As an alternative to submitting a shareholder proposal under
Rule 14a-8, a shareholder can present a proposal from the floor at a
shareholders' meeting. These so-called "floor resolutions" allow
shareholders to bypass the procedural and substantive restrictions in
Rule 14a-8.
The conduct of shareholders' meetings is governed by state law and the
company's governance documents, including the charter and bylaws. The SEC
does not directly regulate meeting conduct. State law imposes only
limited requirements, so most meetings are governed by procedures set
forth in the company's bylaws. In the absence of any guidance in the
bylaws, meeting conduct is based on rules of procedure that are announced
at the beginning of meetings or described in meeting handouts.
Many companies use Robert's Rules of Order. Some companies use their
own simpler procedures since Robert's Rules were developed for meetings
where the members are present and not voting by proxy.
As a practical matter, the conduct of a shareholders'meeting is in the
hands of the meeting's chairperson, who is responsible for preserving
order and setting the tone and style of the meeting. This person
typically is the chairman of the board of directors or the chief
executive officer. The chairperson makes the rulings on both substantive
and procedural matters and normally has wide latitude in its rulings. The
recently issued American Bar Association "Handbook for the Conduct of
Shareholders' Meetings" endorses the view that the chairperson should
have wide latitude.
§ 34.03 Compliance with Advance Notice Bylaw Provision
The bylaws of many companies contain a provision requiring a
shareholder to provide advance notice if it wants to raise a matter from
the floor at a shareholders' meeting. Under Rule 14a-5(e)(2), the SEC
requires that companies disclose such advance notice
requirements in their proxy statements. Typically, as permitted under
most state laws, the advance notice period is ten calendar days before
the meeting date, but may be as long as 60 days or more.
Unless adopted to defeat a particular proposal, advance notice bylaw
provisions are valid and can serve as the basis for the chairperson to
rule out of order the resolution of a shareholder who has failed to
comply with the notice requirement.
§ 34.04 Presentation at the Meeting
Shareholders who are recognized by the chairperson to speak normally
are given a fixed amount of time within which to introduce a motion. This
time is generally announced at the beginning of the meeting or specified
in a handout. Absent a requirement under state law or the company's
governance documents, there is no requirement that motions be seconded
and some states, including Delaware, forbid second requirements.
Some companies place strict and tight time constraints on
shareholders. Other companies are more flexible and will allow for
lengthy presentations so long as they are made in a courteous tone.
§ 34.05 Floor Resolutions
§ 34.05[A] Advantages
Often, proponents use floor proposals because their shareholder
proposals were submitted pursuant to Rule 14a-8 and excluded on procedural
or substantive grounds, or because the shareholder judged that such
exclusion was likely and chose to sidestep the Rule 14a-8 process. None
of the procedural limitations of Rule 14a-8 apply to floor proposals, so
a shareholder need not hold its shares for one year, own shares worth at
least $2,000 or limit itself to one proposal. Similarly, a shareholder
may present a proposal dealing with a subject, such as ordinary business
matters or binding changes to a company's governance documents that would
result in exclusion if submitted pursuant to Rule 14a-8. However, both
the substance and procedure of floor proposals remain subject to
restrictions imposed by state law and the company's governance
documents, and, if a proponent undertakes an independent solicitation, by
the proxy rules applicable to such solicitations.
§ 34.05[B] Disadvantages
Compared with proposals submitted pursuant to Rule 14a-8, floor
resolutions often do not receive the same amount of attention from
shareholders since they are not mentioned in the company's proxy
materials nor are the voting results disclosed in a subsequent SEC
filing. Indeed, some floor proposals have garnered less than 1 or 2% of
the vote.[fn1]
A shareholder may elect to conduct an independent solicitation for
votes in favor of the proposal, but such a solicitation can cost hundreds
of thousands — even millions — of dollars, depending on how
fragmented the shareholder base is, the number of shareholders targeted
for solicitation, and the means selected to communicate with
shareholders. In contrast, requiring the company to include a proposal
pursuant to Rule 14a-8 is virtually cost-free to the shareholders, except
to the extent the shareholder incurs legal fees in connection with
drafting the proposal or defending against a no-action request. In light
of these disadvantages, floor resolutions are not generally submitted
with the goal of achieving a high vote; rather, proponents usually aim to
educate management or attempt to attract media attention to an issue.
[fn1] See Stewart J. Schwab & Randall S. Thomas, "Realigning Corporate
Governance: Shareholder Activism by Labor Unions," 96 Mich. L. Rev. 1018,
1062 (1998).
§ 34.06 Discretionary Voting
When management solicits proxies, the proxies typically confer on
management the right to use its discretion to make a voting decision for
a shareholder if the shareholder returns an unmarked proxy card or fails
to cast a vote on one or more items on the card, or if matters other than
those addressed on the card arise at the meeting. Rule 14a-4 governs
management's use of this discretionary voting authority.[fn2]
Under Rule 14a-4(b)(1), a proxy may confer discretionary authority with
respect to matters as to which a choice is not specified by the
shareholder as long as the form of proxy states in bold-face
type how the shares will be voted in such a case. Rule 14a-4(c)
establishes additional requirements applicable to certain matters,
including shareholder proposals presented outside of the Rule 14a-8
process.[fn3]
Rule 14a-4(c) divides matters into two categories: those about which
the company received timely notice and those about which it did not
receive such notice. Timely notice with respect to an annual meeting of
shareholders is defined in Rule 14a-4(c)(1) as notice received by the
company (i) at least 45 days before the date on which the company first
mailed its proxy materials for the prior year's annual meeting or (ii) on
or before the date specified by an advance notice bylaw provision.[fn4]
If the company did not hold an annual meeting in the prior year, or if
the date of the meeting has changed by more than 30 days from the prior
year, notice is timely if received a reasonable time before the company
mails its proxy materials for the current year. A similar standard
applies in the case of matters to be presented at a special meeting or in
a solicitation of written consents, where Rule 14a-4(c)(3) permits the
exercise of discretionary authority with respect to matters about which
the company was not notified "a reasonable time before the solicitation,"
provided the proxy statement contains a statement to that effect.
Under Rule 14a-4(c)(2), a proxy may confer discretionary authority to
vote on a matter to be presented at an annual meeting with respect to
which the company received timely notice[fn5] if the company includes in
its proxy statement (i) "advice on the nature of the matter" and (ii)
information on how the company intends to exercise its discretion to vote
on the matter. The SEC has emphasized that the "advice" provided by a
company pursuant to this subsection is subject to the anti-fraud requirements of Rule 14a-9.[fn6] In one case, a U.S. district court found that a company had violated Rule 14a-9 by
inadequately describing a proposal regarding shareholder amendment of the
bylaws, reasoning that "[c]hanges in the relative power of shareholder
and director bear a strong semblance of materiality."[fn7]
A company may be prohibited from exercising discretionary authority
regarding a matter, despite provision of the advice and voting
information described above, if a shareholder undertakes an independent
solicitation of votes in favor of the proposal and satisfies certain
requirements designed to verify the existence of the solicitation.
Specifically, Rule 14a-4(c)(2) provides that a company may not exercise
discretionary authority on a proposal if the proponent:
certifies in writing to the company, by the "timely notice"
date established pursuant to Rule 14a-4(c)(1), that it intends to
solicit holders of at least the number of shares needed to pass
the proposal;
includes the same statement in its proxy materials;[fn8] and
provides evidence that the solicitation did in fact occur, in
the form of a statement from the proponent's proxy solicitor or other
person with knowledge of the solicitation that the necessary steps
were taken to deliver a proxy statement and form of proxy to holders
of the number of shares required to prevail.
[fn2] 17 C.F.R. § 240.14a-4 (2001).
[fn3] It is important to note that a company may exercise discretionary
authority with respect to a proposal omitted from the company's proxy
pursuant to Rule 14a-8 or 14a-9 regardless of whether the company
receives timely notice or the shareholder complies with the "proof of
solicitation" requirements discussed below. See Rule 14a-4(c)(6).
[fn4] See supra § 34.03.
[fn5] Rule 14a-4 implies, although it does not explicitly state, that
a company may exercise discretionary authority regarding matters about
which it does not receive timely notice.
[fn6] See Exchange Act Release No. 40,018, 1998 SEC LEXIS 1001 at *33
(May 21, 1998) ("We remind you that the disclosure prescribed by amended
rule 14a-4(c)(2), as with any disclosure item, must take into account the
disclosure requirements of the proxy anti-fraud rule.") (hereinafter
"1998 Release").
[fn7] Fountain v. Avondale Industries, Inc., 1995 U.S. Dist. LEXIS 5598,
at *7 (Apr. 21, 1995).
[fn8] The purpose of this requirement is to "underscore the applicability
of rule 14a-9" to the proponent's statement regarding its intentions.
See 1998 Release, supra note 6, at *39.
§ 34.07 Disclosure Considerations
Note B to Item 7 of Schedule 14A provides, "Where any item calls for
information with respect to any matter to be acted upon at the meeting,
such item need be answered in the registrant's soliciting
material only with respect to proposals to be made by or on behalf of the
registrant."[fn9] Under this provision, then, a company need not disclose
the existence or substance of a non-14a-8 shareholder proposal, even if
it has received timely notice of the proponent's intent to present it at
the upcoming meeting, unless it seeks to exercise discretionary authority
to vote against the proposal.[fn10]
However, Rule 14a-9 may in some circumstances require greater
disclosure than that required by Schedule 14A, although neither the
courts nor the SEC have addressed the issue. The SEC staff has opined
that, with regard to the election of directors, neither Schedule 14A nor
Items 401 or 404 of Regulation S-K (incorporated into Schedule 14A)
require a company to provide information in its proxy statement regarding
nominees other than those specifically nominated by the company. The
staff pointed to Note B, set forth above, for the principle that a
soliciting party need only describe matters for which it is seeking proxy
authority. The staff noted, however, that its no-action advice did not
address the application of Rule 14a-9 to the fact pattern.[fn11]
[fn9] 17 C.F.R. § 240.14a-101 (2001).
[fn10] See supra § 34.06 regarding discretionary voting authority.
[fn11] American Society of Corporate Secretaries, 1996 SEC No-Act. LEXIS
265 (Feb. 27, 1998).
§ 34.08 Practice Pointers
Company Practice Pointers
Educate meeting attendees. It may be useful to provide handouts of the
rules of the meeting to attendees as they walk in the door so that they
are on notice of what is expected if they choose to speak. The rules
should not be unreasonable (e.g., only one minute to address the
attendees) but also not too loose (e.g,. no time limit). It is also
important to have designated personnel on hand to remove any
uncooperative attendees in a professional manner.
Preparation for possible meeting scenarios. Although it is impossible to
script every situation, it is not unusual for an unexpected shareholder
motion or resolution for the floor to be ruled out of order. To help
ensure that an "out of order" ruling is not the result of an
overreaction, the chairperson should get comfortable that some
disturbances at a stockholders' meeting are unavoidable and be mindful of
the media implications of an outburst.
Shareholder Practice Pointers
Give the chair a "heads up". Since the chairperson has wide latitude to
conduct the meeting, a shareholder may not want to surprise the chair by
announcing that she wishes to make a floor resolution. By contacting the
company prior to the meeting, the shareholder can find out what the
appropriate procedures are to raise its resolution without being ruled
"out of order."
Company Practice Pointers