by Cydney Posner

At the PLI conference on February 10, Corp Fin Director Keith Higgins, while focusing primarily on the issue du jour of Rule 14a-8(i)(9), the rule that permits companies to exclude from their proxy statements shareholder proposals that directly conflict with management proposals, also spent a little time on the rule that permits exclusion for shareholder proposals that violate the proxy rules, Rule 14a-8(i)(3). Typically, the violation of the proxy rules at issue is Rule 14a-9, which proscribes false and misleading statements.

Higgins adverted to Staff Legal Bulletin 14B, issued in 2004, in part, to clarify the staff’s views on Rule 14a-8(i)(3) because the staff’s discussion in SLB No. 14 had caused companies to raise objections to shareholder proposals under that Rule that went “well beyond its original intent. The discussion in SLB No. 14 has resulted in an unintended and unwarranted extension of rule 14a-8(i)(3), as many companies have begun to assert deficiencies in virtually every line of a proposal’s supporting statement as a means to justify exclusion of the proposal in its entirety.” Accordingly, SLB 14B sought to limit application of the exclusion so that it would no longer be available for exclusions based on unsupported factual assertions, factual assertions that can be countered or disputed (but are not materially false and misleading), assertions that may be interpreted unfavorably or opinions not identified as such.  Rather, companies were advised to address their objections to these types of statements in their statements in opposition to the proposals.  However, companies may appropriately rely on the exclusion where the shareholder proposal includes assertions that impugn character or make unfounded charges regarding improper conduct, are demonstrably materially false or misleading, are so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires, or are irrelevant to the extent that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter up for a vote. The burden is on the company to persuade the staff that the exclusion applies.  

Higgins observed that, in reviewing requests for no action under the “false and misleading” exclusion, the staff first  considers three threshold questions: First, is the assertion really a “fact” or is the company objecting to an opinion or inference?  Second, has the company demonstrated, using objective evidence of falsity, that the assertion is false or misleading, not just that it is unfair? Finally, applying the test in TSC v. Northway, is the assertion material –does it alter the “total mix” of information?

Later in the program, one of the panelists, former Corp Fin Deputy Director Marty Dunn, shared his insights, from a practical perspective, regarding the factors that will lead the staff to permit exclusion of a shareholder proposal as false and misleading under Rule 14a-8(i)(3). Generally, he contended (and here I’m paraphrasing), companies will be allowed to exclude if the company demonstrates that material statements are inconsistent with the facts or internally inconsistent, a key term is externally defined, or there is no guidance on a key term.  However, companies are generally not successful in excluding a proposal where they just contend that the meanings of a number of terms are unclear (e.g., the terms could mean this or they could mean that) or where they just argue that they won’t know how to implement proposals because they are too vague (even though SLB 14B appears to allow exclusion for assertions that are so vague or indefinite that the company is unable to determine what actions the proposal requires).  Presumably, companies will have flexibility in implementing these proposals.

Posted by Cydney Posner