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Rule 14a-8 under the Securities Exchange Act of 1934 allows shareholders to submit proposals for inclusion in a company’s proxy materials provided that: 1) the shareholder has continuously held securities of the company representing at least $2,000 in market value or 1% of the company’s voting securities for at least one year as of the date the shareholder proposal is submitted; and 2) the shareholder continues to hold the securities through the date of the meeting.  The SEC has released a number of legal bulletins in the past addressing various aspects of the shareholder proposal rule, most recently in October of 2011 with Staff Legal Bulletin 14F.  Today, the SEC released its latest guidance in the form of Staff Legal Bulletin 14G, which provided further clarifications on three topics.

Proof of Ownership and Securities Intermediaries

In Staff Legal Bulletin 14F, the SEC clarified that only DTC participants (as opposed to “introducing brokers” or banks that do not maintain custody of client funds and shares) can provide proof of ownership with respect to shares held in street name by shareholders.  Staff Legal Bulletin 14G makes clear that affiliates of DTC participants may also provide proof of ownership in satisfaction of the Rule 14a-8(b)(2)(i) requirement.

In situations in which a shareholder holds securities through an intermediary that is not a broker or bank, the shareholder must provide a proof of ownership letter from both the securities intermediary and a DTC participant or affiliate of a DTC participant that can verify the record ownership of the securities intermediary.

Specific Dates Required in Exclusion Notices

A company can exclude a shareholder proposal as a result of procedural defects if the company notifies the shareholder of the defect and the shareholder fails to correct the defect.  One of the most common defects is failure to provide attestation of ownership for the entire one year period including the date the proposal was submitted.  The SEC is now requiring companies to get more specific in their notices of defects to shareholders – the SEC will not concur in a no-action request to exclude a shareholder proposal based on a deficiency relating to the one year ownership period unless the notice of defect provided to the shareholder “identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect.”

References to Websites in Shareholder Proposals

A shareholder proposal that includes reference to a web address for further detail may be excluded under Rule 14a-8(i)(3) as vague and indefinite unless “shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information on the website.”  If a proposal includes a reference to a website containing information that only supplements the information contained in the proposal, then the proposal is not in danger of being excluded as vague and indefinite.

A reference to a website in a shareholder proposal can itself (the website reference) be excluded as irrelevant to the subject matter of a proposal under Rule 14a-8(i)(3) if the website is not operational at the time of the proposal.  However, a reference to non-operational website is nevertheless permissible if the shareholder indicates that the website will be operational by the time the proxy materials are filed and provides the company with a copy of the materials that will be published on the website when it becomes operational.

When a company seeks to exclude a website reference because the content of the website has changed after submission of a proposal, the SEC will require a letter from the company describing its reasons for the exclusion, but may allow the company additional time to provide that letter (beyond the normal deadline of at least 80 calendar days prior to the filing of the definitive proxy materials).

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