Rule 14a-8(i)(10) and a Change in the Burden of Proof

Rule 14a-8 permits the exclusion of proposals under certain circumstances.  Subsection (i)(10) provides that a shareholder proposal may be excluded if "substantially implemented" by the company.  17 CFR 240.14a-8(i)(10).  Substantial implementation means that the company must largely duplicate the contents of the shareholder proposal.  In addition, the temporal element requires that the company alternative actually be implemented.  

In two recent no action letters, the staff of the SEC found that the company "substantially implemented" shareholder proposals designed to allow shareholders to call special meetings at lower percentages.  In one of the letters, the proposal sought to set the percentage at 20% of the outstanding voting shares; the other sought to set the percentage at 25% of the outstanding voting shares.   

In both cases, the companies proposed amendments to the articles that would set the thresholds at the percentages requested by shareholders.  In both cases, however, the companies limited eligible shares to those held at least one year in a net long position.  Neither letter disclosed the impact of the holding period on the number of eligible shares.  As a result, it was at least possible that the holding period would reduce the percentage of eligible shares below the percentage of total outstanding shares needed to call a special meeting.  

The holding period made the calling of a special meeting more difficult, both legally and procedurally.  In making its decision, the staff did not require a significant discussion on either the logistical burden imposed on shareholders as a result of the holding period or the impact of the holding period on the number of eligible shares.  The effect was to read out of the rule the requirement that companies have the burden of proof in establishing the availability of an exclusion.  See Rule 14a-8(g). 

A letter on the topic has been submitted to the SEC in connection with the review of subsection (i)(9).

J Robert Brown Jr.