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SEC Issues Guidance on Shareholder Access Proposal Rule

Reese Darragh | October 19, 2011

Staff at the Securities and Exchange Commission's Corporate Finance Division issued legal guidance yesterday to address issues shareholders may have when proving their eligibility to submit shareholder access proposals next proxy season.

Other issues addressed in the staff legal bulletin include: procedures for shareholders to submit revised proposals in situations when they were first rejected by companies, procedures to withdraw no-action requests, and details on a new process by Corp Fin to transmit no-action responses by email.

The legal bulletin was issued to further elaborate on shareholders' rights under the shareholder access proposal rule. Corp Fin staff reiterated that the rule is non-binding and only serves to provide more information to shareholders who plan to submit proposals on the adoption of procedural changes to enable future proxy nominations by shareholders.

The shareholder access proposal rule went into effect on September 13. In the upcoming proxy season, the rule will allow eligible shareholders to ask companies to include shareholder proposals regarding proxy access procedures in their proxy materials. Rule 14a-8 also gives further opportunity for shareholders to establish proxy access standards in companies. The SEC had previously placed a stay order on the rule while waiting to resolve litigation matter on the now-snubbed proxy access rule.

Details of the guidance by Corp Fin staff include:

  • Shareholders' eligibility to submit a proposal

-          Shareholders who have held shares worth more than $2000 or 1 percent of company's securities for at least one year can submit proposals;

-          Registered shareholders can have their share ownership verified independently by an independent company

-          Shareholders who hold their securities through intermediaries or beneficial owners can have their share ownership verified by the record holder of the securities.

  • Role of Depository Trust Company (DTC)

-          Large banks or companies who place their customers share ownership through a depository trust company can request information of securities holdings at a specified date, which identifies the participants having a position in the company's securities and the number of securities held by each participant on that date.

  • Brokers and banks acting as record holder

-          Only DTC participants should be viewed as record holders of securities that are deposited at the DTC company

  • Common errors to avoid in submitting proof of eligibility to companies

-          Make sure proof of ownership letters contain information verifying that shareholders have “continuously held at least $2,000 in market value, or 1 precent, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the proposal

-          Ensure letter confirms continuous ownership of securities

  • Submission of revised proposal

-          Clarifications on revised proposal submission to fulfill the timeliness requirements

  • Division's use of email to transmit no-action responses

-          Both companies and shareholders should include email addresses in order for Corp Fin's staff to send their responses electronically

-          Only staff responses will be included in the emails