Rule 14a-8(i)(13) — former Rule 14a-8(c)(13)

Question 9(13): Specific amount of dividends: If the proposal relates to specific amounts of cash or stock dividends.

§ 26.01 Background of the Exclusion

This exclusion permits the omission of proposals relating to specific amounts of cash or stock dividends but not proposals relating to dividend policy.

§ 26.01[A] History of the Exclusion

Before 1976, proposals relating to dividends were excluded under the ordinary business exclusion, because the SEC staff believed that these proposals fell under the business judgment of boards of directors. As a result, proposals regarding both dividend payment and dividend policy proposals were excludable.

In 1976, as part of an initiative to interpret the ordinary business exclusion to allow the inclusion of more proposals, the SEC decided to change its approach to dividend proposals. Specifically, the SEC altered its position on dividend policy proposals and determined that the decision to pay — or not pay — dividends did not involve "ordinary business" because of the decision's importance both to shareholders and to a company's economic and policy considerations. Accordingly, the SEC decided to allow dividend policy proposals to be included.

At the same time, by adopting the Rule 14a-8(c)(13) exclusion, the SEC decided to address separately proposals that sought the payment of specific dividend amounts. These proposals continued to be excludable, just on a different and new basis.[fn1]

In 1998, this exclusion was renumbered as 14a-8(i)(13). However, this change was purely formal and not substantive.[fn2]

[fn1] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1035-1036 (1976) (proposing release); Exchange Act Release No. 12,999, 10 SEC Dock. 1006, 1013-1014 (1976) (adopting release).

[fn2] Exchange Act Release No. 39,093, 1997 SEC LEXIS 1962 (Sept. 18, 1997); Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 (May 21, 1998).

§ 26.01[B] Purpose of the Exclusion

The SEC created this exclusion for two primary reasons:

the confusion it felt that might be created by multiple proposals asking for different levels of dividends; and

the delegation to the board and management of the responsibility for decisions regarding capital allocation.

§ 26.01[B][1] Confusion Over Dividend Levels

In adopting the exclusion, the SEC was worried that multiple proposals could confuse shareholders and create a dilemma for companies if they were presented with several proposals, each recommending a different level of cash or stock dividends. In a 1976 release, the SEC stated "that unless some restrictions are placed on the type of dividend proposals that are submitted, issuers could be inundated with numerous proposals of a conflicting nature on such matters."[fn3]

For instance, consider the following two proposals, one asking for a 75 cent quarterly dividend; the other, a quarterly dividend of one dollar. Shareholders might well wonder why two seemingly conflicting proposals are on the ballot. In addition, what should management do if both proposals are supported by a majority of shareholders?

[fn3] Exchange Act Release No. 12,598, 9 SEC Dock. 1030, 1035-36 (1976).

§ 26.01[B][2] Dividend Setting as Core Management Function

In adopting the exclusion, the SEC recognized that setting a specific dividend amount — as opposed to the decision about dividend policy — is viewed as a core management function since it involves decisions about which projects to undertake and how capital is allocated. In 1976, the SEC noted that "decisions on dividends traditionally have been within the exclusive province of the board of directors under state laws, and . . . individual directors can be held personally liable under many state laws if they pay dividends in excess of accumulated earnings."[fn4]

Among the major functions of a board is settling upon a strategy that appears to lead to the best use of corporate assets. Companies have long argued that determining a dividend level takes not only business acumen, but also specific and in-depth knowledge about a company's operations. In other words, dividend declaration involves a comprehensive and exhaustive board review, including, among other matters, the expected level of capital expenditures, debt repayments, and the need for working capital to operate the business. The philosophy behind this rationale is similar to that for the "ordinary business" exclusion under Rule 14a-8(i)(7).

Some commentators urge that this exclusion has outlived its usefulness and should be repealed. First, they argue that dividend amounts no longer play as important a role in investment decisionmaking as they once did, pointing to the diminishing number of companies that declare dividends. These commentators believe that performance indicators, such as projected sales or income growth, and the quality of management exert greater influence in the investment calculus. Second, they argue that shareholders, who have become more sophisticated since the exclusion was first applied, would not truly be confused if confronted with proposals recommending different dividend amounts.

[fn4] Id.

§ 26.01[C] Complementing the Ordinary Business Exclusion

Since the rationale for the dividend exclusion overlaps with that behind the ordinary business exclusion contained in Rule 14a-8(i)(7), it is not uncommon for companies to argue that both exclusions apply to proposals regarding dividend payments. However, the SEC staff has stated that as long as it does not attempt to establish a specific amount of dividends, a proposal that seeks the declaration of dividends may be included over objections made under both bases.

EXAMPLE:

In Sonoma West Holdings,[fn5] the company unsuccessfully sought to exclude a proposal that requested that the company declare and pay a dividend, but did not specify the amount. The SEC staff's response stated that the proposal did not concern the form, method or procedure for dividend payments for purposes of (i)(7). While the company did not argue that the proposal could be excluded under the dividend, the staff nevertheless stated that it did not relate to a specific amount of dividends.

[fn5] 2000 SEC No-Act. LEXIS 807 (Aug. 17, 2000).

§ 26.02 Application of the Exclusion

§ 26.02[A] Identifying the Key Issues

In most cases, the application of this exclusion is straightforward. However, there are occasional proposals for which it is difficult to determine whether a proposal relates to policy — and thus is not excludable — or involves specific amounts of dividends, which would result in exclusion.

Similarly, it is not always readily apparent that proposals would result in payment of a specific amount and companies bear the burden of proving that they do.

§ 26.02[B] Defining "Dividend"

Although rare, interpretive issues occasionally arise about what constitutes a "dividend." Since the SEC staff is not constrained by any statutory definition, it usually relies on state law definitions or corporate practice for guidance.

EXAMPLES:

In Eastern Enterprises,[fn6] the SEC staff denied no-action relief with respect to a proposal that, among other requests, asked the board to redeem any outstanding rights under the rights plan. The company argued that the redemption of the rights plan would increase payments to shareholders, and thus constituted a constructive dividend. The proponent did not submit a rebuttal.
In Urstadt Biddle Properties Inc.,[fn7] the company was required to include a proposal that mandated the reversal of the company's creation of Class A common stock. The company argued that the proposal would constrain the board's discretion in determining the company's dividend policy as well as force the board to reverse and eliminate a stock dividend that had already been declared and paid. In its response, the SEC staff noted that the proposal related to changes in the capital structure of company rather than to dividends.

[fn6] 1999 SEC No-Act. LEXIS 270 (Feb. 17, 1999).

[fn7] 1998 SEC No-Act. LEXIS 1078 (Dec. 17, 1998).

§ 26.02[B][1] Property Distributions

The SEC staff normally requires companies to include proposals that relate to distribution of property, which usually are submitted to companies involved in bankruptcy or liquidation proceedings. The rationale is that this exclusion applies only to cash or stock dividends, not other types of property distributions.

EXAMPLES:

In Audio Communications Network,[fn8] the company unsuccessfully sought to exclude a proposal recommending that the board consider selling all or substantially all of the company's assets for the best available price and distributing the proceeds to shareholders. The company, a Florida corporation, argued that the proposal involved the declaration of dividends as they were defined under Florida law. The proponent replied that the company mischaracterized his proposal so he did not offer a detailed rebuttal. In its response, the staff noted that it believed that the proposal involved a liquidating distribution, not a dividend.

[fn8] 1994 SEC No-Act. LEXIS 379 (Mar. 21, 1994).

§ 26.03 Types of Dividends

Over the years, companies have challenged proposals dealing with a variety of different types of dividends. The following analyzes how the SEC staff treats these different proposals.

§ 26.03[A] Stock Dividends

Even though stock dividends are quite different economically from cash dividends, the SEC staff applies this exclusion to both types. This treatment accords with the language of the exclusion, which states that it applies to both "cash or stock dividends."

EXAMPLE:

In SL Industries, Inc.,[fn9] the company successfully excluded a proposal that requested a reinstatement of a 5 to 6% stock dividend and a cash dividend equal to 15-20% of earnings, for the previous four quarters.

[fn9] 1996 SEC No-Act. LEXIS 675 (Aug. 13, 1996).

§ 26.03[B] Special Cash Dividends

The SEC staff consistently allows companies to exclude proposals seeking a special, one-time dividend payout with a specific amount attached to it — even if the amount falls within a range.

EXAMPLES:

Exclusion of special cash dividends

For a special $80 million dividend payout[fn10]
To distribute a portion of the company's excess regulatory capital by paying a special dividend of between $5 and $7 per share[fn11]
To pay a special dividend of $10 per share[fn12]
To pay a special dividend, with funds to come from the difference between the amount of net income and the amount of regular dividends paid[fn13]

[fn10] Mesaba Holdings, 2000 SEC No-Act. LEXIS 595 (Apr. 28, 2000).

[fn11] Empire Federal Bancorp, Inc., 1999 SEC No-Act. LEXIS 412 (Apr. 7, 1999).

[fn12] Compaq Computer Corporation, 1993 SEC No-Act. LEXIS 48 (Jan. 12, 1993).

[fn13] Zions Cooperative Mercantile Institution, 1990 SEC No-Act. LEXIS 509 (Mar. 20, 1990).

§ 26.03[C] Stock Splits and Reverse Stock Splits

Under this exclusion, stock splits and reverse stock splits are treated no differently than stock dividends by the SEC staff. The SEC staff treats these splits as if they were proposals relating to the payment of a stock dividend and consistently allows companies to exclude them. The staff accords them the same treatment even though stock dividends and stock splits are treated differently under most state laws and by the accounting profession.

EXAMPLES:

3 for 1 stock split[fn14]
1-for-2 reverse stock split[fn15]
1 for 20 reverse stock split[fn16]
2 for 1 stock split when the price reaches $60 per share[fn17]

[fn14] NVR, Inc., 2001 SEC No-Act. LEXIS 58 (Jan. 2, 2001).

[fn15] Hecla Mining Company, 2000 SEC No-Act. LEXIS 401 (Mar. 9, 2000).

[fn16] Fleet Financial Group, Inc., 1998 SEC No-Act. LEXIS 1030 (Dec. 2, 1998).

[fn17] Quaker Oats Company, 1998 SEC No-Act. LEXIS 800 (Aug. 20, 1998).

§ 26.03[D] Distribution of Fractional Shares

As an administrative convenience, most companies — as well as some shareholders — prefer that amounts equivalent to fractional shares be distributed as a cash dividend. This would involve rounding down the holdings of shareholders and distributing the related fractional shares in the form of a cash dividend. Although this matter has not been addressed recently, the SEC staff once permitted a company to exclude a proposal that asked for the equivalent of "rounding up" of fractional shares.

EXAMPLE:

In New Haven Water Co.,[fn18] the SEC staff allowed the company to exclude a proposal asking the board to allow shareholders to buy one share at the price at which they were forced to sell their fractional shares. In its response, the staff stated that the proposal related to specific dividend amounts.

[fn18] 1980 SEC No-Act. LEXIS 3685 (June 6, 1980).

§ 26.04 Dividend Policy Proposals

§ 26.04[A] Policy Proposals Includable

The boards of directors of most companies establish policies about whether and why dividends will be paid. These policies are typically non-public and their details are not disclosed in SEC filings. The SEC staff generally requires companies to include proposals that address dividend policy. In some circumstances, it can be difficult to determine whether a proposal truly involves dividend policy or whether it recommends a specific dividend amount. In these cases, companies must overcome their burden to show that the proposals involve specific amounts.

EXAMPLE:

In Burlington Northern Santa Fe Corp.,[fn19] the proponents successfully defended against proposals recommending that the board adopt a dividend policy that incorporates performance benchmarks similar to how executive compensation is tied to performance-based goals. The company argued that the proposal was similar to other proposals that had been excluded. The proponents responded that the proposals were merely recommendations to the board to develop a policy; they did not require any specific dividend amount nor establish a formula for dividend payments.

[fn19] 1998 SEC No-Act. LEXIS 180 and 397 (both on Feb. 6, 1998).

§ 26.04[B] Foregoing Charitable Contributions in Favor of Dividends

The SEC staff requires inclusion of proposals requiring companies to limit corporate charitable contributions and instead distribute the funds to shareholders. The staff's rationale for this position appears to be that this subject relates more to corporate charitable giving policy than to dividend amounts.

EXAMPLE:

In American Express Company,[fn20] the SEC staff denied no-action relief on a proposal requesting that the company refrain from making any charitable contributions and distribute money previously used for that purpose to shareholders. The company argued that the proposal involved a special dividend to be made in the amount normally allocated to the company's charitable programs.

[fn20] 1997 SEC No-Act. LEXIS 115 (Jan. 22, 1997).

§ 26.04[C] Foregoing Dividends in Favor of Charitable Contributions

The SEC staff denied a request to exclude a proposal that sought to have a company establish a plan to allow shareholders to decrease or eliminate their dividends on an individual basis so that the funds saved from these decisions — along with matching "gifts" from the company — could be used as charitable contributions.

EXAMPLE:

In AT&T Corp.,[fn21] the proposal asked the company to adopt a "matching gift program" to enable shareholders to donate their dividends to qualifying organizations and the company to match such contributions. The company argued that the proposal would increase the amount of its dividend by requiring the company to match any shareholder contributions of their dividend payments. The proponent's rebuttal did not address the exclusion.

[fn21] 2000 SEC No-Act. LEXIS 224 (Feb. 17, 2000).

§ 26.05 Tying Executive Compensation to Dividend Payouts

Since the SEC staff changed its position regarding the exclusion of executive compensation proposals under the ordinary business exclusion in 1992, proponents have found some success tying dividend payouts to executive compensation levels, particularly incentive compensation.

Whether these proposals are excludable appears to depend on whether the proposal is viewed as one that relates more to executive compensation levels and does not set a formula that results in specific amounts of dividends. The key is how the proposal is framed.

If a proposal ties executive compensation to a specific dividend level, the SEC staff will probably consider it to be an executive compensation proposal and require it to be included. On the other hand, if a proposal ties dividend levels to specific compensation levels, the staff probably will allow it to be excluded as a dividend proposal.

EXAMPLES:

Executive compensation tied to dividend levels

In Morgan Stanley Dean Witter,[fn22] and AirTouch Communications,[fn23] the same proponent defeated no-action requests regarding two proposals asking the board of each company to adopt a policy of tying at least half of executive compensation to the level of the annual dividend payout. The companies argued that the proposals had a profound impact on how they set their dividend levels and cited prior no-action letters involving dividends tied to executive compensation levels. Regarding the former proposal, the proponent did not submit a rebuttal. In the latter one, the proponent noted that it did not ask the board to declare a certain level of dividends or any dividends at all, but rather only asked the board to use dividends as a gauge for incentive pay.
In Ford Motor Company,[fn24] the SEC staff required the company to include a proposal asking the board to adopt a policy providing that, if the dividend is cut, the executive officers are prohibited from receiving salary raises or new grants of stock options until the dividend is restored to its original amount. The company argued that the proposal is no different from those seeking to establish a specific dividend amount, and contended that the proposal would hinder its ability to respond to competitive conditions in setting compensation levels for senior management. In its response, the SEC staff noted that the proposal appeared to relate to the circumstances under which salaries are increased and options granted rather than to specific amounts of cash or stock dividends.

EXAMPLES:

Dividends tied to executive compensation levels

In Wachovia Corporation,[fn24.1] the company was allowed to exclude a proposal that related to reducing the total compensation of executive officers and the board until the company's dividend level returned to $1.92 per share for a minimum of one year.
In PacifiCorp,[fn25] the company was permitted to exclude a proposal asking the board to increase dividends by the same percentage as total compensation. The company argued that the proposal would have the effect of determining its dividend policy by tying the level to executive compensation. The proponent did not submit a rebuttal.
In COM/Energy Services Company,[fn26] the company successfully excluded two similar proposals in two successive years. The latter proposal sought to limit the rate of increase of salary and benefits of the top 150 officers and employees of the company to the annual rate of increase in cash or stock cash dividends paid to common shareholders; the former proposal was identical except that it sought to limit compensation of the members of the company's board of trustees, as opposed to officers and employees. In both requests, the company argued that while the proposal did not specify the amount of a dividend, the proposal would have the effect of determining its dividend policy. The proponent did not submit a rebuttal.
In Boeing Company,[fn27] the SEC staff granted no-action relief with respect to a proposal that sought to impose a moratorium on salary increases and bonuses until the dividend was increased by 35%. The company noted that although the proposal was ambiguous, the proposed moratorium on salary increases or bonuses was clearly intended to cause the board to increase its cash and/or stock dividends by a specified percentage.

[fn22] 1998 SEC No-Act. LEXIS 1074 (Dec. 18, 1998).

[fn23] 1998 SEC No-Act. LEXIS 1028 (Dec. 3, 1998).

[fn24] 1995 SEC No-Act. LEXIS 158 (Jan. 23, 1995).

[fn24.1] 2002 SEC No-Act. LEXIS 261 (Feb. 17, 2002).

[fn25] 1999 SEC No-Act. LEXIS 284 (Mar. 8, 1999).

[fn26] 1997 SEC No-Act. LEXIS 297 (Feb. 14, 1997) and 1998 SEC No-Act. LEXIS 321 (Mar. 2, 1998).

[fn27] 1998 SEC No-Act. LEXIS 199 (Feb. 7, 1998).

§ 26.06 Specific Amounts Excludable

While this exclusion allows companies to exclude proposals that specify a dividend amount, it is not always readily apparent that a particular proposal involves a specific amount. To exclude these proposals, companies are required to show how specific amounts are implied by a proposal.

§ 26.05[A] Human Rights

The SEC staff consistently allows companies to exclude proposals that seek higher or lower levels of specific dividend payments.

EXAMPLES:

To increase the company's dividends by 10%[fn27.1]
To raise dividends by 10 cents every quarter[fn28]
That a minimum annual dividend of 52% of earnings per share be paid[fn29]
That the company change its dividend policy to monthly shareholder distribution of 1% of its net assets[fn30]
To declare an annual dividend of at least 30% of earnings[fn31]
For dividend increase to $3 per share[fn32]

[fn27.1] Exelon Corporation, 2002 SEC No-Act. LEXIS 267 (Mar. 2, 2002).

[fn28] General Motors Corp., 2000 SEC No-Act. LEXIS 529 (Apr. 7, 2000).

[fn29] International Business Machines Corporation, 1999 SEC No-Act. LEXIS 943 (Dec. 9, 1999).

[fn30] Tri-Continental Corporation, 1999 SEC No-Act. LEXIS 171 (Feb. 11, 1999).

[fn31] Safeway Inc., 1998 SEC No-Act. LEXIS 360 (Mar. 4, 1998).

[fn32] International Business Machines Corporation, 1996 SEC No-Act. LEXIS 917 (Dec. 11, 1996).

§ 26.06[B] Range of Dividends

Proposals that seek higher or lower levels of dividend payments within a specified range will generally be found to be excludable by the SEC staff.

EXAMPLE:

To distribute a portion of the company's excess regulatory capital through a special dividend of between $5 and $7 per share[fn33]

[fn33] Empire Federal Bancorp, Inc., 1999 SEC No-Act. LEXIS 412 (Apr. 7, 1999).

§ 26.06[C] Elimination of Dividends

The SEC staff generally allows companies to exclude proposals requesting that dividend payments cease altogether on the theory that these proposals seek a specific amount — the amount of zero. Proposals like these are excludable regardless of whether the proponent suggests how the company should use the funds it would save by foregoing dividends.

EXAMPLES:

In Minnesota Mining and Manufacturing Company,[fn34] the company successfully excluded a proposal eliminating the payment of dividends and establishing a plan under which shareholders could deposit their shares with the company and instruct it to sell a specified number of shares monthly or quarterly.
Proposals asking the company to buy back shares rather than pay dividends: Minnesota Mining and Manufacturing Company;[fn35] Ford Motor Company;[fn36] AT&T Corp.[fn37]

[fn34] 2001 SEC No-Act. LEXIS 341 (Mar. 6, 2001).

[fn35] 2001 SEC No-Act. LEXIS 205 (Feb. 10, 2001).

[fn36] 2001 SEC No-Act. LEXIS 128 (Jan. 24, 2001).

[fn37] 2001 SEC No-Act. LEXIS 11 (Jan. 2, 2001).

§ 26.06[D] Suspension of Dividends

The SEC staff normally allows companies to exclude proposals that would suspend or delay the payment of dividends for a particular period for the same reason that proposals seeking permanent elimination of dividends are excludable: the staff interprets a request for the suspension of dividend payments as seeking the specific dividend amount of zero.

EXAMPLES:

In National Mine Service Co.,[fn38] the company was permitted to exclude a proposal providing that dividends for the upcoming fiscal year be eliminated.

[fn38] 1981 SEC No-Act. LEXIS 4022 (Sept. 3, 1981).

§ 26.06[E] Dividend Formulas

Proposals containing formulas that result in specific amounts are generally considered to be excludable by the SEC staff. If a specific amount cannot be derived from a formula proposal, the proposal is treated as a dividend policy proposal, and the SEC staff requires inclusion. Sometimes, however, it can be difficult to determine if a formula does indeed result in a specific amount. In these cases, a company may struggle to satisfy its burden of proof.

EXAMPLE:

Inclusion

In Alltel Corp.,[fn39] the SEC staff denied no-action relief on a proposal recommending that the stock be split when the stock price exceeds $1,000 and shareholders have approved the split. The company argued that the formula resulted in a specific amount of dividends in two ways: first, by prohibiting all stock splits unless the company's stock price exceeded $1,000; and second, by imposing a shareholder approval requirement, which could result in the payment of the specific amount of "zero" dividends. The SEC staff did not agree and noted in its response that the proposal did not contain a formula that would result in a specific amount. The proponent did not submit a rebuttal.

EXAMPLES:

Exclusion

That the company return to shareholders an annual amount equal to or greater than the prior year's percentage of dividend earnings per share[fn40]
To pay a dividend of no less than 50% of net annual income[fn41]
To pay an annual dividend equal to 52% of earnings per share[fn42]
To change its dividend policy to distribute 1% of net assets monthly[fn43]
That cash dividends equal 50% of net earnings[fn44]
To pay a cash dividend in an amount not less than the income received as interest and dividends from invested capital[fn45]
That all capital gains be distributed to shareholders in the form of dividends[fn46]

[fn39] 2000 SEC No-Act. LEXIS 157 (Feb. 7, 2000).

[fn40] International Business Machines Corporation, 2001 SEC No-Act. LEXIS 10 (Jan. 2, 2001).

[fn41] Lydall, Inc., 2000 SEC No-Act. LEXIS 420 (Mar. 28, 2000).

[fn42] International Business Machines Corporation, 1999 SEC No-Act. LEXIS 943 (Dec. 9, 1999).

[fn43] Tri-Continental Corporation, 1999 SEC No-Act. LEXIS 171 (Feb. 11, 1999).

[fn44] International Business Machines Corporation, 1997 SEC No-Act. LEXIS 1080 (Dec. 23, 1997).

[fn45] St. Jude Medical, Inc., 1992 SEC No-Act. LEXIS 399 (Mar. 23, 1992).

[fn46] Gabelli Equity Trust, Inc., 1990 SEC No-Act. LEXIS 431 (Feb. 23, 1990).

§ 26.06[F] Replacement of Cash Dividends with Stock Dividends

Some proponents seek the elimination of cash dividends altogether; such proposals have long been considered excludable because they involve the specific amount of zero. As a result, some proponents have unsuccessfully sought other ways to propose elimination.

The most common of these methods is to propose the substitution of stock dividends for cash dividends. The SEC staff consistently allows companies to exclude these proposals. Companies typically note that the implicit goal of these proposals is to cut the dividend. Another argument often offered is that by equating the stock dividend to the current cash dividend, the proposals implicitly use a formula to compute a specific stock dividend amount. A company seeking exclusion of a proposal seeking a substitution of stock dividends for cash dividends must explain in its no-action request how the proposal implies a specific amount or is aimed at eliminating the dividend entirely.

EXAMPLES:

Exclusion

In Eastman Chemical Company,[fn47] the company successfully excluded a proposal that asked the board to declare stock dividends in the amount that cash dividends were currently being paid. The company argued that, although it was not explicitly stated in the proposals, it was clear that no cash dividend would be paid if the proposals were implemented. Instead, the company would pay only stock dividends. The company argued that the proposal related to a specific amount of cash dividends — namely, zero. The proponent did not submit a rebuttal.
In General Motors Corp.,[fn48] the SEC staff granted no-action relief on a proposal that asked the board to pay, if feasible, stock dividends approximating the value of the present cash dividend being paid. The company noted that while the proposal did not on its face specify an arbitrary stock dividend amount, by equating the stock dividend to the company's current cash dividend, the proposal would implicitly require a formula to be used to compute a specific stock dividend amount.
In BellSouth Corp.,[fn49] the SEC staff denied no-action relief on a proposal recommending that the board consider paying stock dividends in an amount equal to the cash dividends that would otherwise be paid. The company acknowledged that the proposal did not specify the amount of stock dividends or a formula for calculating such an amount, but argued that the proposal clearly referred to the present dividend, which implied a specific amount from which to calculate the stock dividend. However, the company did not provide any analysis to support this statement. In its response, the SEC staff stated that the company had not met its burden of establishing that the proposal referred to a specific amount of dividends or a formula for calculating a specific amount.

[fn47] 2000 SEC No-Act. LEXIS 325 (Mar. 8, 2000).

[fn48] 2000 SEC No-Act. LEXIS 167 (Feb. 14, 2000).

[fn49] 2000 SEC No-Act. LEXIS 51 (Jan. 18, 2000).

§ 26.07 Practice Pointers

Company Practice Pointers

Argue under both the ordinary business and dividend exclusions. Since dividends historically have been the province of the board under state law, it is logical that companies raise both exclusions. However, it is now well established that dividend policy proposals — as opposed to proposals seeking to establish a specific dividend amount — are not excludable under either exclusion.

Provide a complete analysis. To obtain no-action relief under this exclusion, a company must show that a proposal relates to specific levels of dividends. In most cases, this is easily done. In the more complex situations, such as those involving a formula, companies should provide a complete analysis of how specific amounts are implied by the proposal.

Proponent Practice Pointers

Beware of problematic terminology. To avoid exclusion, proponents should avoid mentioning specific amounts of cash or stock dividends and focus the discussion in the proposal and supporting statement on dividend policy as much as possible, including specifically using the term "dividend policy." In addition, the form of the proposal should clearly be precatory to avoid omission under the exclusion relating to improper subjects for shareholder action under state law.

Make policy arguments. Proponents also can raise the arguments that have been made by several commentators that the exclusion is inconsistent with Rule 14a-8's overall purpose. As critics note, this exclusion may not be relevant today since dividend levels are not a determinative investment factor for most investors. Since the policy considerations that led to the exclusion's adoption are less compelling today, there may be less need to preserve the board's exclusive hold on setting dividend levels. Although rare, the SEC staff will occasionally change its interpretation of an exclusion basis without the benefit of going through the formal notice and comment process. This exclusion probably is riper for change than most other bases.

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