Rule 14a-8(i)(10) — former Rule 14a — 8(c)(10)

Question 9(10): Substantially implemented: If the company has already substantially implemented the proposal.

§ 23.01 Background of the Exclusion

Under this exclusion, a proposal is considered moot if it already has been "substantially implemented" or the subject matter of the proposal no longer exists.

§ 23.01[A] History of the Exclusion

In 1976, this exclusion was created to codify a policy that had been followed by the SEC staff. The exclusion was proposed with the qualifying language "by the action of management" so that only a company's actions could render a proposal moot. The SEC removed this qualifying phrase after commentators noted that other grounds could render a proposal moot.[fn1]

After its adoption, the staff narrowly interpreted the exclusion so that only proposals that had been "fully" effected were excluded. Based on this interpretation, proponents often succeeded in convincing the staff to allow inclusion of a proposal by merely changing a few words so that the proposal was not identical to what had been implemented.

In 1983, the SEC acknowledged that it had applied the exclusion too strictly and liberalized the language of the exclusion so that proposals could be excluded if the subject matter had been "substantially implemented by the issuer." It explained that "[w]hile the new interpretive position will add more subjectivity to the application of the provision, the Commission has determined that the previous formalistic application of this provision defeated its purpose."[fn2] At that time, the SEC declined to adopt a proposed change that would have permitted the omission of proposals that recommended a particular action (i.e., precatory proposals) if a company's board had made a good faith determination that the proposed action should not be taken. The SEC determined that administrative difficulties would make the test difficult to apply.[fn3]

In 1998, this exclusion was renumbered as Rule 14a-8(i)(10) and the wording was changed to incorporate the 1983 interpretive change to exclude proposals that had been "substantially implemented."[fn4]

[fn1] Exchange Act Release No. 12,598, 9 SEC Dock. 1030-35 (1976).

[fn2] Exchange Act Release No. 20,091, 28 SEC Dock. 802-03 (1983).

[fn3] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 510 (1982); Exchange Act Release No. 20,091, 28 SEC Dock. 798, 802-03 (1983).

[fn4] 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).

§ 23.01[B] Purpose of the Exclusion

A company may exclude a proposal if the company is already doing — or substantially doing — what the proposal seeks to achieve. In that case, there is no reason to confuse shareholders or waste corporate resources in having shareholders vote on a matter that is moot. In the SEC's words, the exclusion "is designed to avoid the possibility of shareholders having to consider matters which have already been favorably acted upon by the management . . ."[fn5]

[fn5] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1035 (1976).

§ 23.01[C] Reliance on Exclusion Increasing

Companies increasingly invoke this basis when requesting permission to omit proposals dealing with corporate responsibility or "social" issues. Many such proposals ask the company to adopt or amend a policy on a particular issue, such as global labor standards or genetically modified ingredients, or to report to shareholders on the issue (or both). As such issues receive greater attention, companies are increasingly promulgating codes of conduct and policies, as well as reporting to shareholders on such matters. Such actions may, in turn, enable companies to rely more frequently on the substantial implementation exclusion.

§ 23.02 Application of the Exclusion

§ 23.02[A] Identifying the Key Issues

Historically, the application of this exclusion was relatively straightforward. However, with respect to complex corporate responsibility proposals, the SEC staff must address the difficult interpretive issue of whether the company's actions are sufficient to satisfy the "substantially implemented" standard. As proponents have become more sophisticated and proposals have become more complex, applying this subjective standard has become more difficult.

One might think that application of this exclusion would not be controversial since mootness implies that a proponent's goals have been met. However, proponents and companies often disagree over the extent to which the company's actions implemented the proposal, especially where the policy adopted by the company does not address all of the matters requested in the proposal, or where the company reports to shareholders on an issue, but not in the form sought by the proponent.

§ 23.02[B] Interpretation of "Substantially Implemented"

Because the test for exclusion is "substantial implementation," proposals do not have to be entirely moot to be excludable. The SEC staff may permit a company to exclude a proposal the company has not implemented precisely as requested. If a proposal has not been completely implemented, a company normally must specify why the proposal is moot, including a point-by-point analysis showing how it has substantially implemented the proposal. The proponent's response can be especially helpful to the SEC staff in ruling on the company's request under these circumstances.

§ 23.02[C] Abandoned or Never Conducted Activities

In a simple application of this exclusion, the SEC staff consistently allows companies to exclude proposals that ask them to refrain from certain activities if a company can show that it had already stopped engaging in those activities or had never engaged in them in the first place. However, cessation of an activity does not moot a proposal requesting a report on that activity.

EXAMPLES:

Companies never engaged in activities

In Eli Lilly and Company,[fn6] the company was permitted to exclude a proposal urging the company to stop buying human fetuses. The company stated that it did not buy, acquire, obtain, use or do anything else with human fetuses, had never done so, and had no intention of doing so in the future. The proponent did not submit a rebuttal.
In AT&T Corporation,[fn7] the SEC staff granted no-action relief with respect to two proposals encouraging the company to reduce by 50% corporate contributions to organizations that lobby and promote abortion. The company argued that it did not make contributions to such organizations and that its policy was not to make contributions to an organization when such a contribution could be perceived as taking a position on abortion.

EXAMPLES:

Abandoned activities

In the late 1980s and early 1990s, the SEC staff allowed several companies to exclude proposals asking them to terminate business relationships in South Africa and not to make new investments or develop business relationships there. The companies demonstrated that they had already substantially terminated their South African business relationships.[fn8]
In Dominion Resources, Inc.,[fn9] the company was permitted to exclude a proposal asking the company to stop seeking bids on foreign produced coal and spend time looking for local coal bids as well as to seek ways to take advantage of a new state tax credit law. The company noted that it no longer bought foreign produced coal and that it purchased Colombian coal only once. It asserted that it did not plan to make any additional purchases of foreign coal and that it was now engaged only in the procurement of Virginia coal.

[fn6] 1999 SEC No-Act. LEXIS 71 (Jan. 25, 1999).

[fn7] 1995 SEC No-Act. LEXIS 39 and 79 (Jan. 6, 1995).

[fn8] General Electric Company, 1990 SEC No-Act. LEXIS 140 (Jan. 30, 1990); TRW Incorporated, 1988 SEC No-Act. LEXIS 322 (Mar. 7, 1988); Coca-Cola Company, 1988 SEC No-Act. LEXIS 223 (Feb. 24, 1988); American Express Company, 1988 SEC No-Act. LEXIS 318 (Mar. 7, 1988).

[fn9] 1987 SEC No-Act. LEXIS 1675 (Feb. 17, 1987).

§ 23.02[D] Delivery of Reports or Studies to Shareholders

Proponents often request that companies take certain actions and then prepare and deliver reports about their actions to shareholders. A difficult interpretive question arises when a company has taken substantially all of the actions requested in a proposal other than the preparation or delivery of a report to shareholders.

When proponents ask that a report be delivered or made widely available to shareholders, it often specifies precisely how the report should be delivered or made available. Companies should be prepared to show how any information that it believes moots the proposal is the equivalent of the manner of delivery or availability that the proponent requests.

EXAMPLE:

In Newell Rubbermaid Inc.,[fn10] the SEC staff required inclusion of a proposal requesting that the board prepare a report on the company's "glass ceiling" progress, including a review of specified topics. The company argued that it had already addressed the major issues raised by the proposal, including direct action in response to the 1991 Glass Ceiling Commission Report mentioned in the proposal. The company noted that it had Affirmative Action Plans in place covering each of its locations and that such plans were mandated by an Executive Order that covered federal contractors. However, the company had not prepared a report on this topic. The proponent did not submit a rebuttal.

[fn10] 2001 SEC No-Act. LEXIS 248 (Feb. 21, 2001).

§ 23.02[E] Implementation of Guidelines

This exclusion often is invoked when proponents ask companies to establish or modify policies — such as those on environmental matters, workplace conduct or equal opportunity issues — that affect the way the companies conduct their business. The SEC staff normally allows a company to exclude this kind of proposal if the company can demonstrate that it already has adopted policies or taken actions to address each element of the proposal.[fn11] The company's policies, practices and procedures must "compare favorably" with the guidelines set forth in the proposal.[fn12]

EXAMPLE:

Exclusion

In Exxon Mobil Corporation,[fn13] the company successfully excluded a proposal that asked the board to report on the Chad-Cameroon pipeline project, including its environmental and human impact. The company argued that in response to a nearly identical proposal submitted the prior year, the board took action to address specifically the concerns and requests raised by the proponent. The company continued to maintain a Web site at which shareholders could obtain the results of the board's review as well as a vast selection of additional information regarding the project. In addition, the information was available from the company upon request (as well as available from the World Bank Web site) and was covered in the company's annual report to shareholders.

EXAMPLES:

Inclusion

In Texaco Inc.,[fn14] the proponent successfully defended against a no-action challenge to a proposal that urged the board to adopt a workplace code of conduct based upon the International Labor Organization's conventions, including five principles set forth in the proposal. The company argued that the proposal had been substantially implemented because the company already had endorsed the Sullivan Principles. The proponent noted that the Sullivan Principles did not cover all of the subjects addressed by the International Labor Organization's Principles nor were the Sullivan Principles co-extensive with them.
In PPG Industries, Inc.,[fn15] the company was required to include a proposal asking the board to adopt the International Labor Organization's conventions on workplace human rights, including the five principles set forth in the proposal. The company argued that it had substantially implemented the proposal because it had adopted various policies, such as its EEO and Global Code of Ethics policies, or was subject to certain laws, including the National Labor Relations Act and the ILO's Convention 105 regarding forced labor (which had been ratified by the U.S., relating to concerns raised in the proposal. The proponent countered by pointing out precisely how the measures cited by the company fell short of substantial implementation. The proponent also argued that the heart of the proposal was to create a single document that explicitly and in one place committed the company to the enumerated principles.

[fn11] See Nordstrom Inc., 1995 SEC No-Act. LEXIS 226 (Feb. 8, 1995).

[fn12] Texaco, Inc., 1991 SEC No-Act. LEXIS 101 (Mar. 28, 1991).

[fn13] 2001 SEC No-Act. LEXIS 119 (Jan. 24, 2001).

[fn14] 2001 SEC No-Act. LEXIS 136 (Jan. 30, 2001).

[fn15] 2001 SEC No-Act. LEXIS 124 (Jan. 22, 2001).

§ 23.03 What Can Render A Proposal Moot

§ 23.03[A] Company Actions that Render a Proposal Moot

Any type of action taken by a company can render a proposal moot, including agreeing to implement the proponent's proposal in its entirety.

EXAMPLES:

Company actions

In Burlington Northern Santa Fe Corporation,[fn15.1] the company successfully excluded a proposal asking that the company redeem all previously issued poison pills unless approved by the shareholders. The company argued that it had already terminated its shareholder rights plan.
In CFS Bancorp, Inc.,[fn16] the proposal mandated that the board conduct annual studies of managerial and financial factors which could affect stockholder value and report the studies to stockholders to the extent required by the federal securities laws. The company successfully argued that it had decided to implement the proposal after the proponent had submitted the proposal the prior year, even though a significant number of shareholders had not supported it. The proponent did not submit a rebuttal.
In Dayton-Hudson Corporation,[fn17] the SEC staff granted noaction relief on a proposal that related to the company's filing of an affirmative action plan with the city of Minneapolis so that the city's debarment of the company could be lifted. The company noted that it had already filed an affirmative action report with the city, that the plan had been accepted and the debarment had been removed.
In E.I. du Pont de Nemours,[fn18] the company was permitted to exclude a proposal asking the board to establish a standing committee to establish a corporate environmental and occupational safety and health policy and to monitor compliance with related laws and regulations. The company noted that its board had already established a committee to address the safety, health and environmental issues implicated in the proposal.

[fn15.1] 2002 SEC No-Act. LEXIS 73 (Jan. 22, 2002).

[fn16] 2001 SEC No-Act. LEXIS 236 (Feb. 16, 2001).

[fn17] 1999 SEC No-Act. LEXIS 344 (Mar. 17, 1999).

[fn18] 1990 SEC No-Act. LEXIS 260 (Feb. 12, 1990).

§ 23.03[B] Third Party Actions that Render a Proposal Moot

For a proposal to be omitted under this exclusion, the action or event rendering it moot need not be originated or caused by the company seeking the omission. It can come from a third party — or even can be unknown to the company when the proposal is initially submitted. In the SEC's words, proposals can be mooted by "matters outside the company's control, such as legislative developments, court decisions, business changes, and supervening corporate events."[fn19]

EXAMPLES:

Third party actions

In Sara Lee Corporation,[fn20] the company successfully sought to exclude a proposal requesting that the company support Alan Greenspan as Chairman of the Federal Reserve Board. The company noted that Alan Greenspan already had been confirmed for that position.
In Corning Natural Gas Corp.,[fn21] the SEC staff allowed the company to exclude a proposal asking the board to ensure that the representative of the company's independent auditors, if any, answer questions from shareholders. The company noted that new auditors had been ratified at the last annual meeting, that a representative planned to attend the upcoming meeting and that appropriate disclosure would be made in the proxy statement about the representative's availability to answer questions at the meeting.

[fn19] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1035 (1976).

[fn20] 2000 SEC No-Act. LEXIS 829 (Aug. 29, 2000).

[fn21] 1983 SEC No-Act. LEXIS 1856 (Feb. 16, 1983).

§ 23.03[C] Action Must Already Be Implemented

To be able to exclude a proposal, the company must show that it already has taken the action that renders the proposal moot. It is not enough for the company to represent that it intends or plans to take the action. The SEC staff will not grant no-action relief to a company until it can prove that the action that moots the proposal has occurred.

§ 23.03[D] Taking Action After Receipt of a Proposal

Companies are permitted to take action substantially implementing a proposal after receiving the proposal. In some cases, companies meet with proponents after receiving a proposal and either agree to take the actions requested in the proposal or reach a compromise with the proponent. When this occurs, the proponent often agrees to withdraw its proposal and no-action relief from the SEC staff is unnecessary.

In other cases, companies decide to implement the proposal without meeting with the proponent and then seek no-action relief. Although this may allow the company to avoid meeting with the proponent, there is some risk that a proponent will not agree that the proper actions have been taken or will object because it wanted to express its view about the matter in the company's proxy materials. As a result, the proponent may still argue that the company should include the proposal.

EXAMPLES:

Actions taken after receipt of proposals

In Hemlock Federal Financial Corporation,[fn22] the company was allowed to exclude a proposal recommending that the board engage an investment banking firm to advise the company on ways to maximize shareholder value, including the sale or merger of the company. The company noted that it had engaged the services of a banker following the proposal submission. The proponent noted that it was inclined to withdraw its proposal but requested that the company provide the SEC staff and the proponent with information regarding the term for which the banker had been engaged and whether the company intended to terminate the banker's services.
In American HomePatient, Inc.,[fn23] the SEC staff granted no-action relief on a proposal requesting that each director take an equity interest in the company. The company took action after receiving the proposal by obtaining a unanimous written consent from the board to substantially implement the proposal.
In Masco Corporation,[fn24] the company obtained no-action relief on a proposal establishing specific qualifications for the company's outside directors to ensure their independence from the company. The company indicated that its board had approved a resolution in substantially the same form submitted by the proponent, with certain modifications to make the qualifications more specific.
In FirstEnergy Corp.,[fn25] the proposal related to including information in the company's quarterly dividend reinvestment plan statements. The company successfully argued that after its initial response to the proponents, the company decided to take the necessary steps to do what the proponents sought to achieve.

[fn22] 2000 SEC No-Act. LEXIS 499 (Mar. 30, 2000).

[fn23] 2000 SEC No-Act. LEXIS 528 (Apr. 12, 2000).

[fn24] 1999 SEC No-Act. LEXIS 390 (Mar. 29, 1999).

[fn25] 1999 SEC No-Act. LEXIS 273 (Mar. 3, 1999).

§ 23.04 Common Types of Proposals

§ 23.04[A] Executive Compensation

The SEC staff generally requires companies to include proposals that either relate to executive compensation or tie other concerns to executive compensation. An exception to this general rule is if the company can show that its actions sufficiently cover the matters requested in the proposal.

EXAMPLES:

In Household International, Inc.,[fn26] the proposal requested that the board conduct a special executive compensation review to study ways of linking a portion of executive compensation to addressing the public's concerns about predatory lending practices and disclose this review in the compensation committee's report. The company noted that the proponent did not allege or offer evidence that it engaged in predatory lending practices or violated any laws or regulations pertaining to lending. The proponent noted that the compensation committee report did not address the matters requested in the proposal, namely the evaluation of management's performance under the company's business principles or any other factor pertaining to corporate social responsibility performance as a factor used in determining executive pay. The SEC staff required the company to include the proposal.
In Minnesota Mining and Manufacturing Company,[fn27] the proposal asked the board to take the necessary steps to establish a performance-based senior executive compensation system for the five most highly paid members of management and requested that the company's compensation committee report contain information specified in the proposal. The company noted that it had already implemented the matters raised in the proposal through its profit sharing and performance unit plans. The proponent contended that the company did not disclose the performance targets, as the proposal sought, and that the company's stock option plan was based more on the vagaries of the stock market than on the company's performance. The SEC staff denied no-action relief.
In Occidental Petroleum Corporation,[fn28] the SEC staff denied no-action relief on a proposal recommending that the board adopt a policy against entering into future agreements with officers and directors to provide compensation contingent on a change of control, unless approved by shareholders. The company argued that its board had already adopted a policy that stated "no future employment agreements containing `golden parachute' provisions shall be entered into between this Corporation and any of its executive officers." The company also argued that the stockholders had already approved its incentive stock plan, which had a change of control provision. The proponent did not submit a rebuttal.
In LTV Corporation,[fn29] the company unsuccessfully sought to exclude a proposal asking that the company immediately terminate a management stock option incentive program and design a new program to specifications set forth in the proposal. The company argued that it had already amended and restated its management incentive program so that a board committee could impose performance goals as a condition to the exercise of stock options that were awarded. The proponent did not submit a rebuttal.

[fn26] 2001 SEC No-Act. LEXIS 295 (Feb. 26, 2001).

[fn27] 2001 SEC No-Act. LEXIS 368 (Mar. 5, 2001).

[fn28] 2000 SEC No-Act. LEXIS 297 (Feb. 28, 2000).

[fn29] 2000 SEC No-Act. LEXIS 186 (Feb. 15, 2000).

§ 23.04[B] Human Rights

The mootness exclusion is often invoked by companies seeking to exclude proposals seeking reports or changes in company behavior related to human rights in international operations. Because of the complexity of some of these proposals, and differing approaches followed by proponents and companies, companies cannot often show that the proposals have been substantially implemented.

EXAMPLES:

Included

In Coca-Cola Company,[fn29.1] the SEC staff required the company to include a proposal requesting that the company implement and/or increase activity on eleven principles set forth in the proposal relating to human and labor rights in China. The company argued that it already was a signatory to the Global Sullivan Principles and that the endorsement and implementation of these principles show that it has already committed itself to the types of goals sought in the proposal on a worldwide basis, including its operations in China. The company also noted that it was in the process of finalizing its own Code of Conduct that would address the proposal's concerns.
In Oracle Corporation,[fn30] the company was required to include a proposal requesting that the board implement the principles promulgated by the International Labor Organization and the United Nations Covenants on Economic, Social and Cultural Rights, and Civil and Political Rights, since both have been signed by the Chinese government. The company argued that its Code of Ethics and Business Conduct substantially implemented the proposal and that there had been no reports of misconduct at any of the company's facilities in China. The proponent explained how the company's Code did not implement each element of the proposal, and emphasized that there was no comprehensive company policy that related to the social and ethical issues that face workers in the People's Republic of China.
In Nordstrom, Inc.,[fn31] the SEC staff denied no-action relief on a proposal urging the board to report on the company's vendor standards and compliance mechanisms in the countries in which goods sold by the company are manufactured. The company argued that it had an adequate Code of Conduct that was monitored by a third party. The proponent pointed out that the proposal did not ask whether the company had vendor guidelines, but rather asked whether those guidelines were being implemented and enforced. To address whether it made the requested information available, the company argued that it would respond to letter inquiries, that a legal settlement existed creating an available court record and that future press releases and the company's annual report to shareholders would address this issue. The proponent responded that these items did not constitute sufficient availability.

[fn29.1] 2002 SEC No-Act. LEXIS 124 (Jan. 25, 2002).

[fn30] 2000 SEC No-Act. LEXIS 808 (Aug. 15, 2000).

[fn31] 2000 SEC No-Act. LEXIS 525 (Mar. 31, 2000).

§ 23.04[C] Workplace Conduct

Companies frequently rely on this exclusion when confronted with proposals regarding U.S. workplace conduct. Like human rights proposals — many of which deal with global labor standards — workplace conduct proposals often involve detailed policy changes and reports, which make it challenging for a company to show substantial implementation.

EXAMPLES:

In Wal-Mart Stores, Inc.,[fn32] the company was required to include a proposal recommending that the board report on the company's "glass ceiling" progress, including a review of specified topics. The company argued that the requested progress report was already in existence. The proponent countered that the report the company claimed would moot the proposal dealt with the general workforce and thus did not address the glass ceiling problem. In addition, the proponent argued that the report requested in the proposal was to cover five specific matters and that the company did not show how its report covered four of those matters.
In Exxon Mobil Corporation,[fn33] the proponent successfully defended against a no-action challenge to a proposal urging the board to amend the company's equal employment opportunity policy to bar sexual orientation discrimination. The company contended that its EEO policy confirmed the company's long-standing non-discrimination policy and that the chairman and chief executive officer had reiterated the policy verbally at the last shareholders' meeting. The proponent responded that the company's EEO policy did not specifically prohibit sexual orientation discrimination — it only forbade unlawful discrimination — and that mere oral statements were not sufficient to argue that a policy had been implemented.
In Merrill Lynch & Co.,[fn34] the company unsuccessfully sought to exclude a proposal asking the board to report on its underwriting, investing and lending criteria, with a view to incorporating criteria related to a transaction's impact on the environment, human rights and risk to the company's reputation. The company argued that it employs "rigorous due diligence," and that existing criteria require a review of impact on the company's reputation as well as on the environment and human rights. The proponent contended that the company had not met its burden of proof since the company merely asserted that the company's "existing criteria call for consideration of a transaction's possible effect on the company's reputation, including any environmental and human rights issues." The proponent noted that the company did not explain where the text of this policy could be found and disputed whether a public policy committee of the board really existed. In addition, the proponent noted that the proposal's request for disclosure of criteria to be applied by the company had not been implemented.
In Exxon Corporation,[fn35] the proponent prevailed in a challenge to a proposal asking the board to adopt a policy barring sexual orientation discrimination. The company argued that its policy covered harassment in the workplace and that the chairman had stated that the company had a policy to not discriminate against anybody for any reason. The proponent argued that the company had not adopted a policy barring sexual orientation discrimination, which was broader than a harassment policy, and that an oral statement by a high-level company official did not establish a corporate policy.

[fn32] 2000 SEC No-Act. LEXIS 573 (Apr. 11, 2000).

[fn33] 2000 SEC No-Act. LEXIS 473 (Mar. 23, 2000).

[fn34] 2000 SEC No-Act. LEXIS 240 (Feb. 25, 2000).

[fn35] 1999 SEC No-Act. LEXIS 274 (Mar. 9, 1999).

§ 23.04[D] Sale, Merger or Strategic Alternatives

If a company confronted by a proposal seeking a merger or other business combination makes representations that it has taken appropriate steps to explore such a transaction, the SEC staff normally allows it to exclude the proposal. In most cases, a company represents that it has hired an investment banker to assist it in analyzing "strategic alternatives, including an extraordinary transaction." The staff normally will accept this representation from the company and not ask a company to provide evidence that a banker has indeed been hired (e.g., a board resolution or engagement letter with banker), even if the company has not publicly announced the engagement.

However, the staff normally will not allow exclusion if the only action taken is a board discussion of the company's alternatives. This position probably stems from a belief that a board considers these matters in the normal course of its regular deliberations, whereas engagement of an investment banker shows a degree of seriousness about pursuing the possibility of a transaction.

Sometimes, a proponent will submit a proposal seeking a merger or other transaction to a company that has already entered into an agreement to effect such a transaction. If there is a significant likelihood that the pending transaction will not be consummated — usually because conditions to closing may not be satisfied — the SEC staff may not allow exclusion of the proposal.

EXAMPLES:

Included strategic alternative proposals

In Lifeline Systems, Inc.,[fn36] the SEC staff denied no-action relief with respect to a proposal that urged the board to appoint a committee of independent directors to explore methods to maximize stockholder value and engage an investment bank to pursue alternatives, including a sale of the company. The company argued that it already had been pursuing these alternatives, and had been doing so for over a year, resulting in talks with multiple bidders during that time. The proponent argued that the company's representations were misleading because senior management had stated that the company was no longer working with an investment banker to sell the company and was focusing on internal growth opportunities. The proponent noted that the company had not publicly stated that it was exploring strategic alternatives for over two years, until after the date of submission of the proposal when the company mentioned this in an earnings press release.
In West Essex Bancorp, Inc.,[fn37] the company was required to include a proposal recommending that the board take whatever actions were necessary to enhance shareholder value, including stock repurchases, dividend increases and consideration of a second stage conversion. The company argued that the board continuously examines a variety of ways to increase the value of the company's common stock, including stock repurchases and the payment of dividends. In particular, the company noted that it had sought a waiver from the Office of Thrift Supervision to enable it to repurchase the maximum amount of common stock permitted under law. The proponent did not submit a rebuttal.
In First Bell Bancorp, Inc.,[fn38] the proponent defeated a challenge to a proposal asking the board to take the necessary steps to achieve a sale or merger that will maximize shareholder value. The company contended that it continued to examine "strategic alternatives" for the company. The proponent pointed out that the company was unable to make any specific representations regarding the progress made in taking the "necessary steps to achieve a sale or merger."

EXAMPLES:

Excluded strategic alternative proposals

In Supreme Industries, Inc.,[fn39] the company was permitted to exclude a proposal urging the board to arrange for the prompt sale of the company to the highest bidder. The company noted that it had documented multiple discussions about increasing shareholder value at board meetings, and that it had entered into a contract with a recognized investment banking company with the intention of finding a suitable buyer for their company. The proponent responded that the company had not publicly announced — nor provided proof of — hiring a banker. The proponent also noted that it had never heard of the banker that the company claimed to have hired and that it did not appear to be a "recognized" investment banking firm, as required by the proposal. In its response, the staff noted the company's representation that it had begun seeking an acquisition candidate by entering into a written agreement with a banker to locate and present acquisition candidates.
In BostonFed Bancorp, Inc.,[fn40 ] the SEC staff granted no-action relief on a proposal recommending that the board engage an investment banker to advise the company on ways to maximize shareholder value, including a sale or merger. The company argued that it had previously engaged the services of a banker. The proponent noted that it was inclined to withdraw its proposal but requested that the company provide the SEC staff and the proponent with information regarding the term for which the banker had been engaged and whether the company had any intentions to terminate the banker's services.
In Kaneb Services, Inc.,[fn41] the SEC staff allowed the company to exclude a proposal that asked the board to create a special committee with the goal of maximizing shareholder value. The company included in its request the text of a board resolution evidencing the formation of a special committee and documenting the number of times the committee had met. The proponent noted that the company had not provided copies of the minutes of the meetings, information relating to the scope and charge of the committee or any other details relating to the committee.

[fn36] 2000 SEC No-Act. LEXIS 494 (Apr. 6, 2000).

[fn37] 2000 SEC No-Act. LEXIS 459 (Mar. 20, 2000).

[fn38] 2000 SEC No-Act. LEXIS 275 (Mar. 3, 2000).

[fn39] 2001 SEC No-Act. LEXIS 200 (Feb. 7, 2001).

[fn40] 2000 SEC No-Act. LEXIS 445 (Mar. 17, 2000).

[fn41] 2000 SEC No-Act. LEXIS 435 (Mar. 15, 2000).

§ 23.04[E] Shareholder Rights Plans

The SEC staff generally allows proponents to include proposals that relate to poison pill redemptions, unless a company can show that it has already terminated a rights plan. The SEC staff has required inclusion of a proposal relating to poison pill redemption if there is a significant chance that a provision might not be triggered — even though it was more likely than not to be triggered.[fn42]

EXAMPLE:

In Texaco Inc.,[fn43] the company unsuccessfully sought to exclude a proposal urging the board not to adopt a rights plan without shareholder approval and to redeem any rights plan not approved by shareholders. The company argued that the proposal interfered with the jurisdiction and order of a bankruptcy court that had already ordered the company to prohibit "greenmail" and "poison pills" and to require shareholder approval to amend these prohibitions.

[fn42] See infra Chapter 27.

[fn43] 2001 SEC No-Act. LEXIS 82 (Jan. 16, 2001).

§ 23.04[F] Change in Company's Products or Services

Proposals that ask a company to enter or exit a line of business or modify the way that it conducts a particular line of business are normally deemed includable.

EXAMPLES:

In Associates First Capital Corporation,[fn44] the proponent defeated a no-action challenge to a proposal requesting that the board establish a committee of outside directors to develop and enforce policies relating to subprime lending and predatory lending practices and provide a report to shareholders on these practices. The company argued that it complied with applicable laws. The proponent responded that the proposal was concerned not with compliance with applicable laws, but rather with the company's policies and actions, and that the proposal called for a board review of the company's policies. The proponent pointed out that the company did not represent that a report to shareholders on these issues either existed or was contemplated.
In American Home Products Corporation,[fn45] the company was required to include a proposal urging the board to adopt a policy of not marketing or distributing genetically engineered agricultural products. The company argued that it had a policy of complying with all applicable laws, including all required safety standards, and that its research in this area should not be considered "distribution or marketing." The proponent disputed the company's assertion that it "does not currently manufacture or sell genetically engineered agricultural products," and argued that the proposal requested that the company refrain from manufacturing genetically altered products, regardless of whether it was legal for the company to market such items. In response to the company's argument that there had been no "commercialization" of the company's alleged genetically altered products, the proponent pointed out that whether the company had actually developed a product but was unable to sell it was irrelevant.
In Baxter International Inc.,[fn46] the company unsuccessfully sought to exclude a proposal asking the board to adopt a policy of phasing out the production of PVC-containing or phthalate-containing medical supplies. The company argued that the proposal, literally read, could require the company to alter its product line and deny proven life-saving technologies to patients in favor of inferior alternatives. On the other hand, the company noted that the proposal might want the board to take steps to make it a priority for the company's management to develop and market non-PVC and non-DEHP containing products where doing so would provide safe patient care, including allocating sufficient funding for research and development of non-PVC materials where acceptable alternatives do not currently exist. In that case, the company argued that the company has already substantially implemented such a policy. The proponent did not submit a rebuttal.

[fn44] 2000 SEC No-Act. LEXIS 314 (Mar. 13, 2000).

[fn45] 2000 SEC No-Act. LEXIS 340 (Mar. 7, 2000).

[fn46] 1999 SEC No-Act. LEXIS 259 (Mar. 1, 1999).

§ 23.04[G] Business Operations

The SEC staff tends to allow companies to exclude proposals imposing limitations on or criticizing management's performance of routine tasks associated with the company's business operations. Although the staff has not articulated its reasoning, it likely accepts companies' arguments that most monitoring of such tasks is already performed by management, the board or others.

EXAMPLE:

In Honeywell International Inc.,[fn47] the SEC staff granted no-action relief with respect to a proposal urging the board to investigate whether management had used improper accounting practices. The company argued that its senior management continually monitored its accounting practices and independent public accountants and that the board had an audit committee. The proponent responded that the company displayed a fundamental misunderstanding of the role of independent audits since the company merely showed it had "substantially implemented" the typical audit and internal control functions. The proponent explained that an investigation into potentially improper accounting practices is quite different than an ordinary audit because independent audits do not generally search for irregularities or deliberate misrepresentations in financial statements, but merely attest that the financial statements are "presented fairly."

[fn47] 2000 SEC No-Act. LEXIS 232 (Feb. 29, 2000).

§ 23.04[H] Board Criteria and Conduct

Proposals that relate to board eligibility criteria or conduct are generally deemed includable by the SEC staff only if the company's actions closely track the actions requested in the proposal. Subtle differences such as varying definitions of independence may lead the staff to find that a proposal has not been substantially implemented.

EXAMPLES:

Included proposals

In General Motors Corporation,[fn48] the company was required to include a proposal recommending that the audit, nominating and compensation committees of the board be composed entirely of independent directors. The company argued that those committees were already composed of independent directors as required by the company's bylaws. Although the company acknowledged that its bylaw definition of independence was not identical to the definition used in the proposal, it argued that they were sufficiently similar and that the proposal had been substantially implemented. The proponent's rebuttal focused on the different definitions.
In Citigroup, Inc.,[fn49] the SEC staff required the company to include a proposal that mandated that the position of honorary director be eliminated and that all directors be elected annually. The company argued that the proponent incorrectly assumed that an advisor functioned as a director, which was not true; accordingly, the company urged that there was no need to eliminate the position. In addition, the company noted that the remainder of the proposal requiring that all directors be elected annually had already been implemented. The proponent did not submit a rebuttal.
In Quality Systems, Inc.,[fn50] the company unsuccessfully sought to exclude a proposal seeking to amend the company's bylaws to require that 75% of the board members be independent. The company argued that it already had substantially implemented the proposal since four out of seven (or approximately 57%) of the current directors were not employees. The company argued that the proposed 75% requirement would not make any appreciable difference in the ability of the independent directors to control the actions of the board and that the proposed definition of "independent director" went far beyond the usual criteria. The proponent responded that its requested changes would enable the board to become truly independent.

EXAMPLES:

Excluded proposals

In Humana Inc.,[fn51] the company was permitted to exclude a proposal asking the company to establish a nominating committee made up solely of "independent" directors. The company argued that its nominating committee consisted solely of independent directors and that all of the members of the committee met the proposal's definition of an independent director. In response, the proponent provided details about how one of the board members did not meet the definition due to his familial relationship with the company's chairman and business relationship with the company.
In First Federal Bankshares, Inc.,[fn52] the SEC staff allowed the company to exclude a proposal requesting that the board not restrict the eligibility of any adult shareholder to serve as a director. The company showed that it did not impose any such restrictions. The proponent did not submit a rebuttal.

[fn48] 2000 SEC No-Act. LEXIS 585 (Apr. 10, 2000).

[fn49] 2000 SEC No-Act. LEXIS 326 (Mar. 8, 2000).

[fn50] 1999 SEC No-Act. LEXIS 558 (June 9, 1999).

[fn51] 2001 SEC No-Act. LEXIS 302 (Feb. 27, 2001).

[fn52] 2000 SEC No-Act. LEXIS 851 (Sept. 18, 2000).

§ 23.04[I] Confidential Voting and Shareholder Meeting Matters

In most instances, the SEC staff requires companies to include proposals that relate to confidential voting and related policies, provided the company has not adopted a policy that adheres very closely to the one set forth in the proposal.

EXAMPLES:

In Chase Manhattan Corporation,[fn53] the proposal requested that the board ensure that all proxies, ballots and voting tabulations be kept confidential, except as required by law or shareholders' request, and that any changes to the policy be approved by shareholders. The company unsuccessfully argued that it already had adopted a confidential voting policy in response to an earlier proposal. The proponent countered that the company had never stated publicly that the board had taken such action and that the company had not offered any written evidence that the policy existed. In addition, the proponent argued that the proposal differed considerably from what the company allegedly practiced because it called for a policy that can only be amended by shareholder vote.
In Walgreen Co.,[fn54] the SEC staff denied no-action relief on a proposal recommending that the board take the steps necessary to adopt and implement a policy of confidential voting. The company argued that it had already adopted a confidential voting policy similar to the one proposed. The proponent replied that the company did not explain the provisions of its policy, including the exceptions to confidentiality and the rights of "certain outside agents" to gain access to proxies and ballots.
In Archer Daniels Midland Company,[fn55] the SEC staff required the company to include a proposal that related to sending a post-meeting report containing certain information to shareholders. The company argued that it already prepared a complete transcript of its annual shareholders' meetings, which included the requested information, and provided that transcript, upon payment of reasonable costs, to any shareholder who requested it within ten days of a meeting. The proponent did not deal with this issue in his rebuttal.
In BankAmerica Corporation,[fn56] the company was required to include a proposal to amend the company's bylaws to give the board flexibility to move the date of the annual shareholders' meeting to ensure that it does not conflict with a religious observance. The company argued that its corporate governance documents already gave the board that flexibility.

[fn53] 2000 SEC No-Act. LEXIS 505 (Mar. 30, 2000).

[fn54] 1999 SEC No-Act. LEXIS 879 (Nov. 2, 1999).

[fn55] 1999 SEC No-Act. LEXIS 643 (July 23, 1999).

[fn56] 1999 SEC No-Act. LEXIS 238 (Feb. 23, 1999).

§ 23.04[J] Disclosure in SEC Reports

Delivery of an annual report or proxy statement to shareholders will be deemed to satisfy a proponent's request for information, thus mooting such a proposal, only if all of the requested information is contained in the delivered document in a form that is accessible to shareholders.

EXAMPLES:

In Lockheed Martin Corporation,[fn57] the SEC staff required the company to include a proposal requesting that the board prepare a report on the dilutive effect of certain stock options. The company argued that it already provided this information in the financial statements that were included as part of its annual report to shareholders. The proponent countered that the company cannot require shareholders to perform their own calculations from raw data provided in multiple different locations of its annual report, and that the raw data in the disclosure was insufficient to enable shareholders to calculate the dilution information requested in the proposal.
In Halliburton Company,[fn58] the proponent successfully defended against a no-action challenge to a proposal asking the board to establish a performance-based senior executive compensation system and include disclosure about this system in the compensation committee report in the proxy statement. The company argued that the proposal had been substantially implemented because the performance criteria considered by the board were already disclosed in the compensation committee report. The proponent responded that the report did not explain why the board chose the criteria it used, the levels of performance necessary to satisfy them, or their relative rank or weight, which were key elements of the proposal. The company argued that it relied on Instruction 2 to Item 402(k), which states that a company is not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors if it would have an adverse effect on the company. The proponent countered that the company did not argue that the requested disclosure would have an adverse effect and that even if it would, the company still had the discretion not to disclose information if doing so would harm the company.

[fn57] 2001 SEC No-Act. LEXIS 157 (Jan. 31, 2001).

[fn58] 2001 SEC No-Act. LEXIS 135 (Jan. 30, 2001).

§ 23.04[K] Disclosure Pursuant to Other Laws

Some companies are subject to laws other than the securities laws that require public disclosure of certain information. The SEC staff has indicated that the disclosure required by such laws is insufficient to satisfy the proponent's request for certain information unless the company can show that the disclosure sufficiently covers the matters requested in the proposal.

EXAMPLE:

In Bangor Hydro-Electric Company,[fn59] the company was required to include a proposal mandating that the company prepare a report discussing political contributions by the company, its directors and certain employees. The company argued that the public utility commission rules require all public utilities to file annual reports describing their political activities, whether conducted by the utility itself or by an entity on the utility's behalf, and providing detailed and separate accounting for expenses associated with such political activities. The company noted that this information was publicly available. The proponent did not submit a rebuttal. Although the SEC staff did not state its reasoning, it appears that the information required under the public utility commission rules was not co-extensive with the disclosure sought in the proposal, perhaps because the definition of "on behalf of" the utility did not cover all contributions by directors and employees.

[fn59] 2000 SEC No-Act. LEXIS 418 (Mar. 13, 2000).

§ 23.05 Practice Pointers

Company Practice Pointers

Provide a detailed explanation. In many cases, a company's burden under this exclusion can be met by clearly demonstrating the steps that a board or management has taken that render the proposal moot. In its no-action request, a company should provide a detailed and organized explanation of how it has substantially implemented the proposal. For example, it is not adequate to simply state that a proposal calling for the establishment of policies concerning health and environmental hazards is moot because the company already has a related policy; rather, the company should analyze how the related policy compares with the elements of the proposal and renders it moot.

Implement the proposal unilaterally. Companies always have the option to moot a proposal by taking the requested action, either unilaterally or as a result of negotiations with the proponent. Negotiating with a proponent before taking such an action is normally advisable to ensure that the action satisfies the proponent's concerns. Such negotiation frequently occurs in response to proposals from larger institutional investors, who may then choose to voluntarily withdraw their proposals. However, there may be circumstances where a proposal is not voluntarily withdrawn — a proponent may not believe sufficient action was taken or may simply want the proposal to come to a vote. In such cases, the company must request a no-action letter from the SEC staff or include the proposal in its proxy statement.

Proponent Practice Pointers

Research whether the company has already implemented the proposal. The first step to avoid exclusion on mootness grounds is to conduct thorough research to determine if a company already has taken the action requested or a similar action. This may be difficult to ascertain, but a proponent should at a minimum review the company's Web site and read the company's SEC disclosure. It may also be worthwhile to request a meeting with the company, where the proponent can learn more about a company's policies and programs.

Get proof of implementation. If a company represents that it will implement the proposal, the proponent should ask the company to substantiate that it actually did implement the proposal in a timely manner.

Modify the proposal for next year. In some cases, proponents want their supporting statements to be included even though the proposal itself is moot. A proponent may want to submit a similar proposal, but with sufficient modifications to avoid exclusion on mootness grounds, the following year with a similar or identical supporting statement.

Rebut the company's arguments. Proposals asking for policies or guidelines to be implemented or for reports to be prepared can be difficult for the staff to evaluate due to their complexity. If the staff does not have the benefit of arguments from both sides, the staff's decisionmaking process can be affected.

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