule 14a-8(i)(8).
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\50\ For this purpose, a ``competitor'' of the company is
proposed to include any enterprise with the same Standard Industrial
Classification code.
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Finally, new Item 8B would require disclosure regarding any
meetings or contacts, including direct or indirect communication by the
shareholder proponent, with the management or directors of the company
that occurred during the 12-month period prior to the formation of any
plans or proposals, or during the pendency of any proposal. The
proposed disclosure would provide:
A description, in reasonable detail, of the content of
such direct or indirect communication;
A description of the action or actions sought to be taken
or not taken;
The date of the communication;
The person or persons to whom the communication was made;
Whether that communication included any reference to the
possibility of such a proposal; and
Any response by the company or its representatives to that
communication
[[Page 43473]]
prior to the date of filing the required disclosure.
To the extent that the shareholder proponent and management or the
directors of the company have an ongoing dialogue, the shareholder
proponent may describe the frequency of the meetings and the subjects
covered at the meetings rather than providing the information
separately for each meeting. However, if an event or discussion
occurred at a specific meeting that is material to the shareholder
proponent's decision to submit a proposal, that meeting would be
required to be discussed in detail separately.
c. Proposed New Item 8C of Schedule 13G
When a shareholder (or group of shareholders) proposes a bylaw
amendment regarding the procedures for nominating directors, background
information regarding the proposing shareholder often will be relevant
to an informed voting decision by the other shareholders. Accordingly,
we are proposing to add a new Item 8C to Schedule 13G concerning the
following information about the shareholder proponent:
If the shareholder proponent is not a natural person:
--The identity of the natural person or persons associated with the
entity responsible for the formation of any plans or proposals;
--The manner in which such person or persons were selected, including a
discussion of whether or not the equity holders or other beneficiaries
of the shareholder proponent entity played any role in the selection of
such person or persons, and whether they played any role in connection
with the formation of any plans or proposals;
--Any fiduciary duty to the equity holders or other beneficiaries of
the entity that the person or persons associated with the entity
responsible for the formation of any plans or proposals have in forming
such plans or proposals;
--The qualifications and background of such person or persons relevant
to the plans or proposals; and
--Any interests or relationships of such person or persons, and of that
entity, that are not shared generally by the other shareholders of the
company and that could have influenced the decision by such person or
persons and the entity to submit a proposal.
If the shareholder proponent is a natural person:
--The qualifications and background of such person or persons relevant
to the plans or proposals; and
--Any interests or relationships of such person or persons that are not
shared generally by the other shareholders of the company and that
could have influenced the decision by such person or persons to submit
a proposal.
With regard to these disclosures, examples of any interests or
relationships of the shareholder proponent not shared by other
shareholders of the company may include, but are not limited to,
contractual arrangements, current or previous employment with the
company, employment agreements, consulting agreements, and supplier or
customer relationships.
d. Proposed New Item 24 to Schedule 14A
Because a shareholder proponent's relationships with the company
often will be relevant to an informed voting decision by other
shareholders, background information regarding these relationships
should be disclosed not only by the shareholder proponent, but also the
company. Accordingly, we are proposing to add a new Item 24 to Schedule
14A to require the disclosure by the company of the nature and extent
of the relationship between the shareholder proponent, any affiliate,
executive officer or agent of the shareholder proponent, or anyone
acting in concert with, or who has agreed to act in concert with, the
shareholder proponent with respect to the proposed bylaw amendment
submitted in accordance with Rule 14a-8(i)(8), on the one hand, and the
company, on the other. Item 24 disclosures would include:
Any direct or indirect interest of the shareholder
proponent in any contract with the company or any affiliate of the
company (including any employment agreement, collective bargaining
agreement, or consulting agreement);
Any pending or threatened litigation in which the
shareholder proponent is a party or a material participant, involving
the company, any of its officers or directors, or any affiliate of the
company; and
Any other material relationship between the shareholder
proponent and the company or any affiliate of the company not otherwise
disclosed.
Additionally, Item 24 of Schedule 14A would require disclosure of
the following with respect to the 12 months prior to the shareholder
proponent forming any plans or proposals, or during the pendency of any
proposal, regarding an amendment to the company bylaws in accordance
with Rule 14a-8(i)(8):
Any material transaction of the shareholder proponent with
the company or any affiliate of the company; and
Any meetings or contacts between the shareholder proponent
and management or directors of the company.\51\
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\51\ As with the corresponding disclosure requirement for
shareholder proponents, the proposed disclosures would include: a
description, in reasonable detail, of the content of such direct or
indirect communication; a description of the action or actions
sought to be taken or not taken; the date of the communication; the
person or persons to whom the communication was made; whether that
communication included any reference to the possibility of such a
proposal; and any response by the company or its representatives to
that communication prior to the date of filing the required
disclosure. See proposed Item 24(d)(2) of Schedule 14A.
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As with the shareholder proponent requirement, to the extent that
the shareholder proponent and management or directors of the company
have an ongoing dialogue, the company would be required to merely
describe the frequency of and the subjects covered at the meetings,
except where an event or discussion occurred that is material to the
shareholder proponent's decision to submit a proposal.
For purposes of meeting these proposed disclosure requirements, the
company would be entitled to rely on the Schedule 13G disclosures of
the shareholder proponent concerning the date on which the shareholder
proponent formed any plans or proposals regarding an amendment to the
company bylaws in accordance with Rule 14a-8(i)(8).
Request for Comment
The proposed disclosure standards relate to the
qualifications of the shareholder proponent, any relationships between
the shareholder proponent and the company, and any efforts to influence
the decisions of the company's management or board of directors. To
assure that the quality of disclosure is sufficient to provide
information that is useful to shareholders in making their voting
decisions and to limit the potential for boilerplate disclosure, we
have proposed that the disclosure standards require specific
information concerning these qualifications, relationships, and efforts
to influence the company's management or board of directors. Is the
proposed level of required disclosure appropriate? Are any of the
proposed disclosure requirements unnecessary to
[[Page 43474]]
shareholders' ability to make an informed voting decision? If so, which
specific requirements are not necessary? Should we require
substantially similar disclosure from both the proponent and the
company as proposed or should the company be allowed to avoid
duplicating disclosure relating to the proponent where the company
agrees with the disclosure provided? Is any additional disclosure
appropriate?
We solicit comments with respect to any other types of
background information regarding a shareholder proponent that should be
disclosed in Schedule 13G or Item 24 of Schedule 14A. What other types
of information do shareholders need to have about the shareholder
proponent, or the shareholder proponent's course of dealing with the
company, when voting on a proposal?
Would the proposed Schedule 13G disclosure requirements
for shareholder proponents be useful to other shareholders in forming
their voting decisions? Are the requirements practical? Is any aspect
of the proposed disclosure overly burdensome for shareholder proponents
to comply with?
As proposed, shareholder proponents would be required to
disclose discussions with a proxy advisory firm prior to submitting a
proposal. Is this disclosure requirement appropriate? Why or why not?
We also propose that companies would be responsible for
disclosure regarding their relationships and course of dealing with the
shareholder proponent in Item 24 of Schedule 14A. Is this proposed
additional disclosure useful? Would any aspect of this disclosure
requirement be impractical or overly burdensome?
As proposed, the disclosures concerning the shareholder
proponent and company's relationship must be provided for the 12 months
prior to forming any plans or proposals, or during the pendency of any
proposals, with regard to an amendment to the company bylaws. Is this
the appropriate timeframe? If not, should the timeframe be shorter
(e.g., 6 or 9 months) or longer (e.g., 18 or 24 months)? Is any federal
holding period requirement appropriate?
Is the proposed reliance on the existing Schedule 13G
framework appropriate? Should we require the type of disclosure found
in Schedule 13G, but nevertheless permit a shareholder who holds less
than 5% of a company's shares to file a Schedule 13G and to submit
bylaw proposals of the type described herein? Is there another
disclosure provision in the federal securities laws with a lesser
ownership requirement that would more appropriate upon which to rely?
Is it appropriate to require any additional disclosure by
shareholders and/or the company, beyond what is currently required, in
connection with a proposed amendment to the company's bylaws in
accordance with proposed Rule 14a-8(i)(8)? Rather, should we require
disclosure only when a shareholder actually seeks to nominate a
director using a nominating procedure established pursuant to a
company's bylaws?
e. Disclosure by Nominating Shareholders--Proposed New Rule 14a-17
One of our primary concerns with using Rule 14a-8 to nominate or
establish a procedure for shareholders to nominate a candidate for
director is that doing so could result in shareholders being asked to
vote on a director nominee without the disclosure that otherwise would
be required under the federal proxy rules applicable to elections
involving solicitations in opposition to the company's nominees. To
address this concern, we are proposing a new Rule 14a-17 that would
provide that the existing disclosure requirements for solicitations in
opposition (either for a short slate or for a majority of board seats)
would apply to nominating shareholders and their nominees under any
shareholder nomination procedure.\52\ These disclosure requirements are
found in Item 4(b), Item 5(b), Item 7, and Item 22(b) of Schedule 14A,
and provide basic information regarding the nominating shareholder (or
shareholder group) and nominee or nominees, including biography and
shareholdings, other interests of the individuals (or group), methods
and costs of the solicitation, and other information to enable voting
shareholders to make an informed decision.
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\52\ See proposed Exchange Act Rule 14a-17(c).
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Because the shareholder nominee would be included in the company's
proxy materials, the company would be required to include the
disclosure in its proxy statement or, in the Internet version of its
proxy statement, to link to a Web site address where those disclosures
would appear. The nominating shareholder would be responsible for
providing the information to the company.\53\ Further, the nominating
shareholder would be required to provide a statement that the
shareholder nominee consented to being named in the proxy materials and
to serve if elected.\54\ Finally, a company would not be required to
include a nominating shareholder's nominee in its proxy materials if
the shareholder fails to provide the information required by proposed
Rule 14a-17(b)-(c).\55\
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\53\ Id.
\54\ See Exchange Act Rule 14a-4(d)(4) (17 CFR 240.14a-4(d)(4)).
The rule provides that such consent is required in order for a
person to be named in the proxy statement as a bona fide nominee.
\55\ See proposed Exchange Act Rule 14a-17(d).
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f. Liability for, and Incorporation by Reference of, Information
Provided by the Nominating Shareholder
It is our intent that a shareholder who nominates a director under
a bylaw provision concerning the nomination of directors would be
liable for any materially false or misleading statements in the
disclosure provided to the company and included by the company in its
proxy materials. The proposed rules contain express language, modeled
on Exchange Act Rule 14a-8(l)(2),\56\ providing that the company would
not be responsible for that disclosure.\57\ In addition, it is our
intention that any information that is provided to the company for
inclusion in its proxy materials by the nominating shareholder and
included in the company's proxy statement would not be incorporated by
reference into any filing under the Securities Act or the Exchange Act
unless the company determines to incorporate that information by
reference specifically into that filing.\58\ However, to the extent the
company does so incorporate that information by reference, we would
consider the company's disclosure of that information as the company's
own statement for purposes of the anti-fraud and civil liability
provisions of the Securities Act or the Exchange Act, as applicable.
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\56\ 17 CFR 240.14a-8(l)(2). Exchange Act Rule 14a-8(l)(2)
applies with respect to proposals and supporting statements that are
submitted by shareholders and then required to be repeated in the
company's proxy materials by Exchange Act Rule 14a-8. In this
regard, Exchange Act Rule 14a-8 states that ``the company is not
responsible for the contents of [the shareholder proponent's]
proposal or supporting statement.''
\57\ See proposed Exchange Act Rule 14a-17(e).
\58\ See proposed Exchange Act Rule 14a-17(f).
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g. Filing Requirements
When, in accordance with a shareholder nomination bylaw procedure,
a shareholder nominates a candidate for director, the company would be
required to file its proxy statement in preliminary rather than
definitive form, in the same manner as under the existing proxy rules
[[Page 43475]]
applicable to proxy contests.\59\ This is the same result that would be
obtained in a traditional contested election in which the shareholder
nominees appeared in a separate proxy statement.
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\59\ See proposed amendment to Exchange Act Rule 14a-6.
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It is possible that either the company or a nominating shareholder
(or group of shareholders) may wish to solicit in favor of their
nominee or nominees outside the company proxy materials. As in a
traditional contested election, it is important that any soliciting
materials in addition to the proxy statement be filed publicly with the
Commission so that such materials are available to all shareholders, to
the company, and to the Commission staff for review. Accordingly, where
a shareholder or company chooses to solicit outside the company proxy
materials, we intend that the existing filing requirements applicable
to definitive additional soliciting materials would apply.\60\ Under
these requirements, all soliciting materials are required to be filed
with the Commission in the same form as the materials sent to
shareholders no later than the date they are first sent or given to
shareholders.\61\
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\60\ See Exchange Act Rule 14a-6(b) (17 CFR 240.14a-6(b)) and
Exchange Act Rule 14a-12 (17 CFR 240.14a-12).
\61\ Id.
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h. Proposed New Rule 14a-17(b)-(c) and Item 25 of Schedule 14A
As noted above, one of the primary concerns with using Rule 14a-8
to establish a procedure for shareholders to nominate directors is that
doing so would not provide shareholders with disclosure they otherwise
would be given in a proxy contest. In this regard, we note that it is
of substantial importance to provide shareholders with clear,
transparent disclosure regarding any shareholder or group of
shareholders using a nominating procedure established pursuant to a
company's bylaws to nominate a candidate for director. Therefore, the
additional disclosures that are proposed to be added to Schedule 13G
for shareholder proponents of a bylaw amendment concerning shareholder
director nominations also would apply to a nominating shareholder under
an adopted bylaw. In this regard, we are proposing to add new Rule 14a-
17(b), which would require any nominating shareholder to provide to the
company the disclosures required by Item 8A, Item 8B, and Item 8C of
Schedule 13G.\62\ These disclosures would be required at the time the
shareholder forms any plans or proposals with respect to submission of
a nominee for director to the company for inclusion in the proxy
materials.\63\ Immediately after the nominating shareholder provides
the company with the disclosure, under Rule 14a-17(c), the company
would be required to provide the information on its Web site or provide
a link on its Web site to a Web site address where the disclosure would
appear. In addition, pursuant to Item 25 of Schedule 14A, the company
would be required to include the disclosure in its proxy statement or
provide a link to a Web site address where the disclosure would appear
in the Internet version of its proxy statement. Under Rule 14a-17(d),
if a nominating shareholder fails to provide the required information,
the shareholder's nominee will not be required to be included in the
company's proxy materials.
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\62\ In this regard, it is important to note that a shareholder
director nomination bylaw may establish any ownership threshold for
nominating a director. Because we believe that the disclosure
required by these items is important for an informed voting decision
by shareholders, we are proposing new Item 25 of Schedule 14A in
order to provide complete disclosure regarding nominating
shareholders utilizing procedures established in bylaw amendments
that allow for nominations by shareholders.
\63\ We have proposed a Note to Exchange Act Rule 14a-17(a)
stating that the formation of any plans or proposals includes
instances where the shareholder has indicated an intent to
management to submit a nomination or has indicated an intent to
management to refrain from submitting a nomination conditioned on
the taking or not taking of a corporate action.
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Request for Comment
As proposed, a nominating shareholder would be required to
provide to the company, for inclusion in the company's proxy materials,
disclosure responsive to Item 8A, Item 8B, and Item 8C of Schedule 13G,
as well as Item 4(b), Item 5(b), Item 7, and Item 22(b) of Schedule
14A, as applicable. Is this the appropriate type and amount of
disclosure for a nomination under a shareholder nomination procedure?
If not, what disclosure requirement would be appropriate? Is the timing
requirement for providing this disclosure appropriate? If not, when
should such disclosures be provided?
Is it appropriate for the disclosure to be provided to the
company for inclusion on its Web site and in its proxy materials, or
should the shareholder instead be responsible for filing the
information provided that they beneficially own more than 5% of the
company's securities entitled to be voted and are eligible to file on
Schedule 13G?
Does the proposal make sufficiently clear that the
nominating shareholder would be responsible for the information
submitted to the company? Should the proposal include language
addressing a company's responsibility for including statements made by
the shareholder that it knows are not accurate?
Should information provided by a nominating shareholder be
deemed incorporated by reference into Securities Act or Exchange Act
filings? If so, why?
Should companies that receive a nomination for director
from a shareholder be required to file their proxy statement in
preliminary form, as is proposed? If not, why would it be appropriate
for companies to file directly in definitive form?
Should solicitations in favor of or against a nominee for
director, by either the company or the shareholder, be filed as
definitive additional soliciting materials on the date of first use, as
is proposed? If not, how should such materials be filed?
As proposed, a nominating shareholder would be required to
provide the information required by Item 8A, Item 8B and Item 8C of
Schedule 13G to the company for inclusion on the company's Web site and
in its proxy. Would it be appropriate to add a disclosure requirement
on Form 8-K that would apply where a company does not maintain a Web
site? Would it be appropriate to allow a company to choose between Web
site disclosure and Form 8-K disclosure even where a company maintains
a Web site? Why or why not?
Is there disclosure other than that proposed concerning
shareholder nominees that would be material to investors? If so, what
are those disclosures and why would they be material? For example,
should we require disclosure regarding the relationship between the
nominating shareholder and shareholder nominee? If so, what disclosures
would be appropriate and useful to shareholders?
B. Electronic Shareholder Forums
1. Background
The Commission's recent series of roundtables on the proxy process
considered, among other issues, the role of technology in facilitating
communications not only between shareholders and companies, but also
among shareholders. Given the opportunities for collaborative
discussion afforded by the Internet and related technological
innovations, the proxy mechanism by comparison offers limited
opportunities--usually only the
[[Page 43476]]
annual meeting--for shareholders to provide advice to management.
Accordingly, the proxy system may not be the only, or the most
efficient, means of shareholder communication with management on purely
advisory matters.
Alternatives or supplements to the proxy machinery that exploit the
advantages of telecommunications technology have been suggested that
could offer shareholders other means to communicate, including with
regard to resolutions such as those typically submitted as non-binding
proposals under Rule 14a-8. For example, an online forum, restricted to
shareholders of the company whose anonymity is protected through
encrypted unique identifiers, could offer the opportunity for
shareholders to discuss among themselves the subjects that most concern
them, and which today are considered--if at all--only indirectly
through the proxy process. Shareholder expressions of interest on
particular suggested actions, tabulated based on their ownership
interest, could be determined on a real-time basis. The company could
use the form to provide information, such as a copy of press release
information regarding record dates and expression of views by the
company. Moreover, the opportunity for this enhanced level of
shareholder participation could be extended throughout the year, rather
than only at annual meetings. From the company's standpoint, such a
shareholder forum could provide more frequent information about the
interests and concerns of investors.
We are not seeking, through the proxy rules or otherwise, to devise
an approved regulatory version of an electronic shareholder forum.
Myriad uses of the Internet to facilitate shareholder communication are
already well under way, and as technology continues to develop,
individuals and entities will find increasingly creative ways to
address the challenges they face in presenting proposals to companies,
determining support for proposals among other shareholders, conducting
referenda on non-binding proposals, and organizing online petitions to
management, among other potential activities. The Commission strongly
encourages these developments. Rather than prescribe any specific
approach to an online shareholder forum in the proxy rules, the
proposed amendment is designed to remove any unnecessary real and
perceived impediments to continued private sector experimentation and
use of the Internet for communication among shareholders, and between
shareholders and their company.
2. Proposed Amendment To Facilitate the Use of Electronic Shareholder
Forums
We propose to facilitate greater online interaction among
shareholders by removing obstacles in the current rules to the use of
an electronic shareholder forum. To facilitate the establishment of
such forums, which can be conducted and maintained in any number of
ways, we propose to clarify that a company is not liable for
independent statements by shareholders on a company's electronic
shareholder forum. In addition, in order to enhance the efficacy of the
forum, we propose to address any ambiguity concerning whether use of an
electronic shareholder forum could constitute a proxy solicitation.
Proposed Rule 14a-18(a) would make clear that both companies and
shareholders are entitled to establish and maintain an electronic
shareholder forum under the federal securities laws, provided that the
forum is conducted in compliance with the federal securities laws,
applicable state law, and the company's charter and bylaws. While the
proxy rules currently do not prohibit or delimit such activities,
neither were they written in contemplation of the wide-ranging
communications potential of the Internet. By addressing specific
concerns relating to the use of the electronic shareholder forum in the
proposed rule, we are seeking to remove legal ambiguity that might
inhibit shareholders and companies from energetic exploitation of the
potential of communications technology, and to encourage shareholders
and companies to take advantage of this technology to facilitate better
communication among shareholders and between shareholders and
companies.
Liability for statements made on an electronic shareholder forum is
one area of concern for companies and shareholders when making the
decision whether to establish such a forum. To alleviate this concern,
we propose to clarify in Rule 14a-18(b) that, for simply establishing,
maintaining, or operating the electronic shareholder forum, a company
or shareholder would not be liable under the federal securities laws
for any statement or information provided by another person to the
forum. The intent is for the person establishing, maintaining, or
operating an electronic shareholder forum to be protected from
liability in a similar way as the federal telecommunications laws
protect an interactive computer service.\64\
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\64\ See Section 230(c)(1) of the Telecommunications Act of 1996
(47 U.S.C. Sec. 230(c)(1)) (``No provider or user of an interactive
computer service shall be treated as the publisher or speaker of any
information provided by another information content provider.'').
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Persons providing information to or making statements on the
electronic shareholder forum would remain liable for the content of
those communications under traditional liability theories in the
federal securities laws, such as those in Section 17(a) of the
Securities Act and Section 10(b), Rule 10b-5, and Section 20(e) of the
Exchange Act. The prohibitions in the anti-fraud laws against primary
or secondary participation in fraud, deception, or manipulation would
continue to apply to those supplying information to the site, and
claims would not face any additional obstacle because of the new rule.
Any other applicable federal or state law would also continue to apply
to a person providing information or statements to an electronic
shareholder forum.
An additional concern regarding the use of an electronic
shareholder forum relates to the broad general application of our proxy
rules under Section 14(a) of the Exchange Act. Under the proxy rules, a
solicitation encompasses any request for a proxy, any request to
execute or revoke a proxy, and the furnishing of a form of proxy or
other communication under circumstances reasonably calculated to result
in the procurement, withholding, or revocation of a proxy.\65\ This
broad definition of solicitation limits the kinds of activities that a
shareholder or the company may undertake in a public forum when
discussing issues that may be voted on at the company's annual or
special meeting.
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\65\ See Exchange Act Rule 14a-1(l ) (17 CFR 240.14a-1(l )).
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To facilitate greater use of the electronic shareholder forum
concept and to encourage more robust communication with the company and
among shareholders, we propose to exempt any solicitation in an
electronic shareholder forum by or on behalf of any person who does not
seek directly or indirectly, either on its own or another's behalf, the
power to act as proxy for a shareholder and does not furnish or
otherwise request, or act on behalf of a person who furnishes or
requests, a form or revocation, abstention, consent or
authorization.\66\ The solicitation would be exempt so long as it
occurs more than 60 days prior to the date announced by the
[[Page 43477]]
company for its annual or special meeting of shareholders or if the
company announces the meeting less than 60 days before the meeting date
the solicitation may not occur more than two days following the
company's announcement.\67\ We further propose to clarify in proposed
Rule 14a-18(c) that a person who participates in an electronic
shareholder forum and makes solicitations in reliance on the proposed
exemption would continue to be eligible to solicit proxies outside of
Rule 14a-2(b)(6) provided that any such solicitation complies with
Regulation 14A.
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\66\ See proposed Exchange Act Rule 14a-2(b)(6).
\67\ The proposal would not affect the application of any other
exemptions under Regulation 14A. For example, a person could rely on
the other applicable exemptions in Exchange Act Rule 14a-2 (17 CFR
240.14a-2).
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The purpose of these amendments is to encourage the free flow of
information, ideas, and opinions in an electronic shareholder forum. It
is not the purpose of these amendments to allow such a forum to be used
to circumvent the proxy or anti-fraud rules. We believe that there is
less risk of an electronic shareholder forum being used for proxy
solicitation more than 60 days prior to an annual or special meeting
and therefore have proposed a 60-day limitation.\68\ Communications
within an electronic shareholder forum that occur less than 60 days
prior to the annual or special meeting, or more than two days after the
announcement of the meeting, would continue to be treated as any other
communication would be treated today, and would be required to comply
with our proxy rules if they are a solicitation unless they fall within
an existing exemption. In addition, we propose to limit the exemption
to persons who do not seek to act as a proxy for a shareholder or
request a form of proxy from them.
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\68\ 60 days corresponds with the maximum amount of time prior
to a scheduled meeting that the company may fix the record date for
determining the stockholders entitled to notice of or to vote at a
meeting under the Delaware Code. See Del. Code title 8, Sec. 213
(2007).
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We propose limitations to the exemption because, though we believe
that an electronic shareholder forum should provide a medium for, among
other things, open discussion, debate, and the conduct of referenda, we
believe that the solicitation of proxies for an upcoming meeting is
more appropriate under the protections of our proxy rules. Any proxies
obtained prior to the application of our proxy rules would not benefit
from the full and fair disclosure required under the regulations.
Request for Comment
Our proposals are intended to provide a company or its
shareholders with the flexibility under the federal securities laws to
establish an electronic shareholder forum that permits interaction
among shareholders and between shareholders and the company's
management or board of directors, and permits the operator of the
electronic shareholder forum to provide for non-binding referenda votes
of forum participants. Do our proposals provide this flexibility? Are
there additional steps that are necessary to assure that the federal
securities laws do not hinder the development of these electronic
shareholder forums?
We propose to amend Regulation 14A to encourage the
development of electronic shareholder forums that could be used by
companies to better communicate with shareholders and by shareholders
to better communicate both with their companies and among themselves.
In addition, the electronic shareholder forum concept could offer
shareholders a means of advancing referenda that might otherwise be
proposed as non-binding shareholder proposals under Rule 14a-8. Is this
appropriate and, if so, how can we further encourage the development of
electronic shareholder forums?
As proposed, the new rules would allow companies and
shareholders to develop electronic shareholder forums as they see fit,
as long as the forums are conducted in compliance with Section 14(a) of
the Exchange Act, other federal laws, applicable state law, and the
company's charter and bylaw provisions. Should we be more prescriptive
in our approach, such as by providing direction or guidance relating to
whether a forum is available for non-binding referenda, whether access
is limited to shareholders, the frequency with which shareholder
records are updated for purposes of enabling participation, or whether
the forum assures the anonymity of shareholders who access it?
As proposed, we make clear that a company or shareholder
that establishes, maintains, or operates a forum is not liable for any
statements or information provided by another person. Does the proposed
rule adequately address the liability concerns that might face sponsors
of and participants in an electronic shareholder forum?
In order to encourage use of electronic shareholder
forums, we are proposing an exemption for solicitations on an
electronic shareholder forum. As proposed, solicitations that do not
seek to act as a proxy for a shareholder or request a form of proxy
from them and occur more than 60 days prior to an annual or special
meeting (or within two days of the announcement of the meeting) are
exempt under the proxy rules. Is it appropriate to provide this
exemption from regulation for communications on an electronic
shareholder forum? Should the exemption apply more broadly to all
communications? Would it be possible to conduct an effective proxy
solicitation on the forum despite the limitations? Is the 60-day
limitation sufficiently long to protect shareholders from unregulated
solicitations? Should the time period be shortened (e.g., 30 or 35
days) or lengthened (e.g., 75 or 90 days)? Is there a better
alternative that would encourage free and open communication on
electronic shareholder forums, but limit the use of the forums as a way
to solicit proxies without providing the full and fair disclosure
required in our proxy rules?
As proposed, we have provided no guidance on what should
happen to the communications and data on the forum within the 60-day
period prior to the annual or special meeting. Solicitations that
remain posted on the forum that were exempt under proposed Rule 14a-
2(b)(6) may no longer be exempt. Should we require that the electronic
shareholder forums be taken down within 60 days of a scheduled meeting?
Alternatively, if the forum continues to run, should shareholders who
continue making communications on the forum file any communications
that are solicitations in compliance with Regulation 14A? Should those
shareholders be required to file any solicitations on the forum that
occurred more than 60 days prior to the meeting? How would the forums
be policed to ensure that the responsible parties are properly filing?
What would be the appropriate use of an electronic
shareholder forum with regard to a bylaw proposal, as contemplated in
this release? For example, should shareholders be able to use a forum
to solicit other shareholders to form a 5% group in order to submit a
bylaw proposal?
C. Request for Comment on Proposals Generally
1. Bylaw Amendments Concerning Non-Binding Shareholder Proposals
Several participants in the Commission's recent proxy roundtables
expressed concern that by requiring the inclusion of non-binding
shareholder proposals in company proxy materials, Rule 14a-8 expands
rather than
[[Page 43478]]
vindicates the framework of shareholder rights in state corporate
law.\69\ A number of other participants in the roundtables indicated,
however, that non-binding shareholder proposals have a useful role in
the proxy process and in corporate governance.\70\ Based, in part, on
these and other views expressed by participants at the roundtables, we
are requesting comment as to whether the Commission should adopt rules
that would enable shareholders, if they choose to do so, to determine
the particular approach they wish to follow with regard to non-binding
proposals. Such an approach was proposed once before by the Commission
but ultimately was not adopted; \71\ however, in light of developments
in the last 25 years that may have diminished the concerns about
shareholders' ability to act as a group, which formed the basis of
arguments for a mandated federal approach, we are again requesting
comment on this approach. These developments include the increasing
importance of institutional investors in contemporary capital markets,
the significant role of private organizations that collect and
disseminate information to institutional investors concerning corporate
governance issues, the prevalence of widely published voting guidelines
for market participants of all sizes, and the significantly enhanced
opportunities for collaborative discussion and decision-making afforded
by the Internet and related technological innovations.
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\69\ See, e.g., Leo E. Strine, Jr., Vice Chancellor, Court of
Chancery of the State of Delaware, Transcript of Roundtable on the
Federal Proxy Rules and State Corporation Law, May 7, 2007, at 18-
23.
\70\ See, e.g., Ted White, Strategic Advisor, Knight Vinke Asset
Management, Transcript of Roundtable on the Federal Proxy Rules and
State Corporation Law, May 7, 2007, at 94-95; Damon A. Silvers,
Associate General Counsel, AFL-CIO, Transcript of Roundtable on
Proposals of Shareholders, May 25, 2007, at 8-11. See also Form
Letters B and C, available on the Commission's Web site at
http://www.sec.gov.
\71\ In 1982, during a comprehensive review of the shareholder
proposal process, the Commission proposed permitting companies and
shareholders to formulate and adopt procedures for including
shareholder proposals in the company's proxy materials. See Release
No. 34-19135 (Oct. 14, 1982) [47 FR 47420]. Under the proposed
approach, the Commission would have continued to have a rule that
specified the procedures governing the submission and inclusion of
shareholder proposals, but would have adopted a supplemental rule to
permit a company and its shareholders to adopt a plan providing
their own procedures to govern the process. The proposed approach
would have allowed a company's board of directors and shareholders,
rather than the Commission or its staff, to make judgments as to
what proposals should be included in the company's proxy materials
at the company's expense. The plan could have been proposed by
either the company's board of directors or shareholders, and subject
to certain minimum requirements, the provisions of the plan could
have been as liberal or restrictive as shareholders were willing to
approve. In 1983, the Commission adopted final rules amending
Exchange Act Rule 14a-8, but left the Exchange Act Rule 14a-8
framework intact, concluding that, at that time, a federal framework
for including shareholder proposals in company proxy materials was
in the best interests of shareholders and issuers. See Release No.
34-20091 (Aug. 16, 1983) [48 FR 38218].
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We therefore are requesting comment on whether a company or its
shareholders should have the ability to propose and adopt bylaws that
would establish the procedures that the company will follow for
including non-binding proposals in the company's proxy materials. In
addition to general comment, we encourage commenters to address the
following specific questions:
Would it be appropriate to require the shareholder (or
group of shareholders) that submits the proposal to file a Schedule 13G
that includes specified public disclosures regarding its background and
its interactions with the company, that corresponds to the proposed
disclosure requirements for shareholder proponents of bylaw amendments
concerning shareholder director nominations?
Should a shareholder (or group of shareholders) proposing
such a bylaw amendment be required to have continuously held a certain
percentage of the company's securities entitled to be voted on the
proposal at the meeting? What would the appropriate percentage be?
Should a holding period be required? If so, how long should the holding
period be?
Should a proposal be required to otherwise satisfy the
requirements of Rule 14a-8 (e.g., the proposal would have to satisfy
the procedural requirements of Rule 14a-8 and not fall within one of
the other substantive bases for exclusion included in Rule 14a-8)?
Under current Rule 14a-8, all shareholder proposals and
supporting statements are limited to 500 words in total. Should the
word limit be different for shareholder submissions of proposed bylaw
amendments to establish procedures for non-binding proposals? If so,
should the word limit be increased to 3,000 words in order to permit a
more thorough description of the proposed procedural framework and in
accordance with the approximate word count in current Rule 14a-8? If
not 3,000, should the word limit be higher or lower than 3,000 (e.g.,
1,000, 2,000, 4,000)?
Should the proxy statement for the shareholder vote be
required to explain that approval of the bylaw would establish
procedures that would govern in all circumstances with regard to
shareholder requests for the inclusion of non-binding proposals? Should
the bylaw itself be required to provide this explanation?
Would it be appropriate for the Commission to provide that
the substance of the procedure for non-binding proposals contained in a
bylaw amendment would not be defined or limited by Rule 14a-8, but
rather by the applicable provisions of state law and the company's
charter and bylaws? For example, the Commission could provide that the
framework could be more permissive or more restrictive than the
requirements of existing Rule 14a-8 (e.g., the framework could specify
different eligibility requirements than provided in current Rule 14a-8,
different subject-matter criteria, different time periods for
submitting non-binding proposals to the company, or different
resubmission thresholds; or it could specify that non-binding proposals
would not be eligible for inclusion in the company's proxy materials,
or alternatively that all non-binding proposals would be included in
the company's proxy materials without restriction, if these approaches
were consistent with state law and the company's charter and bylaws).
To ensure that any new rule is consistent with the
principle that the federal proxy rules should facilitate shareholders'
exercise of state law rights, and not alter those rights, should any
rule adopted include a specific requirement that, to be included in a
company's proxy materials, a shareholder proposal establishing bylaw
procedures for non-binding proposals would have to be binding on the
company under state law if approved by shareholders?
Would it be appropriate for the Commission to provide
that, if shareholders approve a bylaw procedure for non-binding
proposals, interpretation and enforcement of that procedure would be
the province of the appropriate state court? Under such an approach,
the Commission and its staff would not resolve such questions. Should
the Commission or its staff instead become involved in interpreting or
enforcing the company's bylaws? Is there any reasonably foreseeable
situation where intervention by the Commission or its staff would be
critical to the proper functioning of bylaw procedures for non-binding
proposals? In addition, we solicit comments with respect to the
practicality and feasibility of relying on state courts as the arbiter
of disagreements between companies and shareholder proponents over the
company's bylaws as they apply to non-binding shareholder resolutions.
[[Page 43479]]
Should the Commission encourage the proponent of any bylaw
procedure governing non-binding proposals to include in the procedure a
fair and efficient mechanism for resolving any disagreements between
the company and the shareholder as to the bases for inclusion or
exclusion of a proposal?
Should the Commission specify that, even after the
shareholders approve a bylaw procedure for non-binding shareholder
proposals, a shareholder meeting the proposed eligibility requirements
could later submit another bylaw procedure that removes or amends the
previously-adopted non-binding procedure and that bylaw would not
generally be excludable by a company under Rule 14a-8(i)(2) or Rule
14a-8(i)(3)?
How might shareholders' overall ability to communicate
with management and other shareholders be improved or diminished if
shareholders were able to choose different procedures for non-binding
proposals than those currently in Rule 14a-8? Are there additional or
different procedures that the Commission should require, encourage or
seek to prevent?
With respect to subjects and procedures for shareholder votes that
are specified by the corporation's governing documents, most state
corporation laws provide that a corporation's charter or bylaws can
specify the types of binding or non-binding proposals that are
permitted to be brought before the shareholders for a vote at an annual
or special meeting. Further, most state corporation laws permit a
company's board of directors to adopt, amend, or repeal bylaws without
a shareholder vote. Because a company's board of directors could adopt
a bylaw establishing procedures for the consideration of non-binding
proposals at meetings of shareholders, we have not included in the
above request for comment any discussion of a board of directors
adopting bylaws that would limit the ability of shareholders to raise
non-binding proposals for a vote at meetings of shareholders. To the
extent a company had in place a bylaw under which non-binding
shareholder proposals were not permitted to be raised at meetings of
shareholders, a company may be able to look to Rule 14a-8(i)(1) with
regard to the exclusion of such proposals. Such ability to exclude the
proposals would, of course, be reliant on the bylaw's compliance with
applicable state law and the company's governing documents. In light of
the board's power to adopt such a bylaw under state law, please
consider the following specific requests for comment:
Should the board of directors be able to adopt a bylaw
setting up a separate procedure for non-binding shareholder proposals
and be able, under our proxy rules, to follow that procedure in lieu of
Rule 14a-8 with regard to non-binding proposals? Should such procedures
be deemed to comply with Rule 14a-8 if the bylaw is not approved by a
shareholder vote, provided that state law authorizes the adoption of
such a bylaw without a shareholder vote?
Should a bylaw proposed and adopted by a company prior to
becoming subject to Exchange Act Section 14(a) be deemed to comply with
Rule 14a-8 once the company became subject to Exchange Act Section
14(a)? If so, should such companies be required to provide disclosure
regarding the rights of shareholders with respect to the submission of
non-binding shareholder proposals for inclusion in the company's proxy
materials as part of the description of its equity securities in its
Securities Act and Exchange Act registration statements. If not, should
companies instead be required to submit the bylaw to a shareholder vote
once the company becomes public and subject to Section 14(a) of the
Exchange Act, either at a special meeting or an annual meeting?
Is there a concern that affiliates of a company could
obtain a sufficient number of votes to adopt a bylaw without obtaining
a vote of the non-affiliates? Should the federal proxy rules further
restrict the operation of bylaw provisions that are otherwise
permissible under state law by requiring, for example, that once a
company is subject to Section 14(a), the shareholders who are not
affiliates of the company ratify the bylaw, or that the bylaw procedure
be periodically re-approved by shareholders after its initial approval?
Does the fact that the company's bylaws can generally be revised or
repealed at any time after adoption mitigate the need for such
extraordinary procedures?
Should the Commission adopt a provision to enable
companies to follow an electronic petition model for non-binding
shareholder proposals in lieu of Rule 14a-8? Such a model could include
some or all of the following parameters:
Electronic petitions would be submitted by shareholders
and posted by the company on the electronic proxy notice and access Web
site;
Only shareholders as of the record date could sign the
electronic petition through the close of the applicable shareholder
meeting;
Execution of the electronic petition would occur through
the same control numbers used to vote under electronic proxy;
Communications would be subject to Rule 14a-9, but
otherwise would be minimally restricted by the proxy rules;
Results of petitions would be reported as a percentage of
total outstanding shares;
The decision to sign or not to sign an electronic petition
would not be considered a shareholder vote;
Petitions would follow current Rule 14a-8 guidelines
(e.g., would be limited to 500 words) and require the identification of
the shareholder-sponsor;
Companies would be permitted to post a response to each
petition; and
Petition sponsors could use an ``electronic-only''
solicitation approach with no obligation to send paper copies.
Are there additional changes to Rule 14a-8 that would
improve operation of the rule? If so, what changes would be appropriate
and why? For example, should the Commission amend the rule to change
the existing ownership threshold to submit other kinds of shareholder
proposals? If so, what should the threshold be? Would a higher
ownership threshold, such as $4,000 or $10,000, be appropriate? Should
the Commission amend the rule to alter the resubmission thresholds for
proposals that deal with substantially the same subject matter as
another proposal that previously has been included in the company's
proxy materials? If so, what should the resubmission thresholds be--
10%, 15%, 20%? Are there any areas of Rule 14a-8 in which changes or
clarifications should be made (e.g., Rule 14a-8(i)(7) and its
application with respect to proposals that may involve significant
social policy issues)? If so, what changes or clarifications are
necessary?
Currently, Item 4 in Part I of Form 10-K and Form 10-KSB
and Item 4 in Part II of Form 10-Q and 10-QSB require a company to
disclose information regarding the submission of matters to a vote of
security holders. The required disclosure includes a description of
each matter voted upon at the meeting and the number of votes cast for,
against, or withheld, as well as the number of abstentions and broker
non-votes as to each such matter. In the interest of increased
transparency, should additional disclosure be provided with regard to
the voting results for non-binding shareholder proposals? For example,
should the company be required to disclose votes for non-binding
shareholder proposals as a percentage of the total outstanding
[[Page 43480]]
securities entitled to vote on the proposal? Or as a percentage of the
total votes cast? Would shareholders benefit from receiving this type
of information?
2. Other Requests for Comment
Would adoption of the proposed rules conflict with any
state law, federal law, or rule of a national securities exchange or
national securities association? To the extent you indicate that the
proposed rules would conflict with any of these provisions, please be
specific in your discussion of those provisions that you believe would
be violated.
As the Commission staff noted in its July 15, 2003 Staff
Report entitled ``Review of the Proxy Process Regarding the Nomination
and Election of Directors,'' \72\ the cost to shareholders of
soliciting proxies in opposition to the company's solicitation has been
considered to be prohibitive and, as such, has been a key component of
arguments in favor of increasing the opportunity for the inclusion of
shareholder nominees for director in the company's proxy materials.
Significant recent technological advances appear to have the potential
to substantially reduce the costs of such a proxy solicitation,
including the Commission's recently adopted ``E-Proxy'' rules \73\ and
the electronic shareholder forum discussed in this release. Will these
technological advances reduce the costs of proxy solicitations for both
companies and those that solicit in opposition to a company?
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\72\ See Staff Report: Review of the Proxy Process Regarding the
Nomination and Election of Directors, Appendix A (Summary of
Comments in Response to the Commission's Solicitation of Public
Views Regarding Possible Changes to the Proxy Rules) (July 15,
2003).
\73\ Release No. 34-55146 (Jan. 22, 2007) [72 FR 4148].
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Should bylaw proposals establishing a shareholder director
nomination procedure be subject to a different resubmission standard
than other Rule 14a-8 proposals? If so, what standard would be
appropriate and why?
As proposed, the federal proxy rules would not establish a
threshold for the votes required to adopt a bylaw procedure. This is
because the voting thresholds for the adoption of bylaw amendments are
established by state law and a company's governing documents. Is this
reliance on state law and the company's governing documents
appropriate? Should the proxy rules establish a different federal
standard for the required vote to adopt a bylaw procedure, such as the
majority of shares present in person or represented by proxy and
entitled to vote on the proposal, or a supermajority vote?
Our proposals assume that the existing exemptions for
solicitations are sufficient to include soliciting activities of
shareholders that are seeking to form a more than 5% group.
Accordingly, the release does not address any such soliciting
activities or propose any new rules in this regard. Is our assumption
that the existing exemptions are sufficient for the purpose of forming
a shareholder group to submit a bylaw proposal correct? If not, what
would be the appropriate scope of any new exemption or amendment to an
existing exemption?
Is there an alternative to the proposal regarding
shareholder director nomination bylaws that would provide a preferable
method by which shareholders could establish procedures to place their
candidates for director in the company proxy materials? For example,
should shareholders be able to propose a bylaw amendment only where
there has been a majority withhold vote for a specified director or
directors, and the director or directors do not resign? If so, what
ownership threshold would be appropriate in those circumstances?
In light of developments that reduce the costs of proxy
solicitations by shareholder proponents, such as the adoption of ``E-
proxy,'' general advances in communication technology, the proposals
concerning electronic shareholder forums, and, in some instances the
ability of shareholders to request and receive reimbursement for
election contest expenses, is there an alternative to the proposal
regarding shareholder director nomination bylaws that would enable
shareholders to conduct election contests without incurring the expense
of a traditional contest and without being placed on the company
ballot? For example, should our proxy rules be amended to permit pure
electronic solicitation? Should we amend Rule 14a-2(b)(1) to enable
shareholders to solicit a greater number of other shareholders than
currently is permitted under the rule (the rule limits the number
solicited to ten) without being required to furnish a proxy statement?
Would additional amendments to the system for reporting
beneficial and other ownership interests in securities be appropriate?
If so, what additional amendments would be appropriate and why? Are
there areas where additional disclosures would be appropriate (e.g.,
with regard to the exercise of voting rights without an economic
interest in the underlying security)? Are there ways in which the
system could be simplified (e.g., by combining the reports required to
report beneficial and other ownership interests)?
III. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
The proposed amendments that are the subject of this
release;
Additional or different changes; or
Other matters that may have an effect on the proposals
contained in this release.
We request comment from the point of view of companies, investors
and other market participants. With regard to any comments, we note
that such comments are of great assistance to our rulemaking initiative
if accompanied by supporting data and analysis of the issues addressed
in those comments.
IV. Paperwork Reduction Act
A. Background
The proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995,
the PRA.\74\ We are submitting the proposal to the Office of Management
and Budget for review in accordance with the PRA.\75\ The titles for
the collections of information are:
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\74\ 44 U.S.C. 3501 et seq.
\75\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
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(1) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1
through 14a-15 and Schedule 14A)'' (OMB Control No. 3235-0059); and
(2) ``Securities Ownership--Regulation 13D and 13G (Commission
Rules 13d-1 through 13d-7 and Schedules 13D and 13G)'' (OMB Control No.
3235-0145).
These regulations were adopted pursuant to the Exchange Act and the
Investment Company Act of 1940 and set forth the disclosure
requirements for securities ownership reports filed by investors and
proxy statements filed by companies to help investors make informed
voting or investing decisions.
The hours and costs associated with preparing and filing the
disclosure, filing the forms and schedules and retaining records
required by these regulations constitute reporting and cost burdens
imposed by each collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
B. Summary of Proposals
The proposed amendments would establish a new procedure by which
[[Page 43481]]
shareholders could use Rule 14a-8 to propose bylaw amendments
establishing procedures that would permit eligible shareholders to
nominate candidates for the board of directors in the company's proxy
materials.\76\ As proposed, Rule 14a-8 would be amended to require
inclusion of such proposals, provided that the proposals comply with
the procedural requirements of Rule 14a-8 and the additional proposed
disclosure requirements. To be included, the bylaw amendments would be
required to be submitted by a shareholder proponent that is eligible
to, and has, filed a Schedule 13G including all required disclosures
and has continuously held more than 5% of the company's securities
entitled to be voted on the proposal for at least one year. We also
propose to amend Schedule 13G and add Item 24 and Item 25 of Schedule
14A to require disclosure regarding the shareholder proponent's
background and relationships with the company. This disclosure would be
provided by the shareholder proponent and the company, respectively.
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\76\ Proposed Rule 14a-18 would establish special provisions in
the proxy rules applicable to electronic shareholder forums in order
to encourage shareholders and companies to take advantage of these
forums. These rules are intended to allow issuers and shareholders
broad latitude with regard to the forums and do not impose any new
paperwork burdens.
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In addition to the proposed amendments concerning shareholder
proposals to amend company bylaws, we propose several amendments to
require disclosure about shareholder nominees for director and
nominating shareholders when shareholder nominees are included in the
company's proxy material. Proposed Rule 14a-17 would require nominating
shareholders to provide the company with certain Schedule 14A
information regarding each director nominee for inclusion in the proxy
statement or on a Web site to which the proxy statement refers. In
addition, proposed Rule 14a-17 would require a nominating shareholder
to provide information regarding the background of the nominating
shareholder and its relationships with the company that would be
required by proposed Items 8A, 8B and 8C of Schedule 13G to the
company.
The proposed information collection requirements would be mandatory
and responses would not be confidential. The hours and costs associated
with preparing and filing forms and retaining records constitute
reporting and cost burdens imposed by the collection of information
requirements. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information requirement unless
it displays a currently valid OMB control number.
C. Paperwork Reduction Act Burden Estimates
The proposed amendments would, if adopted, require additional
disclosure on Schedule 14A and Schedule 13G, as well as in a company's
registration statements.
1. Proposed Amendments to Rule 14a-8 Concerning Bylaw Proposals for
Shareholder Nominations of Directors
Schedule 14A prescribes the information that a company must include
in its proxy statements to provide security holders with material
information relating to voting decisions. For purposes of the PRA, we
currently estimate that compliance with Regulation 14A, including
preparation of Schedule 14A, requires 475,781 hours of company
personnel time (approximately 66 hours per company) and costs
$63,437,000 for the services of outside professionals (approximately
$8,750 per company).\77\ The proposed amendment to Rule 14a-8 would
require the company to include shareholder proposed bylaw amendments
that provide procedures for shareholder nominations of directors unless
the shareholder has failed to comply with the procedural requirements
of Rule 14a-8.
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\77\ These figures assume 7,250 respondents that file Schedule
14A under Regulation 14A with the Commission. We estimate that 75%
of the burden of preparation is carried by the company internally
and that 25% of the burden of preparation is carried by outside
professionals retained by the issuer at an average cost of $400 per
hour. The hourly cost estimate is based on our consultations with
several registrants and law firms and other persons who regularly
assist registrants in preparing and filing with the Commission.
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Historically shareholders have made relatively few binding
proposals. In the 2006-2007 proxy season, companies received 1,250
shareholder proposals, of which only 100 were binding proposals.\78\ Of
those 100, only three related to bylaw amendments providing for
shareholder nominees to appear in the company's proxy materials.\79\
These three proposals were not subject to the additional disclosure
requirements that would apply to shareholders under the proposed rules.
In light of this historical data and given the proposed eligibility
requirements to submit such proposals, we estimate that there would be
a limited number of shareholder proposals to amend the bylaws to
provide for shareholder nominees to be included in the company's proxy
materials. We note, however, that by establishing procedures for
submission of theses types of proposals, we are likely to encourage
more bylaw amendment proposals than we currently receive. We therefore
assume some increase in such proposals and estimate that the number
would be 30 per year.\80\
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\78\ Rachel McTague, 39 Securities Regulation & Law Report 911
(June 11, 2007) (stating that, according to data complied by the
Institutional Shareholder Services, nearly 1,250 shareholder
proposals were submitted to companies during the 2006 proxy season).
\79\ Tomoeh Murakami Tse, The Washington Post, March 15, 2007,
at D2 (stating that three proxy access proposals were submitted by
shareholders during the 2006 proxy season).
\80\ We estimate that the number of proposals for bylaw
amendments to allow shareholder nominations of directors received
last proxy season (3) would increase tenfold (30).
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For purposes of the PRA, we estimate that the proposed amendments
to Rule 14a-8 would create an incremental burden of six hours of
company personnel time and costs of $800 for the services of outside
professionals. In sum, we estimate that the amendments to Regulation
14A will increase the annual paperwork burden by approximately 180
hours of company personnel time and a cost of approximately $24,000 for
the services of outside professionals. These burdens and costs would
include the additional disclosure in proposed Item 24 and Item 25 of
Schedule 14A as well as the burdens and costs associated with including
the proposal in the company's proxy materials.
2. Proposed Amendments to Schedule 13G Requiring Disclosure From
Shareholder Proponents
Exchange Act Schedule 13G is a short-form filing for persons to
report ownership of more than 5% of a class of voting equity securities
registered under Section 12 of the Exchange Act. Generally, the filer
must certify that the securities have not been acquired and are not
held for the purpose of, or with the effect of, changing or influencing
the control of the issuer of the securities. For purposes of the PRA,
we currently estimate that compliance with the Schedule 13G
requirements under Regulation 13D requires 98,800 burden hours, broken
down into 24,700 hours (or 2.6 hours per respondent) of respondent
personnel time and costs of $22,230,000 (or $2,340 per respondent) for
the services of outside professionals.\81\
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\81\ These figures assume 9,500 respondents that file Schedule
13G with the Commission. We estimate that 25% of the burden of
preparation is carried by the company internally and that 75% of the
burden of preparation is carried by outside professionals retained
by the issuer. These figures assume an average cost of $300 per
hour. The Commission has increased the cost estimate $100 since our
last estimate provided to OMB based on our consultations with
several registrants and law firms and other persons who regularly
assist registrants in preparing and filing with the Commission. In
our PRA submission, we will increase the cost of outside
professionals to meet the new $400 per hour estimate.
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[[Page 43482]]
The proposed amendment to Rule 14a-8 would require the company to
include certain shareholder proposed bylaw amendments only if they are
submitted by a shareholder proponent that is eligible to, and has,
filed a Schedule 13G that complies with proposed Schedule 13G Items 8A,
8B, and 8C. As explained above, we estimate that the number of
shareholder proponents submitting such proposals under Rule 14a-8 would
be 30. Rather than presume that any of the shareholder proponents
previously filed a Schedule 13G on an individual or group basis, we
assume for purposes of the PRA that each person or group will be a new
Schedule 13G filer. This would increase the number of Schedule 13G
filers. In addition, the proposed disclosure of each shareholder
proponent's background and relationships with the company would be
different and more detailed than the disclosure currently required by
Schedule 13G, increasing the reporting burden associated with this
schedule.
For purposes of the PRA, we estimate that the proposed amendments
to Schedule 13G would create an incremental burden of 4.1 hours per
response, which we would add to the existing Schedule 13G burden
resulting in a total burden of 14.5 hours.\82\ Each of the 30
additional filers would incur a burden of approximately 3.6 hours of
respondent personnel time (25% of the total burden) and costs of $4,350
for the services of outside professionals (75% of the total burden). In
sum, we estimate that the amendments to Schedule 13G will increase the
annual paperwork burden by approximately 108 hours of respondent
personnel time and a cost of approximately $130,000 for the services of
outside professionals.
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\82\ We currently estimate the burden for preparing a Schedule
13G filing to be 10.4 hours.
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3. Proposed Rule 14a-17 To Require Disclosure From Nominating
Shareholders and Shareholder Nominees
Proposed Rule 14a-17 would require nominating shareholders and
their nominees to provide disclosure relating to their backgrounds and
relationships with the company for inclusion in a Schedule 14A. As
explained above, we estimate that there will be 30 proposals for bylaw
amendments to allow shareholder nominations of directors annually. Of
these, for purposes of this analysis we estimate that 50% will be
successful. If we assume that in every case where a bylaw amendment is
successful a shareholder nominee is proposed, the additional disclosure
would be required 15 times annually.
For purposes of the PRA, we estimate that proposed Rule 14a-17
would create an incremental burden of six hours of company personnel
time and costs of $800 for the services of outside professionals for
each shareholder nominee included in a Schedule 14A. In sum, we
estimate that the amendments will increase the annual paperwork burden
of Regulation 14A by approximately 90 hours of company personnel time
and a cost of approximately $12,000 for the services of outside
professionals.
D. Solicitation of Comments
We request comment on the accuracy of our estimates. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) Evaluate
whether the proposed collection of information is necessary for the
proper performance of the functions of the agency, including whether
the information will have practical utility; (ii) evaluate the accuracy
of the Commission's estimate of burden of the proposed collection of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(iv) evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Nancy M. Morris, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. S7-16-07. Requests for materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-16-07, and be
submitted to the Securities and Exchange Commission, Office of the
Secretary--Records Management Branch, 100 F Street, NE., Office of
Filings and Information Services, Washington, DC 20549. OMB is required
to make a decision concerning the collection of information between 30
and 60 days after publication of this release. Consequently, a comment
to OMB is assured of having its full effect if OMB receives it within
30 days of publication.
V. Cost-Benefit Analysis
We propose to revise and update the proxy rules to more effectively
serve their essential purpose of facilitating the exercise of
shareholders' rights under state law. We request any relevant data from
commenters that would be helpful in quantifying these costs and
benefits.
A. Benefits
The proposed amendments to Rule 14a-8 concerning binding bylaw
proposals relating to shareholder nominations of directors on the
company's proxy would help shareholders to exercise rights under state
law to nominate and elect directors of their choosing. A bylaw
amendment that allowed shareholder nominees to be included in the
company's proxy materials would reduce the cost for a shareholder to
nominate candidates for election on the board since the nominating
shareholder would not need to incur the cost of preparing separate
proxy materials and mailing those materials to other shareholders.
Allowing shareholders to propose bylaw amendments that would enable
them to include shareholder nominees on the company's proxy may provide
shareholders a more effective voice than simply being able to recommend
candidates to the nominating committee or being able to nominate
candidates in person at a shareholder meeting.
The proposed amendment would require additional disclosure on
Schedule 13G and Schedule 14A by shareholder proponents, nominating
shareholders and shareholder nominees about their background and
relationships with the company. This additional information provided by
such disclosures would help provide transparency to shareholders in
voting on bylaw amendments and shareholder nominees.
Finally, the proposed amendments to Regulation 14A regarding the
electronic shareholder forum seek to remove unnecessary barriers to the
use of technology to increase constructive communication between
shareholders and between shareholders and the company. The exemption
for communications more than 60 days prior to the announced meeting
date would allow for more open and unfettered communication between
parties. The enhanced communication may result in better coordination
among the views of shareholders, more
[[Page 43483]]
effective exercise of state law rights, and a better alignment between
the interests of shareholders and the company.
B. Costs
The proposed amendments would impose some direct costs on companies
and shareholders who are subject to the new rules. For purposes of the
PRA, we estimate that the annual additional burden to companies of
preparing the required proxy disclosure would be approximately 270
hours of company personnel time and a cost of approximately $36,000 for
the services of outside professionals. In addition, for purposes of the
PRA, we estimate that the annual incremental burden to prepare the
required disclosure for shareholder proponents, nominating shareholders
and nominees would be approximately 108 hours of personnel time and a
cost of approximately $130,000 for the services of outside
professionals.
The bulk of the additional disclosure required by the amendments to
Regulation 14A would be provided to the company by shareholder
proponents and nominating shareholders. The proposed amendments would
add costs to the preparation and dissemination of this information in
the company's proxy statement where shareholders have chosen to make
proposals or put forth nominees.
If shareholders have adopted a shareholder nomination bylaw
amendment and chose to allocate company resources to facilitate
shareholder nominations, the cost of preparing the company's proxy
materials would be increased by the need to prepare and include
information relating to the shareholder nominees. In addition, the
company could incur increased costs relating to the solicitation of
proxies in support of the board's candidates and against the
shareholder nominees.
The proposed amendments to Regulation 14A and Schedule 13G would
impose costs on shareholder proponents. Shareholder proponents would be
required to provide extensive background information and information on
their relationships with the issuer on Schedule 13G. Under the proposed
amendments, a company would also incur preparation and filing costs
associated with disclosing the nature and extent of its relationships
with a shareholder proponent. In addition, companies may incur costs
for procedures to monitor its relationships with shareholder
proponents.
If a shareholder nomination bylaw amendment were adopted,
shareholder nominees and nominating shareholders would also incur costs
associated with the Rule 14a-17 disclosure requirements. Nominating
shareholders and their nominees might also bear solicitation costs in
seeking support for the nominee's election. However, these disclosure
and solicitation costs are not expected to exceed the costs that would
be incurred from a separate proxy contest.
Under the proposed rules, companies may choose to incur additional
costs to establish more responsive policies and procedures in an
attempt to avoid having shareholders seek bylaw amendments or propose
shareholder nominees. The company and the board may spend more time on
shareholder relations instead of the business of the company. In
addition, it is possible that electing a shareholder nominee to the
board could have a disruptive effect on boardroom dynamics.
Request for Comment
We are sensitive to the costs and benefits imposed by our rules,
and have identified certain costs and benefits related to these
proposals. We request comment on all aspects of this cost-benefit
analysis, including identification of any additional costs and
benefits. We encourage commenters to identify and supply relevant data
concerning the costs and benefits of the proposed amendments.
What are the costs and benefits of a 5% threshold as
opposed to alternative thresholds? How would the private costs of
assembling a 5% coalition vary across different types or sizes of
companies?
What are the potential costs and benefits of facilitating
an increase in the variation of nomination rules across companies?
What are the costs and benefits of potentially moving away
from a dual-slate structure in which voting shareholders choose between
the management card and the dissident card toward a unitary slate
voting system in which voters choose among items on a single proxy
card?
VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \83\ requires us, when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. In addition, Section 23(a)(2)
prohibits us from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. Section 3(f) of the Exchange Act \84\ and Section
2(c) of the Investment Company Act \85\ require us, when engaging in
rulemaking that requires us to consider or determine whether an action
is necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition and capital formation.
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\83\ 15 U.S.C. 78w(a)(2).
\84\ 15 U.S.C. 78c(f).
\85\ 15 U.S.C. 80a-2(c).
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The proposed rules are intended to promote the exercise of
shareholder rights under state law and provide shareholders with
information about shareholder proponents of, and shareholder nominees
under, shareholder nomination bylaw amendments. The proposed rules, if
adopted, would establish a fair and transparent mechanism for
shareholders to propose and adopt bylaw amendments to establish
procedures relating to shareholder director nominations inclusion in
the company proxy materials.
The disclosure requirements in the proposed rules would require
detailed information regarding the background and relationships of
shareholder proponents of the bylaw amendments to be disclosed by the
shareholder proponents and the company. This disclosure would provide
shareholders a better informed basis for deciding whether to approve
the bylaw amendments. Changes to the company's bylaws should therefore
better reflect shareholders' preferences regarding director nomination
procedures. Investors may value the information about whether companies
have subjected these preferences to a vote and provided a specified
alternative procedure for inclusion of shareholder nominees in the
company's proxy materials. This may promote the efficiency of the
exercise of shareholder rights under state law.
If the shareholders adopt a bylaw amendment and the company is
required to include shareholder nominees in its proxy materials, there
may be increased competition for board positions, which might encourage
or discourage qualified candidates from running. The proposed rules
focus on improving and streamlining information flow between investors
and with the company, which we believe would give more direct effect to
shareholder preferences regarding shareholder director nominees. We
believe these changes are likely to have a limited effect on
efficiency, competition and
[[Page 43484]]
capital formation. The effects of the proposed rules could be positive
or negative depending on what shareholders deem is best for them given
the additional information. We request comment on whether the
proposals, if adopted, would promote efficiency, competition and
capital formation or have an impact or burden on competition.
Commenters are requested to provide empirical data and other factual
support for their view, if possible.
VII. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to proposed revisions to the
rules and forms under the Exchange Act that would permit shareholders
to propose bylaw amendments to establish procedures relating to
shareholder director nominations for inclusion in the company's proxy
materials. The proposed revisions would also facilitate the use of an
electronic shareholder forum by companies and shareholders.
A. Reasons for, and Objectives of, Proposed Action
The proposed rules are intended to open up communication between
the company and its shareholders, promote the exercise of shareholder
rights under state law, and provide shareholders with better
information to make an informed voting decision by requiring disclosure
about shareholder proponents and shareholder nominees under any
shareholder nomination bylaw amendments.
The proposals, if adopted, would facilitate the exercise of
shareholders' rights under state law. As proposed, shareholders who
have held more than 5% of the company's securities entitled to be voted
at the meeting for at least one year by the date of their submission
may submit binding proposals to amend the company bylaws to establish
procedures for shareholder nominations of directors. Enabling
shareholders to establish the company's procedures for inclusion of
shareholder nominees on the company's proxy would provide shareholders
with greater control over the use of the company's proxy process.
In addition, encouraging the use of electronic shareholder forums
and the Internet may have the effect of improving shareholder
communication. Any electronic shareholder forum may enhance
shareholders' ability to communicate not only with management, but also
with each other. Such direct access may improve shareholder relations
to the extent shareholders have improved access to management.
B. Legal Basis
We are proposing amendments to the forms and rules under the
authority set forth in Sections 13, 14, and 23(a) of the Exchange Act,
as amended and Section 20(a) and 38 of the Investment Company Act, as
amended.
C. Small Entities Subject to the Proposed Rules
The Regulatory Flexibility Act defines ``small entity'' to mean
``small business,'' ``small organization,'' or ``small governmental
jurisdiction.'' \86\ The Commission's rules define ``small business''
and ``small organization'' for purposes of the Regulatory Flexibility
Act for each of the types of entities regulated by the Commission.\87\
A ``small business'' and ``small organization,'' when used with
reference to an issuer other than an investment company, generally
means an issuer with total assets of $5 million or less on the last day
of its most recent fiscal year. We estimate that there are
approximately 1,100 issuers, other than investment companies, that may
be considered reporting small entities.\88\ For purposes of the
Regulatory Flexibility Act, an investment company is a small entity if
it, together with other investment companies in the same group of
related investment companies, has net assets of $50 million or less as
of the end of its most recent fiscal year.\89\ Approximately 215
investment companies meet this definition.\90\ The proposed rules may
affect each of the approximately 1,315 issuers that may be considered
reporting small entities, to the extent companies and shareholders take
advantage of the proposed procedures.\91\ We request comment on the
number of small entities that would be impacted by our proposals,
including any available empirical data.
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\86\ 5 U.S.C. 601(6).
\87\ Securities Act Rule 157 (17 CFR 230.157) and Exchange Act
Rule 0-10 (17 CFR 240.0-10) contain the applicable definitions.
\88\ The estimated number of reporting small entities is based
on 2007 data, including the Commission's EDGAR database and Thomson
Financial's Worldscope database.
\89\ Rule 0-10 under the Investment Company Act [17 CFR 270.0-
10] contains the applicable definition.
\90\ The estimated number of reporting investment companies that
may be considered small entities is based on December 2006 data from
the Commission's EDGAR database and a third-party data provider.
\91\ The proposed amendments to Rule 14a-8 would not impact
open-end investment companies that may be small entities because
shareholders of those entities are not eligible to file Schedule
13G, which must be filed in order to rely upon the proposed rule. Of
the 215 investment companies that may be considered small entities,
131 are open-end investment companies.
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D. Reporting, Recordkeeping and Other Compliance Requirements
The proposals would require all companies, including small
entities, to permit certain shareholders to submit the specified
binding proposals to amend the company bylaws. Shareholder proponents,
including proponents that are small entities, would be required to
provide the proposed Schedule 13G disclosure regarding background and
relationships with the company and companies would be required to
include similar disclosure provided by the shareholder proponent with
the company's proxy.
If a bylaw amendment with an alternate shareholder nomination
procedure is adopted, issuers would be required to meet the new
procedural requirements and provide disclosure relating to the
shareholder nominee in the proxy and the nominating shareholders and
shareholder nominees would be required to provide additional
information regarding their background and relationships with the
company.
E. Duplicative, Overlapping or Conflicting Federal Rules
We believe that there are no rules that conflict with or duplicate
the proposed rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the proposed amendments and rules, we
considered the following alternatives:
The establishment of different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
The clarification, consolidation, or simplification of the
rule's compliance and reporting requirements for small entities;
The use of performance rather than design standards; and
An exemption from coverage of the proposed rules, or any
part thereof, for small entities.
The Commission has considered a variety of reforms to achieve its
regulatory objectives. The proposed amendments, if adopted, would
require companies to include binding bylaw amendments relating to
procedures for shareholder nominations of directors. The proposals are
being made in order to more effectively serve the essential
[[Page 43485]]
purpose of the proxy rules to facilitate the exercise of shareholders'
rights under state law. The proposed amendments also would require
additional disclosure by the shareholder proponent (or any subsequent
nominating shareholder or shareholder nominee) and the company of the
background of the proponent and its relationships with the issuer.\92\
We believe this additional disclosure will assist investors in making
an informed voting decision. It is not clear how applying separate
compliance or reporting standards to small entities would further
encourage facilitation of the exercise of these rights. However, we are
considering what level of disclosure would be appropriate for
shareholder proponents, nominating shareholders and shareholder
nominees regarding their background and relationships with the company.
If we require less disclosure from smaller issuers we are concerned
that shareholders may not receive sufficient information with which to
make an informed decision.
---------------------------------------------------------------------------
\92\ The proposed ability for shareholder proponents to propose
bylaw amendments to be included in the company's proxy material is
linked to their filing on Schedule 13G. A lower ownership threshold
for small entities would not be appropriate due to the loss of the
additional disclosure and safeguards provided by Schedule 13G.
---------------------------------------------------------------------------
We considered the use of performance standards rather than design
standards in the proposed rules. The proposal contains both performance
standards and design standards. We are proposing design standards to
the extent that we believe that compliance with particular requirements
are necessary. However, to the extent possible, we are proposing rules
that impose performance standards. By allowing companies to establish
their own procedures relating to shareholder nominations, we seek to
provide companies, shareholder proponents and nominating shareholders
with the flexibility to devise the means through which they can comply
with the standards.
We request comment on whether separate requirements for small
entities would be appropriate. The purpose of the amendments is to
provide certain shareholders with the ability to amend the bylaws to
establish their own procedures for shareholder nominations of directors
and to improve shareholder communications. Exempting small entities
would not appear to be consistent with these goals. The establishment
of any differing compliance or reporting requirements or timetables or
any exemptions for small business issuers may not be in keeping with
the objective of the proposed rules.
G. Solicitation of Comment
We encourage comments with respect to any aspect of this initial
regulatory flexibility analysis. In particular, we request comments
regarding:
The number of small entities that may be affected by the
proposals;
The existence or nature of the potential impact of the
proposals on small entities discussed in the analysis; and
How to quantify the impact of the proposed rules.
Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the final regulatory
flexibility analysis, if the proposals are adopted, and will be placed
in the same public file as comments on the proposed amendments
themselves.
VIII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\93\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\93\ Pub. L. No. 104-121, Title II, 110 Stat. 857
(1996)(codified in various sections of 50 U.S.C., 15 U.S.C. and as a
note to 5 U.S.C. Sec. 601).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
IX. Statutory Basis and Text of Proposed Amendments
We are proposing amendments to rules pursuant to Sections 13, 14,
and 23(a) of the Exchange Act, as amended, and Sections 20(a) and 38 of
the Investment Company Act, as amended.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, the Securities and Exchange
Commission proposes to amend Title 17, chapter II of the Code of
Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATION, 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, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
2. Section 240.13d-102 is amended by:
a. Removing the authority citation following the section; and
b. Adding Items 8A, 8B and 8C.
The additions are to read as follows:
Sec. 240.13d-102 Schedule 13G--Information to be included in
statements filed pursuant to Sec. 240.13d-1(b), (c), and (d) and
amendments thereto filed pursuant to Sec. 240.13d-2.
* * * * *
Item 8A. Shareholder Proponents
(a) Definition of shareholder proponent: In this item, the term
``shareholder proponent'' means:
(1) A person or group that has formed any plans or proposals
regarding an amendment to a company's bylaws, in accordance with Sec.
240.14a-8(i)(8);
(2) A nominating shareholder as defined in Sec. 240.14a-17(a);
(3) Any affiliate, executive officer or agent acting on behalf of
the person (or group) described above in Item 8A(a)(1)-(2) with respect
to the plans or proposals; and
(4) Anyone acting in concert with, or who has agreed to act in
concert with, the person (or group) described above in Item 8A(a)(1)-
(2) with respect to the plans or proposals.
(b) A shareholder proponent, as defined in section (a), shall
provide the additional disclosure required by Items 8B and 8C.
Note to Item 8A. For purposes of this Item 8A and for the
disclosures required by Item 8B and Item 8C, the term ``plans or
proposals'' shall include, but not be limited to, the submission of
a proposal to amend a company's bylaws, and instances where a
shareholder proponent has indicated an intent to management to
submit such a proposal or has indicated an intent to management to
refrain from submitting such a proposal conditioned on the taking or
not taking of a corporate action. The term also shall include a
shareholder nomination for director pursuant to a bylaw procedure
[[Page 43486]]
established pursuant to Rule 14a-8(i)(8), and instances where a
shareholder proponent has indicated an intent to management to
submit such a nomination or has indicated an intent to management to
refrain from submitting such a nomination conditioned on the taking
or not taking of a corporate action.
Item 8B. Relationships With the Company of Shareholder Proponents
(a) A shareholder proponent, as defined in Item 8A, must describe
the following:
(1) Any direct or indirect interest in any contract between the
shareholder proponent and the company or any affiliate of the company
(including any employment agreement, collective bargaining agreement,
or consulting agreement);
(2) Any pending or threatened litigation in which the shareholder
proponent is a party or a material participant, involving the company,
any of its officers or directors, or any affiliate of the company; and
(3) Any other material relationship between the shareholder
proponent and the company or any affiliate of the company not otherwise
disclosed.
Note to Item 8B(a)(3). Any other material relationship of the
shareholder proponent with the company or any affiliate of the
company may include, but is not limited to, whether the shareholder
proponent currently has, or has had in the past, an employment
relationship with the company or any affiliate of the company
(including consulting arrangements).
(b) A shareholder proponent must describe the following items where
they occurred during the 12 months prior to the formation of any plans
or proposals, or during the pendency of any proposal or nomination:
(1) Any material transaction of the shareholder proponent with the
company or any affiliate of the company; and
(2) Any discussion regarding the proposal or nomination between the
shareholder proponent and a proxy advisory firm.
(c) If the shareholder proponent holds more than 5% of any
enterprise with the same Standard Industrial Classification code as the
company, the shareholder proponent must describe the number and
percentage of securities held in the competitor, as of the date the
shareholder proponent first formed any plans or proposals.
(d) Describe any material relationship of the shareholder proponent
with any enterprise with the same Standard Industrial Classification
code as the company other than as a shareholder, as of the date the
shareholder proponent first formed any plans or proposals.
(e) Disclose any meetings or contacts, including direct or indirect
communication by the shareholder proponent, with the management or
directors of the company that occurred during the 12 months prior to
the formation of any plans or proposals or during the pendency of any
proposal or nomination, including:
(1) Reasonable detail of the content of such direct or indirect
communication;
(2) A description of the action or actions sought to be taken or
not taken;
(3) The date of the communication;
(4) The person or persons to whom the communication was made;
(5) Whether that communication included any reference to the
possibility of such a proposal or nomination; and
(6) Any response by the company or its representatives to that
communication prior to the date of filing the required disclosure.
Note to Item 8B(e). To the extent that a shareholder proponent
conducts regularly scheduled meetings or contacts with management or
directors of a company, the shareholder proponent may describe the
frequency of the meetings and the subjects covered at the meetings
rather than providing information separately for each meeting.
However, if an event or discussion occurred at a specific meeting
that is material to the shareholder proponent's decision to submit a
proposal or nomination, that meeting should be discussed in detail
separately.
Item 8C. Background Information Regarding Shareholder Proponents
(a) If the shareholder proponent is not a natural person, provide:
(1) The identity of the natural person or persons associated with
the entity responsible for the formation of any plans or proposals;
(2) The manner in which such person or persons were selected,
including a discussion of whether or not the equity holders or other
beneficiaries of the shareholder proponent entity played any role in
the selection of such person or persons or otherwise played any role in
connection with any plans or proposals;
(3) Whether the person or persons associated with the entity
responsible for the formation of any plans or proposals have, in
forming such plans or proposals, a fiduciary duty to the equity holders
or other beneficiaries of the entity;
(4) The qualifications and background of such person or persons
relevant to the plans or proposals; and
(5) Any interests or relationships of such person or persons, and
of that entity, that are not shared generally by the other shareholders
of the company and that could have influenced the decision by such
person or persons and the entity to submit a proposal or nomination.
(b) If the shareholder proponent is a natural person, disclose:
(1) The qualifications and background of such person or persons
relevant to the plans or proposals; and
(2) Any interests or relationships of such person or persons that
are not shared generally by the other shareholders of the company and
that could have influenced the decision by such person or persons to
submit a proposal or nomination.
Note to Item 8C(a)(5) and Item 8C(b)(2). Examples of interests
or relationships of the shareholder proponent not shared by other
shareholders of the company include, but are not limited to,
contractual arrangements, current or previous employment with the
company, employment agreements, consulting agreements, and supplier
or customer relationships.
* * * * *
3. Section 240.14a-2 is amended by adding paragraph (b)(6) to read
as follows:
Sec. 240.14a-2 Solicitations to which Sec. 240.14a-3 to Sec.
240.14a-15 apply.
* * * * *
(b) * * *
(6) Any solicitation in an electronic shareholder forum established
pursuant to the provisions of Rule 14a-18 by or on behalf of any person
who does not seek directly or indirectly, either on its own or
another's behalf, the power to act as proxy for a security holder and
does not furnish or otherwise request, or act on behalf of a person who
furnishes or requests, a form of revocation, abstention, consent or
authorization provided that the solicitation is made more than 60 days
prior to the date announced by a registrant for its next annual or
special meeting of shareholders or if the registrant announces the date
of its next annual or special meeting of shareholders less than 60 days
before the meeting date, then the solicitation may not be made more
than two days following the date of the registrant's announcement of
the meeting date.
4. Section 240.14a-6 is amended by removing the period at the end
of the undesignated paragraph following paragraph (a)(6), prior to Note
1, and adding a comma in its place; and by adding ``or where the proxy
materials include a shareholder nominee submitted pursuant to a bylaw
adopted in accordance with Sec. 240.14a-8(i)(8).'' after that new
comma.
5. Section 240.14a-8 is amended by:
a. Revising paragraph (b)(1); and
b. Revising paragraph (i)(8);
[[Page 43487]]
The revisions read as follows:
Sec. 240.14a-8 Shareholder proposals.
* * * * *
(b) * * *
(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;
except where additional eligibility requirements are specified in this
rule. You must continue to hold those securities through the date of
the meeting.
* * * * *
(i) * * *
(8) Relates to election: If the proposal relates to a nomination or
an election for membership on the company's board of directors or
analogous governing body or a procedure for such nomination or
election, except for a proposal to establish a procedure by which
shareholder nominees for election of director would be included in the
company's proxy materials, where that proposal:
(i) Relates to a change in the company's bylaws that would be
binding on the company if approved by the shareholders; and
(ii) Is submitted by a shareholder (or group of shareholders) that:
(A) Has continuously held more than 5% of the company's securities
entitled to be voted on the proposal at the meeting for at least one
year by the date the shareholder submits the proposal;
(B) Is eligible to file a Schedule 13G (Sec. 240.13d-102) as an
institutional investor or a passive investor, including pursuant to
Rule 13d-1(l) (Sec. 240.13d-1(l)); and
(C) Has filed a statement of beneficial ownership on Schedule 13G
(Sec. 240.13d-102), or an amendment thereto, that contains all
required information;
* * * * *
6. Add Sec. 240.14a-17 and Sec. 240.14a-18 to read as follows:
Sec. 240.14a-17 Shareholder nominations for election as director.
(a) A nominating shareholder is any shareholder (or group of
shareholders) that forms any plans or proposals regarding the
submission of a nominee or nominees for director to the company for
inclusion in the company proxy materials, in accordance with a company
bylaw that has been adopted by shareholders, as provided in Sec.
240.14a-8(i)(8).
Note to Rule 14a-17(a). The formation of any plans or proposals
includes instances where the shareholder has indicated an intent to
management to submit a nomination or has indicated an intent to
management to refrain from submitting a nomination conditioned on
the taking or not taking of a corporate action.
(b) A nominating shareholder shall provide the information required
by Item 8A, Item 8B, and Item 8C of Schedule 13G (Sec. 240.13d-102) to
the company at the time the shareholder forms any plans or proposals
with regard to submission of a nominee or nominees for director.
Immediately after receiving the information from the nominating
shareholder, the company shall provide the information on its Web site,
or provide a link to a Web site address where the information would
appear. The company also shall include the information provided by the
nominating shareholder pursuant to this section in its proxy statement
or on a Web site to which the proxy statement refers.
(c) At the time that a nominating shareholder submits to the
company for inclusion in the company proxy materials a nominee or
nominees, in accordance with a company bylaw that has been adopted by
shareholders, as provided in Sec. 240.14a-8(i)(8), the nominating
shareholder must provide to the company, for inclusion in the company
proxy statement or on a Web site to which the proxy statement refers,
the following:
(1) Information meeting the disclosure requirements of Item 4(b) of
Schedule 14A, as applicable;
(2) Information meeting the disclosure requirements of Item 5(b) of
Schedule 14A, as applicable;
(3) Information meeting the disclosure requirements of Item 7 of
Schedule 14A, as applicable;
(4) Information meeting the disclosure requirements of Item 22(b)
of Schedule 14A, as applicable; and
(5) The consent of the nominee or nominees to be named in the
company's proxy statement and to serve if elected.
(d) Where a nominating shareholder fails to provide any of the
information required under paragraphs (b) and (c) of this rule, the
shareholder's nominee will not be required to be included in the
company's proxy materials.
(e) The company will not be responsible for the information
provided to the company by the nominating shareholder and included in
the company's proxy statement or on a Web site to which the proxy
statement refers, in satisfaction of the company's disclosure
obligations under Regulation 14A.
(f) Information about a shareholder nominee or nominees that has
been provided to the company by a nominating shareholder, and which is
disclosed in the company's proxy statement or on a Web site to which
the proxy statement refers, in satisfaction of the company's disclosure
obligations under Regulation 14A, will not be deemed incorporated by
reference into any filing under the Securities Act of 1933 or the Act,
except to the extent that the registrant specifically incorporates that
information by reference.
Sec. 240.14a-18 Electronic Shareholder Forums.
(a) A company or shareholder may establish, maintain, or operate an
electronic shareholder forum to facilitate interaction among
shareholders and between the company and its shareholders as the
company or shareholder deems appropriate. Subject to (b) and (c) of
this Rule, the forum must comply with the federal securities laws,
including Section 14(a) of the Act and its associated regulations,
other applicable federal laws, applicable state law, and the company's
charter and bylaw provisions.
(b) No company or shareholder because of establishing, maintaining,
or operating an electronic shareholder forum is liable under the
federal securities laws for any statement or information provided by
another person to the electronic shareholder forum. Nothing in this
Rule 14a-18 prevents or alters the application of other provisions of
the federal securities laws, including the provisions for liability for
fraud, deception, or manipulation, or other applicable federal and
state laws to a person or persons providing a statement or information
to an electronic shareholder forum.
(c) Reliance on the exemption in Rule 14a-2(b)(6) to construct,
maintain, support, or participate in an electronic shareholder forum
does not eliminate a person's eligibility to solicit proxies after the
date that the exemption in Rule 14a-2(b)(6) is available, provided that
any such solicitation is conducted in accordance with this regulation.
7. Section 240.14a-101 is amended by adding Item 24 and Item 25 to
read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 24. Relationships with Shareholder Proponents
Disclose the nature and extent of relationships between the
shareholder proponent, any affiliate, executive officer or agent of
such shareholder proponent, or anyone acting in concert with, or who
has agreed to act in concert with, such shareholder proponent with
[[Page 43488]]
respect to the proposed bylaw amendment submitted in accordance with
Sec. 240.14a-8(i)(8), on the one hand, and the company, on the other,
including:
(a) Any direct or indirect interest of the shareholder proponent in
any contract with the company or any affiliate of the company
(including any employment agreement, collective bargaining agreement,
or consulting agreement);
(b) Any pending or threatened litigation in which the shareholder
proponent is a party or a material participant, involving the company,
any of its officers or directors, or any affiliate of the company; and
(c) Any other material relationship between the shareholder
proponent, the company, or any affiliate of the company not otherwise
disclosed.
Note to Paragraph (c): Any other material relationship between
the shareholder proponent and the company or any affiliate of the
company may include, but is not limited to, whether the shareholder
proponent currently has, or has had in the past, an employment
relationship with the company (including consulting arrangements).
(d) With respect to the 12 months prior to a shareholder proponent
forming any plans or proposals, or during the pendency of any proposal,
regarding an amendment to a company's bylaws in accordance with Sec.
240.14a-8(i)(8):
(1) Any material transaction of the shareholder proponent with the
company or any affiliate of the company; and
(2) Any meeting or contact, including direct or indirect
communication by the shareholder proponent, with the management or
directors of the company, including:
(i) Reasonable detail of the content of such direct or indirect
communication;
(ii) A description of the action or actions sought to be taken or
not taken;
(iii) The date of the communication;
(iv) The person or persons to whom the communication was made;
(v) Whether that communication included any reference to the
possibility of such a proposal; and
(vi) Any response by the company or its representatives to that
communication prior to the date of filing the required disclosure.
Note to Paragraph (d)(2): To the extent that a shareholder
proponent conducts regularly scheduled meetings or contacts with
management or directors of a company, the company may describe the
frequency of the meetings and the subjects covered at the meetings
rather than providing information separately for each meeting.
However, if to the company's knowledge, an event or discussion
occurred at a specific meeting that is material to the shareholder
proponent's decision to submit a proposal, that meeting should be
discussed in detail separately.
Note to Item 24. For purposes of the disclosures required by
this item, the company will be entitled to rely upon the Schedule
13G disclosures of the shareholder proponent concerning the date
upon which the shareholder proponent formed any plans or proposals
with regard to the submission of a proposal to amend a company's
bylaws.
Item 25. Relationships With Nominating Shareholders
(a) Provide the information submitted to the company by any
nominating shareholder as required by Sec. 240.14a-17(b) and (c).
(b) Disclose the nature and extent of relationships between the
nominating shareholder, any affiliate, executive officer or agent of
such nominating shareholder, or anyone acting in concert with, or who
has agreed to act in concert with, such nominating shareholder with
respect to a nomination pursuant to a bylaw adopted in accordance with
Rule 14a-8(i)(8), on the one hand, and the company, on the other,
including:
(1) Any direct or indirect interest of the nominating shareholder
in any contract with the company or any affiliate of the company
(including any employment agreement, collective bargaining agreement,
or consulting agreement);
(2) Any pending or threatened litigation in which the nominating
shareholder is a party or a material participant, involving the
company, any of its officers or directors, or any affiliate of the
company; and
(3) Any other material relationship between the nominating
shareholder, the company, or any affiliate of the company not otherwise
disclosed.
Note to Paragraph (b)(3): Any other material relationship
between the nominating shareholder and the company or any affiliate
of the company may include, but is not limited to, whether the
nominating shareholder currently has, or has had in the past, an
employment relationship with the company (including consulting
arrangements).
(c) With respect to the 12 months prior to a nominating shareholder
forming any plans or proposals to submit a nomination for director for
inclusion in the company's proxy statement, or during the pendency of
any nomination:
(1) Any material transaction of the nominating shareholder with the
company or any affiliate of the company; and
(2) Any meeting or contact, including direct or indirect
communication by the nominating shareholder, with the management or
directors of the company, including:
(i) Reasonable detail of the content of such direct or indirect
communication;
(ii) A description of the action or actions sought to be taken or
not taken;
(iii) The date of the communication;
(iv) The person or persons to whom the communication was made;
(v) Whether that communication included any reference to the
possibility of such a nomination; and
(vi) Any response by the company or its representatives to that
communication prior to the date of submitting the nomination.
Note to Paragraph (c)(2): To the extent that a nominating
shareholder conducts regularly scheduled meetings or contacts with
management or directors of a company, the company may describe the
frequency of the meetings and the subjects covered at the meetings
rather than providing information separately for each meeting.
However, if to the company's knowledge, an event or discussion
occurred at a specific meeting that is material to the nominating
shareholder's decision to submit a nomination, that meeting should
be discussed in detail separately.
Note to Item 25. For purposes of the disclosures required by
this item, the company will be entitled to rely upon the disclosures
of the nominating shareholder submitted to the company as required
by Rule 14a-17(c) concerning the date upon which the nominating
shareholder formed any plans or proposals with regard to the
submission of a nominee or nominees to be included in the company's
proxy materials.
* * * * *
By the Commission.
Dated: July 27, 2007.
Nancy M. Morris,
Secretary.
[FR Doc. E7-14954 Filed 8-2-07; 8:45 am]
BILLING CODE 8010-01-P