Division of Corporation Finance
Securities and Exchange Commission

Shareholder Proposals

Staff Legal Bulletin No. 14C (CF)

Action: Publication of CF Staff Legal Bulletin

Date: June 28, 2005

Summary: This staff legal bulletin provides information for companies and shareholders regarding rule 14a-8 under the Securities Exchange Act of 1934.

Supplementary Information: The statements in this legal bulletin represent the views of the Division of Corporation Finance. This bulletin is not a rule, regulation, or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content. The references to "we," "our," and "us" are to the Division of Corporation Finance.

Contacts: For further information, please contact the Office of Chief Counsel in the Division of Corporation Finance at (202) 551-3500.

A. What is the purpose of this bulletin?

This bulletin is part of a continuing effort by the Division of Corporation Finance to identify and provide guidance on issues that arise commonly under rule 14a-8. Specifically, this bulletin contains information regarding:

• the addresses for submitting no-action requests and shareholder responses to those requests;
   
• the application of rule 14a-8(i)(6) to proposals calling for director independence;
   
• the application of rule 14a-8(i)(7) to proposals referencing environmental or public health issues;
   
• the application of rule 14a-8(l);
   
• the company facsimile number shareholder proponents should rely on when transmitting proposals and responses to notices of defects;
   
• the written materials that should accompany a no-action request;
   
• the withdrawal of a proposal submitted by multiple shareholder proponents; and
   
• the circumstances under which we will transmit our no-action responses by facsimile.
   

The following additional guidance regarding rule 14a-8 is available on the Commission's website:

• the text of rule 14a-8, which is in Exchange Act Release No. 40018 (May 21, 1998), at www.sec.gov/rules/final/34-40018.htm;
   
• SLB No. 14, which explains the rule 14a-8 no-action process and addresses matters of interest to companies and shareholder proponents, at www.sec.gov/interps/legal/cfslb14.htm;
   
• SLB No. 14A, which clarifies our position on shareholder proposals related to equity compensation plans, at www.sec.gov/interps/legal/cfslb14a.htm; and
   
• SLB No. 14B, which clarifies and updates some of the guidance contained in SLB No. 14, at www.sec.gov/interps/legal/cfslb14b.htm.
   

B. Have the addresses for submitting no-action requests and shareholder responses to those requests changed from those published in SLB No. 14?

Yes. The Commission has moved its headquarters. As a result, you should use the following addresses:

• rule 14a-8 no-action requests submitted by registered investment companies and business development companies, as well as shareholder responses to those requests, should be sent to:
   

U.S. Securities and Exchange Commission
Division of Investment Management
Office of Legal and Disclosure
901 E Street, N.W.
Washington, D.C. 20549

• all other rule 14a-8 no-action requests and shareholder responses to those requests should be sent to:
   

U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549

C. Under rule 14a-8(i)(6), when do we concur with a company's view that there is a basis for excluding a proposal calling for director independence?

1. Rule 14a-8(i)(6)

Rule 14a-8(i)(6) is one of the substantive bases for exclusion in rule 14a-8. It permits a company to exclude a proposal that the company would lack the power or authority to implement.

2. Our analysis of no-action requests from companies that intend to rely on rule 14a-8(i)(6) to exclude proposals calling for director independence

Our analysis of whether a proposal that seeks to impose independence qualifications on directors is beyond the power or authority of the company to implement focuses primarily on whether the proposal requires continued independence at all times. In this regard, although we would not agree with a company's argument that it is unable to ensure the election of independent directors, we would agree with the argument that a board of directors lacks the power to ensure that its chairman or any other director will retain his or her independence at all times. As such, when a proposal is drafted in a manner that would require a director to maintain his or her independence at all times, we permit the company to exclude the proposal under rule 14a-8(i)(6) on the basis that the proposal does not provide the board with an opportunity or mechanism to cure a violation of the standard requested in the proposal. In contrast, if the proposal does not require a director to maintain independence at all times or contains language permitting the company to cure a director's loss of independence, any such loss of independence would not result in an automatic violation of the standard in the proposal and we, therefore, do not permit the company to exclude the proposal under rule 14a-8(i)(6).

We believe that our approach is consistent with Commission rules relating to director independence. Specifically, Exchange Act rule 10A-3, adopted pursuant to Exchange Act Section 10A(m), mandates various audit committee requirements for most exchange-listed issuers, including a requirement that audit committees consist entirely of independent directors. Although rule 10A-3 requires entirely independent audit committees for most listed issuers, the rule also contemplates that a director may cease to be independent. In addition, both Section 10A(m) and rule 10A-3 require that an issuer have an opportunity to cure any non-compliance with the applicable audit committee independence requirements before such non-compliance may serve as a basis for prohibiting the listing of the issuer's securities. Therefore, we believe that our view that a board lacks the power to ensure that a director maintains his or her independence at all times is consistent with Section 10A(m) and rule 10A-3, which not only contemplate that a board member may lose independence, but require that mechanisms exist to allow an issuer to cure such a loss.

The following chart illustrates our analysis of the application of rule 14a-8(i)(6) to proposals calling for director independence, and demonstrates that, as we indicated in question and answer B.6 of SLB No. 14, differing language in proposals may result in different no-action responses.

D. Under rule 14a-8(i)(7), when do we concur with a company's view that there is a basis for excluding a proposal referencing environmental or public health issues as relating to the ordinary business matter of evaluating risk?

1. Rule 14a-8(i)(7)

Rule 14a-8(i)(7) is another of the substantive bases for exclusion in rule 14a-8. It permits a company to exclude a proposal that deals with a matter relating to the company's ordinary business operations. The fact that a proposal relates to ordinary business matters does not conclusively establish that a company may exclude the proposal from its proxy materials. As the Commission stated in Exchange Act Release No. 40018, proposals that relate to ordinary business matters but that focus on "sufficiently significant social policy issues . . . would not be considered to be excludable, because the proposals would transcend the day-to-day business matters . . . ."

2. Our analysis of no-action requests from companies that intend to rely on rule 14a-8(i)(7) to exclude proposals as relating to an evaluation of risk

Each year, we are asked to analyze numerous proposals that make reference to environmental or public health issues. In determining whether the focus of these proposals is a significant social policy issue, we consider both the proposal and the supporting statement as a whole. To the extent that a proposal and supporting statement focus on the company engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations that may adversely affect the environment or the public's health, we concur with the company's view that there is a basis for it to exclude the proposal under rule 14a-8(i)(7) as relating to an evaluation of risk. To the extent that a proposal and supporting statement focus on the company minimizing or eliminating operations that may adversely affect the environment or the public's health, we do not concur with the company's view that there is a basis for it to exclude the proposal under rule 14a-8(i)(7). The following chart illustrates this distinction.

E. Must a company submit a no-action request to exclude a shareholder proponent's name or address from its proxy statement under rule 14a-8(l)?

No. Rule 14a-8(l) is a self-executing provision of the rule that permits a company to exclude from its proxy statement a shareholder proponent's name, address, and number of voting securities held, as long as the company includes a statement that it will provide this information to shareholders promptly upon receiving an oral or written request.

F. What company facsimile number should a shareholder proponent rely on when transmitting a proposal or transmitting a response to a notice of defects?

A shareholder proponent is encouraged to submit a proposal or a response to a notice of defects by a means that allows him or her to determine when the proposal or response was received by the company, such as by facsimile. However, if the shareholder proponent transmits these materials by facsimile, the shareholder proponent should ensure that he or she has obtained the correct facsimile number for making such submissions. For example, if the shareholder proponent obtains the company's facsimile number from a third-party website, and the facsimile number is incorrect, the shareholder proponent's proposal may be subject to exclusion on the basis that the shareholder proponent failed to submit the proposal or response in a timely manner. As such, shareholder proponents should use the facsimile number for submitting proposals that the company disclosed in its most recent proxy statement. In those instances where the company does not disclose in its proxy statement a facsimile number for submitting proposals, we encourage shareholder proponents to contact the company to obtain the correct facsimile number for submitting proposals and responses to notices of defects.

G. When submitting a no-action request, should a company provide us with all relevant correspondence exchanged with the shareholder proponent(s)?

Yes. As we indicated in question and answer G.7 of SLB No. 14 and question and answer F.3 of SLB No. 14B, a company should provide us with all relevant correspondence when submitting a no-action request. In this regard, we wish to reiterate that our process may be delayed unless the company provides with its no-action request:

• a copy of the shareholder proposal;
   
• copies of any cover letters that the shareholder proponent(s) provided with the proposal;
   
• any addresses and facsimile numbers of the shareholder proponent(s); and
   
• any other correspondence the company has exchanged with the shareholder proponent(s) relating to the proposal, such as any notices of defects and any shareholder responses to the notices.
   

H. When a company submits a letter withdrawing a no-action request for a proposal submitted by multiple proponents, should the company include documentation demonstrating that each shareholder proponent has agreed to withdraw the proposal?

Yes. As we indicated in question and answer B.15 of SLB No. 14, when a proposal is submitted by multiple shareholder proponents and the proposal is withdrawn, the company should include with its withdrawal letter documentation demonstrating that each shareholder proponent has agreed to withdraw the proposal. In this regard, if each shareholder proponent has designated a lead individual to act on its behalf, and the company is able to demonstrate that the individual is authorized to act on behalf of all of the shareholder proponents, the company need only provide a letter from that lead individual indicating that it is withdrawing the proposal on behalf of all of the shareholder proponents. You can find additional guidance regarding withdrawals of no-action requests in questions and answers B.14 and B.15 of SLB No. 14.

I. Will we transmit our no-action responses by facsimile to companies and shareholder proponents?

Yes. As we indicated in question and answer F.3 of SLB No. 14B, we may transmit our responses by facsimile during the highest volume periods of the rule 14a-8 season to ensure that companies and shareholder proponents are given timely responses. If we are unable to mail our response promptly, we will transmit our response by facsimile if the company requests such a transmission and provides facsimile numbers for both the company and the shareholder proponent. We will not transmit the response to the company by facsimile when we have a facsimile number for the company but not for the shareholder proponent.

We wish to reiterate that the practice of transmitting copies of our no-action responses by facsimile is a courtesy and is not required by Commission rules. In addition, we remind companies and shareholder proponents that commercial databases check the Commission's Public Reference Room routinely for new no-action responses issued by the Division and upload the responses to their systems. As a result, the company or the shareholder proponent often may find our response in the Public Reference Room or on a commercial database prior to their receipt of that response.

J. Conclusion

We hope that this bulletin, along with SLB No. 14, SLB No. 14A, and SLB No. 14B, helps you gain a better understanding of rule 14a-8, the no-action request process, and our views on some significant issues that arise commonly during our review of rule 14a-8 no-action requests. We believe that these bulletins contain information that will assist in the efficient operation of the rule 14a-8 process for both companies and shareholders.

http://www.sec.gov/interps/legal/cfslb14c.htm