Recently the SEC Staff issued Staff Legal Bulletin No. 14G which provides guidance on three issues relating to shareholder proposals: (1) the entities that can provide sufficient proof of a shareholder’s beneficial ownership; (2) the content of deficiency notices when a proponent fails to provide adequate proof of ownership; and (3) the use of website addresses in shareholder proposals and supporting statements. I recently received a memo drafted by SLPC Contributor John Olson and his Gibson Dunn colleagues discussing the new guidance and what companies should do now. Here is an excerpt:
Much of the guidance contained in SLB 14G addresses issues that arose in no-action requests during the 2012 proxy season. It will be important for companies to carefully follow the guidance in SLB 14G when sending out deficiency notices and making both procedural and substantive arguments for the exclusion of shareholder proposals during the 2013 proxy season.
Verifying a Shareholder’s Beneficial Ownership
Rule 14a-8(b) requires a shareholder proponent to provide proof of ownership from the “record” holder of the securities unless the proponent is the registered holder of his or her securities or has filed a Schedule 13D, Schedule 13G, Form 3, Form 4 and/or Form 5 demonstrating ownership of the securities. At the beginning of the 2012 shareholder proposal season, the Staff issued Staff Legal Bulletin No. 14F (Oct. 18, 2011) (“SLB 14F”), which states that “only [Depository Trust Company ('DTC')] participants should be viewed as ‘record’ holders of securities that are deposited at DTC.” As a result of this interpretation, only those firms that are DTC participants (and not introducing brokers) can provide valid Rule 14a-8(b) proof of ownership for proponents whose shares are held in street name.
During the 2012 proxy season, some companies submitted no-action requests seeking to exclude shareholder proposals where the proponent submitted proof of ownership letters provided by entities that were not themselves DTC participants but were affiliated with a DTC participant and had a name that was similar to that of the DTC participant. The Staff did not permit exclusion of these proposals, noting that “the proof of ownership statement was provided by a broker or bank that provides proof of ownership statements on behalf of its affiliated DTC participant.”
SLB 14G confirms the position the Staff took during the 2012 season, stating: “By virtue of the affiliate relationship, we believe that a securities intermediary holding shares through its affiliated DTC participant should be in a position to verify its customers’ ownership of securities.” As we noted in an earlier client alert, located here, the Staff’s position focuses on the relationship between the DTC participant and the entity providing the proof of ownership, not on any similarities that may exist in the entities’ names.
Accordingly, as we have advised in the past, in evaluating proof of ownership letters submitted by shareholders from entities that are not DTC participants, companies should seek to assess whether the entity is affiliated with a DTC participant before expending the resources to draft and send a deficiency notice to the shareholder proponent.
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