Rule 14a-8(i)(3) — former Rule 14a-8(c)(3)

Question 9(3): Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including § 240.14a-9, which prohibits materially false or misleading statements in proxy soliciting materials.

§ 16.01 Background of the Exclusion

This exclusion permits a company to exclude any proposal that is contrary to the SEC's proxy rules, including Rule 14a-9's prohibition against false and misleading statements. Unlike the other bases for exclusion, this exclusion explicitly refers to supporting statements as well as proposals themselves.

§ 16.01[A] History of the Exclusion

In 1976, the SEC adopted this exclusion to allow companies to omit proposals that are contrary to the SEC's proxy rules. This exclusion formalized the staff's prior practice of ensuring that proposals and supporting statements did not violate the proxy rules.[fn1]

In 1982, the SEC stated that it was not considering changes to the exclusion even though some companies felt the SEC staff allowed proponents to amend their proposals or supporting statements too frequently. The SEC noted that these companies favored the omission of the entire proposal and supporting statement if any information contained in a proposal was misleading. The SEC stated that its staff's practice had worked well and was consistent with the treatment of other proxy soliciting material.[fn2]

In 1998, the exclusion was renumbered as Rule 14a-8(i)(3) and minor stylistic changes were made.[fn3]

In 2001, the Staff issued Staff Legal Bulletin No. 14 that noted the Staff's long-standing practice of permitting shareholders to make revisions that are minor in nature and do not alter the substance of the proposal. The Staff adopted this practice to deal with proposals that comply generally with the substantive requirements of Rule 14a-8, but contain some minor defects that could be corrected easily. [fn4]

However, in September 2004, the Staff found it necessary to clarify its views with regard to the application of Rule 14a-8(i)(3), because it was receiving increasing numbers of no-action requests based on 14a-8(i)(3) that it considered inappropriate. [fn5]

[fn1] Exchange Act Release No. 12,999, 10 SEC Dock. 1006, 1011 (1976).

[fn2] Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Oct. 14, 1982).

[fn3] Exchange Act Release No. 39,093, 1997 SEC No-Act. LEXIS 1962 (Sept. 18, 1997) (proposing release); Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998) (adopting release).

[fn4] Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001).

[fn5] See Division of Corporation Finance, Staff Legal Bulletin No. 14B (September 15, 2004).

§ 16.01[B] Purpose of the Exclusion

This exclusion compels proponents to comply with the SEC's proxy rules when they submit their proposals. While the provision relates to all of the SEC's proxy rules, particular emphasis is placed on Rule 14a-9 to prevent the inclusion of proposals or supporting statements that contain false and misleading information.

§ 16.01[C] Overlap with Other Exclusions

Companies use this exclusion in conjunction with almost every other basis for exclusion, often as a fallback argument. Since companies prefer to exclude proposals in their entirety, they raise arguments under additional bases because the staff rarely permits exclusion altogether under this provision. The provision is often argued in conjunction with Rule 14a-8(i)(6) to address proposals that might be considered vague.[fn4] [fn4] Rule 14a-8(i)(6) permits the exclusion of proposals that are beyond the company's power or authority to implement. See infra Chapter 19.

§ 16.02 Application of the Exclusion

§ 16.02[A] Identifying the Key Issues

This exclusion is difficult to apply because determining whether a proposal or its supporting statement contains false or misleading information is challenging, especially in light of the limited amount of information the SEC staff often has before it. As a result, the SEC staff has demonstrated a general reluctance to conclude that entire proposals may be excluded. Rather, the staff tends to permit companies to remove portions of a proposal or supporting statement - or have the proponent amend or provide support for those portions - so that the basis for exclusion no longer exists.

In Staff Legal Bulletin No. 14B[fn5], the Staff stated that reliance on Rule 14a-8(i)(3) to exclude or modify a statement may be appropriate where:

statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation;
the company demonstrates objectively that a factual statement is materially false or misleading;
the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires - this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result; and
substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote.

The Staff also stated in Staff Legal Bulletin No. 14B that it would not be appropriate for companies to exclude supporting statement language and/or an entire proposal in reliance on Rule 14a-8(i)(3) in the following circumstances:

the company objects to factual assertions because they are not supported;
the company objects to factual assertions that, while not materially false or misleading, may be disputed or countered;
the company objects to factual assertions because those assertions may be interpreted by shareholders in a manner that is unfavorable to the company, its directors, or its officers; and/or
the company objects to statements because they represent the opinion of the shareholder proponent or a referenced source, but the statements are not identified specifically as such.

Rather, the Staff stated that companies should address these objections in their statements of opposition.

[fn5]See Division of Corporation Finance, Staff Legal Bulletin No. 14B (September 15, 2004).

§ 16.02[B] Time Consuming Nature for Staff

The application of this exclusion is very time consuming for the SEC staff because it is extremely fact intensive. The staff must consider each word in both the proposal and supporting statement carefully to determine if it runs afoul of Rule 14a-9. In timing its request for a no-action letter, a company must be mindful not only of its mailing date for proxy materials, it should also consider the staff's possible need for extra time to process a request that relies heavily on (i)(3).

§ 16.02[C] Violation of Rule 14a-9

The most common ground for exclusion is that the proposal or the supporting statement contains false or misleading statements under Rule 14a-9. Unlike most other exclusions, the SEC staff will apply this exclusion even if a company did not cite the provision in its request for no-action relief. The staff takes this approach because it is part of the staff's mission to ensure that proxy statement disclosure is not false and misleading. As a result, if the staff believes that a proposal would mislead shareholders, the staff on its own initiative can require that the proposal be revised or excluded. In practice, the staff does not employ this approach often.

§ 16.02[D] Violations of Other Proxy Rules

Other proxy rules can be implicated by this exclusion, including Rule 14a-4 (governing the form of proxy), Rule 14a-5 (regarding clear presentation in the proxy statement) and Rule 14a-12 (pertaining to election contests). However, the use of this exclusion to deal with proxy rules other than Rule 14a-9 has been quite limited.

EXAMPLE:

In Nortek Inc.,[fn5] the SEC staff denied no-action relief with respect to a proposal requesting the repeal of a bylaw restricting shareholder nominations for the board of directors, provided the proponent deleted two phrases. The company had argued that the supporting statement contained a comment which amounted to a "solicitation," or contesting an election, which is normally subject to the procedures set forth in what is now Rule 14a-12. The staff requested that the proponent remove this comment, which stated that shareholders should "withhold [their] proxy authority on the Board-approved nominees so that a new slate can be elected at the Annual Meeting."

[fn5] 1996 SEC No-Act. LEXIS 676 (Aug. 13, 1996).

§ 16.02[E] Types of SEC Staff Responses

There are several types of SEC staff responses under this exclusion:

The staff may allow the exclusion of a proposal in its entirety because it is so vague that it is misleading;
The staff may allow the inclusion of a proposal in its entirety without any changes or further action required by the proponent;
The staff may identify the exact portions of the text in the proposal or supporting statement that the proponent must change to correct the proposal;
The staff may identify the exact portions of the text in the proposal or supporting statement that the proponent must support before she is allowed to keep such text in the proposal or supporting statement; or
The staff may limit its no-action response to permit the company to exclude only the precise text that the staff has identified as misleading or confusing.

In the last three types of responses, the staff specifies in its response letter the length of time that the proponent has to take the requested action, typically seven calendar days from the date of the staff's response letter.

§ 16.02[F] Problems Only with Supporting Statement

Companies often can convince the SEC staff to require proponents to revise their supporting statements, even if the proposal itself is unobjectionable. In egregious cases, entire supporting statements can be excluded as misleading. However, in most cases, the staff requires proponents to modify the objectionable portions of a supporting statement.

§ 16.02[G] Opportunity to Correct or Support

The SEC staff normally provides proponents with an opportunity to correct or modify the challenged language. In rare cases, if it is clear that a proposal and supporting statement are false or misleading in their entirety, the staff will forego the opportunity to cure and allow a company to exclude them.

A problem can arise when a proponent amends a proposal in response to staff comments and the amendment itself contains false and misleading statements. In these cases, companies may send a second request to the staff objecting to the new language. To prevent drawn-out battles over modified language, the staff typically provides specific guidance to the proponent about how to modify or delete language from the proposal or supporting statement.

§ 16.02[H] Impact of Word Limit

Sometimes, companies argue that a proposal or supporting statement omits material information. Proponents often respond that the 500-word limit in Rule 14a-8(d) limits their ability to make a balanced presentation or fully develop a concept. Proponents also point out that the company can present a fuller picture in the statement in opposition appearing in its proxy statement.

However, changes required by the SEC staff to make the proposal or supporting statement not misleading do not excuse proponents from compliance with the 500-word limit. Under these circumstances, proponents must find a way to stay within the word limit while curing the deficiencies or face the risk that the staff will allow the company to exclude the proposal entirely.

EXAMPLES:

In Xcel Energy Inc.,[fn6] the SEC staff required the proponent to recast a statement as an opinion to avoid exclusion of a proposal requesting that the board develop and implement policies and practices about obtaining power supplies from sources that do not cause problems for a particular Indian tribe. The proponent argued that it should not be required to use some of its 500 words to make points raised by the company.
In Halliburton Company,[fn7] the proponent was required to delete one statement in support of its proposal regarding performance-based stock options. The company argued that the proposal omitted material information because it did not discuss the income tax and financial accounting ramifications of allowing the stock option exercise price to be less than fair market value of the stock on the date of the grant. The proponent responded that these matters were not discussed because every issue cannot be included when a proposal and supporting statement are limited to 500 words.

[fn6] 2001 SEC No-Act. LEXIS 153 (Feb. 5, 2001).

[fn7] 2001 SEC No-Act. LEXIS 133 (Jan. 31, 2001).

§ 16.03 Overly Vague Proposals

It is often difficult for the SEC staff to decide to allow companies to exclude proposals in their entirety. The staff does allow companies to exclude entire proposals if they are so vague that it would be impossible for shareholders to know what they are voting on. Proposals that are incoherent and fail to focus on any particular issue are vulnerable to exclusion on this basis, as are proposals requiring a large amount of subjective judgment.

EXAMPLES:

Excluded proposals

In Kmart Corporation,[fn8] the company was permitted to exclude a proposal that asked the company to disclose contributions made to political parties that do not recognize unborn persons' constitutional rights. The company noted that the supporting statement contained numerous purported historical, legal or Biblical quotations, many with obscure references or no citations to source materials, that were presented as if they were facts or statements of applicable law. The company argued that due to inadequate support, many of the quotations were impossible for a reader to verify or understand in relation to the proposal. The company claimed that the supporting statement taken as a whole was a confusing series of statements presented in no logical order. The company pointed to an almost identical supporting statement that the staff allowed to be excluded in a 1995 no-action letter. The proponent did not submit a rebuttal.
In Bank One Corporation,[fn9] the SEC staff granted no-action relief on a proposal recommending that the company not provide financial assistance, services or loans to physicians, clinics, hospitals or organizations that perform abortions. The company noted that the supporting statement was similar to others that had been excluded and that the proposal included several rambling and disjointed "Whereas" clauses referring to a confusing array of various "rights." The company cited two excerpts from the supporting statement as examples of false, misleading, vague or indefinite, or unsupported assertions with no factual basis:

"current American government has embarked on tyrannical rule `destructive of these ends' regarding `persons unborn' (legally recognized by Jefferson's Virginia legislation) by denying `equal protection of the laws' for such defenseless children from any and all attackers . . ." and ". . . `Laws of Nature and of Nature's God entitle' that `you shall give life for life, . . ., wound for wound' (Exodus 12:23) regarding injured unborn and (applicable through common law/Louisiana State) `Roman law, the principles of which are the nearest to natural reason' (Jefferson), asserts `an unborn child is entitled to action for restitution, where he has lost something by usurpation'. . ."

The proponent did not submit a rebuttal.

[fn8] 2000 SEC No-Act. LEXIS 468 (Mar. 28, 2000).

[fn9] 2000 SEC No-Act. LEXIS 351 (Mar. 8, 2000).

§ 16.03[A] Lack of Direction About Implementation

Another approach used by the SEC staff to handle vague proposals involves the exclusion of proposals that are misleading because any action ultimately taken to implement the proposal would be significantly different from the actions envisioned by shareholders in voting. However, the staff may allow the proponent to amend the proposal to specify a means of implementation. Only if it is totally unrealistic for a company to implement a proposal's subject matter will a proposal be deemed to be incapable of being cured.

EXAMPLE:

Excluded proposal

In Tri-Continental Corporation,[fn10] the SEC staff allowed the company to exclude a proposal mandating that the company divest any German, Austrian, Italian and Japanese stocks until "just judgments" are made to victims of the Holocaust and their heirs and for "other inconveniences endured by the aggrieved" and their heirs. Emphasizing terms such as "just judgments" and "other inconveniences," the company contended that the proposal was so vague and misleading so that it was unclear when the company could resume investing in the targeted companies. The proponent did not submit a rebuttal.

EXAMPLES:

SEC staff requiring implementation methods

In Adams Express Company,[fn11] the SEC staff required the proponent to provide a means of implementation to avoid exclusion of a proposal requiring director nominees to own 1000 shares of the fund's common stock. The fund argued that the proposal was vague because it did not provide for a means of implementation, such as an amendment to the articles of incorporation or bylaws. It also argued that the proposal did not specify whether the words "director nominee" in the proposal were intended to refer to all nominees or only to the board's nominees, how long the nominee must hold shares of stock, or the consequences of disqualification. In its response, the SEC staff required the proponent to provide a means of implementation, such as amending the articles of incorporation or bylaws, and to clarify to whom the proposal was intended to apply. In a footnote, the staff noted that the supporting statement clarified that "ownership of shares . . . should be a qualification for each director nominated" so that it appeared to disclose adequately that the proposal was intended to apply to all nominees, but stated that the proposal itself was vague on this issue and required clarification. The proponent did not submit a rebuttal.
In SI Handling Systems, Inc.,[fn12] the proponent was instructed to revise a proposal seeking the replacement of the company's bylaws with the bylaws that existed prior to 1996 to specify the substance of the proposed revisions. In addition, the proponent was required to recast the statement that "the current By-Laws are not shareholder friendly" as the proponent's opinion. The company argued that the statement that the "bylaws are not shareholder friendly" was an unfounded assertion that was not supported by fact. In addition, the company contended that the amendments to the bylaws put forward in the proposal had consequences not mentioned in the supporting statement and that this made the entire proposal false and misleading.

EXAMPLES:

Included proposals

In Halliburton Company,[fn13] the SEC staff required the proponent to recast four sentences in a proposal asking the board to establish a performance-based senior executive compensation system for the five most highly paid officers. The company argued that the proposal provided no guidance on implementation. The proponent replied that the proposal deferred to the board to establish the contemplated system and pointed out that earlier in the company's request, the company argued that the proposal was too specific.
In Microsoft Corporation,[fn14] the company was required to include a proposal requesting that the board implement and/ or increase activity on 11 principles set forth in the proposal relating to human and labor rights. The company argued that neither shareholders nor the company could determine with any reasonable certainty exactly what actions or measures the proposal required. The proponent replied that the proposal was clear because it involved a general set of principles in which endorsing companies commit to a set of standards and that 50 companies had already endorsed the United Nation's Global Compact Code. The proponent noted that upon endorsing the Global Compact Code each company determines how it will implement the standards.
In Bank of America Corporation,[fn15] the SEC staff required inclusion of a proposal recommending that the board adopt a policy that the company not make or solicit any political contributions. The company argued that the proposal was written so broadly that shareholders would not be able to determine with reasonable certainty what actions the company would have to take (or not take) to comply with the proposal. The company noted that the proposal sought a policy prohibiting contributions to any "political movement or entity," but did not define such a movement or entity. The proponent did not submit a rebuttal.

[fn10] 2000 SEC No-Act. LEXIS 369 (Mar. 14, 2000).

[fn11] 2000 SEC No-Act. LEXIS 1025 (Dec. 28, 2000).

[fn12] 2000 SEC No-Act. LEXIS 629 (May 5, 2000).

[fn13] 2001 SEC No-Act. LEXIS 135 (Jan. 30, 2001).

[fn14] 2000 SEC No-Act. LEXIS 854 (Sept. 14, 2000).

[fn15] 2000 SEC No-Act. LEXIS 434 (Mar. 10, 2000).

§ 16.04 False and Misleading

§ 16.04[A] Types of "False and Misleading" Information

The SEC staff has found a wide variety of statements to be "misleading," thus requiring revision or exclusion of a proposal or supporting statement (or both). These range from statements mischaracterizing matters relating to the company to statements that misrepresent matters about the proponent.

§ 16.04[B] Personal Disclosures About the Proponent

The SEC staff ordinarily requires proponents to remove statements in proposals that relate to the proponent personally. In some cases, these personal disclosures persuade the staff to allow companies to exclude a proposal altogether because they suggest that the proponent is abusing the shareholder proposal process.

EXAMPLE:

In Bangor Hydro-Electric Company,[fn16] the SEC staff required the company to include a proposal asking the board to prepare a report on political contributions by the company, its directors and certain employees, but allowed the company to exclude the entire supporting statement. The company argued that it was unclear whether the proposal required directors and certain employees to disclose only political contributions made at the behest of the company or also contributions made in such persons' individual capacities. As for the supporting statement, the company contended that it made numerous fragmentary, irrelevant and confusing statements regarding how organizations elect their members and leaders. More important, the company pointed out that the supporting statement included statements about the proponent's sexual orientation, mental condition, monthly earnings and other personal matters. The company cited prior no-action letters allowing exclusion of proposals from this particular proponent that included similar personal statements. The proponent did not submit a rebuttal.

[fn16] 2000 SEC No-Act. LEXIS 418 (Mar. 13, 2000).

§ 16.04[C] Defamation or Impugning Character

The Note to Rule 14a-9 states that misleading statements include "material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations, without factual foundation." The SEC staff requires proponents to remove defamatory language from their proposals and supporting statements.

Unfounded assertions and inflammatory statements representing the unsubstantiated personal opinion of a shareholder have long been viewed as excludable. The staff particularly frowns upon character attacks, even if a proponent offers supporting information. The more difficult situations for the staff to evaluate are those that include subtle defamatory statements through artfully worded questions or quotations from media articles or judicial proceedings taken out of context.

EXAMPLES:

In Idacorp, Inc.,[fn17] the company successfully excluded a proposal recommending that the board report on the details of merger discussions with any publicly traded company or any non-U.S. company meeting certain requirements. The company argued that the proponent had wrongfully accused it of conspiracy by stating that potential merger partners were in a conspiracy to deceive shareholders. The company noted that this statement was false, misleading and without any basis in fact. The proponent did not submit a rebuttal.
In General Magic, Inc.,[fn18] the company successfully excluded a proposal that asked the company to change its name to "The Hell with Share Holders Inc." The company argued that the proposal clearly was inflammatory on its face. The supporting statement asked that the company "answer shareholders [sic] questions properly" and requested that the company make "no more false statements." The company argued that these statements impugned the company's reputation by implying that it promotes or tolerates dishonest and disrespectful behavior by its employees.

[fn17] 2001 SEC No-Act. LEXIS 29 (Jan. 9, 2001).

[fn18] 2000 SEC No-Act. LEXIS 602 (May 1, 2000).

§ 16.04[D] URLs in Proposals

During the past few years, there has been a debate over whether a Web site address (also known as a uniform resource locator or URL) should be permitted to appear in a proposal or supporting statement.

The primary issue issue in this debate is whether the content associated with the URL is reliable. The SEC staff does not have the resources to check information on a Web site continually to ensure that it is not false and misleading and otherwise complies with this exclusion. The SEC staff recently gave guidance about how companies seeking to exclude a Web site address under this provision should specifically indicate why they believe information contained on the particular Web site is materially false or misleading.[fn19]

[fn19] For more information on this topic, see infra Chapter 36, Shareholder Proposals and the Internet.

§ 16.05 Modifying Proposals or Supporting Statements

§ 16.05[A] Shareholder Rights

A common claim by companies is that newspaper or magazine articles cited by a proponent do not support the proponent's position or are otherwise cited out of context. In response to these types of claims, the SEC staff normally requires proponents to provide evidence that the articles are related to their position or that the context is accurate. Even if a proponent offers support — normally in the form of arguments that tie their statements to the cited articles — the staff does not always agree that the support is sufficient to allow the proponent to retain the cite to the article. This may be because the article itself could be considered misleading or because the proponent would be required to provide much more information to place the article in context.

EXAMPLES:

In General Electric Company,[fn20] the SEC staff required the proponent to take a number of actions to avoid exclusion of a proposal regarding board independence. The company claimed that references to certain sources of supporting information should be deleted because some shareholders might not have access to them. The proponent responded that differences of opinion exist on certain corporate governance rules and practices and that such conflicting viewpoints did not render one position or another misleading. The proponent also noted that the company based its arguments on numerous legal sources that are available to a much smaller circle of shareholders. In response to the company's arguments that the authorities cited do not support the proposal's definition of independence, the SEC staff required the proponent to amend its supporting statement to indicate the standard or definition of independence used by each commentator and article cited.
In R.J. Reynolds Tobacco Holdings, Inc.,[fn21] the proponent was required to provide two citations to avoid exclusion of a proposal asking the board to create a committee of outside directors to investigate the placement of the company's products in retail outlets and to prepare a report to shareholders. The SEC staff asked the proponent to provide citations for a "1997 report" and "one Colorado experiment" discussed in the supporting statement. The company claimed that references to these two items were too vague to adequately support the proponent's claims associated with them. The proponent responded by stating that, contrary to the claims of the company, the statistics were factual and not excessively vague.

[fn20] 2001 SEC No-Act. LEXIS 120 (Jan. 24, 2001).

[fn21] 2000 SEC No-Act. LEXIS 341 (Mar. 7, 2000).

§ 16.05[B] Presenting Statements as Opinions

In many instances, the SEC staff allows proponents to avoid exclusion by expressing a statement in the form of an opinion. If a statement is factually incorrect, it cannot be cured by restatement as an opinion. However, if a proponent makes a claim that is legitimately open to dispute, the staff normally allows its inclusion. The difficulty is that sometimes "one person's facts are another person's opinions," and the line between the two is not always clear. The SEC staff normally asks proponents to recast statements as opinions after considering the company's complaints and making a common sense analysis of the statements complained about. In many cases, the statements are ones that portray the company or management in a negative light that are not supported by objective supplemental materials.

EXAMPLES:

In Halliburton Company,[fn22] the SEC staff conditioned inclusion of a proposal on performance-based senior executive compensation on the proponent recasting four sentences as an opinion.
In The Home Depot, Inc.,[fn23] the SEC staff required the proponent to recast two sentences in its supporting statement as opinions. One of the sentences stated that "30% of the company's directors have major flaws" and the other stated that a particular director was "over-extended." The company urged that there was no factual basis for these characterizations and that they should be deleted entirely. The proponent explained his reasoning.

[fn22] 2001 SEC No-Act. LEXIS 135 (Jan. 30, 2001).

[fn23] 2000 SEC No-Act. LEXIS 514 (Apr. 4, 2000).

§ 16.05[C] Purely Factual Corrections

In most cases, there is no dispute over whether purely factual corrections should be made. Occasionally, however, the company and proponent will disagree over whether a fact needs to be corrected. In such cases, the staff reviews the supplemental materials provided by both parties and attempts to make a determination about the veracity of the disputed fact.

EXAMPLES:

Disputed facts

In Halliburton Company,[fn24] the SEC staff required the proponent to amend its supporting statement to clarify that under SEC regulations, the Compensation Committee Report is included in the company's proxy statement, rather than its annual report. The company argued that the proposal violated Rule 14a-8 by recommending that the Compensation Committee Report be moved to the annual report instead of the proxy statement where it is legally required to appear. In addition, the company quoted several passages from the supporting statement which the company claimed were false and misleading personal opinions. The proponent argued that despite the SEC's regulations, it believed that disclosure regarding how the executive compensation framework motivates management to focus on long-term results would be more useful in the annual report.
In Citigroup, Inc.,[fn25] the SEC staff required the proponent to revise the proposal to replace the phrase "separate class of directors" with "honorary directorship." The proposal mandated that the position of honorary director be eliminated and that all directors be elected annually. The company noted that its board did not have a separate class of directors, nor did the company have the power to create one. Rather, it had appointed someone "honorary director" in recognition of his prior contributions to the board and his continued status as an advisor and consultant. The company argued that the mere grant of an honorary title, without more, did not create a separate class of directors. The proponent did not submit a rebuttal.

EXAMPLES:

Undisputed facts

In Milacron Inc.,[fn26] the SEC staff required the proponent to delete the statement that the proposal applied to "bonuses." The proposal asked that the board consider reducing the base salaries of management as well as discontinuing all bonuses and other incentive compensation under the company's long-term incentive plan. The company pointed out that bonuses were not granted under the identified plan. The proponent agreed to make any changes necessary as long as the company granted him a reasonable amount of time.

[fn24] 2001 SEC No-Act. LEXIS 135 (Jan. 30, 2001).

[fn25] 2000 SEC No-Act. LEXIS 326 (Mar. 8, 2000).

[fn26] 2001 SEC No-Act. LEXIS 121 (Jan. 24, 2001).

§ 16.05[D] Statements Unrelated to Proposal's Subject Matter

The SEC staff allows companies to exclude statements in a proposal or a supporting statement that are completely unrelated to the subject matter of the proposal. This type of decision is among the easiest for the staff to make under this exclusion since it is easily apparent from the face of a proposal or supporting statement.

EXAMPLES:

In Burlington Northern Santa Fe Corporation,[fn27] the SEC staff required the proponent to delete a paragraph from the supporting statement because it was unrelated to the proposal, which urged the board to solicit shareholder approval for rights plans. After the company noted that the same proponent had included an unrelated paragraph to further an environmental agenda in the prior year, the staff asked the proponent to delete the following statement:

Like Texaco, which suffered a major controversy involving racial discrimination, BNSF has exposed its shareholders to a complex net of problems. For example, BNSF is a major transporter of hazardous waste. Even as it guards against expenses, BNSF's hazardous waste movements require our company to protect diligently the environment. Shareholders are growing increasingly concerned about their interests in profiting from ownership while at the same time promoting environmental standards.

The proponent replied that this language was relevant because the company posed environmental threats.
In Boise Cascade Corporation,[fn28] the proponent was required to delete five statements in a proposal urging that the board separate the positions of Chair of the Board and Chief Executive Officer. The company noted that only the last paragraph addressed the issue of a separate Chair and CEO and that the rest of the supporting statement consisted of seven paragraphs that dealt with the company's alleged bypassing of the election process, criticized the company on environmental and human rights issues, discussed the link between the company and a massacre in Mexico, described the company's alleged attempts to delay the regulatory process and criticized the overall performance of the board.

[fn27] 2001 SEC No-Act. LEXIS 148 (Jan. 31, 2001).

[fn28] 2001 SEC No-Act. LEXIS 122 (Jan. 23, 2001).

§ 16.05[E] Scope of Required Changes

The modifications or deletions that the staff may require can vary greatly because the staff addresses the specific circumstances of each particular request. Required changes can be as simple as the modification of one word or as extensive as wholesale modifications of an entire proposal.

EXAMPLE:

In Sempra Energy,[fn29] the SEC staff required the proponent to recast a proposal that related to reinstating simple majority vote on all matters that are submitted to a shareholder vote as a recommendation or request rather than a mandate. The staff specified that the entire paragraph following the word "Resolved" had to be modified.

[fn29] 2000 SEC No-Act. LEXIS 296 (Feb. 29, 2000).

§ 16.06 Trends by Types of Proposals

§ 16.06[A] Social Proposals

Proposals relating to social issues frequently involve lengthy correspondence from both sides in cases where Rule 14a-8(i)(3) is implicated. This is because social issue proponents often include extensive supporting statements to set forth the context of their social proposals. In many cases, the company's view of the context is quite different from the proponent's view. As a result, companies frequently dispute statements made in the supporting statements and these proponents respond with a lengthy analytical rebuttal. Much of the interpretive gloss under this exclusion has been created in connection with these types of proposals.

EXAMPLE:

In UST Inc.,[fn30] the proponent was required to provide support for three statements to avoid exclusion of a proposal related to the placement of the company's tobacco products in retail outlets. However, the staff did not require the proponent to revise a fourth statement from the preamble to the proposal even though the company claimed that it included unsupported statistics relating to the shoplifting of cigarettes that were irrelevant to the company's business. The SEC staff required factual support for the average amount of placement fees earned by convenience stores, the non-payment of placement fees and a statement attributed to a study. The SEC staff rejected the company's argument that the proposal itself was vague and misleading because it did not specify whether it sought only an investigation of company policies and procedures relating to product placement or also an investigation of retail outlet policies and procedures relating to product placement. The proponent did not submit a rebuttal.

[fn30] 2000 SEC No-Act. LEXIS 436 (Mar. 13, 2000).

§ 16.06[B] Workplace Conduct Proposals

Due to the controversial nature of the issues involved, it is not uncommon for proposals relating to workplace conduct to contain numerous disputed statements.

EXAMPLES:

In PPG Industries, Inc.,[fn31] the company was required to include a proposal that urged the board to adopt, implement and enforce a workplace code of conduct based upon the International Labor Organization's conventions on workplace human rights. The proponent argued that the company's objections amounted to little more than pulling words out of context and claiming that the entire proposal was tainted as a result. As an example, the proponent pointed to the company's objection over the term "based on" the ILO Conventions. The company noted that there were 180 separate conventions dealing with similar issues. The proponent argued that the proposal was intentionally flexible regarding implementation. The proponent also argued that the company read too much into its assertion of the company's level of involvement in China.
In Emerson Electric Co.,[fn32] the SEC staff required the proponent to delete one statement to avoid exclusion of a proposal requesting that the board amend the company's written equal employment opportunity policy to bar discrimination on the basis of sexual orientation. The company claimed that information contained in six different "whereas" clauses of the proposal was false and misleading because each clause implied untrue facts. The company also claimed that the tenth whereas clause was unrelated to the proposal.
In Emerson Electric Co.,[fn33] the company was required to include a proposal asking the board to review and amend the company's "Code of Business Ethics and Conduct" and prepare a report of that review for shareholders. The company argued that it did not have any document entitled "Code of Business Ethics and Conduct." The company also complained that the proposal implied that the company used child labor and forced labor and engaged in bribery and harmful environmental practices. The company noted that it had for five consecutive years been named one of the "World's 100 Best-Managed Companies" by Industry Week magazine and that it had been recognized as a leader in other areas such as philanthropy and environmental responsibility. The proponent did not submit a rebuttal.
In Kroger Co.,[fn34] the SEC staff denied no-action relief on a proposal recommending that the board adopt a policy concerning genetically engineered ("GE") products. The company argued that the supporting statement contained false or misleading information because it misstated what a wholesaler of grains had announced regarding the use of genetically engineered crops from suppliers and because the "scientists" who allegedly said that GE foods could pose risks to human health in 1989 were not identified. The proponent's rebuttal did not address this exclusion.

[fn31] 2001 SEC No-Act. LEXIS 124 (Jan. 22, 2001).

[fn32] 2000 SEC No-Act. LEXIS 918 (Oct. 27, 2000).

[fn33] 2000 SEC No-Act. LEXIS 889 (Oct. 3, 2000).

[fn34] 2000 SEC No-Act. LEXIS 547 (Apr. 12, 2000).

§ 16.06[C] Sale or Business Combination Proposals

In the past, proponents sometimes submitted proposals that purported to be binding, in effect seeking shareholder approval for the suggested transaction. In these cases, the SEC staff took the position that the proposal must include all of the information under Item 14 of Schedule 14A. Since it is impossible to provide such disclosure within the word limit, the staff consistently allowed companies to exclude these proposals. More recently, as proponents have increasingly cast proposals as recommendations, exclusion on this basis has become less common.

A further question that may arise in proposals calling for a specific sale or merger involves attempts to establish a value for a proposed transaction. To support the proposal, the proponent may provide its views as to the company's proper valuation. It is difficult to provide the background necessary to fully explain a particular valuation method within the rule's 500-word limit, particularly if a proposal seeks the termination of a transaction.

The SEC believes that the use of valuations and projected realizable values creates a heightened risk that shareholders will be misled. In 1980, the SEC stated:

The Division is concerned that, even when such valuations are the major factor in the solicitation, the usual expectation that the interests of the opposing parties in a contest will generally assure a full airing of the principal issues may not be warranted for reasons peculiar to this arena. Parties to these contests may not engage in a thorough debate of the merits of such valuations for a number of reasons, not the least of which are perceptions of serious risks of liability in attempting to forecast an alternative valuation, and, even if willing to run such risk, the limited time actually available for the opposing party to consider and make its own estimate of the realizable value likely upon execution of the proposal.[fn35]

According to the release, the use of valuations and projections of realizable value will not violate Rule 14a-9's prohibition on false and misleading statements only if the statements are:

made in good faith and on a reasonable basis; and
accompanied by disclosure which facilitates shareholders' understanding of the basis for and the limitations on the projected realizable values.

Some statements do not pass muster even with complete disclosure. In some instances, the SEC stated, "where the valuations are so qualified and subject to such material limitations and contingencies, inclusion in proxy soliciting material of specific realizable values may be unreasonable."[fn36]

[fn35] Exchange Act Release No. 16,833, 1980 SEC LEXIS 1414 (May 23, 1980).

[fn36] Id.

§ 16.07 Practice Pointers

Company Practice Pointers

Attempt to negotiate. Since it likely that the SEC staff will limit its relief to having the proponent modify objectionable language in a proposal or supporting statement, companies can save themselves — as well as the staff — time by reaching an agreement with a proponent to modify language. This particularly can save time and money if this basis would otherwise be the sole reason for a company to ask for no-action relief. Some proponents are willing to change language in their proposal to insure inclusion, while others may prefer to take their chances with the staff.

Address each allegedly misleading statement. Companies bear the burden of establishing that a statement is misleading. If the company alleges that multiple statements are materially misleading, it must thoroughly address each claimed inaccuracy. Not only must the company identify which statements are false or misleading, it must also support its belief with documentation.

Proponent Practice Pointers

Choose a tactic. When a company claims a proposal is false and misleading, a proponent can do one or more of the following:

Rebut the arguments through a letter to the staff and wait to see whether the staff requires the proponent to modify its proposal or supporting statement;
Talk directly to the company to attempt to negotiate mutually acceptable changes to the proposal or supporting statement; or
Agree to remove the language that the company believes is false and misleading (in exchange for a withdrawal of the no-action request) and avoid the possibility that the staff may exclude the entire proposal.

Each allegation must be shown to be misleading. Proponents should check to ensure that a company's no-action request addresses each alleged deficiency individually. In addition, proponents can challenge whether each statement is materially false or misleading. If a company has not met its burden here, a proponent should point this out to the staff.

Provide a detailed rebuttal. Proponents are more likely to persuade the SEC staff that modification is unnecessary if they clearly rebut each point that a company has made regarding alleged deficiencies. This is the best way that the staff can evaluate whether the proposal and supporting statement includes misleading information.

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