Rule 14a-8(i)(12) — former Rule 14a-8(c)(12)

Question 9(12): Resubmissions: If the proposal deals with substantially the same subject matter as a prior proposal submitted to security holders in the registrant's proxy statement and form of proxy relating to any annual or special meeting of security holders held within the preceding five calendar years, it may be omitted from the registrant's proxy materials relating to any meeting of security holders held within three calendar years after the latest such previous submission: Provided, That

(i) If the proposal was submitted at only one meeting during such preceding period, it received less than three percent of the total number of votes cast in regard thereto; or

(ii) If the proposal was submitted at only two meetings during such preceding period, it received at the time of its second submission less than six percent of the total number of votes cast in regard thereto; or

(iii) If the prior proposal was submitted at three or more meetings during such preceding period, it received at the time of its latest submission less than 10 percent of the total number of votes cast in regard thereto.

§ 25.01 Background of the Exclusion

This exclusion is known as the "resubmission rule" because it permits a company to exclude a proposal that deals with the same subject matter as one that appeared in its proxy materials within the last five years if the proposal did not receive a certain level of support the last time it was presented to shareholders for a vote.

§ 25.01[A] History of the Exclusion

As the SEC noted in 1983, this exclusion has a long and turbulent history. In 1948, the SEC adopted the exclusion's predecessor, which allowed the exclusion of "substantially the same proposal" if it had received less than 3% of the votes cast at the last shareholders' meeting.[fn1]

In 1953, the exclusion was amended to include more numerical thresholds, with progressively higher minimum percentages for proposals submitted over longer time periods. At that time, the exclusion was designated as Rule 14a-8(c)(4).[fn2]

In 1976, the SEC proposed, but did not adopt, a broader "substantially the same subject matter" test in response to perceived widespread abuses of the exclusion. The SEC decided to keep the less restrictive phrase, "substantially the same proposal," which the SEC staff historically had interpreted quite literally. The result of this interpretive approach is that some proponents were able to make minor changes to proposals that might otherwise have been excludable on this basis.[fn3]

In 1983, the SEC decided to adopt the broader "substantially the same subject matter" standard that it had first proposed in 1976. The SEC viewed this as a way to "signal a clean break from the strict interpretive position applied to the existing provision." Since 1976, proponents had increasingly avoided exclusion simply by recasting the form of their proposals, expanding their proposals' coverage or otherwise changing the language in a way that precluded companies from arguing that the proposals were identical to earlier ones. The SEC also amended the numerical thresholds, increasing the percentage tests for resubmission from 3 to 5% in the first year, and from 6 to 8% in the second year. The 10% threshold for each subsequent year remained the same.[fn4]

After the new percentage thresholds were adopted, they were quickly challenged in the courts by members of the proponent community charging that the SEC had failed to give the public an adequate opportunity to comment on the changes. In proposing the changes, the SEC had merely stated, "From time to time, the Commission has received suggestions from proponents and issuers alike that the percentage tests reflected in Rule 14a-8(c)(12) should be revised. The Commission is requesting comment on the question of the appropriate levels for the percentage tests." Since the SEC had not proposed specific threshold changes, the court, in United Church Bd. for World Ministries v. SEC,[fn5] vacated the new numeric thresholds based on the SEC's failure to comply with the notice and comment requirements of the Administrative Procedure Act. As a result, the prior numerical thresholds were reinstituted in 1985.[fn6]

In 1997, the SEC again attempted to increase the resubmission thresholds by proposing levels of 6% of votes cast on the first resubmission, 15% on the second resubmission and 30% on the third. In its proposing release, the SEC recognized that these higher resubmission thresholds would be controversial, but favored an "up or out" approach that shifted more responsibility to shareholders to decide which proposals deserved resubmission. After receiving extensive negative comment, the SEC withdrew this proposal and left the numerical thresholds intact. In hindsight, the SEC might have been able to obtain more support for changing the resubmission thresholds if it had proposed new levels that were not so high relative to existing levels. Following these amendments, companies have continued to argue that the SEC staff requires inclusion of proposals whose proponents have made only minor changes.[fn7]

[fn1] Exchange Act Release No. 4185, 1948 SEC LEXIS 401 (Nov. 5, 1948); Exchange Act Release No. 4114, 1948 SEC LEXIS 386 (July 6, 1948).

[fn2] See Exchange Act Release No. 4950, 1953 SEC LEXIS 146 (Oct. 9, 1953).

[fn3] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1035 (1976) (proposing release); Exchange Act Release No. 12,999, 10 SEC Dock. 1006, 1013 (1976) (adopting release).

[fn4] Exchange Act Release No. 19,135, 26 SEC Dock. 494, 510-11 (1982) (proposing release); Exchange Act Release No. 20,091, 28 SEC Dock. 798, 803 (1983) (adopting release).

[fn5] 617 F. Supp. 837 (D.D.C. 1985).

[fn6] Exchange Act Release No. 22,625, 34 SEC Dock. 682 (1985).

[fn7] See John Wilcox, "Ending the Stalemate: Taking a Second Look at the SEC's Latest Shareholder Proposal Release," Corp. Gov. Adv., at 1 (Jan./Feb. 2001).

§ 25.01[B] Purpose of the Exclusion

This exclusion permits a company to exclude an otherwise valid proposal from its proxy materials that has been considered but not supported by a significant number of shareholders. The exclusion is intended to prevent proponents from abusing the shareholder proposal rule by repeatedly resubmitting proposals "that have generated little interest when previously presented to the security holders."[fn8]

[fn8] Exchange Act Release No. 19,135, 1982 SEC LEXIS 691 (Oct. 14, 1982).

§ 25.01[C] Overlap with Other Exclusions

In many respects, this exclusion is more procedural than substantive and companies often make alternative arguments under one or more of the substantive exclusion bases.

§ 25.02 Application of the Exclusion

§ 25.02[A] Identifying the Key Issues

The principal interpretive issue arising under this exclusion is whether a particular proposal involves "substantially the same subject matter" as one or more proposals previously submitted to shareholders within the prescribed time periods. This determination is extremely subjective and quite difficult in many cases. Other issues that are less difficult involve the proper calculation of the five and three calendar year provisions as well as how votes should be tabulated to determine the percentage of the vote cast.[fn9]

[fn9] The SEC staff provided guidance about how to make the calculations under this exclusion in Item F2 of Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001).

§ 25.02[B] Calculation of Submission Thresholds

§ 25.02[B][1] Abstentions and Broker Non-Votes Not Counted

The SEC staff does not count abstentions and broker nonvotes[fn10] as votes cast for purposes of this exclusion regardless of how state law treats these types of votes.[fn11] Only votes cast "for" or "against" a proposal are counted in calculating whether the resubmission thresholds have been reached.[fn12]

EXAMPLES:

In Occidental Petroleum Corporation,[fn13] the company asked the staff to reconsider its position that abstentions and broker non-votes should not be counted in making calculations under this exclusion. The company noted that a proposal received only 5.66% of the vote in the prior year if abstentions were included in the determination and would thus be excludable if the staff reversed its position. In requiring the company to include the proposal, the staff implicitly rejected the company's request for reconsideration of its position.
In Coastal Corporation,[fn14] the company was permitted to exclude a proposal asking it to prepare a report describing company programs, progress and future plans relative to the Ceres Principles. The SEC staff permitted exclusion after allowing the company to file an amendment to its Form 10-Q to disclose the number of abstentions and broker nonvotes cast on a substantially similar proposal. In the absence of this required disclosure, the proponent conjectured that the company was mistaken about the level of support for the prior proposal. The proponent argued that abstentions and broker non-votes had been improperly included in the denominator in making a calculation of the votes cast.
In Loews Corporation,[fn15] the SEC staff required the company to include two proposals even though the SEC staff concurred with the company that the proposals appeared to deal with substantially the same subject matter as proposals included in prior proxy materials. The SEC staff's decision to require inclusion was based on its view that the proposals had received 6% of the votes cast for and against the proposal; the company contended that they had received only 5.9%. The proponents rebutted the company's assertion by submitting data from the Investor Responsibility Research Center showing the votes cast in favor as 6.1%. The company failed to rebut the IRRC data.

[fn10] Under the rules that govern brokers that have record ownership of shares that are held in "street name" for their clients (the clients are the beneficial owners of the shares), brokers have the discretion to vote such shares on routine matters, but not on non-routine matters. For example, the broker may turn in a proxy card for uninstructed shares that votes "FOR" the election of directors and ratification of auditors, but expressly states that the broker is not voting on the shareholder proposal. The vote with respect to the shareholder proposal in this case is referred to as a "broker non-vote."

[fn11] The SEC staff provided an example of how to make the calculations with abstentions and broker non-votes under this exclusion in Item F4 of Division of Corporation Finance, Staff Legal Bulletin No. 14 (July 13, 2001) (available at www.sec.gov/interps/legal/cfslb14.htm).

[fn12] In the Rule 16b-3 context, the SEC staff's position on vote tabulation differs somewhat from its Rule 14a-8 position. Since Rule 16b-3 provides that employee benefit plans must be approved "by the affirmative vote of the holders of a majority of the securities of the issuer present, or represented, and entitled to vote," the staff's view is that abstentions are properly treated as present and entitled to vote on the matter and those shares are included in the denominator for the purpose of determining whether the matter has been approved. As a result, abstentions have the effect of a "no" vote.

On the other hand, the staff's position is that broker non-votes should not be considered shares entitled to vote because the broker and proxy holder do not have the authority to vote the shares with regard to the plan. As a result, broker nonvotes do not affect the outcome of a vote on a Rule 16b-3 proposal.

[fn13] 2001 SEC No-Act. LEXIS 171 (Feb. 2, 2001).

[fn14] 1995 SEC No-Act. LEXIS 272 (Feb. 16, 1995).

[fn15] 1995 SEC No-Act. LEXIS 89 and 49 (Jan. 6, 1995).

§ 25.02[C] Disclosure of Treatment of Abstentions and Broker Non-Votes

In 1992, the SEC amended Item 21 of Schedule 14A to clarify how companies must disclose the manner in which they will count proxy votes, including the treatment and effect of abstentions and broker non-votes under state law. In particular, the SEC was concerned that companies varied widely in their treatment of abstentions and broker non-votes when calculating the percentage of the vote that shareholder proposals receive.[fn16]

[fn16] Exchange Act Release No. 30,849, 1992 SEC LEXIS 1296 (June 24, 1992).

§ 25.02[D] No Rounding

The SEC staff applies the numerical thresholds literally, so that proponents may not round up percentages to attain the percentage necessary for resubmission of a substantially similar proposal. This is a logical application of the terminology used in the exclusion, which requires that the vote for a substantially similar proposal not have been "less than" the specified percentages. Page 25-9 EXAMPLE:

In United Technologies Corporation,[fn17] the SEC staff granted no-action relief with respect to a proposal that had garnered only 5.96% the last time it was submitted. A substantially similar proposal had been submitted twice during the previous five years.

[fn17] 1995 SEC No-Act. LEXIS 892 (Dec. 8, 1995).

§ 25.02[E] Vote Tabulation Required

It is important for a company to tabulate votes relating to a proposal even if a proponent fails to present the proposal at the meeting because the SEC staff takes the position that the failure to tabulate is tantamount to not including the proposal in the company's proxy materials. If a "substantially similar" proposal to one for which votes were not tabulated is submitted in a subsequent year, it will not be considered a resubmission and this exclusion will not be available. EXAMPLE:

In Baldwin Piano & Organ Co.,[fn18] the proponent successfully included a proposal calling on the board to take the steps necessary to achieve the sale of the company on terms which would maximize shareholder value. Even though a virtually identical proposal had been included in the company's proxy materials the prior year, the proponent had failed to present the proposal at the meeting so the company had not tabulated any votes related to the proposal. The company argued that this meant that the proposal received no votes. The SEC staff disagreed, stating that because there had been no tabulation, the proposal had not received "less than 3 percent of the votes cast" within the meaning of the exclusion.

[fn18] 2000 SEC No-Act. LEXIS 590 (May 1, 2000).

§ 25.02[F] Votes at Predecessor Companies

After a company reorganizes or merges with another company, it must be prepared to demonstrate that it is entitled to rely on the voting results of its predecessor if it receives a proposal that is substantially the same as one included in the predecessor company's proxy materials in a prior year. For simple reorganizations, making this showing is normally not very difficult. For more complex restructurings or business combinations, this can be more difficult. "The critical question is whether the body of shareholders is dramatically altered by the extraordinary event. For a simple holding company reorganization, the company probably can easily show that the relatively same base of shareholders considered the same proposal at the meeting before the reorganization. For a business combination, it probably is difficult to show that the same basic group of shareholders exists after the merger."

EXAMPLE:

Successful reliance on predecessor submission

In PG&E Corporation,[fn19] the company was allowed to exclude a proposal requesting that directors be compensated solely in stock. The company was a recently formed holding company whose predecessor had received substantially the same proposal three times during the prior five years; in none of those years had the proposal received the requisite 10% vote. The company showed that it was entitled to rely on its predecessor's submission of proposals by merely including a statement in a footnote in its request.

EXAMPLE:

Failure to argue that it was entitled to rely on predecessor submission

In Niagara Mohawk Holdings,[fn20] the company unsuccessfully sought no-action relief on a proposal requesting endorsement of the Ceres Principles. The company argued that same proposal had been submitted three times during the prior five years and had failed to receive the requisite 10% vote to be eligible for resubmission. In its response, the SEC staff noted that the company had failed to argue that it was entitled to rely on the submissions to its predecessor company and that this holding company had been organized only two years earlier, making it ineligible to rely on this exclusion on its own.

[fn19] 1999 SEC No-Act. LEXIS 59 (Jan. 15, 1999).

[fn20] 2000 SEC No-Act. LEXIS 404 (Mar. 20, 2000).

§ 25.02[G] Disclosure of Voting Results from Prior Meetings

Companies must disclose how shareholders cast their votes regarding a proposal in the first quarterly report they file after a shareholders' meeting is held (or in an annual report on Form 10-K or 10-KSB if it is filed first). Item 4 of Part II of Form 10-Q and Form 10-QSB requires that the company disclose the number of votes cast for and against a proposal as well as the number of abstentions and broker non-votes.

§ 25.03 Interpretation of "Substantially the Same Subject Matter"

§ 25.03[A] Both Proposal and Supporting Statement Considered

In making its determination, the SEC staff does not focus exclusively on the proposal, but rather looks at the context of the proposal and the supporting statement. This approach is necessary to make an often difficult subjective determination regarding the scope of the proposal.

Due to the subjective nature of its analysis, the staff occasionally renders surprising decisions. As a result of the extensive parsing of the precise wording of proposals and supporting statements, it is not uncommon for the staff to take opposite positions based on similar fact patterns.

In 1992, the SEC staff signaled a move to a more expansive interpretive approach that would allow companies to exclude more proposals under this exclusion. In two highly publicized no-action letters, the staff intimated that it had changed its position. In Interpublic Group of Companies, Inc.,[fn21] and Kennametal, Inc.,[fn22] the staff allowed companies to exclude proposals recommending that the company refrain from new or expanded investment in South Africa because they were substantially similar to prior proposals asking the companies to divest their South African operations. Since that time, however, the staff appears to have gradually reverted to its more narrow interpretation, seeming to err on the side of inclusion more than exclusion, probably because companies bear the burden of persuasion.

[fn21] 1992 SEC No-Act. LEXIS 482 (Apr. 3, 1992).

[fn22] 1992 SEC No-Act. LEXIS 883 (Aug. 4, 1992).

§ 25.03[B] Same Subject Matter Not Dispositive

In adopting the "substantially the same subject matter" standard, the SEC expressed the intention that the staff make its judgments "based upon a consideration of the substantive concerns raised by a proposal rather than the specific language or actions proposed to deal with those concerns."[fn23]

However, one thing that has been made clear over time is that the staff's interpretation of "same subject matter" does not mean that the mere mention of the same subject renders a proposal excludable. In many cases, the SEC staff has not allowed companies to rely on this exclusion to exclude a recurring proposal if it has a different recommendation or scope than an earlier one, even if the subject matter clearly is the same.

[fn23] Exchange Act Release No. 20,091, 1983 SEC LEXIS 1011 (Aug. 16, 1983).

§ 25.03[C] Proponent's Identity Irrelevant

In considering whether a proposal involves "substantially the same subject matter" as a previous proposal, it is generally irrelevant if the same proponent or an affiliate submitted the prior or current proposal. In other words, the focus is on the subject matter of the proposals, not the identities of the proponents who submitted them.

A proponent can have its proposal omitted under this exclusion even if it had no affiliation with — or even knowledge of — one or more of the prior proposals that did not receive adequate support from shareholders. However, a company may want to bring any evidence of affiliation among proponents to the SEC staff's attention as proof that the proposals are "substantially the same" since it may indicate that the two proponent's motives are aligned and that they thus intend the proposals to be the same. Similarly, companies should highlight the fact if the substantially similar proposals were submitted by the same proponent.

EXAMPLES:

In Lawson Products, Inc.,[fn24] the company was allowed to exclude a proposal that urged the board to arrange for the sale of the company. The company provided evidence that it found on a Web site to illustrate that the proponents of the current and prior proposals were associates.
In Eastman Chemical Company,[fn25] the SEC staff granted no-action relief with respect to a proposal requesting that the board adopt a policy not to manufacture cigarette filters until certain research has been completed. The company argued that the current and prior proposals, while submitted by two different organizations, had been prepared and filed through the auspices of the Tobacco Program of the Interfaith Center on Corporate Responsibility. The argument was based on the correspondence accompanying the proposal. The company noted that both proposals referenced the ICCR and either the coordinator of the ICCR's anti-tobacco campaign or the ICCR Communications Director. The proponent did not submit a rebuttal.

[fn24] 2000 SEC No-Act. LEXIS 447 (Mar. 17, 2000).

[fn25] 1998 SEC No-Act. LEXIS 456 (Mar. 27, 1998).

§ 25.03[D] Ties to Executive Compensation

A relatively new innovative approach employed by experienced proponents is to modify proposals to tie the subject matter of an otherwise excludable proposal to executive compensation, thus rendering this exclusion unavailable. Such modified proposals are not considered "substantially the same" as the prior proposal. During the past few years, a number of proposals have been included because the proponents linked the issue of interest to them to executive compensation.

EXAMPLE:

In Boeing Company,[fn26] the company was required to include a proposal asking the board to institute a special executive compensation review and prepare a report about how to link executive compensation to social corporate performance as well as financial performance. The company argued that the proposal was "a thinly veiled attempt to once again put the issue of China's human rights record before the shareholders." In support of its argument, the company highlighted extensive portions of the supporting statement that referred to China and pointed out that the footer on the second page of the proposal was entitled "Shareholder Resolution on China & Human Rights." The proponent responded by illustrating how an analysis of the "whereas" clause weighed in favor of the inclusion of the proposal because it focused on compensation. The proponent noted that in the first three paragraphs of this clause, totaling 176 words in eight sentences, there was no mention of China. In addition, the proponent asserted that it did not mention China in its conclusion.
In Loews Corporation,[fn27] the SEC staff denied no-action relief on a proposal requesting that the board create a formula linking executive compensation with decreases in teen consumption of the company's tobacco brands. The company cited extensive no-action letter precedent for excluding substantially similar proposals, but did not provide a detailed analysis of how the supporting statement referred to tobacco consumption. Even though the proponent acknowledged that its proposal was similar to a prior proposal, it contended that it was sufficiently different because the prior one had asked the company to adopt proposed Food and Drug Administration regulations as its own policy. In contrast, the proponent argued, the current proposal dealt principally with setting executive compensation.

[fn26] 2000 SEC No-Act. LEXIS 307 (Mar. 3, 2000).

[fn27] 1999 SEC No-Act. LEXIS 266 (Feb. 22, 1999).

§ 25.03[E] Request for a Study or Report

Another difficult interpretive question involves the application of this provision to proposals cast as requests for reports or studies of matters that have been the subject of a prior proposal. In these cases, proponents take proposals for which they have obtained insufficient shareholder support and modify them to ask for a report on a matter rather than specific action regarding it. The SEC staff's responses sometimes appear to be inconsistent due to the subjective determination involved.

In some cases, the SEC staff distinguishes between a request for a report and a request related to the activities that would be the subject of the report. In other words, a proposal that asks for a report can avoid exclusion — even though the proposal deals with substantially the same subject matter — despite the proponent's obvious objective to have the company take action regarding a particular matter. On the other hand, sometimes proponents have been unsuccessful when they converted their proposals into a request for a report. The staff has not provided any specific guidance in this area so it remains a facts and circumstances determination. A key factor may be whether shareholders may have voted in favor of a report to learn more about the issue raised — but would not have voted in favor of the action itself at this time. Obviously, this is a difficult subjective determination for the staff to make.

EXAMPLES:

Inclusion of a request for a report

In Cooper Industries, Inc.,[fn27.1] the company was required to include a proposal requesting that the company report on the social and environmental issues related to sustainability. A prior proposal submitted by the same proponents, which had not received sufficient support for resubmission, had asked the company to adopt a set of global corporate standards regarding human rights, workplace safety, and the environment. The company, pointing to similarities in the proposals and supporting statements, and to references in the proponents' cover letters, argued that the new proposal was only a reformulation of the earlier proposal, since both focused primarily on sustainable living wages, human rights, labor, and environmental issues in the global communities in which Cooper operates.
In Chevron Corporation,[fn28] the company was required to include a proposal asking the board to prepare a report on the potential environmental damage that would result if the company proceeded with its plans to drill for oil and gas in the Arctic National Wildlife Refuge. In its response, the SEC staff acknowledged that the proposals dealt with substantially the same subject matter but denied no-action relief because the current proposal called for a report, while the prior proposals had requested the cessation of drilling in the Refuge.

EXAMPLES:

Exclusion of a request for a report

In General Electric Company,[fn29] the company was allowed to exclude a proposal requesting a report on the feasibility of the company's withdrawal from the promotion and production of new nuclear power reactors and the decommissioning of the company's current reactors. The company argued that the "thrust and direction" of both this proposal and a prior proposal was to have the company withdraw from the nuclear power business. (The prior proposal asked the company to assist customers of its nuclear reactors in closing their nuclear operations and halting development of future reactors.) The company pointed out that the supporting statements of both proposals suggested that the company should instead promote the sale of other power services, such as its gas combined cycle units. The proponent argued that his first proposal had advocated the use of the company's nuclear engineers to resolve the problem of radioactive waste isolation and develop technology for decommissioning all reactors and nuclear fuel cycle facilities, which he saw as a good business opportunity for the company. Although the proponent acknowledged that both proposals dealt with the growing problem and hazards of radioactive waste, he argued that it did not ask the company to close its nuclear operations and halt development of future reactors as his second proposal did. In its response, the SEC staff stated that it had considered the language in both proposals, as well as their supporting statements, to conclude that both proposals appeared to focus on the same matter: decommissioning reactors and halting the company's promotion of nuclear power.

[fn27.1] 2002 SEC No-Act. LEXIS 19 (Jan. 14, 2002).

[fn28] 2000 SEC No-Act. LEXIS 235 (Feb. 29, 2000).

[fn29] 1999 SEC No-Act. LEXIS 117 (Jan. 29, 1999).

§ 25.04 Calculation of Three-year Exclusion Period

§ 25.04[A] Calculation Strictly Applied

The SEC staff applies the three-year exclusion period literally. In other words, a company cannot rely on this exclusion if an upcoming meeting is to be held several days after the three-year anniversary of the last meeting during which a substantially similar proposal was presented. As a result, if a company delays its shareholders' meeting so that the three-year period expires before the meeting is held, an otherwise excludable proposal must be included, even if the company earlier had obtained a no-action letter.

Because a calendar year runs from January 1 through December 31, the staff does not look at the specific dates of shareholders' meetings. Instead, it looks at the calendar year in which a meeting was held. The staff provided the example of a company with a meeting scheduled for April 25, 2002. In looking back three calendar years to determine if a proposal or proposals dealing with substantially the same subject matter was included, any meeting held in calendar years 1999, 2000 or 2001 — which would include any meeting held between January 1, 1999 and December 31, 2001 — would be relevant under this exclusion.[fn30]

EXAMPLE:

In Merck & Co., Inc.,[fn31] the SEC staff denied no-action relief on a proposal that asked the board to discontinue incentive plans for senior management. The SEC staff required inclusion because the company's upcoming annual meeting was to be held three years and two days from the date of the last meeting at which a substantially similar proposal had been presented. The company argued that the intent of the resubmission exclusion should lead the SEC staff to focus on the number of meetings over the three-year period and overlook the technicality.

[fn30] Additional examples were provided by the staff in Item F3 of the Staff Legal Bulletin, supra note 11.

[fn31] 2000 SEC No-Act. LEXIS 274 (Feb. 27, 2000).

§ 25.04[B] Meeting Date Not Required to Be Set

Under this exclusion, a company can exclude a proposal even if it does not yet know when its next shareholders' meeting will be held, as long as the three-year period has not yet run. In fact, this exclusion can be applied regardless of when the next shareholders' meeting is held, provided it is held within the three year period.

EXAMPLE:

In Dow Jones & Company, Inc.,[fn32] the company successfully sought to exclude a proposal that requested that the board take the steps necessary to declassify the board. The company successfully argued that this exclusion could be applied even if the date of the upcoming stockholders' meeting had not been set. The proponent urged that the company could not rely on the resubmission exclusion under those circumstances.

[fn32] 1998 SEC No-Act. LEXIS 244 (Feb. 19, 1998).

§ 25.05 Common Types of Proposals

The majority of the cases involving this exclusion relate to social proposals because many social issue proposals do not receive sufficient votes to avoid exclusion, especially after the third submission. However, the groups seeking corporate action on these issues continue to use proposals to put pressure on companies by modifying their proposals to keep the issues before shareholders. As a result, these types of proposals normally are the ones that continue to produce interpretations of "substantially the same subject matter."

§ 25.05[A] Human Rights

In a number of cases, companies have successfully argued that a proposal that broadens or narrows the scope of alleged human rights violations is still "substantially the same subject matter." However, there are also instances in which proponents have successfully included proposals by modifying a proposal from year to year. EXAMPLE:

Broader proposal that was excluded

In Chevron Corporation,[fn33] the SEC staff allowed the company to exclude a proposal requesting that the board review and report on the company's code of business conduct, including the company's commitment to human rights, social justice and environmental responsibility to the communities in which the company operated. The company argued that the current proposal's "whereas" clauses were similar to two prior "substantially similar" proposals. The proponent argued that the current proposal was substantially broader on its face than the prior proposals. The proponent also argued that the current proposal included new text that referred to new alleged human rights in Nigeria that took place subsequent to the company's last annual meeting. Although the proponent argued that the proposal applied to the company's worldwide operations, the SEC staff stated after reviewing the supporting statement that the proponent appeared to target the company's operations in Nigeria. The staff made this determination even though the proposal itself did not contain any specific mention of Nigeria.

EXAMPLE:

Narrower proposal that was excluded

In General Motors Corporation,[fn34] the company successfully excluded two proposals recommending that the board adopt specific policies relating to slave and forced labor for all dealings with China. The major distinction between the current proposal, on the one hand, and the earlier proposals, on the other, was that the earlier proposals applied to both China and the former Soviet Union, while the current proposal was narrower and only applied to China.

[fn33] 1999 SEC No-Act. LEXIS 257 (Mar. 4, 1999).

[fn34] 1999 SEC No-Act. LEXIS 372 and 425 (Mar. 18, 1999).

§ 25.05[B] Environmental

Environmental proposals often do not receive substantial support and are thus implicated under this exclusion. This type of proposal often includes requests that a report or study be conducted.

EXAMPLE:

In Chevron Corp.,[fn35] the SEC staff denied no-action relief with respect to a proposal requesting that the board prepare a report regarding toxic chemical compounds, including dioxin compounds, released from its refineries. The company argued that the proponent was only concerned with dioxin since it was mentioned in each "whereas" clause and was the sole subject matter of three of the five whereas clauses. The company made additional arguments based on the repeated discussion of dioxin in the supporting statement. Although the company acknowledged that the resolved clause used broad language, it noted that the clause contained a specific reference to dioxin. The proponent argued that its proposal dealt with a narrow topic compared to the prior proposals that dealt with the broad subject of the safety of chemical plants. Even though the proponent acknowledged that there was some overlap between the current and prior proposals, it argued that the proposals dealt with entirely different subject matters.

[fn35] 1998 SEC No-Act. LEXIS 219 (Feb. 11, 1998)

§ 25.05[C] Executive Compensation

In most cases, the SEC staff permits a company to exclude a proposal that appears to have "substantially the same subject matter" as a prior proposal when both proposals deal with the form and amount of executive compensation, even though the suggested level of compensation differs in each proposal. However, the SEC staff requires companies to include proposals if the form and recipients of compensation are sufficiently different from those in a prior proposal.

EXAMPLES:

In General Motors Corporation,[fn36] the company was allowed to exclude a proposal that mandated the "discontinuance of all bonuses, and options, rights, SAR's, etc." after termination of any existing programs for top management. The company argued that the proponent had "tweaked" the language of the proposal over the years, changing a mandatory resolution to a precatory one and specifying types of compensation such as bonuses or severance payments that were arguably included in the "etc." used in a prior proposal. The proponent's rebuttal did not address the "substantially the same" issue.
In BankAmerica Corporation,[fn37] the SEC staff granted no-action relief with respect to a proposal requesting that directors' compensation include stock. For four out of the prior five years, the company noted, it had agreed to include similar proposals. In each successive year, the proposal contained minor differences that in essence required directors to receive a greater portion of their compensation in equity. The company noted that the changes in the current proposal related to the specific number of shares that directors would receive as compensation and a requirement to retain the shares after leaving the board. The proponent's rebuttal did not address this exclusion.

[fn36] 2000 SEC No-Act. LEXIS 582 (Apr. 10, 2000).

[fn37] 1998 SEC No-Act. LEXIS 96 (Jan. 26, 1998).

§ 25.05[D] Workplace Conduct

Workplace conduct proposals sometimes do not receive substantial support and are thus implicated under this exclusion. This type of proposal often includes requests that a report or study be conducted.

EXAMPLES:

In Wal-Mart Stores, Inc.,[fn38] a proponent successfully defended against a no-action challenge to a proposal asking the board to prepare a report on the company's "glass ceiling" progress, including a review of five specified topics. A prior proposal had asked for a report regarding the company's progress with providing equal employment opportunities. The company argued that the five topics in the glass ceiling proposal did not differ markedly from the earlier proposal and provided a detailed analysis to support its argument. Although the proponent acknowledged that both proposals dealt with the same subject matter, it argued that the proposals were sufficiently different because the prior proposal dealt with an issue applicable to the company's entire workforce but the current proposal applied only to senior management (which was less than one-tenth of 1% of the workforce). The proponent also disputed the company's assertion that the current proposal's specified topics were very similar to the prior proposal.
In Bristol-Myers Squibb Company,[fn39] the company successfully excluded a proposal requesting that the board form a committee to formulate an educational plan to inform women of the possible abortifacient action of the company's products. The current proposal requested a plan be instituted to educate women about the way its products were used in abortions, while the prior proposal asked that the company refrain from giving charitable contributions to organizations that perform abortions. The company noted that the proposals involved the same subject manner — abortion — and that only the form of the proposals differed. In its response, the SEC staff recognized that both proposals dealt with abortion-related matters and deemed them substantially similar.
In Eastman Chemical Company,[fn40] the SEC staff granted no-action relief with respect to a proposal recommending that management initiate a comprehensive study of the legal issues related to the company's production of essential elements for cigarettes. The company argued that even though both the current and prior proposals were submitted by different religious organizations and differed somewhat, they were prepared by the Tobacco Program of the Interfaith Center on Corporate Responsibility. The company also contended that despite different wording, both proposals were aimed at the same issue — the company's supply of raw material products to tobacco companies.
In Gannett Co., Inc.,[fn41] the SEC staff allowed the company to exclude a proposal asking the board to take steps to stop teen smoking, including adopting advertising guidelines. The prior proposal had asked the board to prepare a report on how the company's products were advertised and that advertising's impact on customers. The company argued that the proposals had the same focus, tobacco advertising, and the same social purpose, namely, curtailing the appeal of smoking through restrictions on advertising. The company also pointed out that there was some textual overlap between the prior and current proposals.
In American Brands, Inc.,[fn42] two proponents defeated a no-action challenge to a proposal requesting that the company take steps to accomplish a spin-off of the company's tobacco business from its non-tobacco businesses. Prior proposals had asked the company to exit the tobacco business. The company urged that the current proposal continued to focus on the company's tobacco operations. In particular, the company argued that the proponents offered vague statements about how the spin-off would benefit the company's business. In its response, the SEC staff stated that it believed that the current proposal related to the economics of a spinoff of the company's tobacco operations and found that the current proposal was not "substantially the same" as prior proposals.

[fn38] 2000 SEC No-Act. LEXIS 573 (Apr. 11, 2000).

[fn39] 1996 SEC No-Act. LEXIS 170 (Feb. 6, 1996).

[fn40] 1997 SEC No-Act. LEXIS 381 (Feb. 28, 1997).

[fn41] 1996 SEC No-Act. LEXIS 182 (Feb. 12, 1996).

[fn42] 1995 SEC No-Act. LEXIS 47 and 87 (Jan. 6, 1995).

§ 25.06 Practice Pointers

Company Practice Pointers

Concise requests are typically possible. This exclusion presents one of the best opportunities for a company to draft a no-action request without the assistance of outside counsel. Particularly if the current and prior proposals are identical or nearly identical, companies have been able to provide minimal analysis to the SEC staff and still obtain no-action relief. They merely need to cite the exclusion, indicate the voting results for the prior proposal and attach copies of both proposals.

Point out all overlapping material. If there is overlapping language in the resolutions, whereas clauses or supporting statements, each instance of such overlap should be brought to the staff's attention in the request. However, companies still must meet their burden of proof and the staff has required companies to include proposals if a company fails to provide any logical basis for exclusion.

No opinion required. Under this exclusion, companies typically do not need to include an opinion since the arguments are not based on matters of law. Of course, companies often make arguments under multiple exclusionary bases and may need to include an opinion under those alternate bases. In that case, a company may want to condition its opinion so that it only applies to bases that involve a matter of law.

Proponent Practice Pointers

Consider the likelihood of meeting the threshold. The exclusion contains a sliding scale with three thresholds. From a tactical standpoint, a proponent may want to delay resubmission until a subsequent year if its proposal has not achieved the requisite votes in prior years and another low vote would render it excludable under this exclusion.

Modify the proposal or tie it to another subject matter. Another technique to avoid exclusion is modifying a proposal so that it pertains to a different subject matter. Tying the prior subject matter to a new subject matter sometimes accomplishes this goal, such as tying a social issue to executive compensation. Although not dispositive, proponents should take care to not imply that the prior and current proposals are related. This means that the prior proposal and supporting statement, as well as correspondence with the company and the SEC regarding prior proposals, should not be used as a "template" or explicitly refer to the prior proposal.

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