June 5, 1998
SEC ADOPTS CHANGES TO SHAREHOLDER PROPOSAL RULES
The SEC recently adopted certain changes to the rules governing the shareholder proposal process. The changes, while relatively modest in comparison to the more sweeping revisions proposed by the SEC last September, have some important implications: • The "ordinary business" exclusion under Rule 14a-8 will be applied by the SEC on a case-by-case basis to employment-related shareholder proposals having "social policy" implications. • There are additional restrictions on a Company's ability to use discretionary voting authority in connection with shareholder proposals submitted outside the scope of Rule 14a-8.* There is an additional required disclosure in all proxy statements concerning the timing of submission of non-Rule 14a-8 shareholder proposals. • Because the SEC has created a new interrelationship between the timing of non-Rule 14a-8 shareholder proposals and a Company's advance notice by-laws, these by-law provisions should be reviewed to determine whether modifications are appropriate.
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A proposal submitted outside the scope of Rule 14a-8 is one submitted by a shareholder who chooses not to invoke the procedures of the Rule, but instead notifies a Company of his or her intention to present the proposal for a vote at a shareholders' meeting. Such a proposal, therefore, is neither subject to the requirements, nor entitled to the benefits, of Rule 14a-8.
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Rule Changes.
1. Reversal of "Cracker Barrel" Position. The SEC has reversed the controversial position taken in its 1992 Cracker Barrel no action letter. That ruling permitted a Company to omit from its proxy statement any Rule 14a-8 proposal relating to the Company's non-executive employees, even if the proposal raised significant social policy issues. With a return to its preCracker Barrel approach, the SEC will now make a case-by-case determination as to whether it will grant no action relief to a Company seeking to exclude such a proposal from its proxy statement. 2. Discretionary Voting on Non-Rule 14a-8 Proposals. The new rules modify the SEC's previous interpretive position concerning the use of discretionary voting authority when a Company is faced with a non-Rule 14a-8 shareholder proposal. Discretionary authority is now available if the Company does not receive notice of the proposal by a specified deadline date -45 days before the anniversary of the date on which the Company mailed its proxy materials for the prior year's annual meeting (unless a shorter or longer period is specified in a Company's advance notice by-law in which case the provisions of the by-law control). If, however, a non-Rule 14a-8 proposal is received on a "timely" basis (i.e., on or before the deadline date), the Company's ability to use discretionary voting authority will depend upon whether the proponent also informs the Company on a "timely" basis of its intention to distribute its own proxy statement and proxy card to the holders of at least a majority of the shares (or such higher percentage of shares as may be necessary in order for the proposal to be adopted). If the proponent gives timely notice of its intention to solicit (and provides subsequent evidence that such solicitation is, in fact, being conducted), the Company is required to include the proposal in its proxy statement and proxy card, and will not have discretionary voting authority. In addition, the Company will be required to file its proxy statement with the SEC in preliminary form. On the other hand, if the proponent does not provide timely notice of its intention to solicit, the Company may exercise discretionary voting authority provided that it discloses in its proxy statement the nature of the proposal and how it intends to use its discretionary voting authority. The inclusion of such disclosures will not require a preliminary filing of the proxy statement. In a revision to the rules applicable to all Companies, proxy statements must disclose, in addition to the usual Rule 14a-8 submission date, the deadline for timely submission of non-Rule 14a-8 proposals. 3. Other Changes. The new rules include some other technical changes: (i) the
stock ownership eligibility threshold for Rule 14a-8 proposals is now $2,000 in market value instead of $1,000; (ii) if the date of an annual meeting is advanced or delayed by more than 30 days from the date of the prior year's meeting, the Company is required to inform shareholders
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(including, if practicable, by notice in Item 5 of its next Form 10-Q filing) of the change in meeting date and the new deadline dates for submission of Rule 14a-8 and non-Rule 14a-8 proposals; and (iii) there is now a uniform 14-calendar day period for a Company to notify a proponent of any eligibility or procedural defects in the submission of a Rule 14a-8 proposal. 4. "Plain English" Q&A Format. Rule 14a-8 has been entirely recast in a simplified Q&A format for the stated purpose of making it more understandable. The bases for omitting proposals from a Company's proxy statement -- which previously had appeared in Rule 14a-8(c) -- are now set forth in the answers to Question 9. II. Effect on Advance Notice By-Laws. As discussed above, the new rules provide that the "timeliness" deadline date for non-Rule 14a-8 proposals is overridden by the provisions of a Company's advance notice by-law. As a result, two issues may arise: • First, the typical advance notice by-law which requires 60 (or sometimes fewer) days advance notice will have the effect of extending the deadline and providing the proponent with additional time to make a timely submission of a non-Rule 14a-8 proposal. This can be avoided by having a 90-day advance notice by-law period.** Second, Companies with advance notice by-law provisions tied to the date of the current year's annual meeting may have difficulty specifying in their prior year's proxy statement the deadline date for timely submission of non-Rule 14a-8 proposals. This can be avoided by tying the advance notice period to the anniversary date of the prior year's annual meeting.
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For example, if a Company typically holds its annual meeting on April 30 and mails its proxy statement five weeks earlier on March 25, in the absence of an advance notice by-law, the deadline date for timely submission of a non-Rule 14a-8 proposal would be February 8 (45 days before the March 25 mailing date). With a 60-day advance notice by-law, however, the deadline date for timely submission would be extended by three weeks to March 1 (60 days prior to the April 30 meeting date). With a 90-day advance notice by-law, the deadline date would be January 30.
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III.
SEC Proposals Not Adopted.
The SEC decided not to adopt many of its previously proposed changes to Rule 14a-8. The proposals not adopted include the following: • A provision that would have permitted the holders of 3% of a Company's voting shares to override an SEC no action letter permitting the exclusion of a shareholder proposal on either "ordinary business" or "relevance" grounds. An increase in the "resubmission" thresholds (i.e., the percentage of the vote that a proposal needs before it can be resubmitted in future years). A modification of the "personal grievance" exclusion so that the SEC would take "no position" if the proposal was facially neutral. A modification of the "relevance" exclusion to create a purely economic standard. • The elimination of the Company's obligation to furnish the proponent with a copy of its opposing statement at least 30 days prior to filing its definitive proxy statement. * * *
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The change in the Cracker Barrel position was effective May 21, 1998; the other changes will become effective on June 29, 1998. If you have any questions regarding the new shareholder proposal rules or would like a copy of the adopting Release (No. 34-40018), please call your usual contact person at Skadden, Arps. You also may call Daniel E. Stoller (212-735-3360), David J. Friedman (212735-2218) or Richard J. Grossman (212-735-2116) in our New York office, or Michael P. Rogan (202-371-7550) in our Washington, D.C. office.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates (collectively referred to as "Skadden, Arps" or the "firm") for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum may be considered advertising under applicable state laws.
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