SEC Adopts Amendments to Shareholder Proposal Rules

Washington, DC, June 9, 1998 - The Securities and Exchange Commission has adopted amendments to the shareholder proposal rules under the Securities Exchange Act of 1934. The Institute had filed a comment letter on the proposed amendments, which were more expansive than those adopted. They are designed to help improve the operation of rules governing shareholder proposals and to address some of the concerns raised over the last several years by shareholders and companies relating to the operation of the proxy process. The amendments are effective June 29, 1998.

Specifically, the Commission:

Recast Rule 14a-8 into a plain-English, question-and-answer format. The Commission believed, and the Institute agreed, that reformatting the rule would make it easier for shareholders and companies to understand and follow. The questions will cover procedural and eligibility requirements, and will include certain technical and clarifying modifications. Except as noted below, these modifications are not substantive in nature. The Release also indicates that the Commission, through the Division of Corporation Finance, anticipates establishing a special electronic mailbox for Rule 14a-8 correspondence.

Reversed the Cracker Barrel interpretive position. Cracker Barrel (Oct. 13, 1992) established a bright-line approach whereby all employment-related shareholder proposals raising significant social policy issues would be excludable under the "ordinary business" exclusion of Rule 14a-8(c)(7). Its reversal will result in a return to a case-by-case analytical approach by the staff to determine when such proposals fall within the scope of the "ordinary business" exclusion. Determinations will be based on the subject matter of the proposal and the degree to which the proposal seeks to "micro-manage" the company. The reversal is effective as of May 21, 1998 and will relate to all future and pending no-action responses.

Adopted other amendments to Rule 14a-8. The amendments to Rule 14a-8 include both modifications to existing rule provisions, as well as new provisions. Some revisions to the rule reflect current staff or Commission interpretations of the rule. These amendments: 1) increase from $1000 to $2000 the dollar value of a company's voting shares that a shareholder must own in order to be eligible to submit a shareholder proposal; 2) change existing policy to provide that, in order to be included on the ballot, proposals should be requests for specific action, not merely statements of dissatisfaction expressed with a company policy; 3) require a company to notify a shareholder of its intent to omit a shareholder proposal from the proxy within 14 days of receipt by the company of the proposal, instead of within 14 days of the date the proposal is postmarked; 4) reflect a long-standing interpretation of paragraph (c)(9) of the rule permitting the omission of a shareholder proposal if the company demonstrates that the subject matter directly conflicts with all or part of one of management's proposals; and 5) reflect an interpretation of paragraph (c)(10) of the rule permitting the exclusion of proposals that have been substantially implemented.

Amended Rule 14a-4 to provide shareholders and companies with clear guidance on the exercise of discretionary voting authority in connection with annual shareholder meetings. If a shareholder does not follow Rule 14a-8's procedures for placing a proposal in a company's proxy materials, the amendments allow the company to exercise discretionary voting authority with respect to the matter in the proposal if the company does not receive notice of the proposal within 45 days before the month and day in the current year corresponding to the date on which the company first mailed its proxy for the prior year's annual meeting of shareholders, or by a date established by an overriding advance notice provision. The rule would still require a specific statement in the proxy statement or proxy card of an intent to exercise discretionary voting authority in these circumstances. The company may exercise discretionary voting authority notwithstanding receipt of "timely" advance notice if, in the proxy statement, the company describes the matters as to which it has received notice and how the company intends to exercise its discretion to vote on each matter should it be presented. The proxy card must also include a cross-reference to this description in the proxy statement. Discretionary voting authority may not be exercised if, as part of its advance notice, a shareholder provides a statement that it intends to solicit the necessary shareholder votes required to carry the proposal, followed with specific evidence that the votes have actually been solicited. The rule also addresses the exercise of discretionary voting authority in connection with special shareholders' meetings and other solicitations.

The Commission declined to adopt other proposed amendments to the shareholder proposal rules that would have reduced the Commission's and its staff's overall participation in the proxy process. Specifically, the amendments do not: 1) modify the application of Rule 14a-8(c)(4) relating to the exclusion of proposals relating to grievances or special interests; 2) streamline the exclusion in Rule 14a-8(c)(5) for matters considered irrelevant to the company and its business by applying a purely economic standard; 3) amend Rule 14a-8(c)(12) to increase the percentage of the vote a proposal must receive before it can be resubmitted in future years if it is not approved; or 4) implement an "override" mechanism in Rule 14a-8 that would have permitted 3% of a company's share ownership to override a company's decision to exclude a proposal based on the "ordinary business" exclusion and the "relevance" exclusion.