Rule 14a-8(i)(4) — former Rule 14a-8(c)(4)

Question 9(4): Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other shareholders at large.

§ 17.01 Background of the Exclusion

This exclusion permits a company to exclude a proposal that seeks to redress a personal claim or grievance. It also is applied to prevent proposals that are intended to provide the proponent with a benefit not shared by the company's shareholders as a whole.

§ 17.01[A] History of the Exclusion

In 1948, the SEC adopted this exclusion to allow companies to omit proposals if they related to a personal claim or grievance against the company or management.[fn1]

In 1952, the SEC expanded the exclusion to permit companies to omit proposals submitted primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes. This change placed a greater emphasis on a proponent's motive for submitting a proposal.[fn2]

In 1972, the SEC amended several provisions in the shareholder proposal rule. To attempt to minimize the subjective nature of the rule's application. In particular, the SEC reduced the need for staff inquiry into a proponent's motive when applying the "personal grievance" and relevance exclusions. Although the SEC retained the "general economic, political, racial, religious, social or similar causes" language added in 1952 (because the SEC wanted to keep the language to support the broader ordinary business exclusion), it deleted the "primarily for the purpose of promoting" language that preceded this clause. Applying this new standard was still difficult because all proposals contain some element of personal interest. For example, when religious groups in the 1970s submitted proposals regarding South Africa, they were motivated by a personal interest — eliminating racial discrimination.

Even though some companies sought the omission of these proposals as a personal interest, the SEC staff did not agree because the personal interest was not limited to the proponent; the issue had larger significance and was shared by other shareholders. In addition, the SEC amended the exclusion to permit companies to omit any proposals that related to the enforcement of a personal claim or the redress of a personal grievance against any person, not just the company or management.[fn3]

In 1983, the SEC attempted to clarify the exclusion's scope by adding a new qualifying clause, "or if it is designed to result in a benefit to the proponent or to further a personal benefit, which benefit or interest is not shared with the other security holders at large." This amendment made the distinction clearer between proposals motivated solely by personal interest and those that affected a broader group of shareholders. The SEC allayed the concerns of some commentators by stating that it would not interpret "personal interest" to automatically exclude proposals relating to issues to which the proponents were personally committed or intellectually and emotionally interested.[fn4]

In 1998, the SEC proposed to modify how the exclusion was applied by removing the staff as the arbiter of this exclusion. As proposed, the staff would have granted no — action relief only if the proposal itself — not the supporting statement or supplemental materials — revealed a personal grievance or personal interest. If a proposal was neutral on its face, the staff would issue a "no-view" letter. The company could then decide whether it felt strongly enough about the perceived underlying reasons for the submission of the proposal, risking legal action if it excluded the proposal.

This proposal was attacked as allowing companies effectively to use the exclusion as they saw fit. Commentators believed that companies would have excluded numerous proposals, forcing proponents to go to court. In dropping the proposal, the SEC stated that it decided not to make the change because "companies might rely on the rule to exclude proposals focusing on social policy matters."

Although the SEC did not adopt the proposed substantive change to the exclusion in 1998, it did renumber the exclusion as 14a-8(i)(4) and made minor stylistic changes. The SEC also reiterated its position that "social proposals are generally not excludable" under this exclusion.[fn6]

[fn1] Exchange Act Release No. 4185, 1948 SEC LEXIS 401 (Nov. 5, 1948).

[fn2] Exchange Act Release No. 4775, 1952 SEC LEXIS 121 (Dec. 11, 1952).

[fn3] Exchange Act Release No. 9784, 1972 SEC LEXIS 155 (Sept. 22, 1972).

[fn4] Exchange Act Release No. 20,091, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

[fn6] Exchange Act Release No. 39,093, 1997 SEC LEXIS 1962 (Sept. 18, 1997) (proposing release); Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998) (adopting release).

§ 17.01[B] Purpose of the Exclusion

The purpose of this exclusion is to prevent proponents from using the proposal process to further their own personal agendas. The proxy statement is not the proper forum to address issues that are not of interest to a significant number of other shareholders, particularly where shareholder interests are not directly involved. In addition, including this type of proposal in the proxy statement shifts the cost of vindicating a proponent's personal interests to the company and indirectly to all shareholders.

§ 17.01[C] Overlap with Other Exclusions

The facts that support a company's request based on this exclusion are unlike those underlying requests under other exclusions. As a result, it is not uncommon for a no-action request to address only this substantive basis if a personal grievance is alleged to be involved.

§ 17.02 Application of the Exclusion

§ 17.02[A] Identifying the Key Issues

This exclusion is among the most difficult and subjective for the SEC staff to apply, because all proposals are motivated in some part by a personal interest. The challenge is distinguishing between proposals motivated solely by personal interest and those that affect a broader group of shareholders.

Even when a proposal appears to deal with a topic that relates to the general welfare of all shareholders, the staff may permit a company to exclude a proposal if the staff finds it is clear that the proponent is using the proposal as a tactic to redress a personal grievance or gain a personal interest. In such cases, the application of the exclusion hinges upon the motivation of the proponent, not the text of the proposal alone. Determining a proponent's motivation using only the information provided in the no-action request, any rebuttals provided by the proponent, and the proposal itself can be challenging.

§ 17.02[B] Inconsistency of Staff Responses

Due to the highly subjective nature of this exclusion, the response of the SEC staff may appear to be inconsistent, especially for proposals that do not articulate the grievance in the language of the proposal. This inconsistency is a function of the varying quality of the arguments and supplemental materials provided by the company and the proponent. These arguments and materials may lead the staff to reach opposite results even for two identical proposals.

§ 17.02[C] Burden to Show Improper Motive

The company must demonstrate that the proponent's motives in submitting the proposal are personal. This task is relatively easy when the proposal on its face indicates an improper motivation. The company may also have little trouble proving a personal claim or grievance when a proponent submits a facially neutral proposal but indicates elsewhere that the proposal is designed to advance an improper agenda.

EXAMPLE:

In State Street Corporation,[fn7] the company was required to include a proposal requesting that the board adopt a policy that the Revised Model Business Corporations Act govern the company's conduct where it does not directly conflict with its bylaws or applicable state or federal laws. In this case, the proponent and the company each submitted four letters to the SEC staff in support of their positions.

[fn7] 2000 SEC No-Act. LEXIS 312 (Mar. 2, 2000).

§ 17.02[D] Prospective Relief to Exclude Future Proposals

In a few cases, proponents routinely submit proposals to the same company each year to vent their personal grievance. Even when a company is able to establish the fact that there is a grievance, it is required to file a new no-action request each year to the staff to obtain no-action relief.

In 1983, the SEC acted to provide some assistance by allowing companies to request prospective relief in these circumstances. When companies seek prospective relief, they ask that the staff's response state that all future proposals from a particular proponent relating to the grievance can be excluded. In processing prospective relief requests, some of the factors that the staff considers include: how often the proponent already has had proposals excluded on this basis, the egregiousness of the personal grievance and the impact of the proposal's topic on the company.

If the staff grants this relief, the company still has an obligation under Rule 14a-8(j) to notify the staff and the proponent of its intention to exclude the proposal. The staff will retain the notice in its records, but will not issue a no-action response.[fn8]

EXAMPLES:

Grant of prospective relief

In Exxon Mobil Corporation,[fn9] the company both successfully excluded a proposal and obtained prospective relief with respect to the proponent. The proposal sought to establish a committee to investigate and review sexual activities, and to take remedial action, including removal of employees involved in sexual activities on company property or while away from their regular place of employment for company purposes. The company noted that the proposal was virtually identical to a proposal submitted — and excluded under this exclusion — the prior year. The company explained that the proponent had filed a lawsuit against an employee to recover fees allegedly owed by the employee to the proponent in connection with services he rendered as her attorney and to recover a car, jewelry, other items and cash that he allegedly gave to this employee. In addition, the company asserted that the proponent had sent extensive documentation to various company employees over the past several years and called numerous in-house lawyers, security personnel and employees and noted that the documentation included descriptions of his alleged sexual encounters with the employee. Finally, the company noted that the proponent enclosed numerous documents along with his proposal that related to the grievance, including diary entries and handwritten notes allegedly made by the employee.
In Cabot Corp.,[fn10] the SEC staff granted no-action relief with respect to a proposal after the same proponent had submitted proposals eight times in as many years relating to the same personal grievance. The staff also granted prospective relief relating to the proponent. The company asserted that the proponent was a former employee, who was eligible for a long-term disability benefit and who had sought to return to work after recovering from the disability, to find that his former position was no longer available. The company represented that the proponent also sought payment for various employee benefits. While this claim was pending, the proponent sought to intervene in a rate case involving one of the company's business units and sued the company alleging age discrimination. The company noted that the proponent had appeared in person at its annual shareholders' meeting many years ago to contest a proposed amendment to the company's charter to limit directors' liability and acknowledged that his stance on the proposed amendment was a response to his pending claims against the company. The company noted that the proponent then submitted shareholder proposals in each of the seven years following the settlement of his claims with the company.

[fn8] See Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001), Item C5.

[fn9] 2001 SEC No-Act. LEXIS 357 (Mar. 5, 2001).

[fn10] 1994 SEC No-Act. LEXIS 754 (Nov. 4, 1994).

§ 17.03 Issues Relating to Particular Types of Proponents

It is usually easier for a company to clearly point to a motivating factor that involves a personal benefit if a proponent is an individual. It is much more difficult to prove such a motive if the proponent is a group. As a result, the staff is more likely to allow a company to exclude a proposal if the proponent is an individual and tends to allow inclusion if the proponent is a group.

§ 17.03[A] Employees

Current or former employees with documented histories of disputes with the company often submit proposals that raise issues under this exclusion. These disputes often provide a basis for exclusion, especially if a proposal claims unfair treatment or seeks changes to allegedly discriminatory policies that purportedly harmed the proponent. Sometimes, even with ample documentation, companies are not able to meet their burden of proving that these employees have submitted a proposal for personal reasons.

EXAMPLES:

Excluded proposals

In Eastman Kodak Co.,[fn11] the company successfully excluded a proposal by a terminated employee to establish a stockholders' advisory committee. The company argued that the proponent had conducted an extensive campaign to further his grievance that included several lawsuits, appearances at annual meetings, and an incident where the proponent was escorted out of the company's headquarters. The company alleged that the proponent's grievance first arose from the company's denial of a suggestion he submitted to the company through an employee suggestion program and that it later intensified when he was terminated from the company. The proponent did not submit a rebuttal.
In Phillips Petroleum Company,[fn12] the company was permitted to exclude a proposal asking the company to modify executive compensation so that it was more closely tied to performance. The proponent was a former employee who wanted to make a presentation to the board's audit committee regarding reimbursement of repatriation expenses and other costs arising from a two-year delay in the shipping of his personal belongings. The company noted that this proposal was the proponent's fourth in five years and that the SEC staff had allowed the company to exclude the first three. The company asserted that the proponent had been discharged for cause nearly ten years earlier and that following his discharge, the proponent had corresponded extensively with management and the board. The company represented that it had negotiated with the proponent in good faith and had afforded him every avenue of appeal, including consideration of his grievances by senior management and the audit committee.
In Union Pacific Corporation,[fn13] the SEC staff granted no-action relief with respect to a proposal prohibiting the company from discriminating against current employees formerly employed by an acquired company by not repealing a pension plan offset provision, and prohibiting representatives of the company from engaging in deceptive communications with these employees concerning their pension benefits. The company represented that the proponents had previously unsuccessfully sought to alter one specific term of a negotiated transaction and to impose an alternative pension integration structure that would have personally benefited a small group of employees, of which the proponents were a part. The company noted that the proponents had submitted, with their rebuttal, a letter from their attorney to the company demanding the same action set forth in their proposal, which also served as evidence that the proposal was personal in nature.
In Southern Company,[fn14] the SEC staff allowed the company to exclude a proposal that required the company to form a shareholder committee to investigate complaints against management. The company noted that the proposal was identical to a proposal submitted in the prior two years, both of which were excluded. The company asserted that the proponent was a disgruntled former employee who had raised numerous claims during the prior seven years. The proponent had been terminated over five years ago as part of a reduction in force and he had declined to accept severance compensation within the prescribed time period. Since then, the proponent had sent the company more than 40 letters, faxes, requests, and proposals seeking redress for his personal grievance, including a proposal for consideration at a meeting five years ago which was excluded. The proponent did not submit a rebuttal.
In International Business Machines Corp.,[fn15] the company successfully excluded a proposal and obtained prospective relief relating to the proponent after the same proponent submitted stockholder proposals 11 times in 11 years relating to the same personal grievance. The company argued that the proponent, a former employee who had been terminated for poor job performance in the 1970s, had repeatedly attempted to use the proposal process to redress his personal grievance. Following his termination, the proponent initiated correspondence with the company's chief executive claiming unfair treatment and requesting an impartial investigation into his termination. The company stated that following the conclusion of its investigation, the proponent entered into litigation against the company. Following the dismissal of the litigation, the proponent began to use the proposal process, including letters the company characterized as aggressive.

EXAMPLES:

Included proposals

In State Street Corporation,[fn16] the company unsuccessfully sought to exclude a proposal requesting that the board adopt a policy that the Revised Model Business Corporations Act govern the company's conduct where it does not directly conflict with its bylaws or applicable state or federal laws. In this case, the proponent and the company each submitted four letters to the SEC staff in support of their positions. One of the proponent's letters had 23 exhibits attached. The company argued that the proponent's grievance stemmed from his termination from the company, which led to a lawsuit filed by the proponent against the company alleging discrimination due to sexual orientation. The company asserted that the proponent, after the unsatisfactory resolution of his lawsuit, created a Web site in which he described his actions against the company as a "war" in order to facilitate "corporate bloodletting." The proponent contended that the proposal did not further any exclusively personal goals.
In Ford Motor Company,[fn17] the company was required to include a proposal mandating that the board create a special committee to study the addition of "employee directors" to the board. The proponent was an employee of the company who had been engaged in a wage dispute with the company for the past two years over whether he had been denied wage increases as a result of age discrimination. He had filed a complaint with the EEOC, which was subsequently dismissed. The company claimed that the proponent's true goal was to advance his claim of age discrimination against the company and quoted sections of the proponent's correspondence to the SEC staff to support this claim. The company noted that in 1999, the proponent had submitted a similar proposal to the company and at the shareholders' meeting he used the presentation time to discuss his age discrimination claims. Since that meeting, the company stated, the proponent had several unsatisfactory meetings with company officials and that the proponent had a paragraph alleging age discrimination in his supporting statement. Pointing to this sequence of events, the company contended that this year's proposal was at least partially a campaign to use the proposal process to advance his personal claim. The proponent's rebuttal did not address the exclusion.
In Boeing Company,[fn18] the SEC staff denied no-action relief with respect to a proposal requiring the company to pay litigation costs associated with the unlawful conduct of its agents from funds normally available for executive compensation. The company stated that the proponent was a former employee who quit his job ten years earlier and subsequently filed claims that he had been constructively discharged; that the company was liable for failure to accommodate him and for allowing him to be harassed; and that the company's subsequent failure to consider him for employment, despite his own representations that he was unable to work, violated several civil and criminal statutes. The company noted that two prior identical proposals from the proponent had been excluded. The proponent argued that while he was a former employee of the company, he believed that his investment in the company was at risk. He also claimed that the company sought to exclude all proposals submitted by current and former employees.
In Citigroup Inc.,[fn19] the SEC staff required inclusion of a proposal that related to establishing a charitable matching gift program for employees and retirees. The company noted that the proponent was a retired employee and that he would stand to benefit under the proposal because the contributions he would make would be matched by the company, thereby doubling his donations. The company argued that this benefit would not be shared with the company's other shareholders.
In International Business Machines Corporation,[fn20] the proponent defeated a no-action challenge to a proposal requesting that the board adopt a policy that all employees, regardless of age, receive the same retirement medical insurance and pension choice as employees who are within five years of retirement and that the portable cash-balance plan provide a monthly annuity equal to that expected under the old pension plan or an actuarially equivalent lump sum. The company argued that the proposal clearly related to a personal grievance because the proponent and 301 of the 330 cosponsors were active employees or spouses of IBM employees, and that the proposal would benefit those persons. The proponent argued that like other employees within five years of retirement, he had already had made an irrevocable choice so that he could not personally benefit from any improvement of options under the cash balance plan.

[fn11] 1993 SEC No-Act. LEXIS 383 (Mar. 5, 1993).

[fn12] 2000 SEC No-Act. LEXIS 392 (Mar. 8, 2000).

[fn13] 2000 SEC No-Act. LEXIS 75 (Jan. 31, 2000).

[fn14] 1999 SEC No-Act. LEXIS 949 (Dec. 10, 1999).

[fn15] 1995 SEC No-Act. LEXIS 848 (Nov. 22, 1995).

[fn16] 2000 SEC No-Act. LEXIS 312 (Mar. 2, 2000).

[fn17] 2000 SEC No-Act. LEXIS 506 (Mar. 28, 2000).

[fn18] 2000 SEC No-Act. LEXIS 356 (Mar. 6, 2000).

[fn19] 2000 SEC No-Act. LEXIS 253 (Feb. 29, 2000).

[fn20] 2000 SEC No-Act. LEXIS 165 (Feb. 16, 2000).

§ 17.03[B] Business Partners

The SEC staff tends to allow companies to exclude proposals submitted by shareholders who had conducted — or hoped to conduct — business with the company. A proposal is particularly likely to be omitted if it seeks to force the company to conduct business with the proponent.

EXAMPLES:

In Schlumberger Limited,[fn21] the company was permitted to exclude a proposal relating to the formation of an impartial fact-finding committee concerning a pending merger and the establishment of a "Statement of Fair Business Principles." The company represented that this was the third time the proponent had submitted this proposal and that the proposal related to a personal grievance over a matter that arose in 1962. The proponent was president of a corporation that had sought to recover a finder's fee from the company. The company noted that it had won a 1969 lawsuit over the dispute.
In Dresdner RCM Global Strategic Income Fund, Inc.,[fn22] the SEC staff allowed exclusion of a proposal providing that if the fund terminated an existing investment advisory contract, the fund must enter into a new investment management contract with a specified manager. The fund noted that the proponent sought to install itself as the new investment adviser and that this was an incontrovertible attempt by the proponent to garner an immediate, direct and substantial personal benefit. In its response, the SEC staff noted that if the proposal was adopted, the proponent would receive investment advisory fees from the fund for serving as adviser, which was a benefit not shared by the fund's other shareholders.
In Unocal Corporation,[fn23] the SEC staff granted no-action relief on a proposal asking the company to take certain actions regarding underground tanks located on properties where the company previously had operated service stations and to dismiss employees and legal counsel under certain circumstances. The company argued that the proponent had had a personal grievance since July 1990, when he sent a letter threatening the company with legal action regarding the costs of remediating certain property in which the proponent had an ownership interest because the company had previously owned the property and used it as a gasoline service station. Throughout the course of his dealings with the company, the company stated that the proponent sent numerous harassing faxes and letters to the company and its attorneys. As a result, the company had obtained a restraining order against him prohibiting him from communicating directly with the company during the pendency of the appeal from a judgment in the company's favor. In addition, the company noted that the proponent had filed grievance petitions with the state bar against the outside counsel involved in the litigation as well as the judge who heard the case, all of which were dismissed. The proponent did not submit a rebuttal.

[fn21] 2000 SEC No-Act. LEXIS 875 (Sept. 28, 2000).

[fn22] 2000 SEC No-Act. LEXIS 843 (Sept. 13, 2000).

[fn23] 2000 SEC No-Act. LEXIS 542 (Mar. 30, 2000).

§ 17.03[C] Institutional Investors

Companies often argue that the agenda of institutional shareholders differs from that of other shareholders. As some commentators have pointed out, as might be expected, institutional shareholders sometimes prefer noncorporate interests over corporate interests when they submit shareholder proposals.[fn24]

However, unless a company can prove that an institutional investor's interest is personal, the SEC staff tends to require inclusion of their proposals. It is extremely difficult for companies to show that institutional investors have a personal interest since the persons that run these entities are accountable for their performance and are subject to fiduciary duties that preclude acting in their own personal interests.

[fn24] See, e.g., James E. Heard, "Executive Compensation: Perspective of the Institutional Investor," 63 U. Cin. L. Rev. 749 (1995); Philip R. Lochner, Jr. & Richard H. Koppes, "Good Corporate Governance and its Advocates: The Governance of Public Pension Funds and the Governance of Public Companies," Corporate Governance Advisor, at 7 (Sept./Oct. 2000).

§ 17.03[D] Labor Unions

Company attempts to exclude proposals submitted by labor unions have generated significant controversy. Companies sometimes argue that the proposals, though neutral on their face, are designed to aid the union in organizing workers or collectively bargaining, rather than to further a cause shared by all shareholders. Attempts to exclude these proposals are rarely successful because evidence of such a motive is often difficult to produce. A company will not be able to exclude a labor union proposal by merely alleging that the company has a dispute with a union, particularly when the proposal is neutral on its face.

EXAMPLES:

Companies permitted to exclude labor union proposals

In Merck & Co., Inc.,[fn25] the company successfully excluded a proposal recommending that the company implement a policy of using construction companies whose work force is unionized. The company argued that the proposal was intended to result in the hiring of members of the proponent union and its affiliates to the detriment of non-union workers and that this benefit would not be shared with the company's other shareholders. In addition, the company contended that the union had used a variety of other tactics in the past to achieve the goal set out in the proposal. The proponent responded that the use of unionized labor was in the self-interest of the company because union workers are generally covered by health plans and generally participate in pension plans that enable them to purchase the company's products.
In Dow Jones & Co.,[fn26] the company was allowed to exclude two proposals that appeared neutral on their face. The company argued that the proposals were part of a larger union campaign aimed at ongoing labor negotiations. The company noted that union officers had admitted publicly that the proposals were intended to put pressure on the company in connection with contract negotiations. The proponent argued that his involvement with the union did not mean he was attempting to address the union's grievance through the shareholder proposal process. The proponent also contended that his pay would in no way be affected by implementation of the proposal.

EXAMPLES:

Companies not permitted to exclude proposals

In Consolidated Freightways,[fn27] the SEC staff denied no-action relief on a proposal requesting that the board take the necessary steps to remove the requirement that 80% of the outstanding shares vote in favor of any change in the structure of the board. The company contended that the proponents, three union members, were actively pursuing a corporate campaign designed to harass and pressure the company in connection with union organization efforts at the company's nonunion operating subsidiaries. The proponents countered that there was no possible connection between the elimination of a supermajority requirement and the advancement of the union's interests in organizing or collective bargaining. The proponents emphasized that, by insisting that the employee-shareholders did not truly care about corporate governance issues, the company was refusing to acknowledge that the proponents had a stake in the financial future of the company equal to that of other shareholders.
In Waste Management, Inc.,[fn27.1] the SEC staff denied a no-action challenge to a proposal asking the company to report on the effect on its business strategy of efforts to oppose the privatization of waste collection, disposal, transfer, and recycling services. The company argued that the proponent, the AFSCME Employees' Pension Plan, was advancing the interests of AFSCME, a labor union that has opposed the privatization of government services. The proponent responded that the Plan was a legally separate entity that had not pursued an anti-privatization agenda, and that the company had failed to establish that the Plan was acting on the union's behalf.

[fn25] 1994 SEC No-Act. LEXIS 166 (Feb. 7, 1994).

[fn26] 1994 SEC No-Act. LEXIS 142 (Jan. 24, 1994).

[fn27] 1996 SEC No-Act. LEXIS 158 (Feb. 1, 1996).

[fn27.1] 2002 SEC No-Act. LEXIS 362 (Mar. 11, 2002).

§ 17.04 Determining Who is the Real Proponent

§ 17.04[A] Proponents as Alter Egos

Occasionally, a shareholder attempts to use an alter ego (i.e., asks another shareholder to submit a proposal on his behalf) to obscure the fact that the motivation for the proposal is personal. The SEC staff often must make difficult decisions about whether a company's claim that an alter ego is being used is true, particularly in the face of strong denials. In some cases, a company is able to find evidence that an alter ego exists, such as a familial or other relationship between the proponent and the shareholder with the grievance or an admission by the nominal proponent that he is acting on behalf of another person. However, in most cases, companies are hard pressed to provide evidence to the staff that an alter ego is involved.[fn28]

EXAMPLES:

In Optelecom, Inc.,[fn29] the proponent defeated a no-action challenge to a proposal recommending that the board redeem rights issued pursuant to a rights agreement and refrain from issuing any additional rights without shareholder approval. The company argued that the proposal was motivated by the personal grievance of a former employee, and was therefore eligible for exclusion. The proponent argued that the SEC staff should not accept, without the benefit of an evidentiary trial, that there was an alter ego involved and submitted an affidavit stating that the proposal and supporting statement accurately reflected his opinion and were not part of some alleged scheme.
In Eagle Bancshares,[fn30] the SEC staff required the company to include a proposal relating to the redemption of the company's poison pill. The company argued that the proposal was motivated by the termination of the proponent's son's employment with the company, offering as evidence the proposal's discussion of the proponent's son's personal grievance with management. The proponent acknowledged that the proposal discussed the grievance but argued that the grievance was not personal, that many other shareholders shared his concerns about the governance of the company and that he felt no personal animosity over the issues involving his son.

[fn28] For further discussion of the alter ego issue, see supra Chapter 9.

[fn29] 1999 SEC No-Act. LEXIS 445 (Apr. 6, 1999).

[fn30] 1994 SEC No-Act. LEXIS 503 (May 12, 1994).

§ 17.04[B] Grievance Has to Be Personal

The SEC staff normally requires the inclusion of proposals if the proponent's motivation is that others — with whom the proponent has no direct relationship — have allegedly been victimized by the company. The fact that a proponent is a member of a special interest group such as an environmental or social justice organization does not itself render the proposal excludable. The SEC staff's response to company arguments based on this concept of personal grievance is similar to the way it approaches traditional social issue proposals, where the proponent seeks to influence a company with the goal of accomplishing a benefit for society.

EXAMPLES:

In Sturm, Ruger & Company, Inc.,[fn31] the proponent successfully defended against a no-action challenge to a proposal requesting that the board prepare a report on the company's policies and procedures aimed at stemming the incidence of gun violence in the United States. The company argued that the proponent, despite drafting the proposal so that it appeared to relate to matters that may be of general interest to all shareholders, sought curtailment of the sale of legally manufactured firearms, which was an interest not shared by other shareholders. The proponents responded that the fact that they were intellectually committed to some type of gun control was irrelevant.
In J.P. Morgan & Co., Incorporated,[fn32] the company was required to include a proposal mandating that the company discontinue banking services with members of the "Commonwealth of Nations ETC" until all claims by Australian Aborigines and their legatees are resolved by appropriate judicial authorities. The company claimed that the proponent had a history of submitting multiple proposals, at this company and others, that were motivated by personal grievances. The company noted that even though the basis for the proponent's most recent proposal was the mistreatment of Aboriginal children and not his own past suffering, both it and the proponent's past proposals attempted to publicize victimization. The proponent did not submit a rebuttal.
In Emerson Electric Co.,[fn33] the SEC staff denied no-action relief on 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 the proponent, a foundation devoted to gay rights, had a "personal interest" in the proposal because it was a "special interest group" interested in and dedicated to securing equal protection for gays. The company argued that it was clear that the proposal was not drafted to address specific concerns in relation to the company's employment policies and practices because the proposal included no information specifically charging that the company sanctioned discrimination on the basis of sexual orientation. The company also claimed that "sexual orientation is inherently a `personal interest'." The proponent replied that the company misinterpreted the phrase "not shared by other shareholders at large"; that phrase, the proponent urged, should not be interpreted as referring to the policies that shareholders may want, but requires an inquiry into the history of the proponent's relationship to the company, the nature of the proponent's demands, and the subject matter of the proposal.

[fn31] 2001 SEC No-Act. LEXIS 342 (Mar. 5, 2001).

[fn32] 2000 SEC No-Act. LEXIS 58 (Jan. 24, 2000).

[fn33] 2000 SEC No-Act. LEXIS 918 (Oct. 27, 2000).

§ 17.04[C] Personal Interest of Proponent's Affiliate

In some cases, the SEC staff allows companies to exclude proposals in which an affiliate of the proponent has a personal interest. A company must show not just a relationship between the proponent and the affiliate but also a benefit that will flow to the proponent as a result of the proposal.

EXAMPLES:

In UAL, Inc.,[fn34] the SEC staff required the company to include a proposal seeking a report on a pilots' strike. The company argued that the proponent was a member of the union that had sued the company in connection with the strike and that the law firm that represented the proponent had also represented the pilots in the strike. The proponent argued that the company did not claim that he had a personal grievance and that the pending litigation with the pilots' union did not involve the proponent in any way. One lawsuit, the proponent asserted, dealt with the rights of non-striking and "prehire" pilots, groups of which he was not a member; the other involved a claim by the pilots' union to recover excess pension assets diverted by the company from the pilots' defined benefit retirement plan and although the proponent was a participant in that plan, his benefit entitlement was entirely determined by a formula based on years of service and final average compensation, and would not change if the disputed assets were returned to the plan.
In Long Island Lighting Co.,[fn35] the company successfully excluded a proposal regarding the apportionment of costs incurred in the construction of a power plant. The company argued that the proponent, who was a candidate for public office, had indicated that he was going to spearhead a campaign to have consumers hold back on paying rate increases. The company also noted that the proponent had previously appeared in opposition to the company at six hearings for rate increases and had initiated a campaign to encourage customers to overpay their electric bills as a means to frustrate the company's computer system.

[fn34] 1986 SEC No-Act. LEXIS 1946 (Mar. 14, 1986).

[fn35] 1982 SEC No-Act. LEXIS 2007 (Feb. 24, 1982).

§ 17.05 Motive Evaluation

§ 17.05[A] Proponent Allowed to Have Some Personal Interest

The SEC staff has difficulty applying this exclusion because all proposals are motivated in some part by a personal interest. The SEC staff determines the acceptable level of personal interest by considering whether the issues raised by the proposal affect a broad group of shareholders. The SEC has made clear that the exclusion does not operate to allow omission of proposals regarding issues to which the "proponent was personally committed or intellectually interested."[fn36]

[fn36] Exchange Act Release No. 20,091, 1983 SEC LEXIS 1011 (Oct. 14, 1983).

§ 17.05[B] Types of Motives

§ 17.05[B][1] Compensation for Damages

The SEC staff consistently allows companies to exclude proposals if they are submitted by shareholders to obtain damages or compensation from the company, particularly if a proposal seeks to force the company to take action regarding matters that are or were litigated in a court between the parties. To support exclusion, companies generally follow one of three approaches: produce a "smoking gun," an admission that the proposal was submitted to further the litigation or claim; show that the subject mater of the proposal is substantially identical to the issues in dispute between the parties; or prove unequivocally that the proponent has engaged in a campaign of harassment aimed at the company.

EXAMPLES:

In Sara Lee Corporation,[fn36.1] the SEC granted a no-action request with respect to a proposal asking the company's board to prohibit the company from making payments outside ordinary business without the approval of board members who were not company employees. The company argued that the proponent had a personal grievance regarding the company's decision six years ago to cease the operations of a manufacturing facility that had been owned by the proponent's family before acquisition by the company. The company noted the proponent's involvement in litigation related to the closing that was contrary to the company's interest.
In KeyCorp,[fn37] the company was allowed to exclude a proposal asking the board to disclose fully the performance of some of its mutual funds. The company explained that the proponent was the remainder beneficiary of a trust established by his grandmother 30 years ago for a wholly owned subsidiary of the company of which she was a trustee. When his mother, the lifetime beneficiary, died, the proponent objected to the final accounting and filed a lawsuit alleging that funds had been improvidently invested. The company noted that the case was still pending and that the supporting statement mainly repeated the allegations set forth in that lawsuit. As further evidence of the proponent's motive, the company noted the statement from the supporting statement that having the grantors and beneficiaries elect the directors of the company would "make the Board more accountable" and thus better able to "explain the performance" of the trusts. The proponent did not submit a rebuttal.
In Johnson & Johnson,[fn38] the SEC staff permitted exclusion of a proposal that required the company to adopt a policy of compensating inventors and discoverers of any product manufactured, marketed, distributed or sold by it, regardless of whether they were employees, to the satisfaction of "both parties." The company represented that the proponent had been seeking compensation and recognition from the company for a product that he claimed to have invented. The company produced evidence that the subject matter of the proponent's invention claim was identical to the subject matter of his proposal. The proponent briefly responded that the proposal did not pertain to a personal grievance because it applied to all inventors or discoverers whose products were sold by the company.
In Station Casinos, Inc.,[fn40] the company was allowed to exclude a proposal recommending that the company obtain liability insurance. The company argued that the proponent had previously represented a client in connection with a lawsuit filed against the company, which sought to recover monetary damages resulting from an alleged theft of the client's personal property while he was a guest at one of the company's hotels. The company stated that it believed that the proponent was merely representing the interests of his client in collecting damages — not the interests of the company's shareholders — and that the supporting statement made the proponent's intentions evident. In his rebuttal, the proponent did not explain how the proposal would provide specific benefits to shareholders.

[fn36.1] 2001 SEC No-Act. LEXIS 693 (Aug. 10, 2001).

[fn37] 2001 SEC No-Act. LEXIS 245 (Feb. 22, 2001).

[fn38] 2000 SEC No-Act. LEXIS 14 (Jan. 7, 2000).

[39] [Reserved.]

[fn40] 1997 SEC No-Act. LEXIS 944 (Oct. 15, 1997).

§ 17.05[B][2] Investor Relations

Occasionally, proponents submit proposals dealing with company mistreatment of shareholders. The SEC staff tends to allow companies to exclude such proposals, including requests that the company buy back its stock. However, when a shareholder would not benefit personally from a proposal, but rather submits it out of a belief that the company has made an erroneous decision, the SEC staff requires inclusion of the proposal.

EXAMPLES:

In NSTAR,[fn41] the company was required to include a proposal that related to rescinding approval of a pending merger. The company noted that the proposal was dated two days after the special meeting at which shareholders approved the merger. The supporting statement recounted the proponent's experience at the shareholder meeting, where the proponent alleged that he was "subjected to intimidation" when he attempted to express his opposition to the merger. The company denied that the incident occurred, asserted that all shareholders were treated in a cordial and professional manner, and claimed that no shareholder was denied the opportunity to express himself during the meeting. The company noted that the proponent had been offered the opportunity to speak at the meeting and did so following the close of the formal business part of the meeting, but prior to the recording of the vote on the merger transaction. The company surmised that the proponent was frustrated at not having his position prevail at the meeting.
In US WEST, Inc.,[fn42] the SEC staff permitted the company to exclude a proposal mandating that the board be censured for certain actions relating to the company's transfer agent and its treatment of shareholders. The company argued that the proponent was upset that the transfer agent had not backdated his purchase of company stock. The company urged that the proponent was requesting that the company censure its board for a series of complaints that he had against the company's transfer agent and that the proponent's reasons were personal.

[fn41] 2000 SEC No-Act. LEXIS 431 (Mar. 15, 2000).

[fn42] 1999 SEC No-Act. LEXIS 241 (Feb. 22, 1999).

§ 17.05[B][3] Self-Enrichment

The SEC staff consistently allows companies to exclude proposals that are submitted by proponents using the shareholder proposal process as a way to enrich themselves. However, a company may have difficulty meeting its burden of proof. Self-enrichment motives are not always clear and companies often have to rely on supplemental information to reveal the proponent's true goal since the proposal and supporting statements are generally neutral on their face. Moreover, the SEC staff will not allow a company to exclude a proposal simply because the proponent seeks to facilitate a transaction with an entity in which the proponent has an interest.

EXAMPLES:

In Crown Central Petroleum Corporation,[fn43] the SEC staff denied no-action relief with respect to a proposal requesting that the board sell, merge or otherwise dispose of the company to maximize shareholder value. The company argued that the proposal sought to mislead its shareholders into adopting a proposal that would pressure the company's board into effecting a merger with a company of which the proponent was chief executive officer and in which he held an ownership interest. The company claimed that the proponent's interest was adverse to that of the company's other shareholders. The company also argued that the proponent was attempting to use the proposal in circumstances in which the proposal, in combination with the proxy process, could be used to adversely affect the company's pursuit of other options.
In USLIFE Income Fund, Inc.,[fn44] the fund successfully excluded a proposal recommending that the fund invest in equity securities as well as fixed income securities. The fund argued that the proponent submitted the proposal as part of a plan to enrich itself by taking control of the fund and cause the proponent's affiliates to become investment advisers to it. The fund asserted that a Schedule 13D filed by the proponent for another fund provided evidence of its strategy to pressure a number of funds to hire it.
In SCANA Corporation;[fn45] Sprint Corporation;[fn46] and Kansas City Power & Light Company,[fn47] the companies successfully excluded proposals mandating that the company identify any person responsible for threatening to withhold, or ordering withholding of, federal income tax on dividends; identify the regulation authorizing the withholding; and mandate that the company and its transfer agent not discriminate against shareholders applying for nonresident alien status in connection with such withholding. Each company noted that it had an outstanding dispute with the proponent concerning the proposal's subject because when they asked him to certify his taxpayer identification number on IRS Form W-9, he returned a Form W-8, Certificate of Foreign Status, along with a letter stating that he was not a U.S. citizen. The companies noted that although Form W-8 contains language that the certifications it contains are made under penalty of perjury, that language was struck through on the Form W-8 sent by the proponent. In addition, the companies noted that their transfer agents had attempted to accommodate the proponent's demands while at the same time complying with their obligations under federal income tax laws regarding the type of certification that they could accept from a person claiming foreign status to avoid backup withholding. The companies also noted that the proponent authored a book entitled "Whistle-Blower: How to Blow the IRS out of the Water" and speculated that the proponent had submitted the proposals as a means to publicize the book. The proponent's rebuttals did not specifically address the exclusion.

[fn43] 2000 SEC No-Act. LEXIS 247 (Feb. 24, 2000).

[fn44] 1999 SEC No-Act. LEXIS 898 (Oct. 29, 1999).

[fn45] 2000 SEC No-Act. LEXIS 324 (Mar. 8, 2000).

[fn46] 2000 SEC No-Act. LEXIS 56 (Jan. 24, 2000).

[fn47] 2000 SEC No-Act. LEXIS 103 (Jan. 24, 2000).

§ 17.05[B][4] Embarrassment

Sometimes companies argue that a proponent's motive for submitting a proposal is to embarrass management. Potential embarrassment is not sufficient to justify exclusion because many proposals could embarrass management, even if the proponent does not bear management any ill will. Proponents often submit proposals to effect change in corporate behavior, which at least indirectly is a criticism of management's current performance.

EXAMPLE:

In Adams Express Company,[fn48] the company was permitted to exclude a proposal in which the proponent "commanded" the chairman of the board to file a complaint with the president of the American Society of Corporate Secretaries against the secretaries of certain corporations. The company stated that the proposal was submitted after the secretaries of several companies did not provide the proponent with information he requested regarding the time and location of every stockholder meeting in the United States. The company contended that the proposal had no bearing on the company and was merely used to pressure the company to provide the information. The proponent did not submit a rebuttal.

[fn48] 1997 SEC No-Act. LEXIS 1009 (Nov. 13, 1997).

§ 17.05[B][5] Targeting Employees

The SEC staff normally allows companies to exclude proposals submitted to seek revenge against or otherwise attack employees. Exclusion is especially likely if a proposal could harm the employee or invade her privacy.

EXAMPLE:

In Exxon Mobil Corporation,[fn49] the SEC staff permitted the company to exclude a proposal recommending that the board establish an oversight committee to review all reported sexual activities, and to take remedial action, including removal of employees involved in such activities on company property or while away from their regular place of employment for work purposes. The proposal stemmed from a dispute after the end of a personal relationship between the proponent and an employee. The company noted that the proponent had filed a lawsuit against the employee for recovery of legal fees allegedly owed by the employee to the proponent in connection with services he had rendered as her attorney in several lawsuits and recovery of a car, jewelry, other items and cash that he had allegedly given to the employee while they were in the relationship. In addition, the company noted that the proponent had sent extensive documentation to various employees of the company over the past several years relating to the alleged sexual activities of the employee, sought to have the employee's employment terminated and had been waging a campaign to alert company personnel of employee's alleged sexual activities, even though the company had completed a thorough investigation of the allegations.

[fn49] 2000 SEC No-Act. LEXIS 422 (Mar. 23, 2000).

§ 17.05[C] Difficulties in Evaluating Motives

This exclusion requires the SEC staff to determine why a proponent decided to submit a proposal. Probably more than under any other exclusion, this process is adversarial. It is not uncommon for both a company and proponent to provide lengthy analyses to the staff about the applicability of the exclusion.

Quite often, the staff must reach factual conclusions concerning the subjective motivations of a proponent, purely on the basis of correspondence, under circumstances when the objective evidence — the proposal and supporting statement — suggests that there is no personal grievance.

§ 17.05[C][1] Staff Requires Evidence of Motive

A company will more likely persuade the staff that a proposal is motivated by personal interest if it can describe other instances in which a proponent has interacted with the company about an issue. The staff typically will accept a company's representations about these interactions — they need not be documented. However, the proponent may dispute the company's characterizations of these interactions so written evidence is likely to be more persuasive.

EXAMPLE:

In Storage Technology Corporation,[fn50] the proponent defeated a no-action challenge to a proposal requesting that the board restrict each officer and director from selling company stock for a period of five years from the date of the exercise or purchase of shares. The company claimed that the proposal was part of a larger pattern of harassment against the company. For example, the proponent had spoken to company representatives over the past seven years more than one hundred times. The company claimed that the proponent had written more than 50 letters during the past seven years, primarily to its president, with numerous false and derogatory statements. In addition, the company pointed out that the proponent had posted over a hundred messages on a Web message board disparaging the company. The company noted that the proponent had indicated that one of his goals was to become a member of the board. The proponent responded that the company only produced five of the "more than 50" letters that the company alleged he had sent and that the company did not indicate how it thought they were false. The proponent also disputed having sent two of the six prior proposals that the company claimed he had submitted.

[fn50] 2000 SEC No-Act. LEXIS 519 (Apr. 3, 2000).

§ 17.05[D] Motive Evident from Proposal Itself

The easiest cases for the SEC staff involve proposals that on their face seek redress of a grievance or a personal benefit or where the nexus between the proposal and benefit is so clear and direct as to be unmistakable. When the motive is evident from a proposal itself, the staff consistently allows companies to exclude it.

EXAMPLES:

In Caterpillar Inc.,[fn51] the SEC staff allowed the company to exclude a proposal that required the company to adopt a particular overtime pay policy for certain employees at one of its plants. The company noted that the proponent disagreed with its overtime policy and argued that the proposal was not the correct forum to express that disagreement. The company contended that implementing the proposal would only benefit the proponent and other employees at one facility at a specific salary level range.
In Phillips Petroleum Co.,[fn52] the company successfully sought no-action relief with respect to a proposal asking the company to settle an outstanding claim or to voluntarily compensate persons (including the proponent) inconvenienced by corporate action. The company argued that the proponent had a personal grievance due to the allegedly improper termination of his employment with the company.

The company argued that the proposal would expressly benefit the proponent, and would use the company's annual meeting to further his grievance. The company pointed out that two thirds of the proponent's proposal detailed his case and his allegedly unfair termination by the company, as well as making disparaging remarks about the company and its executives. The proponent did not submit a rebuttal.

[fn51] 1999 SEC No-Act. LEXIS 948 (Dec. 13, 1999).

[fn52] 1996 SEC No-Act. LEXIS 222 (Feb. 22, 1996).

§ 17.05[E] Campaign of Harassment

Sometimes, although a proponent's personal grievance is not apparent from the face of the proposal, the proponent and the company have a long history of disputes. When it is unambiguous that the proposal is part of a campaign by the proponent, the SEC staff permits exclusion. However, the standard for making such a showing is high.

EXAMPLES:

In Burlington Northern Santa Fe Corporation,[fn53] the company successfully excluded several proposals relating to various aspects of the company's operations. In its 2001 letter to the SEC staff, the company noted that this was the third consecutive year in which family members (or their alter egos) had submitted at least six proposals. In the 2000 letter, the company asserted that the family members had also notified the company of their intention to nominate the father, four of his children and one other individual to the board. In both letters, the company argued that the father had a long and continuous history of harassing the company and its officers through various means including litigation, abuse of the proposal process, and multiple Web sites, as documented in the company's 1998 and 1999 no-action letter requests. The company noted that the proponents had registered over 20 Web addresses with variations on the BNSF trademark, including www.BNSF.net, www.BNSF.org, www.BNSFU.org, and others with more profane addresses. In addition, the company pointed out that the proponent had tried unsuccessfully to sue the company on several occasions, and had impugned the name of the company's chief executive officer in radio and print interviews, as well as on the Internet. The proponent did not submit a rebuttal.
In Phillips Petroleum Company,[fn54] the SEC staff allowed the company to omit a proposal to amend the company's bylaws to require shareholder approval prior to the "alienation" of assets exceeding a certain amount. The company argued that the proponent had conducted an extensive, ongoing correspondence campaign with a number of its employees. The company alleged that the proponent's personal grievance had arisen from his 1989 termination from the company due to excessive absence and personal phone calls. Following his dismissal, the proponent conducted a campaign of correspondence to numerous company employees in an attempt to have his termination reconsidered. The proponent disputed the company's assertion that his proposal related to his personal grievance, and argued that the mere fact that he was a former employee of the company did not mean that his proposal related to his personal grievance. The proponent stated that the proposal would benefit other shareholders.

[fn53] 2001 SEC No-Act. LEXIS 166 (Feb. 1, 2001) and 2000 SEC No-Act. LEXIS 292 (Feb. 24, 2000).

[fn54] 1999 SEC No-Act. LEXIS 281 (Mar. 4, 1999).

§ 17.06 Practice Pointers

Company Practice Pointers

Arguments to staff are critical. A company must illustrate that a proponent's motivations for submitting a proposal are personal. Since the SEC staff's determination primarily depends on the claims made in the correspondence presented by the proponent and the company, the arguments sent to the staff are vitally important. For example, a company should submit a detailed description of the proponent's actions, such as the number of letters or calls made to the company regarding the grievance.

Investigate to uncover motives. Companies should make an effort to investigate and uncover evidence to demonstrate that the proponent's motivation is personal. This could be as simple as interviewing employees who have had contact with the proponent to searching the Web for content from the proponent that discusses the proposal or the company.

Proponent Practice Pointers

Ensure that neither the proposal nor the supporting statement highlights any grievance. To avoid exclusion, proponents should ensure that they don't blow the whistle on themselves by discussing any personal grievances in their proposals or supporting statements.

Don't make the connection. Proponents should refrain from characterizing their proposals, orally or in writing, as an attempt to gain an advantage in an unrelated dispute with the company.

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