10 Tips for Dealing with Shareholder Proposals

From PLI’s Course Handbook

14th Annual Preparation of Annual Disclosure Documents

#22438

10 tips for dealing with

shareholder proposals

Rick E. Hansen

Chevron Corporation

10 Tips for Dealing with Shareholder Proposals

Rick E. Hansen, Counsel, Chevron Corporation

1. Know the rules and be familiar with the Staff’s guidance. Shareholder proposals are subject to many procedural and substantive requirements and considerations. Key resources include the following items. Staff Legal Bulletins are available at

Regulation 14A, Rule 14a-8, Shareholder Proposals, which contains the rules governing shareholder proposals.

Staff Legal Bulletin No. 14, Shareholder Proposals (July 13, 2001), which explains the Rule 14a-8 no-action process and addresses matters of interest to companies and shareholder proponents.

Staff Legal Bulletin No. 14A, Shareholder Proposals (July 12, 2002), which clarifies the Staff’s position on shareholder proposals relating to equity compensation plans.

Staff Legal Bulletin No. 14B, Shareholder Proposals (September 15, 2004), which clarifies and updates some of the guidance contained in SLB No. 14.

Staff Legal Bulletin No. 14C, Shareholder Proposals (June 28, 2005), which addresses additional matters of interest to companies and proponents, and clarifies and updates some of the guidance contained in SLB No. 14 and SLB No. 14B.

Staff Legal Bulletin No. 14D, Shareholder Proposals (November 7, 2008), which clarifies the Staff’s position on shareholder proposals recommending, requesting, or requiring a board of directors to unilaterally amend the company’s articles or certificate of incorporation.

2. Know the deadlines. The shareholder proposal process includes many important deadlines. Staff Legal Bulletin Nos. 14 and 14B contain extensive guidance as to determining the appropriate deadlines.

Proposals for a regularly scheduled annual meeting must be received at the company's principal executive offices not less than 120 calendar days before the release date of the previous year's annual meeting proxy statement.

If a company seeks to exclude a proposal because the shareholder has not complied with the procedural requirements of Rule14a-8, it must notify the shareholder of the alleged defect(s) within 14 calendar days of receiving the proposal. The shareholder then has 14 calendar days after receiving the notification to respond.

If a company intends to exclude a proposal from its proxy materials, it must submit its no-actionletter request to the SEC no later than 80 calendar days before it files its definitive proxy statement and form of proxy.

If a proposal appears in a company's proxy materials the company is required to provide the shareholder with a copy of its statement in opposition no later than 30 calendar days before it files its definitive proxy statement and form of proxy.

3. Check proposals for procedural defects as soon as they are received. Shareholder proposals must meet certain procedural requirements relating to timeliness, ownership and proof thereof, and form. Timing is critical. If a company seeks to exclude a proposal because the shareholder has not complied with an eligibility or procedural requirement of Rule14a-8, it must notify the shareholder of the alleged defect(s) within 14 calendar days of receiving the proposal. The shareholder then has 14 calendar days after receiving the notification to respond. Staff Legal Bulletin Nos. 14, 14B, 14C and 14D contain extensive guidance as to procedural defects issues.

4. Make sure your “notice of procedural defects” is correct as to form and content. Staff Legal Bulletin Nos. 14, 14B, 14C and 14D contain very specific guidance as to the appropriate form and content of correspondence with shareholder proponents to apprise them of procedural defects. At a minimum you should:

provide adequate detail about what the shareholder proponent must do to remedy the eligibility or procedural defect(s);

include a copy of Rule 14a-8 with the notice of defect(s);

explicitly state that the shareholder proponent must transmit his or her response to the company's notice within 14 calendar days of receiving the notice of defect(s); and

send the notification by a means that allows the company to determine when the shareholder proponent received the letter.

5. Reach out to the proponent early in the process. A willingness to dialogue with shareholder proponents can create goodwill and reduce proposals. Sometimes shareholder proponents submit a proposal simply as a means of getting the company's attention and encouraging dialogue. If you can reach out to proponents sooner rather than later to discuss their proposal you may be surprised to find they are willing to withdraw the proposal in exchange for dialogue.

6. Determine whether you have a valid basis for seeking to exclude the proposal via the Staff’s no-action letter process. Proposals can be excluded on the basis of procedural and substantive defects. Rule 14a-8(i) lists 13 different substantive bases upon which proposals may be challenged including improper under state law ((i)(1)), ordinary business ((i)(7)), substantially implemented ((i)(10)) and resubmissions ((i)(12)). Staff Legal Bulletins contain extensive guidance on the no-action letter process and the Staff’s approach to certain types of proposals vis-à-vis the substantive bases for exclusion. In addition, the Staff has issued hundreds of no-action letters over the years responding to requests from companies to exclude all kinds of shareholder proposals. These no-action letters should be searched to determine whether there is (or is not) a "precedent" for your request. Westlaw and Lexis both contain searchable databases of the Staff’s no-action letters.

7. Determine whether seeking no-action relief is the “strategically right” thing to do. A December 2008 Corporate Governance Commentary issued by Georgeson and Latham & Watkins contained this important advice: "Even if a shareholder proposal may be excludable under Rule 14a-8, the company may want to consider whether it actually wants to seek a no-action request. Since there is a monetary and management time cost to seeking a no-action letter, a company may decide to include the shareholder proposal in its proxy statement without seeking no-action relief" based upon the following considerations:

"Who is the proponent? Companies should consider who is making the proposal, their history, their other interests in the company in its industry, and the success of the proponents and their proposals with other companies.

"What is the proposal? The nature of the proposal is critical. For example, if it is one where there is either a high likelihood of success or failure, the company needs to consider how much time and expense it is willing to spend to defeat the proposal.

"What is the likelihood of success? It is very important for the company to understand its shareholder base, the various positions of its shareholders on the issues raised by the proposal, and that the likelihood of how it shareholders would vote on the proposal. This can be done through a combination of a company’s own shareholder outreach program and work with its proxy solicitor to understand its shareholder base and to obtain the solicitor’s voting projections on the proposal.

"How important is the issue to the company? The company should consider, based on legal and other reasons, how important it is for the company to defeat the proposal. For example, a precatory proposal typically has far less impact on the company than a legally binding proposal. In some situations, a company may already be considering the topic of the proposal and may be close or ready to adopt the action requested by the proponent.

"Should the company implement the proposal? Based on business or legal considerations, the company may determine that it makes sense to implement some or all of the proposal or the company may consider making a management proposal on the same topic, but one which does not go as far as the shareholder proposal."

8. Tailor your board response to the content of the proposal. Board responses to shareholder proposals appear alongside the proposal in the proxy statement. These response statements are the board’s and company’s best opportunity to share their views on the proposal. Since other companies have likely received the same proposal before it is helpful to review the board responses in other company's proxy statements. Be careful not to simply copy other companies’ opposition statements, however. Take the time to help your board craft responses that speak meaningfully to the content of the proposal you received and your company's particular circumstances and views.

9. Don't forget to mail the proponent a copy of your board response. In most cases, shareholder proponents are entitled to receive a copy of your board’s response to their proposal at least 30 days in advance of the date you will file your proxy statement.

10. Keep on communicating even when proxy season is over. Your shareholder outreach and communications programs should not be limited to proxy season only. Effective outreach and communications programs can help you stay abreast of issues of interest to your shareholders and encourage shareholder proponents to opt for dialogue rather than shareholder proposals.