Rule 14a-8(h)(1) — former Rule 14a-8(a)(2)

Question 8: Must I appear personally at the shareholders' meeting to present the proposal?

(1) Either you, or your representative who is qualified under state law to present the proposal on your behalf, must attend the meeting to present the proposal. Whether you attend the meeting yourself or send a qualified representative to the meeting in your place, you should make sure that you, or your representative, follow the proper state law procedures for attending the meeting and/or presenting your proposal.

(2) If the company holds its shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.

(3) If you or your qualified representative fail to appear and present the proposal, without good cause, the company will be permitted to exclude all of your proposals from its proxy materials for any meetings held in the following two calendar years.

§ 12.01 Background of the Exclusion

Under Rule 14a-8(h)(3), a proposal may be omitted from a company's proxy materials if the proponent has included a proposal in the company's proxy statement for any shareholders' meeting during the previous two years and has failed, without good cause, to present the proposal for action at the meeting, either in person or through a representative.

§ 12.01[A] History of the Exclusion

Beginning with the rule's adoption in 1942, a proponent has been required to provide written notice to a company of its intention to appear personally at the meeting to present a proposal for action.[fn1]

In 1948, the SEC adopted the provision that a company could omit a proposal if a proponent had submitted a proposal during the previous two years but had failed to attend the meeting or present the proposal.[fn2] In 1976, the SEC recognized that many proponents were unaware of the notice requirement and unintentionally failed to comply, so it adopted a provision that required a company to provide notice to the proponent before it could rely on the exclusion. Upon receipt of the notice, a proponent had ten business days to inform the company if it intended to attend the meeting. The SEC also clarified that a proponent who furnished the requisite notice in good faith but subsequently determined that it was unable to appear at the meeting could arrange for a representative to present the proposal on its behalf. The representative was required to be a shareholder of the company.[fn3]In 1983, the SEC amended the exclusion to permit a proponent to appoint a representative to appear at the meeting in its place, so that proponents were no longer required to provide notice of their intention to attend. In addition, the SEC eliminated the requirement that the representative had to be a shareholder.[fn4] In 1998, the SEC added an advisory note to this exclusion to remind proponents and their representatives to ensure that they follow applicable procedures under state law for appearing at the meeting or presenting a proposal.[fn5]

[fn1] Exchange Act Release No. 3347, 1942 SEC LEXIS 44 (Dec. 18, 1942).

[fn2] Exchange Act Release No. 4185, 1948 SEC LEXIS 401 (Nov. 5, 1948).

[fn3] Exchange Act Release No. 12,598, 1976 SEC LEXIS 326 (Nov. 22, 1976).

[fn4] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 503-04 (1982) (proposing release); Exchange Act Release No. 20,091, 28 SEC Dock. 798, 800 (1983)(adopting release).

[fn5] Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 12.01[B] Purpose of the Exclusion

The purpose of the exclusion is to ensure that proponents are available at shareholders' meetings to answer any questions that arise from the shareholders attending the meeting. Such a colloquy may assist shareholders in deciding whether to vote for the proposal. In the SEC's words, the exclusion provides "some degree of assurance that the proposal not only will be presented for action at the meeting (the management has no responsibility to do so), but also that someone will be present to knowledgeably discuss the matter proposed for action and answer any questions which may arise from the shareholders attending the meeting."[fn6]

[fn6] Exchange Act Release No. 12,999, 1976 SEC LEXIS 326 (Nov. 22, 1976).

§ 12.02 Application of the Exclusion

§ 12.02[A] Identifying the Key Issues

The application of the exclusion is straightforward and raises few interpretive questions. The issues that may arise relate to whether the proponent had "good cause" for not presenting its proposal and whether someone who did present the proposal on behalf of the proponent was truly the proponent's representative.

The staff interprets the "good cause" standard so that the bar is quite high for proponents. The staff's narrow interpretation requires that proponents prepare for a range of unexpected occurrences, particularly since they are allowed to arrange for a representative to present the proposal on their behalf.

§ 12.02[B] Before-the-Fact Application

In appropriate circumstances, the SEC staff allows a company to exclude a proposal if the proponent clearly indicates that it does not have the intention of attending the meeting or arranging for a representative to attend the meeting on its behalf. The staff does not appear to require written evidence of the proponent's intentions and often relies on the company's representations of what a proponent told it. However, a company should let the staff know that it informed the proponent of its obligation to attend the meeting.

On the other hand, a proponent is not required to affirmatively represent to a company that it intends to attend and present its proposal. Accordingly, the failure of a proponent to respond to a company's request as to whether the proponent intends to attend cannot serve as the basis for before-the-fact exclusion. The proponent has to respond negatively for exclusion to be justified. In fact, the SEC staff has warned companies that they cannot coerce proponents into making a statement on this question.[fn7]

EXAMPLES:

In Exxon Mobil Corporation,[fn8] the SEC staff granted no-action relief with respect to a proposal because the proponent had represented that he did not intend to attend the meeting. The company represented that a corporate officer had had a conversation with the proponent to remind him that he or a representative was required to attend the meeting. Even though he acknowledged the attendance requirement, the proponent stated unequivocally that he would not personally attend the meeting and that he would not secure a representative to present the proposal on his behalf.
In Johnson & Johnson,[fn9] the company was permitted to exclude a proposal because the proponent had stated that he would not attend the meeting. The proponent argued that he was not an orator and that he did not see the value of a presentation since very few of the company's shareholders would be present at the actual meeting.
In Walt Disney Company,[fn10] the SEC staff required the company to include a proposal even though the company could not get assurance from the proponent that she indeed would attend the meeting. The company argued that the proponent had a well-established pattern of failing to present proposals submitted to other companies and that the arguments she made in her rebuttal implied she would not attend. The company noted that the proponent specifically declined to affirm her intent to appear in support of the proposal but did not state that she would not attend.

[fn7] See Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001), Item C4(a) (available at www.sec.gov/interps/legal/cfslb14.htm).

[fn8] 2001 SEC No-Act. LEXIS 349 (Mar. 7, 2001).

[fn9] 2001 SEC No-Act. LEXIS 39 (Jan. 9, 2001).

[fn10] 1999 SEC No-Act. LEXIS 880 (Nov. 4, 1999).

§ 12.02[C] Evidence of Lack of Attendance

The SEC staff normally accepts a company's representation that a proponent or its representative did not present a proposal at a prior meeting without any further evidence. Some companies do submit additional evidence to the staff to clearly overcome their burden, such as an affidavit from an officer or third party who presided over the shareholders' meeting.

EXAMPLES:

In Computer Horizons Corp.,[fn11] the company was permitted to exclude a proposal submitted by a proponent who had failed to present a proposal at a prior shareholders' meeting. The company attached an affidavit of the company's secretary that stated that neither the proponent nor his representative had presented the proposal at the prior annual meeting. The affidavit also noted that the secretary inspected the register signed by each individual who attended the annual meeting, and that neither the proponent's signature nor that of any person who identified himself or herself as a representative appeared there.
In Entergy Corporation,[fn12] the company attached a certificate from the company's secretary which indicated that the proponent's proposal had been considered and voted upon, but that neither the proponent nor his representative had been present at the meeting to present the proposal. The SEC staff allowed exclusion of a subsequent proposal submitted by the proponent.

[fn11] 2001 SEC No-Act. LEXIS 344 (Mar. 6, 2001).

[fn12] 2001 SEC No-Act. LEXIS 169 (Feb. 9, 2001).

§ 12.02[D] Proponent Not Required to Vote for Proposal

The SEC staff does not interpret this exclusion to require proponents to support their own proposals by voting for them. In other words, a proponent may resubmit a proposal that the proponent did not support the last time he submitted it.

EXAMPLE:

In Exxon Mobil Corporation,[fn13] the proponent successfully defended against a no-action challenge to a proposal even though he had voted against his own proposal in a prior year. The company argued "that the proponent would be, in fact, a proponent would seem to be an intuitive and implicit requirement. This is particularly important, since the Board of the relevant company may take a position in opposition to the proposal — as is very often the case." The proponent claimed that he would support his resubmitted proposal at the next annual meeting.

[fn13] 2001 SEC No-Act. LEXIS 113 (Jan. 22, 2001).

§ 12.02[E] Proposals Submitted During Two-Year Period

This exclusion does not apply automatically. Rather, as with other provisions of the rule, a company must obtain no-action relief from the SEC staff before it can exclude a proposal.

This requirement applies even if a proponent submits more than one proposal during the two-calendar-year-period after a proponent fails to present a proposal — the company must request no-action relief for each proposal submitted. In some cases, companies have requested and received a staff response that its no-action relief applies for a two-year period. This relieves the company of the need to obtain more than one no-action letter. However, the company still has an obligation to notify the SEC that it intends to exclude a proposal. The SEC does not respond to this notice; it merely keeps it on file.[fn14]

A company is not required to notify a proponent after it misses a meeting that future proposals are excludable for a two-year period. However, such notice could save the company the expense of submitting a request for no-action relief if the proponent voluntarily agrees that he is barred for this period of time.

[fn14] Staff Legal Bulletin, supra note 7, Item C4(3).

§ 12.02[F] Applies to Special and Annual Shareholders' Meetings

In most cases, the laws of the states in which companies are incorporated provide that shareholders are not permitted to submit proposals to companies for special meetings called by management. However, if a proponent is permitted under state law to submit a proposal for a special meeting, but does not appear at the meeting to present its proposal, a company can exclude future proposals for the following two calendar years, at both annual and special shareholders' meetings. The applicability of this exclusion to special meetings is contained in the exclusion itself.

EXAMPLE:

In CCBT Financial Companies, Inc.,[fn15] the company successfully excluded a proposal after the proponent failed to appear — or have a qualified representative present — at a special meeting. In its response, the SEC staff made clear that its relief applied to any future submissions to the company by the same proponent with respect to any shareholder meetings held during the current and following calendar year.

[fn15] 2000 SEC No-Act. LEXIS 995 (Dec. 12, 2000).

§ 12.02[G] Applies to "Electronic" Shareholders' Meetings

Under Rule 14a-8(h)(2), if a company holds a shareholders' meeting in whole or in part through an electronic medium, proponents or their representatives can appear through the same electronic medium rather than traveling to the meeting to appear in person. So far, no company has held its meeting entirely electronically, as is now permitted under Delaware law in certain circumstances. However, over 100 companies have supplemented their shareholder meetings with Webcasts. Very few of those companies have allowed interaction with their online audience and those interactions have been limited to e-mailing questions to management, not asking questions before the entire meeting audience. At this time, it is unclear what level of online interaction is sufficient to satisfy the attendance requirement in Rule 14a-8(h)(2).

§ 12.02[H] No Need for a "Second"

A company cannot require a "second" at a shareholders' meeting before a proponent can present its proposal unless it is required by state law or by a company's governing instruments.

EXAMPLE:

In Motorola, Inc.,[fn16] the company did not call for a vote on the proponent's shareholder proposal at the annual meeting because the proposal lacked a "second." The proponent argued that the company's maneuver was illegal. The company did not rebut the proponent's claim. In its response, the staff stated that the exclusion "does not require a `second,' the voting of proxies received with respect to a shareholder proposal included in a company's proxy material pursuant to Rule 14a-8 should not be conditioned upon the proposal being "seconded" at the meeting, absent a "second" being required by state law or by a company's governing instruments." The staff then went on to state that "because neither Delaware law nor the Company's certificate of incorporation or by-laws requires a `second' as a condition to calling a vote on a matter introduced for shareholder action at the Company's shareholder meetings, it is our view that the Company-imposed requirement of a `second' was not a valid condition to the voting of proxies received with respect to your clients' proposal."

[fn16] 1987 SEC No-Act. LEXIS 2541 (Oct. 8, 1987).

§ 12.02[I] Adjournments

If a company adjourns its shareholders' meeting, the proponent is required to attend and present its proposal at the adjourned meeting.

EXAMPLE:

In CCBT Financial Companies, Inc.,[fn17] the proponent submitted a proposal for a special meeting of shareholders that was originally called for July 15, 1999, but adjourned until July 29, 1999. Even though the company informed the proponent of the time and place of the adjourned special meeting, the proponent failed to be present at the adjourned meeting or to have a qualified representative present. The company was permitted to exclude a subsequent proposal by the proponent.

[fn17] 2000 SEC No-Act. LEXIS 995 (Dec. 12, 2000).

§ 12.03 Good Cause Exception

In theory, a proponent who can show "good cause" can overcome his failure to attend a meeting. In practice, the staff rarely finds that a proponent had good cause. The staff interprets the "good cause" standard narrowly, requiring proponents to prepare for a wide range of unexpected occurrences. The staff does so because proponents can ask others to act as their representative and present the proposal on their behalf.

Normally, proponents send their good cause arguments to the SEC staff to rebut a company's request for omission. In the alternative, a proponent can describe the facts that support a "good cause" argument in its transmittal letter when it submits a proposal to a company. Such a submission might convince the company not to seek no-action relief.

Companies do not need to rebut proponents' good cause arguments, but they may do so if they wish. In the vast majority of cases, companies dispute a proponent's claim of good cause.

§ 12.03[A] Explanations that are not "Good Cause"

Among other "excuses," it is clear that inconvenience, costs and unexpected travel delays are not "good causes." In fact, it is unclear what, if any, circumstances constitute good cause under this exclusion.

The following explanations have been rejected by the SEC staff:

Missed airplane flight[fn18]
Too costly to attend[fn19]
Not willing to attend if only allowed three minutes to speak[fn20]
Expense of travel[fn21]
Physically difficult due to old age[fn22]
Inconvenient[fn23]
Ignorance of requirement to present the proposal[fn24]
Traffic delays[fn25]
Attending another shareholders' meeting on the same date[fn26]
Attending a funeral[fn26.1]

[fn18] Southwest Airlines Co., 2001 SEC No-Act. LEXIS 387 (Mar. 12, 2001).

[fn19] Mattel, Inc., 2001 SEC No-Act. LEXIS 323 (Mar. 9, 2001).

[fn20] Eastman Kodak Company, 2001 SEC No-Act. LEXIS 146 (Feb. 5, 2001).

[fn21] Occidental Petroleum Corporation, 2001 SEC No-Act. LEXIS 85 (Jan. 16, 2001).

[fn22] Johnson & Johnson, 2001 SEC No-Act. LEXIS 39 (Jan. 9, 2001).

[fn23] CCBT Financial Companies, Inc., 2000 SEC No-Act. LEXIS 177 (Feb. 15, 2000).

[fn24] Continental Materials Corporation, 1999 SEC No-Act. LEXIS 282 (Mar. 8, 1999).

[fn25] Transamerica Inc., 1989 SEC No-Act. LEXIS 1213 (Dec. 27, 1989).

[fn26] Exchange Act Release No. 20,091, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

[fn26.1] FleetBoston Financial Corporation, 2002 SEC No-Act. LEXIS 56 (Jan. 3, 2002).

§ 12.03[B] Even Showing Good Cause may be Insufficient

Even in cases where the SEC staff acknowledges that proponents have shown "good cause" for their own failure to attend a meeting, the staff tends to allow companies to exclude the proposals if circumstances permitted the proponent to arrange for a representative to present the proposal.

EXAMPLE:

In College Retirement Equities Fund,[fn27] the proponent explained that he had not attended a meeting because he was caring for his wife after an operation. In allowing the company to exclude the proposal, the staff noted that the proponent had provided information suggesting that he had a "good cause" for his own failure to appear personally, but that the proponent had not taken steps to have a representative present the proposal on his behalf.

[fn27] 2000 SEC No-Act. LEXIS 838 (Sept. 7, 2000).

§ 12.03[C] Proponent Must Actually Present Proposal

A proponent or representative must not merely attend the meeting, but must actually present the proposal. In parliamentary procedure terms — many companies use some version of parliamentary procedure in conducting shareholders' meetings — this means that the proponent or representative must formally "move" the proposal.

EXAMPLE:

In Paccar Inc.,[fn28] the company was permitted to exclude a proposal even though the proponent's representative had attended the meeting. The company noted that the representative did not know which proposal she was supposed to present or what she should say. The company noted that the inspector of elections who spoke to the representative told her that "she could not counsel her on what to say or do." The proponent argued that the company had "obstructed the presentation" of the proposal by his representative.

[fn28] 2000 SEC No-Act. LEXIS 211 (Feb. 11, 2000).

§ 12.04 Qualifications for Proponent Representatives

§ 12.04[A] State Law Governs Representative Process

The SEC's rules do not dictate whom a proponent can select to serve as a representative. Rather, any person qualified under applicable state law can present a proposal at a shareholders' meeting on the proponent's behalf. The applicable state law is the law of the company's state of incorporation.

Under most state laws, the proponent must execute a proxy that names someone as its representative. The representative should bring this proxy to the meeting to prove to the company that he is authorized to attend and present a proposal at the meeting. It should be noted that the proxy provided by the proponent should cover both the admittance to the meeting and the right to present the proposal.

§ 12.04[B] Representative Does Not Have to be a Shareholder

The representative presenting a proponent's proposal need not be a shareholder unless required by applicable state law.

§ 12.04[C] Representative Can Obtain Own Representative

If, for some reason, a representative cannot attend the meeting to present a proposal, it can choose its own representative, unless the proponent has restricted the ability of the representative to do so in its proxy. If allowed under the proponent's proxy, the representative can ask someone else to attend the meeting even if the proponent is not aware of this delegation.

EXAMPLE:

In CSX Corp.,[fn29] the staff permitted submission of a proposal by a proponent, who had asked another person to present the proposal; that person, in turn, had asked a third person to present the proposal. The third person presented the proposal but disassociated himself from any connection with the proponent. The company argued that the proponent had failed to appear at the prior annual meeting to present her proposal, making her ineligible to submit proposals to the company for two years. In its response, the staff stated that "since it would appear that the proponent did arrange to have another security holder present her proposal at the meeting and noting that the proposal was, in fact properly presented, it is the Division's view that the Company may not rely on Rule 14a-8(a)(2) as a basis for omitting the proposal."

[fn29] 1981 SEC No-Act. LEXIS 3139 (Feb. 25, 1981).

§ 12.04[D] Company Employee as Representative

Sometimes a company's officer or director presents a proposal at a meeting if the proponent or its representative does not appear at the meeting. Companies often move a proposal for a proponent as a matter of courtesy to the shareholders attending the meeting who want an opportunity to vote on it. In addition, companies may want a vote to be tallied since this allows them, if the vote falls short of the required resubmission threshold, to exclude proposals on "substantially the same subject matter" submitted in the following three years.[fn30]

Since the officer or director has not agreed to formally act as the proponent's representative in these cases, the company can rely on this exclusion despite the fact that the proposal was actually presented. In other words, if a company uses its discretion to introduce a proposal, it does not waive its right to invoke this exclusion.

The company may rely on this exclusion even if a third party decides to present the proposal in the proponent's absence. Without appropriate documentation obtained in advance, a person cannot unilaterally appoint himself as the proponent's representative. Although a company may decide to allow a stranger to present a proposal on behalf of an absent proponent, it does so as a courtesy without conceding that the presenter is the proponent's representative. On the other hand, a company can object to a stranger's presentation of an absent proponent's proposal and prevent it from being voted upon.

EXAMPLES:

In Southwest Airlines Co.,[fn31] the company was allowed to exclude a proposal even though the proponent claimed he had missed a flight to attend the meeting. The proponent asserted that he had seen the chairman at a prior meeting voluntarily introduce a proposal because a proponent had missed a flight, and he argued that the chairman should have done the same for him.
In Eastman Kodak Company,[fn32] the SEC staff permitted the exclusion of a proposal even though a stranger had presented the absent proponent's proposal at a prior annual meeting as a courtesy to the proponent. The company argued that it had allowed the stranger to present the proponent's proposal as a courtesy, and since neither the proponent nor a representative had been present at the meeting, the current proposal was excludable. In its rebuttal, the proponent commented on the unfairness of having to pay for travel expenses to and from meetings while corporate officers traveled at shareholders' expense.

[fn30] See infra Chapter 25.

[fn31] 2001 SEC No-Act. LEXIS 377 (Mar. 12, 2001).

[fn32] 1996 SEC No-Act. LEXIS 725 (Sept. 9, 1996).

§ 12.05 Practice Pointers

Company Practice Pointers

Bring a copy of applicable state laws to meeting. To establish that an improperly designated representative cannot be allowed into a shareholders' meeting (if a proxy does not cover the transfer of shareholder status) or cannot be allowed to speak (if a proxy does not cover presentation of a proposal), a company should have a copy of the applicable law at the meeting to show to the putative representative as well as to help make last-minute decisions regarding the validity of proxies.

Prepare for confrontation. If a company believes it has a valid basis to prevent someone from presenting a proposal, it should designate someone well in advance of the meeting to handle the delicate task of preventing the presenter from entering the meeting or presenting the proposal, if necessary. To help ensure that such actions can be accomplished in a peaceful manner, this designee should be someone with experience in these matters, such as the corporate secretary or in-house lawyer, working together with a veteran security guard or off-duty police officer.

Communicate with the proponent before the meeting. Most companies maintain an open line of communication with proponents before a meeting in order to determine whether the proponent will attend the meeting, and if not, the identity of the proponent's representative. Such communication helps the company reduce the likelihood of any surprises, which is especially important when senior management and the board will be present at the meeting.

Nip it in the bud. Although a company is not required to notify a proponent who misses a meeting that any proposals that the proponent submits for two years are excludable, this practice could save the company the expense of submitting a request for no-action relief. At a minimum, this type of letter should be sent after the company receives a subsequent proposal.

Proponent Practice Pointers

Pick a representative from among like-minded shareholders. If a proponent knows that it cannot attend a meeting, it should attempt to find a shareholder that supports the proponent's cause to present the proposal. A proponent may find a shareholder who plans to attend the meeting and is willing to act as the proponent's representative by contacting users of Internet message boards devoted to discussions about the company or its stock.

Seek advice from experienced proponents. Seasoned proponents often are willing to coach inexperienced proponents on how to conduct themselves at a shareholders' meeting. A proponent who adheres to the rules gains credibility and has a better chance of reaching agreement with the company in the future on the subject matter of a proposal.

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