[Federal Register Volume 62, Number 187 (Friday, September 26, 1997)]
[Proposed Rules]
[Pages 50682-50706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25448]



[[Page 50681]]

_______________________________________________________________________

Part III





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 240



Amendments to Rules on Shareholder Proposals; Proposed Rule

  Federal Register / Vol. 62, No. 187 / Friday, September 26, 1997 / 
Proposed Rules  

[[Page 50682]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-39093; IC-22828; File No. S7-25-97]
RIN 3235-AH20


Amendments to Rules on Shareholder Proposals

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``we'' or 
``Commission'') proposes revisions to the rule that opens, and then 
regulates, a channel of communication among shareholders, and between 
shareholders and the management of their companies: rule 14a-8, the 
shareholder proposal rule. We propose to recast rule 14a-8 into a 
Question & Answer format that both shareholders and companies should 
find easier to follow, and to modify the rule to address concerns 
raised by both shareholders and companies. We also propose revisions to 
related rules.

DATES: Public comments are due November 25, 1997.

ADDRESSES: Please send three copies of the comment letter to Jonathan 
G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington D.C. 20549. Comment letters can be sent 
electronically to the following e-mail address: [email protected]. 
The comment letter should refer to File No. S7-25-97; if e-mail is used 
please include the file number in the subject line. Anyone can inspect 
and copy the comment letters in the SEC's Public Reference Room, 450 
Fifth Street, N.W., Washington, D.C. 20549. We will post comment 
letters submitted electronically on our Internet site (http://
www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Frank G. Zarb, Jr., Special Counsel, 
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900, or Doretha M. VanSlyke, Division of Investment Management, at 
(202) 942-0721, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for comment 
amendments to the following rules under the Securities Exchange Act of 
1934 (the ``Exchange Act''):\1\ 14a-8,\2\ 14a-4,\3\ 14a-5,\4\ 14a-2,\5\ 
and 13d-5.\6\
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 240.14a-8.
    \3\ 17 CFR 240.14a-4.
    \4\ 17 CFR 240.14a-5.
    \5\ 17 CFR 240.14a-2.
    \6\ 17 CFR 240.13d-5.
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I. Executive Summary

    The shareholder proposal rule provides an avenue for communication 
between shareholders and companies, and among shareholders themselves. 
Like any other well-traveled road, however, the rule is in need of some 
repair. These proposals accordingly are designed to rectify problems 
identified by both shareholders and corporations.
    The proposals today would make it easier for shareholders to 
include a broader range of proposals in companies' proxy materials, and 
provide companies with clearer ground rules and more flexibility to 
exclude proposals that failed to attract significant shareholder 
support in prior years. We are proposing a ``package'' of reforms that 
we believe best accommodates the concerns of most participants in the 
shareholder proposal process, including proposals to accomplish the 
following:
     Recast the rule into a more understandable Question & 
Answer format;
     Reverse the Cracker Barrel policy, making it easier for 
shareholders to include in companies' proxy materials employment-
related proposals that raise significant social policy matters;
     Make it more difficult to present proposals again that 
received an insignificant percentage of the votes cast on earlier 
submissions, enhancing shareholders' ability to decide for themselves 
which proposals are important to the company;
     Introduce an ``override'' mechanism permitting 3% of the 
share ownership to override a company's decision to exclude a proposal 
under certain of the bases for exclusion;
     Adopt a new qualified exemption from the proxy rules under 
Section 14(a) of the Exchange Act, and a safe harbor under Section 
13(d) of the Exchange Act and rule 13d-5, to make it easier for 
shareholders to use the new ``override;''
     Streamline the exclusion for matters considered irrelevant 
to corporate business, to permit companies to exclude proposals that 
relate to economically insignificant portions of their businesses;
     Streamline our administration of the rule whereby 
companies are permitted to exclude proposals furthering personal 
grievances or special interests; and
     Provide clearer ground rules for management's exercise of 
discretionary voting authority when a shareholder notifies the company 
that it intends to present a proposal outside the mechanism of rule 
14a-8.

II. Introduction and Background

    Rule 14a-8 provides, and then regulates, a channel of communication 
among shareholders, and between shareholders and companies. It is not 
the only avenue for communication, since a shareholder may undertake an 
independent proxy solicitation or may seek informal discussions with 
management or other shareholders outside the proxy process. Rule 14a-8 
is popular because it provides an opportunity for any shareholder 
owning a relatively small amount of the company's shares to have his or 
her own proposal placed alongside management's proposals in the 
company's proxy materials for presentation to a vote at an annual or 
special meeting of shareholders.
    The rule's operation is fairly simple. A shareholder must mail a 
copy of his or her proposal to the company in time to meet the deadline 
imposed by the rule.\7\ If the company intends to omit the proposal 
from its proxy materials, it must first submit its reasons to the 
Commission.\8\ The Division of Corporation Finance or Division of 
Investment Management (the ``Division'') usually issues a written 
response either concurring or declining to concur with the company's 
reasoning.\9\ The Division's response is not legally binding, and does 
not necessarily reflect the view of the Commission.\10\ Either party 
may obtain a legally binding decision on the excludability of a 
challenged proposal from a federal court.
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    \7\ Rule 14a-8(a)(3) [17 CFR 240.14a-8(a)(3)].
    \8\ Rule 14a-8(d) [17 CFR 240.14a-8(d)].
    \9\ The Division of Corporation Finance has reviewed 
approximately 400 submissions under rule 14a-8 annually. The 
Division of Investment Management typically has reviewed fewer than 
12 submissions from investment companies in previous years; 
shareholder proposals have only infrequently been submitted to 
investment companies, and those submitted have usually involved 
closed-end investment companies.
    \10\ The procedures on the rendering of staff advice for 
shareholder proposals are explained in Exchange Act Release No. 
12599 (July 7, 1976) (41 FR 29989). These proposals do not alter the 
procedures set forth in that release.
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    Proposals are considered appropriate for inclusion in proxy 
materials under rule 14a-8 unless the company demonstrates that the 
proposal falls within one of thirteen bases for exclusion, or that the 
shareholder

[[Page 50683]]

proponent is otherwise ineligible to submit a proposal. A company may, 
for example, omit a shareholder proposal that is not a proper matter 
for shareholder action under state law,\11\ or if the shareholder fails 
to demonstrate that he or she continuously held $1000 worth of the 
company's voting securities for at least one year prior to submitting a 
proposal.\12\
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    \11\ Rule 14a-8(c)(1) [17 CFR 240.14a-8(c)(1)].
    \12\ Rule 14a-8(a)(1) [17 CFR 240.14a-8(a)(1)].
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    Between 300 and 400 companies typically receive a total of about 
900 shareholder proposals each year.\13\ Their subjects vary. A 
majority of the proposals each year focus on corporate governance 
matters--such as proposals to repeal by laws establishing a classified 
board of directors--and on compensation matters--such as proposals to 
eliminate pension plans for non-employee directors. Social policy 
issues, such as environmental matters or the manufacture of tobacco 
products, and other issues, such as extraordinary business 
transactions, are also the focus of a significant number of proposals 
each year.
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    \13\ See American Society of Corporate Secretaries (``ASCS''), 
Report on Shareholder Proposals, July 1, 1995-June 30, 1996; IRRC 
Summary of 1996 U.S. Shareholder Resolutions, Apr. 12, 1997. The 
IRRC tracks proposals at approximately 1,500 companies each year, 
and the ASCS monitors proposals at approximately 1,950 public 
companies. A company is not required to contact the Commission staff 
unless it intends to omit the proposal from its proxy materials.
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    While we believe that the rule works well overall, some shareholder 
and corporate groups have expressed concerns about certain aspects of 
the rule and how it operates. Some shareholders seek to broaden the 
subject matter categories of proposals that companies are required to 
include in their proxy statements,\14\ focusing in particular on a 1992 
no-action letter issued to Cracker Barrel Old Country Store, Inc.\15\ 
In the Cracker Barrel letter, the Division announced a new ``bright 
line'' test for analysis of employment-related shareholder proposals 
that raise significant social policy issues.\16\ Some shareholders want 
that test changed.
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    \14\ In response to a questionnaire on shareholder proposals 
which we distributed last February (the ``Questionnaire''), 63% of 
shareholder respondents ranked as a top goal of reform expanding the 
categories of proposals that companies must include in their proxy 
materials. As discussed more fully below, the Commission staff 
prepared the Questionnaire as part of a Congressionally-mandated 
study of the shareholder proposal process.
    \15\ See, e.g., Rulemaking Petition dated July 27, 1995, 
submitted to the Commission by the Interfaith Center on Corporate 
Responsibility, Calvert Group Ltd., and the Comptroller of the City 
of New York. The petition asked that the Commission modify its 
position announced in the no-action letter Cracker Barrel Old 
Country Store, Inc. (Oct. 13, 1992) (``Cracker Barrel'') (proposal 
that company implement employment practices related to sexual 
orientation). The proposals address the concerns raised by the 
petition. See Section III, Part D of this release.
    \16\ Cracker Barrel. The Commission subsequently upheld the 
Division's response. See Letter dated January 15, 1993 from Jonathan 
G. Katz, Secretary to the Commission, to Sue Ellen Dodell, Deputy 
Counsel, Office of Comptroller, The City of New York.
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    Just as some shareholders have expressed concern that the rule 
permits companies to exclude important proposals, some companies in 
turn believe that the rule and current interpretations of the rule 
compel them to include too many proposals of little relevance to their 
businesses.\17\ Some companies suggest that the problem be addressed by 
an increase in the amount of stock a shareholder must hold to be 
eligible to submit a proposal, or in the percentage of the vote a 
proposal must receive to qualify for re-submission in future years.\18\ 
Among companies responding to the Questionnaire, 40% rank as a top 
reform goal reduction of the types of proposals that they must include 
in their proxy materials.
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    \17\ See e.g., Response of Porter Lavoy & Rose Inc., No. 31; The 
Finova Group, No. 61; Boise Cascade Corp., No. 163; Allied Signal 
Inc., No. 184; Intel Corporation, No. 216; RJR Nabisco, Inc., No. 
207; The Proctor & Gamble Company, No. 264. The responses are 
available for inspection and copying in file number S7-5-97.
    \18\ See, e.g., Response of Roanoke Electric Steel Corp, No. 44; 
Cooper Industries, No. 174; Carolina Power and Light Co., No. 156; 
Eastman Kodak Company, No. 268.
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    Companies also seek additional guidance on their exercise of 
discretionary voting authority \19\ when a shareholder notifies them of 
his or her intention to present proposals without invoking rule 14a-
8.\20\ And they raise other concerns about the operation of the rules 
governing shareholder proposals.\21\
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    \19\ Discretionary voting authority is the ability to vote 
proxies that shareholders have executed and returned to the company, 
on matters not reflected on the proxy card, and on which 
shareholders have not had an opportunity to vote.
    \20\ See, e.g., Response of Gannett Co., Inc., No. 117; Questar 
Corp., No. 18; Albertson's Inc., No. 204; CNF Transportation, No. 
11; Safety-Kleen Corp., No. 180; Honeywell Inc., No. 198.
    \21\ The American Trucking Associations (``ATA''), for instance, 
recently petitioned the Commission to amend rule 14a-8(c)(4), the 
personal grievance exclusion, to ``prevent labor unions from 
continuing to use the shareholder proposal process to advance union 
interests not shared by the target company's shareholders' 
generally.'' Rulemaking Petition dated October 13, 1995 submitted to 
the Commission by the ATA. The Commission considered the ATA's 
concerns in connection with these proposals. Section III, Part B, 
describes proposed modifications to the way we administer current 
rule 14a-8(c)(4).
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    Congress recently required that we conduct a comprehensive study of 
the shareholder proposal process, and submit a report on the results of 
the study by October 11, 1997.\22\ We began the study in February 1997 
with the distribution of a Questionnaire on shareholder proposals. 
While we did not design the Questionnaire to obtain a scientific 
sampling, it provided us with some indication of the views of 
interested shareholders and companies, including those who do not 
typically express their views to the Commission.\23\ In addition, the 
Commission staff has held discussions with interested groups, and 
tapped its own reservoir of experience and knowledge about the rule.
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    \22\ National Securities Markets Improvement Act of 1996, Pub. 
L. No. 104-290, Sec. 510(b), 110 Stat. 3416 (1996). The Commission 
is required to study ``(A) whether shareholder access to proxy 
statements pursuant to section 14 of the Securities Exchange Act of 
1934 has been impaired by recent statutory, judicial, or regulatory 
changes; and (B) the ability of shareholders to have proposals 
relating to corporate practices and social issues included as part 
of proxy statements.''
    \23\ We received a total of 330 responses, including 172 
responses from companies, and 149 from individual and institutional 
shareholders. We also heard from a handful of other types of 
institutions, such as a proxy solicitation firm, an investor 
relations consulting firm, and an economic consulting firm. You may 
inspect and copy completed Questionnaires in our Public Reference 
Room, public file number S7-5-97.
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    Although we have considered some fundamentally different approaches 
to regulating the shareholder proposal process, the proposals today 
reflect our belief that most participants would prefer that we maintain 
the current system, with modifications. We request your comments on 
whether our view is correct, and on whether we should consider some 
other approach in lieu of the amendments proposed today.
    We could, for instance, withdraw entirely from the area, leaving it 
to each state to adopt its own shareholder proposal rule to govern what 
proposals are appropriate to be included in companies' proxy materials. 
The shareholder proposal process affects the internal governance of 
corporations, and it is state law--not federal securities law--which is 
primarily concerned with corporate governance matters. In its current 
form, rule 14a-8 in fact defers to state law on the central question of 
whether a proposal is a proper matter for shareholder action.\24\ The 
``ordinary business'' exclusion \25\ is based in part on state 
corporate law establishing spheres of authority for the board of 
directors on one hand, and the company's shareholders on the other.\26\
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    \24\ Rule 14a-8(c)(1).
    \25\ Rule 14a-8(c)(7) [17 CFR 240.14a-8(c)(7)].
    \26\ States likely do not currently have appropriated procedures 
in place to accommodate such an approach. We could retain rule 14a-8 
for a period of time, such as 3 or 6 years, to permit states to 
adopt necessary procedures, if we decide to pursue this approach.

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[[Page 50684]]

    In 1982, the Commission proposed for comment fundamental 
alternatives to the existing shareholder proposal rule, although it did 
not propose leaving the matter up to the states. Under one proposal, 
the Commission would have adopted a supplemental rule to permit a 
company and its shareholders to adopt a plan providing their own 
alternative procedures governing the process. Another alternative would 
have required companies to include in their proxy materials all 
proposals that are proper under state law and that do not involve the 
election of directors, subject to a numerical maximum. Most of those 
who expressed views on the 1982 proposals rejected the proposed 
alternatives, and the Commission adopted revisions that left the rule 
essentially in its current form.\27\
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    \27\ See Exchange Act Release No. 20091 (Aug. 16, 1983) (the 
``1983 Release'') [48 FR 38218].
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    We believe that it is worthwhile to consider whether there is a 
workable alternative approach to the current rule and process. Among 
other things, the current rule in effect places the Commission and its 
staff in the role of informal arbiter between companies and 
shareholders submitting a growing variety of shareholder proposals. In 
implementing rule 14a-8, the Commission and its staff are sometimes 
called upon to make difficult judgments about the proper interpretation 
of proposals and about the matters to which they relate. Should these 
judgments be made by institutions other than the Commission, or by the 
shareholders and companies themselves? Your comments are welcome on 
these matters.
    Despite these considerations, the results of the Questionnaire 
appear to support the view that most participants would prefer that we 
maintain the current system, possibly with modifications. The 
Questionnaire sought views on a number of different alternatives to the 
existing system, none of which appeared to receive strong support from 
respondents. For instance, the Questionnaire asked about a system like 
that discussed above where states would be urged to adopt their own 
shareholder proposal rules in place of rule 14a-8; and about a system 
where each company would be permitted to adopt its own shareholder 
proposal rule, subject to shareholder approval. Neither shareholders 
nor companies appeared to favor these approaches.\28\
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    \28\ One percent of shareholder respondents and 47% of company 
respondents favored, and 93% of shareholders and 49% of companies 
disfavored, allowing each company to set up its own shareholder 
proposal process. Eighty-nine percent of shareholders, and an equal 
percentage of companies, disfavored replacing rule 14a-8 with state-
adopted systems, while only 8% of companies and 5% of shareholders 
favored the approach.
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    The Questionnaire also asked about another approach that would have 
substantially restricted companies' ability to exclude proposals, but 
would have placed a numerical cap on the total number of proposals that 
a company would be required to include in its proxy materials. The 
results were mixed. Many companies supported the approach, while most 
shareholders did not.\29\
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    \29\ Sixty-three percent of company respondents and 9% of 
shareholder respondents supported the approach, while 34% of 
companies and 86% of shareholders disfavored it.
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    The Questionnaire also asked whether respondents would prefer the 
existing system, with possible modifications, to some other alternative 
not identified in the Questionnaire. Most preferred retaining the 
existing system.\30\
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    \30\ Seventy-three percent of company respondents and 75% of 
shareholder respondents preferred the existing system either without 
reform or with other reforms. Only 6% of companies and 4% of 
shareholders, preferred some other alternative.
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    The results also reflected some support for the Commission's 
continued involvement in the shareholder proposal process. Most 
shareholders and a number of companies responding to the Questionnaire 
indicated that the Commission's role should be expanded or stay the 
same.\31\
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    \31\ Fifty-four percent of shareholder respondents and 47% of 
company respondents indicated that they believed the Commission's 
role would either increase or stay the same. Twenty-six percent of 
shareholders and 49% of companies indicated that our role should be 
diminished, and only 1% of shareholders and 8% of companies thought 
it should be eliminated. Additionally, 64% of shareholder 
respondents and 74% of companies indicated their belief that the 
Commission's role as informal ``referee'' in the shareholder 
proposal process is beneficial.
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III. Proposed Amendments

    We view the various reforms proposed today as a ``package'' 
designed to address in a balanced manner the sometimes conflicting 
concerns of different participants. Your comments should therefore 
focus not only on whether we should adopt each proposal viewed in 
isolation, but also on whether we should adopt the proposal as part of 
an overall package.
    Part A below describes the proposed Question & Answer format for 
revised rule 14a-8, and clarifying language changes. Part B addresses 
our proposal to change the way the Division applies rule 14a-8(c)(4) 
\32\, which permits companies to exclude proposals furthering personal 
grievances or special interests. Proposed amendments to rule 14a-
8(c)(5) \33\, the ``relevance'' exclusion, are explained in Part C. 
Part D describes how we propose to modify our interpretation of rule 
14a-8(c)(7), which permits companies to exclude proposals relating to 
their ``ordinary business operations.'' In Part E, we describe proposed 
modifications to rule 14a-8(c)(12),\34\ which permits companies to 
exclude proposals that received less than specified percentages of 
voting support on earlier submissions.
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    \32\ 17 CFR 240.14a-8(c)(4).
    \33\ 17 CFR 240.14a-8(c)(5).
    \34\ 17 CFR 240.14a-8(c)(12).
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    Part F describes a proposed mechanism to permit shareholders to 
``override'' certain bases for excluding proposals. Part G addresses a 
proposed safe harbor from Section 13(d),\35\ and a qualified exemption 
from the proxy rules, for shareholders using the proposed ``override'' 
described in Part F. Part H describes proposed revisions to rule 14a-
4(c) \36\ designed to establish clearer guidelines for the exercise of 
discretionary voting authority when a company receives advance notice 
that a shareholder intends to present a proposal for a vote without 
invoking rule 14a-8's mechanism. Finally, in Part I, we explain some 
other proposed amendments to rules 14a-8 and 14a-5.
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    \35\ 15 U.S.C. 78m(d).
    \36\ 17 CFR 240.14a-4(c).
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A. Plain-English, Question & Answer Format

    We propose to amend and recast Rule 14a-8 into a Question & Answer 
format so that the hundreds of shareholders and companies who refer to 
the rule each year can more easily understand its requirements.\37\ We 
request your comments on whether the proposed revisions on the whole 
would make the rule easier to understand. Should we instead retain the 
format and style of the current rule?
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    \37\ The existing rule may be confusing for shareholders who may 
have had little or no prior experience dealing with our rules. In 
response to the Questionnaire, 65% of individual shareholder 
respondents indicated that they do not believe that shareholders 
generally understand the current shareholder proposal rule.
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    Your comments should also address each of the proposed revisions 
individually. Except as specifically noted here, or elsewhere in 
Section III of this release, most of the proposed language 
modifications are intended solely to make the requirements easier to 
understand and follow, and not to result in substantive modifications. 
Some proposed revisions described in this Part A, however, are intended 
to reflect current Division or Commission interpretations of the rule. 
Your

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comments should address whether each proposed language modification 
makes the rule more understandable, whether some other revision would 
be more appropriate, and whether the proposed modification is 
consistent with current interpretations.
    Most of the current rule's procedural and eligibility requirements 
would appear in the answers to Questions 2 through 8, and 12. We also 
proposed revisions to some of the thirteen bases upon which a company 
may rely for excluding a proposal, which appear in paragraph (c) of 
current rule 14a-8. The bases would now appear in the answer to 
Question 9.
    In current paragraph (c)(1), permitting exclusion of proposals that 
are not proper subjects for shareholder action under state law, the 
reference to the ``laws of the issuer's domicile'' would be replaced by 
a reference to ``the laws of the state of the company's 
incorporation,'' which we have applied to have the same meaning. We 
would revise the note to the paragraph to reflect the Division's 
current practice of assuming that a proposal drafted as a 
recommendation or request is proper unless the company demonstrates 
otherwise.
    We propose to make only minor plain-English revisions to current 
paragraph (c)(2),\38\ replacing the word ``require'' with the word 
``cause'' and moving to a ``note'' the portion of the current paragraph 
discussing the priority accorded domestic laws. We request your 
comments on whether some other formulation would make this paragraph 
easier to understand and follow, and whether the revisions appear 
consistent with current interpretations.\39\
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    \38\ 17 CFR 240.14a-8(c)(2).
    \39\ See, e.g., Firestone (Dec. 8, 1987).
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    Current paragraph (c)(3) \40\ would be amended to eliminate the 
reference to ``regulations'' because it is redundant. We request your 
comments on whether this revision would make the rule clearer, or 
whether some other revisions would make the rule easier to understand 
and follow.
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    \40\ 17 CFR 240.14a-8(c)(3).
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    A proposed modification of the way we administer current paragraph 
(c)(4), and revisions to current paragraph (c)(5), are described in 
Parts B and C below.
    As proposed, current paragraph (c)(6) \41\ would be revised to 
permit exclusion ``[i]f the company would lack the power or authority 
to carry out the proposal.'' We believe that the revised language is 
clearer, without altering the meaning of the paragraph, which currently 
permits exclusion of proposals that are ``beyond the registrant's power 
to effectuate.'' We request your comments on whether some other 
revision would make the rule easier to understand and follow, and 
whether the revision appears consistent with current interpretations of 
the rule.\42\
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    \41\ 17 CFR 240.14a-(c)(6).
    \42\ See, e.g., SCECorp (Dec. 20, 1995) (proposal that third 
party fiduciary trustees amend discretionary voting agreements).
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    Current paragraph (c)(7) permits the exclusion of proposals 
relating to a company's ``ordinary business operations.'' We recognize 
that the term ``ordinary business'' is a legal term of art that 
provides little indication of the types of matters to which it refers. 
We therefore propose to revise the paragraph to permit exclusion ``if 
the proposal relates to specific business decisions normally left to 
the discretion of management.'' The revised rule would provide a list 
of examples, which is not exclusive, including the way a newspaper 
formats its stock tables, whether a company charges an annual fee for 
use of its credit card, the wages a company pays its non-executive 
employees, and the way a company operates its dividend reinvestment 
plan. For an investment company, an example is a decision whether to 
invest in the securities of a specific company.
    These proposed revisions are intended to make the ``ordinary 
business' exclusion easier to understand, not to modify current 
interpretations. We request comments on whether the examples of 
excludable matters provided are helpful and appropriate, and whether 
some other examples than the ones proposed would be more helpful. We 
also request your comments on the degree to which the proposed 
formulation would be consistent with current interpretations.\43\
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    \43\ See the summary of the principal considerations in the 
application of the ``ordinary business'' exclusion in Part D below.
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    We also request your comments on whether some other revision would 
be preferable. We could, for instance, retain the existing language, 
with or without additional guidance on its meaning. An example of this 
approach would be to revise current paragraph (c)(7) to permit omission 
of a proposal ``if it deals with a matter relating to the conduct of 
the company's ordinary business operations (matters that should be left 
to the discretion of the company's managers because of their 
complexity, impracticability of shareholder participation, or relative 
insignificance).'' Would this formulation be preferable to the current 
or proposed approach, and be consistent with current interpretations of 
the rule?
    The proposed revisions to current paragraph (c)(8) \44\ are 
designed to reflect the current interpretation that the rule applies 
only to proposals on elections of individuals for membership to, and 
removal from, the board of directors.\45\ We propose to revise current 
paragraph (c)(9) \46\ to reflect the Division's long-standing 
interpretation permitting omission of a shareholder proposal if the 
company demonstrates that its subject matter directly conflicts with 
all or part of one of management's proposals.\47\ We request your 
comments on whether some other revision would make these rules easier 
to understand and follow, and whether the revisions appear consistent 
with current interpretations of the rules.
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    \44\ 17 CFR 240.14a-8(c)(8).
    \45\ See, e.g., Cornerstone Properties, Inc. (Mar. 8, 1996) 
(proposal nominating proponent for election to company's board of 
directors).
    \46\ 17 CFR 240.14a-8(c)(9).
    \47\ See, e.g., General Electric Corporation (Jan. 28, 1997) 
(shareholder proposal requiring company to modify stock option plans 
conflicted with company proposal); Northern States Power Co. (July 
25, 1995) (shareholder proposal counter to management's).
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    Current paragraph (c)(10),\48\ permitting exclusion of ``moot'' 
proposals, would be revised to reflect the Commission's interpretation 
permitting exclusion of proposals that have been ``substantially 
implemented.'' \49\ Only minor stylistic revisions would be made to 
paragraph (c)(11) \50\, which permits omission of substantially 
duplicative proposals. Although we significantly revised current 
paragraph (c)912),\51\ the rule restricting resubmission of certain 
proposals, the only substantive proposed modifications to the paragraph 
are described in Part E below. We request your comments on whether the 
current rules are preferable, or whether some other revision would make 
the rules easier to understand and follow, and whether the proposed 
revisions appear consistent with current interpretations of the rules.
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    \48\ 17 CFR 240-14a-8(c)(10).
    \49\ 1983 Release Consistent with that release, in order to have 
been ``substantially implemented,'' the company must have actually 
taken steps to implement the proposal. It is insufficient for the 
company to have merely considered the proposal, unless the proposal 
clearly seeks only consideration by the company, and not necessarily 
implementation.
    \50\ 17 CFR 240.14a-8(c)(11). See, e.g., Detroit Edison (Jan. 
16, 1996).
    \51\ See, e.g., Gannett Co. (Feb. 12, 1996).
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    Finally, the rule as proposed to be revised would permit both 
companies and shareholders to send their rule 14a-8 submissions to the 
Commission by

[[Page 50686]]

electronic mail. That option is not currently available.

B. Personal Claim or Grievance Exclusion: Rule 14a-8(c)(4)

    We propose to modify the application of rule 14a-8(c)(4), which 
permits companies to exclude proposals relating to ``a personal claim 
or grievance against the registrant or any other person, or if it is 
designed to result in a benefit to the proponent or to further a 
personal interest, which benefit or interest is not shared by the other 
security holders at large.'' The goal of paragraph (c)(4) is 
straightforward: to screen out proposals designed to further a personal 
grievance or a special interest, since such proposals are unlikely to 
further the interests of all shareholders at large.\52\ The Commission 
has recognized, however, that the exclusion is ``[p]erhaps the most 
subjective provision and definitely the most difficult for the staff to 
administer'' because it ``requires the staff to make determinations 
essentially involving the motivation of the proponent in submitting the 
proposal.'' \53\
---------------------------------------------------------------------------

    \52\ Exchange Act Release No. 19135 (Oct. 14, 1982) [47 FR 
47420].
    \53\ Id.
---------------------------------------------------------------------------

    Application of the exclusion is particularly difficult when the 
proposal is neutral on its face, meaning that the proposal itself does 
not by its terms relate to a personal grievance or special interest of 
the proponent. In those situations, the Division must make factual 
determinations, sometimes involving the proponent's or the company's 
credibility, based normally on circumstantial evidence presented in the 
parties' submissions.\54\ In practice, the Division has infrequently 
concurred in the exclusion of a ``neutral'' proposal under rule 14a-
8(c)(4).
---------------------------------------------------------------------------

    \54\ See, e.g., Service Corporation Int'l (Feb. 28, 1997) 
(company pointed to proponent's history of harassment as indicative 
of a personal claim or grievance); Nortek Inc. (Aug. 13, 1996) 
(staff did not concur with company's view that proposal requesting 
recision of a bylaw was excludable under rule 14a-8(c)(4)).
---------------------------------------------------------------------------

    We propose to modify the way the Division applies the rule so that 
the staff would concur in the exclusion of a proposal on this ground 
only if the proposal (including any supporting statement) on its face 
relates to a personal grievance or special interest. While a company 
would still be required to make a submission under rule 14a-8 if it 
intends to omit a ``neutral'' proposal under paragraph (c)(4), the 
Division would automatically express ``no view,'' rather than concur or 
decline to concur in its exclusion.
    We propose this new approach because we recognize that the basic 
policy underlying paragraph (c)(4) is equally applicable to proposals 
that are neutral on their face. The proposed modification of the way we 
administer the rule merely reflects our appreciation that the 
Division's ability to make the necessary factual findings is limited in 
the context of such a proposal. Companies receiving ``no view'' 
responses could elect to omit the proposal if they believe they possess 
adequate factual records to demonstrate the personal grievance or 
interest. However, the Commission and its staff would not make that 
determination.
    While this is a change in the Division's administration of the 
rule, we nevertheless request your comments on whether we should 
implement this change, including whether it would lead to abuse by 
either shareholders or companies.

C. Rule 14a-8(c)(5): The ``Relevance'' Exclusion

    We propose to narrow and clarify the operation of rule 14a-8(c)(5), 
which is often called the ``relevance'' exclusion because its primary 
purpose is to screen out proposals that are of little or no economic 
relevance to the company and its business. Currently, the rule permits 
companies to exclude a proposal relating to

operations which account for less than 5 percent of the registrant's 
total assets at the end of its most recent fiscal year, and for less 
than 5 percent of its net earnings and gross sales for its most 
recent fiscal year, and is not otherwise significantly related to 
the registrant's business.

    Since its adoption, the rule has suffered from the inherently 
subjective nature of the ``otherwise significantly related'' standard. 
The Commission has considered more objective tests. In 1976, for 
example, the Commission considered a purely economic test for 
determining a proposal's relevance, but rejected the idea largely out 
of recognition that some matters, such as cumulative voting rights or 
the ratification of auditors, may be important to the company despite 
the unavailability of a quantifiable economic value.\55\ The Commission 
nonetheless recognized that there were ``circumstances in which 
economic data may indicate a valid basis for omitting a proposal under 
this provision.'' \56\
---------------------------------------------------------------------------

    \55\ Exchange Act Release No. 12999 (Nov. 22, 1976) [49 FR 
52994].
    \56\ Id.
---------------------------------------------------------------------------

    Realizing that the rule continued to suffer from imprecision, the 
Commission revised it in 1983 to add the specific 5% economic test and 
to modify the reference to ``significantly related'' matters.\57\ Thus, 
if the subject of the proposal represented less than 5% of total 
assets, gross sales, and net earnings, the proponent could avoid 
exclusion of a proposal by demonstrating that the proposal is 
``otherwise significantly related'' to the company's business.\58\
---------------------------------------------------------------------------

    \57\ 1983 Release; see also Exchange Act Release No. 19135 (Oct. 
14, 1982).
    \58\ The proponent carries the burden of demonstrating that the 
proposal is ``otherwise significantly related.'' See Exchange Act 
Release No. 19135 (Oct. 14, 1982).
---------------------------------------------------------------------------

    Largely as a result of the subjectivity of the ``otherwise 
significantly related'' language, that portion of the rule frequently 
overshadows the 5% economic standard. Thus, even if a proposal 
represents less than 5% of the company's total assets, net earnings, 
and gross sales, the proponent often can satisfy the ``otherwise 
significantly related'' part to defeat the company's reliance on the 
rule. In the period between September 30, 1996, and the date of this 
release, only two companies successfully invoked the rule to exclude 
proposals.\59\
---------------------------------------------------------------------------

    \59\ Atlantic Richfield Company (Jan. 28, 1997) (proposal on 
company's operations in Myanmar); La Jolla Pharmaceutical Company 
(Feb. 18, 1997) (proposal on use of human fetal tissue).
---------------------------------------------------------------------------

    The rule as revised would apply a purely economic standard. The 
exception for proposals that are ``otherwise significantly related'' 
would be deleted. A company would be permitted to exclude proposals 
relating to matters involving the purchase or sale of services or 
products that represent $10 million or less in gross revenue or total 
costs, whichever is appropriate, for the company's most recently 
completed fiscal year. However, an economic threshold lower than $10 
million would apply if 3% of the company's revenue or total assets 
(whichever is higher), for its most recently completed fiscal year, 
results in a number lower than $10 million.
    For instance, assume a proposal relates to a single retail store 
operated by a company with multiple stores, and the store generated $4 
million in gross revenue for the company' most recently completed 
fiscal year. Because $4 million is less than $10 million, the company 
would be permitted to exclude the proposal unless the exception in the 
second part of the rule applies. However, because the company's gross 
revenue worldwide for the last completed fiscal year was $500 million, 
and its total assets totalled $400 million, the exception would not 
apply in this example. Three percent of the company's gross revenue for 
the relevant period (the higher number)

[[Page 50687]]

amounts to $15 million--a number greater than $10 million. If it 
resulted in a lower number, that number would be the applicable 
threshold.
    In response to the Questionnaire, companies stated that rule 14a-8 
operates in a manner that requires them to include too many proposals 
of little or no relevance to their businesses.\60\ We believe that the 
proposed revisions address this concern by establishing clearer, more 
predictable criteria for excluding proposals. The proposed revisions 
should also make it easier for companies to exclude economically 
insignificant proposals. The approach would appear to balance the 
various competing concerns, since under the proposed revision companies 
may also be unable to exclude some proposals--with relatively greater 
economic significance--that they are currently permitted to omit under 
the existing 5% test.
---------------------------------------------------------------------------

    \60\ See Section II above. In addition, of those responding to 
the Questionnaire, 59% of shareholders, and 54% of companies, ranked 
either simplification of the shareholder proposal process, or 
reduction of the cost and time required to participate, as a top 
goal of reform.
---------------------------------------------------------------------------

    There would be four safeguards to prevent the revised rule from 
precluding proposals that may be significant to the company despite a 
low quantifiable value. First, the exclusion would apply only to 
proposals relating to quantifiable matters, such as operations in a 
specific foreign country, a specific product line, or a specific retail 
store or set of stores. It would not apply to proposals where 
quantification is impracticable or unreliable, such as proposals on 
cumulative voting, or the ratification of auditors.
    Second, the economic threshold in the proposed rule has been 
reduced significantly from the threshold in current rule 14a-8(c)(5) to 
counter-balance the elimination of the ``otherwise significantly 
related'' portion of the current rule. The economic thresholds that 
would apply under the proposed rule would be the lesser of either $10 
million in gross revenues or total costs (which is appropriate), or 3% 
of gross revenues or total assets (whichever is higher).
    We recognize that $10 million may be economically significant for 
some smaller companies. That is why we propose the alternative 3% test 
which would make it more difficult to exclude proposals at smaller 
companies. The alternatives test could operate only to reduce the $10 
million threshold, not to increase the threshold.
    Third, the exclusion would apply only to proposals relating to the 
purchase or sale of products and services. This qualification is 
designed to help ensure that the exclusion is applied only to distinct 
operational matters relating to the company's business activities, and 
not to matters involving the company's internal governance, such as 
voting procedures for the board of directors.
    Finally, we believe that any inflexibility that may result from 
adoption of a purely economic standard would be mitigated by the 
adoption of the ``override'' mechanism described in Part F below. That 
mechanism would permit a proponent who obtained sufficient shareholder 
support to override a company's use of current paragraph (c)(5) if he 
or she believed that it permitted exclusion of an important proposal.
    We request your comments on whether we should consider some other 
modification of current paragraph (c)(5). For example, instead of 
eliminating the ``otherwise significantly related'' portion of the 
current paragraph, should we attempt to clarify and narrow that portion 
of the rule? Should it refer instead to specific types of proposals 
that would not be subject to the exclusion, such as corporate 
governance proposals and/or proposals relating to extraordinary 
transactions? \61\ Should we revise the language to make it less 
subjective, to refer for instance to proposals where the substantiative 
action in the resolution relates to matters that under the applicable 
corporate law can be effectuated only by shareholders or the board of 
directors, or both acting together? Or should we instead retain the 
``otherwise significantly related'' language?
---------------------------------------------------------------------------

    \61\ The Questionnaire asked about a reformulation that would 
permit companies to exclude proposals representing less than 5% of 
assets, earnings, and sales, unless the proposal relates to 
corporate governance. Forty-one percent of shareholder respondents 
and 23% of companies indicated that they would favor such an 
approach.
---------------------------------------------------------------------------

    We also request your comments on whether the qualification that the 
exclusion apply only to matters relating to purchase or sale of goods 
or services is necessary to ensure that the exclusion is not overly 
broad? Would some other formulation work more effectively, such as 
limiting application of the exclusion to matters relating to a 
company's assets or earnings?
    In addition, we solicit your comments on whether economic 
thresholds other than $10 million in gross revenues or total costs, or 
3% of gross revenues or total assets, might be more appropriate. Should 
there be only one threshold, such as the $10 million threshold, or the 
3% threshold, or is it appropriate to have alternative thresholds, as 
proposed? The 3% test is intended to apply to relatively small 
companies where the fixed dollar test might be too high. Is that 
safeguard unnecessary if the fixed dollar threshold is set at a number 
as low as $10 million? The alternative 3% percent test would operate 
only to reduce the $10 million threshold, not to increase the 
threshold. We request your comments on whether the alternative test 
should also operate to increase the fixed dollar threshold.
    Your comments should also address whether the proposed $10 million 
threshold is too low, so that it would fail to permit omission of 
economically insignificant proposals. If so, should the threshold be 
higher, such as $15 million or $25 million? Or would the rule as 
proposed permit companies to exclude too many proposals? If that is so, 
should the threshold be lower, such as $1 million, or $5 million? 
Similarly, should we adopt a percentage threshold lower than the 
proposed 3%, such as 1% or .5%, or a higher one, such as 5% or 8%?
    The proposed $10 million threshold would be based on total costs or 
gross revenues, whichever is appropriate. Cost appears to be an 
appropriate measure for some matters, such as supply contracts, while 
revenue appears more appropriate for others, such as retail operations. 
Companies would not be permitted to choose between the two measures. 
For the percentage portion of the exclusion, we believe that a test 
based alternatively on gross revenues or total assets is warranted 
because it would apply in the most consistent and meaningful manner 
among different companies and industries compared to other possible 
measures. While revenues should in most cases be a consistent measure 
of size, assets may be a better measure for some types of companies, 
such as banks.
    Should we instead adopt some other basis, or series of bases, for 
measuring the fixed dollar amount, such as pre-tax income, total 
assets, gross profit and/or net earnings? Instead of basing the amount 
on an alternative between two measures--such as revenues or cost--
should we base it on only one measure, such as only cost, revenues, or 
assets? Similarly, we request your comments on whether the percentage 
portion of the test should be based on a measure other than gross 
revenues or total assets. Should we instead adopt some other basis, or 
series of bases, such as pre-tax income, gross profit and/or net 
earnings?

[[Page 50688]]

D. The Interpretation of Rule 14a-8(c)(7): The ``Ordinary Business'' 
Exclusion

    When adopted in 1953, the ``ordinary business'' exclusion had a 
fairly straightforward mission: to ``relieve the management of the 
necessity of including in its proxy material security holder proposals 
which relate to matters falling within the province of management.'' 
\62\
---------------------------------------------------------------------------

    \62\ Exchange Act Release No. 4950 (Oct. 9, 1953) [18 FR 6646].
---------------------------------------------------------------------------

    That mission became more complicated with the emergence of 
proposals focusing on social policy issues beginning in the late 
1960's. As drafted, the rule provided no guidance on how to analyze 
proposals relating simultaneously to both an ``ordinary business'' 
matter and a significant social policy issue.
    In 1976, the Commission considered revisions to the ``ordinary 
business'' exclusion, hoping to fashion more workable language 
distinguishing between ``mundane'' business matters and ``important'' 
ones.\63\ It declined to adopt the new language after commentators 
expressed concern that the new language might be overly restrictive and 
difficult to apply.\64\ In lieu of adopting revisions, the Commission 
stated that it would apply the exclusion in a ``somewhat more flexible 
manner.'' \65\
---------------------------------------------------------------------------

    \63\ Exchange Act Release No. 12598 (Jul. 7, 1976) [41 FR 
29982].
    \64\ Exchange Act Release No. 12999 (Nov. 22, 1976) [41 FR 
52994].
    \65\ Id.
---------------------------------------------------------------------------

    In applying the ``ordinary business'' exclusion to proposals 
relating to social policy issues, the Division applies the most well-
reasoned standards possible, given the complexity of the task. From 
time to time, in light of experience dealing with proposals in 
particular subject areas, it adjusts its approach. Over the years, for 
instance, the Division has in several instances reversed its position 
on the excludability of proposals involving plant closings,\66\ the 
manufacture of tobacco products,\67\ executive compensation,\68\ and 
golden parachutes.\69\
---------------------------------------------------------------------------

    \66\ See Pacific Telesis Group (Feb. 2, 1989).
    \67\ See Philip Morris Companies, Inc. (Feb. 13, 1990).
    \68\ See Reebok Int'l Ltd. (Mar. 16, 1992).
    \69\ See Transamerica Corp. (Jan. 10, 1990).
---------------------------------------------------------------------------

    Another of these interpretive adjustments is a subject of today's 
proposals. In a 1992 no-action letter issued to the Cracker Barrel Old 
Country Stores, Inc.,\70\ the Division announced that

    \70\ See Cracker Barrel.
---------------------------------------------------------------------------

the fact that a shareholder proposal concerning a company's 
employment policies and practices for the general workforce is tied 
to a social issue will no longer be viewed as removing the proposal 
from the realm of ordinary business operations of the registrant. 
Rather, determinations with respect to any such proposals are 
properly governed by the employment-based nature of the proposal.

    As a basis for the interpretive shift, the Division explained in 
the letter that

[n]otwithstanding the general view that employment matters 
concerning the workforce of the company are excludable as matters 
involving the conduct of day-to-day business, exceptions have been 
made in some cases where a proponent based an employment-related 
proposal on `social policy' concerns. In recent years, however, the 
line between includable and excludable employment-related proposals 
has been increasingly difficult to draw. The distinctions recognized 
by the staff are characterized by many as tenuous, without substance 
and effectively nullifying the application of the ordinary business 
exclusion to employment-related proposals.

    The Cracker Barrel interpretation has been controversial since it 
was announced.\71\ While the reasons for adopting the Cracker Barrel 
interpretation continue to have some validity, as well as significant 
support in the corporate community,\72\ we believe that reversal of the 
position is warranted in light of the broader package of reforms 
proposed today. Reversal will require companies to include proposals in 
their proxy materials that some shareholders believe are important to 
companies and fellow shareholders. In place of the 1992 position, the 
Division would return to its approach to such proposals prevailing 
before it adopted the position. That is, employment-related proposals 
focusing on significant social policy issues could not automatically be 
excluded under the ``ordinary business'' exclusion.
---------------------------------------------------------------------------

    \71\ Shortly after its announcement, the New York City Employees 
Retirement System unsuccessfully challenged the Commission's 
authority to adopt the position. See New York City Employee's 
Retirement System v. SEC, 843 F. Supp. 858, rev'd 45 F.3d 7 (2d Cir. 
1995). The Amalgamated Clothing and Textiles Union successfully 
challenged Wal-Mart's decision to exclude an affirmative action 
proposal after the Division concurred that the proposal could be 
excluded. See Amalgamated Clothing and Textile Workers Union v. Wal-
Mart Stores, Inc., 821 F. Supp. 877 (S.D.N.Y. 1993). During the last 
proxy season, we declined proponents' requests that we review three 
Division no-action responses implicating the interpretation, and 
concerning companies' affirmative action policies and practices. 
Commissioner Wallman dissented, and issued a dissenting statement.
    \72\ In response to the Questionnaire, 91% of companies favored 
excluding employment-related shareholder proposals raising 
significant social policy issues under the Cracker Barrel 
interpretation. Eighty-six percent of shareholders thought such 
proposals should be included.
---------------------------------------------------------------------------

    Under this proposal, the ``bright line'' approach for employment-
related proposals established by the Cracker Barrel position would be 
replaced by the case-by-case analysis that prevailed previously. Return 
to a case-by-case approach should redress the concerns of shareholders 
interested in submitting for a vote by fellow shareholders employment-
related proposals raising significant social issues. While this would 
be a change in the Commission's interpretation of the rule, we 
nonetheless request your comments on whether we should reverse the 
Cracker Barrel interpretation. Your comments should focus on the 
proposed interpretive change independently of other proposals as well 
as part of the overall package of reforms proposed today.
    In framing responses, commenters should bear in mind that the 
Cracker Barrel position relates only to employment-related proposals 
raising significant social policy issues. Reversal of the position 
would not affect the Division's analysis of any other category of 
proposals under the exclusion, such as proposals on general business 
operations. Also, the Division would continue to concur in the 
exclusion of straightforward employment proposals not raising 
significant social issues.\73\
---------------------------------------------------------------------------

    \73\ See, e.g., Marion Merrell Dow, Inc. (Mar. 26, 1993) 
(proposal on the scope of employees' responsibilities); Eastman 
Kodak Company (Jan. 30, 1991) (procedures for employee-management 
communications); International Business Machines Corporation (Dec. 
28, 1995) (proposal requesting amendment of terms of employee 
benefit plans).
---------------------------------------------------------------------------

    Despite return to a case-by-case, analytical approach, some types 
of proposals raising social policy issues may continue to raise 
difficult interpretive questions. For instance, reversal of the Cracker 
Barrel position would not automatically result in the inclusion of 
proposals focusing on wage and other issues for companies' operations 
in the Maquiladora region of Mexico,\74\ or on ``workplace practices.'' 
\75\
---------------------------------------------------------------------------

    \74\ See, e.g., Allied Signal, Inc. (Jan. 8, 1997) (proposal on 
company's Maquiladora operations). In response to the proponents' 
request for Commission review, we declined to review this no-action 
response in light of the ongoing Congressionally-mandated study of 
the shareholder proposal process.
    \75\ See, e.g., W.R. Grace & Co. (Feb. 29, 1996) (proposal on 
matters such as employee training, quality control).
---------------------------------------------------------------------------

    Finally, we believe that it would be useful to summarize the 
principal considerations in the Division's application of the 
``ordinary business'' exclusion. These considerations would continue to 
impact our reasoning even

[[Page 50689]]

if the proposals are adopted. The general underlying policy of this 
exclusion is consistent with the policy of most state corporate laws: 
to confine the resolution of ordinary business problems to management 
and the board of directors since it is impracticable for shareholders 
to decide how to solve such problems.\76\ Although the policy is based 
on state law, it is not completely guided by it, due in part to an 
absence of state authority on many of the issues we are called upon to 
address.
---------------------------------------------------------------------------

    \76\ See Testimony of Chairman Armstrong, Hearings on SEC 
Enforcement problems Before a Subcommittee of the Senate Committee 
on Banking and Currency, 85th Cong., 1st Sess., pt. 1, at 118 
(1957); see also Exchange Act Rel. No. 12999 (Nov. 22, 1976).
---------------------------------------------------------------------------

    The policy underlying the rule includes two central considerations. 
The first relates to the subject matter of the proposal. Certain tasks 
are so fundamental to management's ability to run a company on a day-
to-day basis that they could not, as a practical matter, be subject to 
direct shareholder oversight. Examples include the management of the 
workforce, such as the hiring, promotion, and termination of employees, 
decisions on production quality and quantity, and the retention of 
suppliers. However, proposals relating to such matters but focusing on 
significant social policy issues generally would not be considered to 
be excludable, because such issues typically fall outside the scope of 
management's prerogative.\77\
---------------------------------------------------------------------------

    \77\ See, e.g., Reebok Int'l Ltd. (Mar. 16, 1992).
---------------------------------------------------------------------------

    The second consideration relates to the degree to which the 
proposal seeks to ``micro management'' the company by probing too 
deeply into ``matters of a complex nature that shareholders, as a 
group, would not be qualified to make an informed judgment on, due to 
their lack of business expertise and lack of intimate knowledge of the 
[company's] business.''\78\ This consideration may come into play in a 
number of circumstances, such as where the proposal seeks intricate 
detail, or seeks to impose specific time-frames or methods for 
implementing complex policies.\79\
---------------------------------------------------------------------------

    \78\ Exchange Act Release No. 12999 (Nov. 22, 1976).
    \79\ See, e.g., Capital Cities/ABC, Inc. (Apr. 4, 1991) 
(proposal requested detailed information on the composition of the 
company's workforce and other matters); Templeton Dragon Fund/
Newgate Management Associates (Jun. 11, 1997) (proposal sought to 
establish the interval between repurchases and the amount of the 
initial repurchase offer for a fund's repurchase program); 
Burlington Northern Santa Fe Corp. (Jan. 22, 1997) (proposal on 
development of new technology for railroad braking systems); see 
also, e.g., Roosevelt v. Dupont, 958 F.2d 416, 427 (D.C. Cir. 1992) 
(proposal sought to impose earlier timetable for cessation of CFC 
production).
---------------------------------------------------------------------------

E. Rule 14a-8(c)(12): The Resubmission Thresholds

    We propose to increase the resubmission thresholds under rule 14a-
8(c)(12). If a proposal fails to receive a specified level of support, 
that rule permits a company to exclude a proposal focusing on 
substantially the same subject matter for a three-year period. In order 
to avoid possible exclusion, a proposal must receive at least 3% of the 
vote on its first submission, 6% on the second, and 10% on the third.
    We propose to raise the thresholds to 6% on the first submission, 
15% on the second submission, and 30% on the third. At least for the 
time frame contemplated by the rule, we believe that a proposal that 
has not achieved these levels of support has been fairly tested and 
stands no significant chance of obtaining the level of voting support 
required for approval. We propose to increase the second and third 
thresholds by relatively larger amounts because the proposal will have 
had two or three years to generate support.
    The amendments would also respond to companies' concerns that they 
receive too many proposals of little or no relevance to their 
businesses.\80\ In addition, we believe that the amendments are 
appropriate to counter-balance other proposals that would expand the 
range of proposals companies must include in their proxy materials, 
such as the proposed reversal of the Cracker Barrel position, and the 
``override'' mechanism described in Part F below.
---------------------------------------------------------------------------

    \80\ See Section II above.
---------------------------------------------------------------------------

    The theory of this approach is consistent with that of the proposed 
``override'' mechanism: in some circumstances, shareholders may be the 
best judge of which rule 14a-8 proposals deserve space on the company's 
proxy card. Even with the proposed revisions, paragraph (c)(12) will 
continue to permit shareholders an opportunity to see otherwise proper 
proposals at least once, and to decide for themselves which are 
sufficiently important and relevant to see on the proxy card a second, 
third, or fourth time. In this respect, we believe that the proposed 
approach is preferable to other suggested alternatives, such as 
increasing the eligibility criteria for initial submissions,\81\ or 
further restricting the types of proposals that may appear in proxy 
materials. We request your comments whether this approach is preferable 
to alternatives, such as increasing eligibility criteria.
---------------------------------------------------------------------------

    \81\ For a discussion of the eligibility criteria, see Part I.2. 
below.
---------------------------------------------------------------------------

    We request your comments on whether the thresholds should remain at 
their current levels, or whether they should be amended to amounts 
lower or higher than those proposed. For instance, instead of 
increasing the first threshold of 6%, we could increase it to 5%, or to 
8% or 10%. The second threshold instead could be increased to 10% or 
20%, and the third to 15% or 40%. Alternatively, we could increase only 
one or two of the thresholds. To illustrate, we could increase only the 
second and third thresholds, for instance to 15% and 30%, but leave the 
first at its current level of 3%.
    We also request your comments on whether the size of the thresholds 
should vary in inverse relationship to the size of the company. Under 
this alternative, the percentage vote that a proposal must receive 
could be higher or lower depending on the company's total assets, 
market capitalization, revenues, profits, earnings, or a combination of 
those factors. A smaller percentage would be sufficient for a larger 
company, and a larger percentage for a smaller company. This approach 
would account for the fact that obtaining a certain percentage of 
support may become more difficult as the size of the shareholder base 
increases. If you believe that the thresholds should vary, your 
comments should specify the factors that should be considered in 
distinguishing between companies.
    Finally paragraph (c)(12) prescribes a ``votes cast'' standard for 
determining whether a proposal received sufficient voting support in 
previous years to bar its omission in the current year. Under this 
standard, which has been characterized as the ``most favorable to 
shareholder proponents,\82\ abstentions and broker non-votes \83\ are 
excluded

[[Page 50690]]

from the denominator comprised of the total number of votes cast 
``For'' and ``Against'' a given proposal. This figure in turn is 
divided into the total number of favorable votes cast to obtain the 
requisite percentage.
---------------------------------------------------------------------------

    \82\ See American Bar Association Interpretive Letter (avail. 
June 24, 1993) (quotation in footnote 2 of incoming letter 
describing staff's position, for tabulation purposes, on 14a-
8(c)(12) resubmission thresholds; the letter sought staff 
interpretive advice on the proper treatment of broker non-votes and 
abstentions for purposes of Rule 16b-3).
    \83\ In Exchange Act Release No. 30849 (June 24, 1992) [57 FR 
29564], at footnote 67, the Commission described abstentions and 
broker-dealer non-votes as follows:
    In two instances, a shareholder will be deemed present at the 
meeting for quorum purposes, but will be deemed not to have voted on 
a particular matter. First, the shareholder may specifically abstain 
from the vote by registering an abstention vote. Second, a nominee 
holding shares for beneficial owners [e.g., a broker-dealer] may 
have voted on certain matters at the meeting pursuant to 
discretionary authority or instructions from the beneficial owners, 
but with respect to other matters may not have received instructions 
from the beneficial owner and [therefore] may not exercise 
discretionary voting power. Such unvoted shares are termed ``non-
votes.''
---------------------------------------------------------------------------

    The Commission believes that the staff should continue to apply 
this method of vote counting for (c)(12) purposes, regardless of 
whether the existing thresholds are increased. Comment is sought on 
whether a different method should be applied; for example, including 
abstentions and/or broker non-votes as votes cast in the denominator, 
and/or treating abstentions and/or broker non-votes as votes against a 
proposal. We note that treating abstentions and/or non-votes as votes 
cast would result in the largest denominator, requiring the most 
``For'' votes to surmount the (c)(12) thresholds.

F. Proposed Override Mechanism

    We propose to revise rule 14a-8 to permit a shareholder proponent 
to override the exclusions under rules 14a-8(c) (5) and (7) if he or 
she demonstrates that at least 3% of the company's outstanding voting 
shares support the submission of the proposal for a shareholder vote. 
Current rule 14a-8 does not include any mechanism for overriding 
exclusions currently listed in any paragraph of rule 14a-8.
    The ``override'' mechanism would broaden the spectrum of proposals 
that may be included in companies' proxy materials where a certain 
percentage of the shareholder body believes that all shareholders 
should have an opportunity to express a view on the proposal. The 
proposed mechanism would accordingly provide shareholders an 
opportunity to decide for themselves which proposals are sufficiently 
important and relevant to all shareholders--and, therefore, to the 
company--to merit space in the company's proxy materials.
    As an example, companies often rely on current paragraph (c)(7) in 
attempting to exclude shareholder proposals on a variety of issues. 
Under the proposed ``override,'' a shareholder obtaining the required 
level of support could avoid exclusion under that paragraph.
    The requirement that the proponent obtain the support of a certain 
percentage of his or her fellow shareholders should serve two purposes. 
First, the percentage should be high enough to ensure that the 
proposals receiving that level of support are likely to be sufficiently 
relevant and important to the company to deserve a space in its proxy 
materials. Second, the percentage should not be so high as to make the 
``override'' unattainable. We believe that 3% would strike the right 
balance, but we request your comments on whether the percentage should 
be higher, such as 5% or 8%, or lower, such as 1% or 2%. Your comments, 
preferably supported by empirical information, should address the 
degree to which a 3% support level is achievable.
    As proposed, the shareholder who submitted the proposal could 
include his or her own shares in calculating the 3% necessary to 
accomplish an override. We recognize that, under this approach, a 
proponent who holds 3% of a company's outstanding voting shares could 
accomplish an override without having to obtain the endorsement of 
other shareholders. We request your comments on whether alternatively 
the rule should preclude consideration of the proponent's own shares in 
calculating the percentage required for an override.
    We request your comments on whether we should adopt an alternative 
mechanism for establishing a shareholder override in addition to, or in 
place of, the 3% requirement. We could, for instance, permit an 
override by a fixed number of shareholders, such as 200, or 500 
holders, either in place of the 3% threshold, or as an alternative 
test. If so, should it be permissible for the supporters to be members 
of the same organization, such as the same shareholder organization?
    We also request your comments on whether the level of support a 
shareholder must obtain should vary in inverse relationship to the size 
of the company. That is, the percentage of share ownership that a 
proposal must receive could be higher or lower depending on the 
company's total assets, market capitalization, revenues, profits, 
earnings , income or a combination of those factors. A smaller 
percentage would be sufficient for a larger company, and a larger 
percentage for a smaller company. This approach would account for the 
fact that obtaining a certain percentage of support may become more 
difficult as the size of the shareholder base increases. If you believe 
that the thresholds should vary, your comments should specify the 
factors that should be considered in distinguishing between companies.
    One method for obtaining the required support likely could be to 
enlist the support of institutions holding large blocks of the 
company's voting shares. We currently do not have conclusive 
information on the extent to which institutions would actually support 
inclusion of social proposals, and we request your comments on this 
question. Our review of institutional filings on form 13F indicates 
that in many cases the support of 3% could be achieved by enlisting the 
support of only one institutional holder,\84\ although it did not 
indicate how many of those holders would as a practical matter likely 
be in a position to engage in shareholder proposal activity.
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    \84\ In the last quarter of 1996, institutional investment 
managers filing Form 13F [17 CFR 249.325] reported holdings in 5,993 
listed equity issues. For 69% (4,166) issues, institutional holdings 
are sufficiently high that an investor would need to contact only 
one holder to communicate with at least 3% of the corporation's 
equity ownership.
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    In calculating the percentage, a proponent could rely on the number 
of voting shares outstanding reported in the company's annual report to 
shareholders distributed for the prior year's annual meeting.\85\ 
Proponents taking advantage of the ``override'' would be responsible 
for demonstrating to the company, not less than 120 calendar days 
before the date of the company's proxy statement released to 
shareholders in connection with the previous year's annual meeting, 
that their proposals had received the endorsement by the holders of 3% 
of the company's shares entitled to be voted on the proposal at the 
meeting. That would include, from each supporter:
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    \85\ Companies are required to provide this information in the 
annual report under rule 5-20 of Regulation S-X. The information 
should also be available in the company's annual report on Form 10-K 
[17 CFR 249.310].

    (i) His or her written statement supporting the inclusion of the 
proposal in the company's proxy materials for a specific meeting of 
shareholders. The statement must be executed and dated as of a date 
no earlier than the date of the company's annual meeting for the 
prior year. If the company did not hold a meeting the prior year, 
the statement must be dated no more than one year before the 
scheduled date of the meeting for which the proposal is submitted. 
Of course, a shareholder's support of an ``override'' effort would 
not include proxy authority with respect to the vote on the proposal 
if it is ultimately placed in the company's proxy materials;\86\ and
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    \86\ See discussion in Part G below of proposed amendments to 
rules 14a-2 and 13d-5.
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    (ii) A written statement from the record holder of the 
supporter's shares, specifying the number of shares that the 
supporter held as of the date of the supporter's statement described 
in (i) of this section.

    It would be the proponent's responsibility to collect this evidence 
from the supporters and provide it to the company in an organized,

[[Page 50691]]

understandable form. We request your comments on these procedures, 
including the requirement that proponents submit the written evidence 
no later than 120 calendar days before the date that the company first 
mailed its proxy materials to shareholders for the prior year's annual 
meeting. Would a deadline set at 60 or 90 calendar days, or 150 or 180 
calendar days, be more appropriate?
    The 120-day deadline has the benefit of simplicity because it would 
track the deadline that currently applies to the submission of 
shareholder proposals to companies, which companies are already 
required to publish in their proxy materials. The 120-day deadline 
would also ensure that companies learn of a potential override 
sufficiently before they print and mail their proxies to review the 
proponent's written support and to discuss any questions on its 
sufficiency.
    Under current rule 14a-8's timing requirements, there is little 
change that a proponent would learn whether a company intends to omit, 
and may properly omit, his or her proposal before invoking the override 
mechanism. Under paragraph (d) of current rule 14a-8, a company 
intending to omit a proposal is not required to submit its reasons to 
the Commission until 80 calendar days before the date the company files 
its definitive copies of its proxy statement and form of proxy.\87\ 
That, of course, is after the proposed 120-day deadline for submitting 
``override'' material to companies. We accordingly propose to amend 
rule 14a-8's timing requirements to provide a proponent a chance to 
learn the Division's views on whether the proposal is properly 
excludable before undertaking an override effort.
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    \87\ See rule 14a-8(d)[17 CFR 240.14a-8(d)].
---------------------------------------------------------------------------

    Under current rule 14a-8(d), the 80-day deadline applies to 
companies' submissions with the Commission without regard to when the 
company receives a copy of the shareholder proposal. Unless the company 
submits early, the Division's views on the excludability of the 
proposal may not be available until weeks before the date of the 
meeting of shareholders. We propose to amend current paragraph (d) to 
require companies to make their submissions no later than 40 calendar 
days after receiving a proposal. Thus, under proposed Question 12, a 
company would be required to submit its reasons to the Commission no 
later than 40 calendar days after the date that it receives a 
shareholder proposal for inclusion in its proxy materials, and no later 
than 80 calendar days before it files its definitive proxy statement 
and form of proxy with the Commission. Under this approach, a proponent 
who submits his or her proposal to the company early enough would 
likely learn whether, in the Division's view, the proposal may be 
excluded before needing to commence an override effort.
    We request your comments on whether it is necessary for proponents 
to learn of the Division's position before undertaking an override 
effort. We also request your comments on whether the proposed 
modification of rule 14a-8's timing requirements would provide 
proponents with an adequate opportunity to learn of the Division's 
response prior to commencing an override effort. Finally, would the 
proposed modification provide companies with adequate time to consider 
shareholder proposals, and to prepare and submit a rule 14a-8 filing 
with the Commission? \88\ Should companies be allowed more time, such 
as 50 or 60 days, or less time, such as 30 days?
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    \88\ Under current rule 14a-8(d), shareholder proposals must be 
submitted to the company no later than 120 calendar days before the 
date that the company mailed it proxy materials to shareholders the 
prior year. Because the company need not make its filing until 80 
calendar days before the filing of definitive proxy materials, the 
current rule in most instances assures companies approximately 40 
days to consider and respond to the receipt of a proposal.
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    As proposed, written support for an override effort must be 
executed and dated no earlier than the date of the company's annual 
meeting for the previous year. The purpose of this requirement is to 
ensure that support for an override is sought and provided as of a date 
reasonably close to the date of the meeting at which the proposal is to 
be presented. It is also designed to prevent a proponent from using the 
same override more than once. We request your comments on whether 
proponents should have more time, such as 18 months, to collect 
override evidence, or less time, such as 9 months. We also request your 
comments on whether we should consider some other approach, such as 
stating that override evidence may be used only once, without placing a 
limitation on how old it can be.
    The proposed share ownership requirements for supporting an 
override would be more lenient than the current eligibility 
requirements for actually submitting a proposal to a company. Paragraph 
(a) of current rule 14a-8 requires that the actual proponent have held 
his or her shares for at least one year before becoming eligible to 
submit a proposal to a company. One purpose of the one-year requirement 
is to curtail abuse of the rule by requiring that those who put the 
company and other shareholders to the expense of including a proposal 
in its proxy materials have had a continuous investment interest in the 
company. While we do not propose a one-year ownership requirement for 
supporting the placement of a proposal in a company's proxy materials 
under the override mechanism, we request your comments on whether we 
should adopt one. If so, your comments should address whether we should 
choose one year, or instead a shorter ownership period for the purposes 
of the override, such as 6 months, or a longer period, such as 2 years.
    In addition, paragraph (a) of the current rule requires that an 
actual proponent state that he or she intends to hold his or her shares 
at least through the date of the meeting. Largely out of concern that 
the fiduciary duties of institutional holders would preclude them from 
making such a commitment, we do not propose that those supporting an 
override promise to hold their shares through the date of the meeting. 
We request your comments, however, on whether we should adopt such a 
requirement, and on whether it would, if adopted, interfere with 
fiduciary duties. Alternatively, should we require a supporter to state 
that he or she intends, as of the date of the statement, to hold his or 
her shares through the date of the meeting, without attaching a penalty 
to a sale of the shares before the meeting date? \89\
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    \89\ Under current rule 14a-8(a)(1), if a proponent fails to 
hold his or her securities continuously through the date of the 
meeting, the company may preclude him or her from including another 
proposal in its proxy materials for two calendar years.
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    As proposed, the override mechanism would limit each shareholder to 
endorsement of no more than one proposal sponsored by another 
shareholder. That would not, however, affect the shareholder's 
eligibility to submit a proposal of his or her own. The purpose of the 
limit would be to place a limitation on the number of proposals that a 
group of shareholders could force a company to include in its proxy 
materials. We request your comments on whether the ``one endorsement'' 
limit should be more liberal, permitting each shareholder to endorse 
two or three proposals for each company. Or should it be more 
restrictive, permitting each shareholder to either submit one proposal, 
or to endorse one proposal, at each company? Under that approach, a 
shareholder who had endorsed a proposal would be disqualified from 
submitting his or her own proposal.
    We view the proposed override as a supplemental, rather than a 
primary,

[[Page 50692]]

method for including proposals in companies' proxy materials. 
Accordingly, we are not proposing any special mechanisms for requiring 
companies to provide shareholder lists or other shareholder information 
to proponents seeking to obtain support for an override. We request 
your comments on whether the rule should include any such mechanisms.

G. Safe Harbor Under Section 13(d); Qualified Exemption From Proxy 
Rules

    To address concerns that a proponent's efforts to gather 
shareholder support to avail himself or herself of the override might 
be deterred by concerns about triggering filing and other obligations 
under Section 13(d) \90\ or 14(a) \91\ of the Exchange Act, we also 
propose a new safe harbor from the 13(d) ``group'' beneficial ownership 
reporting requirements, and a new exemption from the proxy rules in 
rule 14a-2.
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    \90\ 15 U.S.C. 78m(d).
    \91\ 15 U.S.C. 78n(a).
---------------------------------------------------------------------------

    Under current rules, there may be a concern that shareholders 
cooperating in an ``override'' effort, who beneficially own in 
aggregate more than 5 percent of the company's equity securities, might 
be required to file a Schedule 13D or 13G if deemed to have formed a 
``group'' under rule 13d-5. Similarly, there may be a concern that the 
shareholder proponents and others assisting them in seeking support 
also could trigger obligations under the proxy rules if their 
cooperation involves any ``solicitation'' as defined in rule 14a-
1(l)(1).\92\ The relief afforded by the safe harbor would be limited to 
support for the inclusion of the proposal in the company's proxy 
materials for a shareholder vote. It would not extend to agreements or 
arrangements on how shareholders would ultimately vote if the proposal 
appears in the company's proxy materials. Proposed rule 13d-5(b)(3) 
would provide that:

    \92\ 17 CFR 240.14a-1(l)(1).

    Notwithstanding paragraph (b)(1) of this section, a group formed 
among the beneficial owners of a class of equity securities solely 
by an understanding, arrangement, or agreement that a shareholder 
proposal should be placed in a registrant's proxy materials for a 
shareholder vote, for the purpose of using the ``override'' 
mechanism provided in Sec. 240.14a-8(j) (Question 10), shall be 
deemed not to have acquired any equity securities beneficially owned 
by the other members of the group for the purposes of Section 
13(d)(1) of the Act (15 U.S.C. 78m); provided, however, that such 
understanding, arrangement or agreement does not relate to how the 
holders will vote on the proposal if it is ultimately placed in the 
---------------------------------------------------------------------------
registrant's proxy materials.

    We request your comments on whether this relief is necessary in 
order to enable shareholders effectively to make use of the override, 
and, if so, whether it will serve that purpose adequately. We also 
request your comments on whether efforts to obtain an override for 
certain types of proposals (e.g., those affecting control of the 
company) should be afforded protection under the safe harbor, and more 
generally on whether the proposed safe harbor is overly broad.
    Proposed new rule 14a-2(b)(2) would provide an exemption from 
compliance with all proxy rules except rule 14a-9,\93\
---------------------------------------------------------------------------

    \93\ 17 CFR 240.14a-9.
---------------------------------------------------------------------------

for any solicitation made for the sole purpose of gathering support 
for placing a shareholder proposal in a registrant's proxy materials 
pursuant the ``override'' mechanism provided in Sec. 240.14a-8(j) 
(Question 10); provided that such solicitation does not seek proxy 
authority with respect to the vote on the proposal if it is 
ultimately placed in the registrant's proxy materials;

    We request your comments on whether we should adopt proposed new 
rule 14a-2(b)(2), including whether it would provide adequate relief 
for shareholders concerned that their participation in an ``override'' 
effort could amount to a ``solicitation,'' or whether the proposed 
relief is overly broad. We also request your comments on whether, and 
the extent to which, the restrictions set forth in current rule 14a-
2(b)(1) (i)-(x) \94\ should also apply to limit the persons who may use 
the proposed new exemption. Alternatively, we have previously made 
clear that proponents of rule 14a-8 proposals may use the exemption 
provided by rule 14a-2(b)(1);\95\ instead of adopting the proposed new 
rule, should we make clear that proponents seeking to use the proposed 
override mechanism may avail themselves of that exemption?
---------------------------------------------------------------------------

    \94\ 17 CFR 240.14a-2(b)(1).
    \95\ See Exchange Act Release No. 31326 (Oct. 16, 1992) [57 FR 
48276].
---------------------------------------------------------------------------

H. Rule 14a-4: Discretionary Voting Authority

    If a shareholder submits a proposal under rule 14a-8 to be included 
in the company's proxy materials, but the company properly excludes the 
proposal, rule 14a-4(c)(4) \96\ permits the company to exercise 
discretionary voting authority to vote uninstructed proxies against 
that proposal if the shareholder chooses an alternative route for its 
presentation to a vote. The proponent may, for instance, intend to 
present the proposal from the floor of the company's annual meeting, or 
solicit proxy votes independently by distributing its own proxy 
statement and form of proxy.
---------------------------------------------------------------------------

    \96\ 17 CFR 240.14a-4(c)(4).
---------------------------------------------------------------------------

    Rule 14a-4 does not, however, clearly address the exercise of 
discretionary voting authority if the shareholder chooses not to use 
rule 14a-8's procedures for placing a proposal in the company's proxy 
materials. This may occur if the proponent notifies the company of his 
or her intention to present the proposal from the floor of the meeting, 
or commences his or her own proxy solicitation, without ever invoking 
rule 14a-8's procedures.
    The availability of discretionary voting authority on a non-14a-8 
proposal has been the subject of litigation and attendant 
uncertainty.\97\ Current rule 14a-4(c)(1) permits a company to exercise 
voting authority on proposals that the company did not know of a 
``reasonable time'' before the meeting. The ``reasonable time'' 
standard has been the source of some uncertainty when a company is 
notified of a shareholder proposal shortly before its meeting is 
scheduled to take place.\98\
---------------------------------------------------------------------------

    \97\ See, e.g., United Mine Workers of America v. Pittston 
Company, Fed. Sec. L. Rep. para. 94,946 (D.D.C. Nov. 24, 1989); 
Larkin v. Baltimore Bancorp, 769 F. Supp. 919, 925 (D.Md. 1991). See 
also Union of Needletrades, Industrial and Textile Employees 
(``UNITE'') et al. v. The May Department Stores Company, 97 Civ. 
3120 (SDNY).
    \98\ See, e.g., Larkin v. Baltimore Bancorp, 769 F. Supp. 919, 
925 (D.Md. 1991).
---------------------------------------------------------------------------

    In response to the Questionnaire, companies indicated that they 
seek clearer ground rules and the avoidance of potential delay and 
expense when they are notified of possible proposals after they have 
begun to print or even mail proxy materials to shareholders.\99\ We 
accordingly propose to amend rule 14a-4(c) in part to clarify when a 
company may exercise discretionary voting authority on a shareholder 
proposal where the proponent has not invoked rule 14a-8's procedures.
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    \99\ See Section II above.
---------------------------------------------------------------------------

    Last year, the Division provided no-action advice on the ability of 
a company to exercise discretionary voting authority under rule 14a-
4(c)(1) to vote on a matter to be raised at an annual meeting, when the 
company received adequate advance notice of the proposal.\100\ Under 
those no-action letters, a company that receives adequate advance 
notice of a non-rule 14a-8 proposal--such as under its advance notice 
bylaw--nevertheless may preserve its discretionary voting authority by 
disclosing in its proxy materials the nature of any proposal it has 
been advised may be presented, and

[[Page 50693]]

the manner in which the company intends to exercise its discretion. 
Under the no-action letters, the company loses its voting discretion, 
however, once the proponent commences a proxy solicitation and solicits 
the percentage of holders required to carry the proposal.
---------------------------------------------------------------------------

    \100\ See Idaho Power Company (Mar. 13, 1996) and Borg-Warner 
Security Corporation (Mar. 14, 1996).
---------------------------------------------------------------------------

    Of course, the Division's no-action letters provide only informal 
advice, and we recognize that the position outlined in those letters 
has not eliminated all uncertainty in situations where a company has 
advance knowledge of a potential proxy contest. For instance, if the 
shareholder proponent files preliminary proxy materials after the 
company has filed its own proxy statement, or even after the company 
has mailed its definitive proxy statement and form of proxy to 
shareholders, the company may be placed in a dilemma of either 
including the shareholder's proposal on its proxy card, or risking the 
delay and expense of a last-minute resolicitation. That is because the 
company may not know whether the shareholder intends to begin to 
solicit proxies independently by circulating his/her own proxy card, 
along with the definitive version of his or her proxy statement, or how 
many shareholders will be solicited if such a solicitation is actually 
launched.
    To address these uncertainties, we propose to amend paragraph 
(c)(1) of rule 14a-4, and to add new paragraph (c)(2), to provide 
clearer guidelines in these circumstances. The proposed revisions to 
paragraph (c)(1) would replace the ``reasonable time'' standard with a 
clear date after which notice of a possible shareholder solicitation 
would not be deemed adequate for purposes of proposed new paragraph 
(c)(2).
    Revised paragraph (c)(1) would allow a company voting discretion 
where ``the registrant did not have notice of the matter more than 45 
days before the date on which the registrant first mailed its proxy 
materials for the prior year's annual meeting.'' \101\ This approach 
will not only provide clearer guidelines for shareholders and 
companies, but also benefit investors by helping to ensure that 
companies are notified of proposals sufficiently in advance of the 
annual meeting to provide shareholders a meaningful opportunity to 
review related disclosures in the proxy statement.
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    \101\ Because the company's mailing date for the previous year's 
annual meeting may not be available to shareholders, we propose to 
amend rule 14a-5(e) [17 CFR 240.14a-5(e)] to require companies to 
publish in their proxy materials the date by which notice would have 
to be received. This date will by definition be 75 days after the 
date by which shareholder proposals must normally be received under 
rule 14a-8 (Question 5). See Part I.4 below.
---------------------------------------------------------------------------

    We recognize that the laws of some states authorize bylaw 
provisions requiring shareholders to provide advance notice of 
proposals that they intend to present at a meeting of shareholders. We 
do not intend to interfere with the operation of state law authorized 
definitions of advance notice. Accordingly, an advance notice bylaw 
provision ordinarily would override the 45-day period under rule 14a-4 
as proposed to be amended, resulting in either a longer or shorter 
notice period. For example, if a company properly adopts a bylaw 
provision requiring advance notice 60 days before the previous year's 
mailing date, that date would apply instead of the date specified by 
the proposed paragraph 14a-4(c)(1).
    We request your comments on whether it would be more appropriate to 
establish a shorter period than 45 days, such as 30 days or 15 days, or 
a longer period, such as 60 or 90 days for revised paragraph 14a-
4(c)(1). We understand that some companies begin printing their proxy 
materials well in advance of the mailing date. We request your comments 
on whether the 45-day period is adequate to accommodate printing 
schedules.
    Proposed new paragraph 14a-4(c)(2) would address a company's 
ability to exercise discretionary voting authority after it has 
received timely notice of a non-14a-8 proposal for the purposes of 
paragraph (c)(1). The new rule would permit the exercise of such 
authority if the proxy materials include: (i) In the proxy statement, a 
discussion of the nature of the matters and how the company intends to 
exercise its discretion on each matter, and (ii) on the proxy card, a 
cross-reference to the discussion in the proxy statement and a box 
allowing shareholders to withhold discretionary authority from 
management to vote on the same matter(s).
    We believe that the proposed framework would benefit both 
shareholders and companies by establishing clearer and more predictable 
ground rules. The proposed framework also would provide shareholders 
with some control over the company's discretionary authority to vote 
their shares on matters for which the company received adequate notice. 
Under current rules, a company is not required to provide shareholders 
an opportunity to withhold discretionary authority on such matters 
where such authority properly can be exercised.\102\ Under proposed new 
rule 14a-4(c)(2), the company would be required to provide shareholders 
who execute and return proxies an opportunity to withhold discretionary 
authority, albeit only on those matters for which it received adequate 
notice and which it described in its proxy statement. Should we provide 
shareholders greater latitude to ``grant'' discretionary voting 
authority, or to ``abstain,'' in addition to the ability to 
``withhold''?
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    \102\ Rule 14a-4(a)(3) currently provides that ``[n]o reference 
need be made * * * to proposals as to which discretionary authority 
is conferred pursuant to [rule 14a-4(c)].''
---------------------------------------------------------------------------

    We request your comments on the proposed revisions to paragraph 
(c)(1), and the adoption of proposed new paragraph (c)(2). Would some 
other approach be more effective? For example, should we require 
companies to place proposals in their proxy materials if the proponent 
commences a formal proxy solicitation, and solicits the number of 
shares necessary to carry the proposal? What impact, if any, might the 
proposed revision(s) have on the conduct of proxy contests generally? 
Would the proposed amendments have the effect of unduly discouraging 
insurgent solicitations? Your comments should address the proposed 
revisions individually, together with the other proposed changes to 
rule 14a-4(c), and the broader package of reforms proposed today.
    Although they would provide clearer guidance on the exercise of 
discretionary voting authority under rule 14a-4(c), the proposed 
amendments would not relieve companies of their obligation under rule 
14a-9, the anti-fraud rule. Under that rule, companies must provide 
shareholders with sufficient information to make informed voting 
decisions as well as a meaningful opportunity to review the 
information. If the proponent solicits a large number of his or her 
fellow shareholders, for instance, a company may elect to provide 
shareholders with an opportunity to vote for or against a shareholder's 
proposal. In this and similar circumstances, the company must remain 
mindful of its obligations under rule 14a-9.\103\
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    \103\ Recently, for example, some companies have included 
shareholder proposals in supplemental proxy materials with revised 
forms of proxy, which they mailed shortly before the date that the 
annual meeting is scheduled to take place. Even if the supplemental 
proxy contains all material information necessary to make an 
informed voting decision, we understand that the beneficial holders 
may not receive the supplemental materials, or may receive them too 
late for meaningful review and consideration of whether to change or 
formulate new voting decisions. Timing considerations often depend 
on the facts and circumstances of individual cases, and the 
obligation to provide a meaningful opportunity rests with the 
company.

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[[Page 50694]]

    Finally, during the past proxy season, the Division permitted 
several companies to file proxy materials in definitive form despite 
prior notification of a non-14a-8 shareholder proposal, so long as they 
disclosed the nature of the proposal and how they intended to exercise 
discretionary voting authority if the proposal were to be 
presented.\104\ In light of the proposed amendments to rule 14a-4, we 
would reverse that informal position, so that companies receiving 
notice of a non-rule 14a-8 proposal before the filing of their proxy 
materials would henceforth be required to file their materials in 
preliminary form, subject to staff review. We request your comments on 
this proposed reversal.
---------------------------------------------------------------------------

    \104\ Rule 14a-6 [17 CFR 240.14a-6] addresses when a company 
must file its proxy materials in definitive form, and when it must 
file in preliminary form.
---------------------------------------------------------------------------

I. Other Proposed Modifications

    We propose a few other modifications to rules 14a-8 and 14a-5:
    1. The answer to Question 1 of revised rule 14a-8 would define a 
``proposal'' as a request that the company or its board of directors 
take an action. The definition reflects our belief that a proposal that 
seeks no specific action, but merely purports to express shareholders' 
views, is inconsistent with the purposes of rule 14a-8 and may be 
excluded from companies' proxy materials. The Division, for instance, 
declined to concur in the exclusion of a ``proposal'' that shareholders 
express their dissatisfaction with the company's earlier endorsement of 
a specific legislative initiative.\105\ Under the proposed rule, the 
Division would reach the opposite result, because the proposal did not 
request that the company take an action. We request your comment on 
whether this or some other approach may be preferable.
---------------------------------------------------------------------------

    \105\ Pacific Gas and Electric Company (Jan. 21, 1997).
---------------------------------------------------------------------------

    2. Rule 14a-8(a)(1) currently requires that a shareholder have held 
for one year the lesser of $1,000 in market value, or 1%, of the 
company's voting shares, at the time he or she submits a proposal. We 
propose adjusting the $1,000 requirement to account for inflation since 
first adopted in 1983.\106\ The amended rule, which would appear in the 
answer to Question 2, would require continuous ownership of $2,000 in 
market value of the company's voting shares. While the actual inflation 
adjustment from the date of adoption to today would increase the 
existing requirement by approximately $600, we propose $2,000 to 
account for future inflation, and because it will be easier to use for 
calculations. We sought to avoid increasing the threshold further out 
of concern that a more significant increase could restrict access to 
companies' proxy materials by smaller shareholders, who equally with 
other holders have a strong interest in maintaining channels of 
communication with management and fellow shareholders. We request your 
comments on whether we should adopt a higher number such as $3,000, 
$5,000 or $10,000, or a lower number such as $1,500.
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    \106\ See 1983 Release.
---------------------------------------------------------------------------

    We also request your comments on whether we should modify or 
eliminate the one-year continuous ownership period. One purpose of the 
requirement is to curtail abuse of the rule by requiring that those who 
put the company and other shareholders to the expense of including a 
proposal in proxy materials have had a continuous investment interest 
in the company. We could, for example, permit shareholders more 
flexibility to submit proposals earlier, by adopting a shorter period, 
such as 6 months, or less flexibility, by adopting a longer period, 
such as 18 months. Alternatively, we could maintain the current one-
year period, but provide that relatively larger holders, such as 
holders of 3% or 6% of the outstanding voting shares, would be eligible 
to submit proposals without regard to a continuous ownership period.
    3. The answer to Question 6 in revised rule 14a-8 would describe 
the procedures a company must follow if it intends to omit a proposal 
on grounds that the proponent is ineligible or otherwise failed to 
comply with the rule's procedures. As proposed, the answer states that 
a company may omit a proposal on the grounds only after it has first 
noticed the proponent of the deficiency and gives the proponent 14 
calendar days to remedy the deficiency.\107\ The proposed language 
largely adopts the procedures set forth in current paragraph (a)(1) 
\108\ and (a)(4) \109\ of the current rule. However, the proposed 14-
day period in which a shareholder must respond is shorter than the 21 
calendar days allowed by current paragraph (a)(1), and by some of the 
Division's response letters under paragraph (a)(2).\110\ We believe 
that the shorter period will be sufficient for shareholder proponents, 
and will help to streamline the rule's operation by establishing a 
single ``shareholder response period'' that would apply under all 
circumstances that may arise under the rule. The shorter response time 
should expedite the timing of a company's filings with the Commission 
and, in turn, the Commission's responses. We request your comments on 
whether we should adopt some other mechanism, including whether the 
proposed time for responding should be shorter, such as 10 calendar 
days, or longer, such as 21 calendar days.
---------------------------------------------------------------------------

    \107\ Of course, consistent with current practice, a company 
would not have to follow these procedures if the deficiency cannot 
be remedied, such as if the proponent fails to submit a proposal by 
the company's proper deadline.
    \108\ 17 CFR 240.14a-8(a)(1).
    \109\ 17 CFR 240.14a-8(a)(4).
    \110\ 17 CFR 240.14a-8(a)(2). See, e.g., CoBancorp Inc. (Feb. 
22, 1996); Archer-Daniels-Midland (July 29, 1996).
---------------------------------------------------------------------------

    4. Rule 14a-5(e) currently requires a company to disclose the 
deadline for submitting proposals to be included in proxy materials for 
the next year's annual meeting. We propose to revise the rule to 
require companies also to disclose the date after which proposals 
submitted outside the framework of rule 14a-8 are considered untimely 
for the purposes of rule 14a-4(c)(1).\111\ This is because shareholders 
may not be aware of all the information necessary to calculate the date 
for themselves.
---------------------------------------------------------------------------

    \111\ See Part H above.
---------------------------------------------------------------------------

    In addition, current paragraph (e) requires companies to notify 
shareholders of a new meeting date, and deadline for submitting 
proposals, if the date of the next annual meeting is subsequently 
advanced by more than 30 days, or delayed by more than 90 days. For the 
sake of consistency with other rules,\112\ we propose to revise the 
rule to require notification of changes in the meeting date and each of 
the disclosed dates if the meeting date is delayed or advanced more 
than 30 calendar days. Finally, the current rule contemplates 
notification by ``any means calculated to so inform'' shareholders. We 
propose to require that such notification of date changes appear in the 
company's earliest quarterly report on Form 10-Q \113\ or 10-QSB,\114\ 
if practicable.\115\ We request your comments on whether notice in a 
company's quarterly report is

[[Page 50695]]

likely to be effective, and whether we should require notification in 
some document other than the company's quarterly report, such as Form 
8-K.\116\
---------------------------------------------------------------------------

    \112\ Current rule 14a-8(a)(3)(i) [17 CFR 240.1a-8(a)(3)(i)], 
and proposed rule 14a-8 (Question 5), require the company to adjust 
the deadline for submitting proposals if the date of the annual 
meeting is delayed or advanced by more than 30 calender days.
    \113\ 17 CFR 249.308a. The new information, if applicable, would 
be disclosed under Item 5 of Form 10-Q or 10-QSB (``Other 
Information'').
    \114\ 17 CFR 249.308b.
    \115\ For investment companies, the proposal would require the 
notification to appear in shareholder reports under 30D-1 [17 CFR 
270.30d-1] of the Investment Company Act.
    \116\ 17 CFR 249.308. The information would be included under 
Item 5 of that form.
---------------------------------------------------------------------------

    5. Current rule 14a-8(e) \117\ provides a mechanism for a 
shareholder to obtain staff review of a company's statement in 
opposition to a shareholder proposal appearing in its proxy materials. 
In our experience, only a handful of shareholders make use of the 
mechanism each year, and the staff review rarely results in 
modifications to the company's statement. In most instances, the 
shareholder's objection highlight matters that do not constitute 
materially false or misleading statements for the purpose of rule 14a-
9. Accordingly, we propose to eliminate the mechanism provided by 
current rule 14a-8(e). We request your comments on this proposal.
---------------------------------------------------------------------------

    \117\ 17 CFR 240.14a-8(e).
---------------------------------------------------------------------------

    . Current rule 14a-8(a)(2) provides that a proposal may be 
presented at a meeting either by the proponent or by his or her 
representative qualified under state law to present the proposal. It 
has been our long-standing interpretation of this rule that both the 
proponent and his or her representative must follow any procedures for 
attending the meeting and/or presenting the proposal that are 
authorized or required by state law (e.g., possession of a valid 
proxy). A proponent who holds his or her shares in street name may have 
to obtain from the record holder (usually a broker or bank) a proxy to 
permit attendance at the meeting and/or presentation of the proposal. A 
proponent's representative may have to obtain a proxy from the 
proponent. A particular state's law, of course, may not authorize or 
require any such procedures, or the company may elect not to adopt or 
enforce them where permissible under applicable state law.
    We added the following advisory in the answer to Question 8 of the 
proposed rule: ``Whether you attend the meeting yourself or send a 
qualified representative to the meeting in your place, you should make 
sure that you, or your representative, follow any applicable procedures 
that are proper under state law for appearing at the meeting and/or 
presenting your proposal.'' We request your comments on this revision, 
including whether our long-standing interpretation on this subject is 
appropriate.

IV. Request for Comments

    We request your comments on the proposals, other matters that may 
have an impact on the proposals, and your suggestions for additional 
changes. In addition to the requests for your comments on each of the 
specific proposals, we would like to hear your comments on the 
proposals viewed as a package of reforms, whether they fairly balance 
participants' sometimes conflicting concerns, and whether they would 
bring an overall improvement to the process whereby shareholders 
present proposals to fellow shareholders.
    You should consider whether the Commission should instead adopt 
some fundamentally different approach to the shareholder proposal 
system. Some alternatives, such as encouraging each company to adopt 
its own shareholder proposal rule and process, would largely remove the 
Commission from its role of ``arbiter'' pursuant to the staff's role in 
issuing response letters. If you believe that we should adopt an 
alternative approach, your comments should explain the approach in some 
detail, including the role that the Commission should play.
    You may also consider the purposes of the rule, and the degree to 
which the rule and the proposed amendments serve those purposes. We 
believe that the purpose of the rule is to ensure proper disclosure and 
enhance investor confidence in the securities markets by promoting 
proposals raising significant issues that are relevant to the company 
and its business. You may want to consider whether this is the proper 
purpose of the rule, and if so, what types of proposals are the most 
relevant and important.
    We also request comments on the matters discussed in Sections V 
through VIII below, including our initial regulatory flexibility 
analysis, our preliminary analysis of costs and benefits and effects on 
competition, and our obligations under the Paperwork Reduction Act, and 
the Small Business Regulatory Enforcement Fairness Act of 1996.
    If you wish to submit written comments, you should file three 
copies with Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW,. Washington, D.C. 20549. Comments may 
also be submitted electronically at the following e-mail address: rule-
[email protected]. Comment letters should refer to File No. S7-25-97; 
this file number should be included on the subject line if e-mail is 
used. All comments received will be available for public inspection and 
copying in the Commission's public reference room at the same address. 
Electronically submitted comments will be posted on the Commission's 
Internet web site (http://www.sec.gov).

V. Initial Regulatory Flexibility Analysis

    We have prepared this Initial Regulatory Flexibility Analysis under 
5 U.S.C. 603 concerning the proposed amendments to rules 14a-8, 14a-2, 
14a-4, 14a-5, and 13d-5. We will consider your written comments in the 
preparation of a final analysis. The purpose of the amendments is to 
streamline the operation of the rule, and address concerns raised by 
both shareholder and corporate participants. We propose the amendments 
pursuant to Sections 13, 14, and 23 of the Exchange Act \118\ and 
Section 20(a) of the Investment Company Act of 1940 \119\ (``Investment 
Company Act'').
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 78m, 78n & 78u.
    \119\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

    The amendments focus primarily on rule 14a-8, which requires 
companies to include shareholder proposals in their proxy materials, 
subject to certain bases for excluding them. We propose to revise the 
rule into a more understandable Question & Answer format; make it 
easier for shareholders to include a broader range of proposals in 
companies' proxy materials; and provide companies with clearer 
guidelines, and more flexibility to exclude economically insignificant 
proposals and proposals that lack significant shareholder support.
    The proposed amendments to rules 14a-2 and 13d-5 are ancillary to 
the amendments to rule 14a-8. Proposed new 14a-2(b)(2) would provide an 
exemption from the proxy rules for shareholders attempting to comply 
with a proposed new ``override'' mechanism in rule 14a-8. The override 
would permit holders of 3% of the company's voting shares to override 
the operation of two bases for excluding proposals. Proposed new rule 
13d-5 would provide relief for such holders from filing obligations 
under Section 13(d) of the Exchange Act.
    We also propose to amend rule 14a-4 to further clarify when a 
company may exercise discretionary voting authority on proposals 
submitted outside the rubric of rule 14a-8.\120\ We believe that the 
revisions would help to mitigate the uncertainty that some companies 
experience when presented with such proposals. The revisions should 
also decrease a company's likelihood of incurring the delay and expense 
of rescheduling its meeting of

[[Page 50696]]

shareholders, or of resoliciting its shareholders.
---------------------------------------------------------------------------

    \120\ We propose related amendments to rule 14a-5 to require a 
company to identify in its proxy statement a date relating to its 
potential exercise of discretionary voting authority.
---------------------------------------------------------------------------

    The proposed amendments would affect small entities that are 
required to file proxy materials under the Exchange Act or the 
Investment Company Act. Exchange Act rule 0-10 defines ``small 
business'' as a company whose total assets on the last day of its most 
recent fiscal year were $5 million or less.\121\ Investment Company Act 
rule 0-10 defines ``small entity'' as an investment company with net 
assets of $50 million or less as of that date.\122\ We are currently 
aware of approximately 1,000 reporting companies that are not 
investment companies with assets of $5 million or less. There are 
approximately 800 investment companies that satisfy the ``small 
entity'' definition. Only approximately one-third of all investment 
companies have shareholder meetings and file proxy materials annually. 
Therefore, we believe approximately 250 small entity investment 
companies may be affected by the proposals.
---------------------------------------------------------------------------

    \121\ 17 CFR 240.0-10.
    \122\ 17 CFR 240.0-10.
---------------------------------------------------------------------------

    Not all companies conducting a proxy solicitation receive 
shareholder proposals each year. Furthermore, a company that receives a 
proposal has no obligation to make a submission under rule 14a-8 unless 
it intends to exclude the proposal from its proxy materials. In the 
period from September 30, 1996 to today, we received submissions from a 
total of 245 companies, and only 6 were ``small businesses.''
    Some of the proposed amendments to rule 14a-8 may broaden the range 
of proposals that companies must include in their proxy materials, 
requiring companies to include more proposals in their proxy materials 
than they have in the past. This includes the proposal to reverse the 
Cracker Barrel position on employment-related shareholder proposals 
raising social policy issues, and the proposal to permit the holders of 
3% of the company's voting shares to override the exclusions under 
paragraphs (5) and (7) under Question 9 of the proposed rule. This 
year, the Division received approximately 30 submissions, none by 
``small business,'' involving employment-related proposals tied to 
social issues. It is likely, however, that reversal of the Cracker 
Barrel position, if implemented, would lead to an increase in the 
number of proposals included in proxy materials each year. We request 
your comments on the potential impact on the number of employment-
related proposals submitted to companies each year.
    Because rule 14a-8 currently does not include a mechanism like the 
proposed override, there is no reliable way to predict how often 
shareholders would in the future take advantage of the override to 
force companies to include proposals that they would otherwise be 
permitted to exclude. We request your comments and supporting empirical 
data on the potential impact of the proposed override on the total 
number of proposals companies are required to include in their proxy 
materials.
    Other proposed revisions, however, would enhance companies' ability 
to exclude certain proposals that are economically insignificant to 
them. As revised, paragraph (5) under proposed Question 9 would permit 
companies to exclude proposals on matters relating to the lesser of $10 
million in total costs or gross revenues (whichever is appropriate), or 
3% of total assets or gross revenues (whichever is higher). Because 
companies' submissions under current rule 14a-8 have not addressed 
these criteria, we presently have no reliable way to estimate their 
future impact on the number of proposals companies are required to 
include in their proxy materials. Unlike the current paragraph (c)(5), 
however, the proposed revision would enable companies to include 
companies to exclude proposals based solely on economic criteria, which 
may permit companies to exclude proposals that they are not permitted 
to exclude under the current rule. On the other hand, because the 
proposed economic thresholds are lower than the current thresholds, if 
the revisions are adopted, companies may be unable to exclude some 
proposals that they are currently permitted to exclude. We request your 
comments, preferably supported by empirical data, on the nature and 
magnitude of the potential impact of this proposed revision.
    We expect the proposed increase in the resubmission thresholds 
under Question 9, paragraph (12), to cause a decrease in the total 
number of proposals companies must include in their proxy materials 
each year. Current rule 14a-8(c)(12) permits a company to exclude a 
proposal focusing on substantially the same subject matter as a prior 
proposal that failed to receive at least 3% of the vote on its first 
submission, 6% on the second, and 10% percent on the third. We propose 
to increase the thresholds to 6%, 15%, and 30%, respectively. However, 
because companies' submissions under current rule 14a-8 have not 
addressed these criteria, we presently do not have a reliable way to 
estimate the future impact on the number of proposals companies are 
required to include in their proxy materials. We nonetheless expect 
that the proposed revisions would increase the number of proposals that 
companies are permitted to exclude; a proposal would have to receive a 
higher percentage of the votes in order to avoid exclusion if the 
revisions are adopted. We request your comments, preferably supported 
by empirical data, on the potential impact of this proposal.
    Rule 14a-8(a)(4) permits companies to exclude proposals relating to 
personal grievances or special interests. We propose to modify our 
administration of the rule to express ``no view'' if the proposal does 
not on its face relate to the grievance or interest. We request your 
comments on the potential impact of this proposal on the number of 
proposals companies are required to include in their proxy materials 
each year.
    Your comments should address whether the proposals will on balance 
significantly alter the overall number of proposals companies are 
required to include in their proxy materials.
    We do not have empirical data demonstrating the marginal cost of 
including an additional shareholder proposal in companies' proxy 
materials. However, question 14 of the Questionnaire asked each company 
respondent how much money on average it spends on printing costs (plus 
any directly related costs, such as additional postage and tabulation 
expenses) to include shareholder proposals in its proxy materials. 
While individual responses may have accounted for the printing of more 
than one proposal, the average cost reported by 67 companies was 
$49,563.\123\ We expect that any additional printing costs are lower 
for small entities, since small entities typically should have to print 
fewer copies of their proxy materials because they have fewer 
shareholders. We request your comments, preferably supported by 
empirical data, on the incremental cost that ``small businesses'' would 
incur if required to include additional proposals in their proxy 
materials.
---------------------------------------------------------------------------

    \123\ This average is based on respondents reporting costs 
greater than zero. Reported costs ranged from a low of $200 to a 
high of nearly $900,000. The median cost was $10,000.
---------------------------------------------------------------------------

    None of the proposed amendments should increase the time or burden 
of preparing individual submissions under rule 14a-8. Our proposal to 
reformat the rule into a more understandable Question & Answer format 
should help decrease the time and expense incurred by both shareholders 
and companies

[[Page 50697]]

attempting to comply with its provisions. Companies frequently consult 
with legal counsel in preparing submissions under rule 14a-8. The 
rule's added clarity may obviate the need for a shareholder or company 
to consult with counsel, depending on the issues raised by the 
submission. Under some circumstances, however, companies' submissions 
must include supporting opinions of counsel.
    In addition, because a company that includes a proposal is not 
required to make a submission under rule 14a-8, any costs of including 
an additional proposal should be offset, at least partially, by not 
having to make a rule 14a-8 submission. Under rule 14a-8, a company is 
not required to make a submission to the Commission unless it intends 
to exclude the proposal from its proxy materials. Therefore, a company 
would save any costs associated with the submission if it decides to 
include the proposal.
    We do not have empirical data demonstrating how much it costs 
companies to consider and prepare an individual submission under rule 
14a-8. We do not believe, however, that the cost is likely to vary 
depending on the size of the company. That is, the cost to a small 
entity is likely to be the same as the cost to a larger entity. 
Question 13 of the Questionnaire asked respondent companies how much 
money they spend on average each year determining whether to include or 
exclude shareholder proposals and following Commission procedures in 
connection with any proposal that it wishes to exclude (including 
internal costs as well as any outside legal and other fees). While 
responses may have accounted for consideration of more than one 
proposal, the costs reported by 80 companies averaged $36,603.\124\
---------------------------------------------------------------------------

    \124\ This average is based on respondents reporting costs 
greater than zero. Reported costs ranged from a low of $10 to a high 
of approximately $1,200,000. The median cost was $10,000.
---------------------------------------------------------------------------

    The proposed amendments to rule 14a-4 should favorably affect 
companies, including ``small business,'' because they would provide 
clearer ground rules when a shareholder presents a proposal without 
invoking rule 14a-8. We do not have empirical information on the number 
of ``small businesses'' that receive non-rule 14a-8 proposals each 
year, since non-14a-8 proposals do not necessarily lead to a submission 
to the Commission. We therefore request your comments on the number of 
``small businesses'' that may be affected by the proposed amendments to 
rule 14a-4.
    To the extent they receive such proposals, we believe that the 
proposed amendments to rule 14a-4 would favorably affect ``small 
businesses'' by reducing uncertainly, and decreasing the likelihood 
that the company would have to incur the delay and expense of 
rescheduling its annual meeting, or resoliciting its shareholders. We 
request your comments and empirical data, however, on any costs or 
other burdens that these amendments may impose on small entities.
    Under the proposed revisions to rule 14a-4, a company wishing to 
preserve discretionary voting authority on certain possible proposals 
may be required to include in its proxy materials an additional 
discussion among other things describing the proposals. It may also be 
required to include an additional box on its proxy card permitting 
shareholders to withhold discretionary voting authority on the 
proposals if they are raised. We request your comments and empirical 
data on any incremental costs resulting from these proposed 
requirements. Automatic Data Processing, Inc. informed the staff that 
tabulation of an additional box on the proxy card permitting 
shareholders to withhold discretionary authority would likely cause no 
increase in the cost of its tabulation services. Daniels Financial 
Printing informed the staff that in most cases adding up to three-
fourths of a page in the proxy statement would not increase the cost to 
the company. That is because up to an extra three-fourths of a page can 
normally be incorporated without increasing the page length by 
reformatting the document. Daniels Financial estimated that adding more 
than three-fourths of a page could increase costs by about $1,500 for 
an average sized company.
    As discussed in section III.I of this release, the proposed 
amendment to rule 14a-5 would require companies to disclose an 
additional date in their proxy statements. Disclosure of the date 
should require no more than an additional sentence, and therefore 
should result in no, or negligible, additional printing costs. Because 
it is exemptive, the proposed amendment to rule 14a-2 should help 
shareholders attempting to use the proposed override mechanism to avoid 
the expense of preparing proxy materials, and should impose no 
additional costs. Similarly, because it would provide a safe harbor, 
the proposed amendments to rule 13d-5 should impose no additional costs 
on shareholders, which may include small entities.
    Finally, current rule 14a-8(e) provides a mechanism for a proponent 
to challenge a company's statement in opposition to a proposal if the 
proponent believes that the statement contains materially false or 
misleading statements in violation of rule 14a-9. The elimination of 
the rule will likely save companies, including small entities, the 
expense of responding to challenge under the rule. This proposal is 
discussed more fully in section III.I. We request your comments on 
these views.
    We considered significant alternatives to the proposed amendments 
for small entities with a class of securities registered under the 
Exchange Act. We could, for instance, exempt small businesses from any 
obligation to include shareholder proposals in their proxy materials. 
Such an exemption, however, would be inconsistent with the current 
purpose of the proxy rules, which is to provide and regulate a channel 
of communication among shareholders and public companies. Exempting 
small entities would deprive their shareholders of this channel of 
communication.
    We also considered other alternatives identified in Section 603 of 
the Regulatory Flexibility Act to minimize the economic impact of the 
amendments on small entities. We considered the establishment of 
different compliance requirements or timetables that take into account 
the resources available to small entities. Different timetables, 
however, may make it difficult for the Division to issue responses in a 
timely manner, and could otherwise impede the efficient operation of 
the rule.
    We also considered the clarification, consolidation, or 
simplification of the rule's compliance requirements for small 
entities. As explained more fully in section III.A. of this release, we 
propose to recast and reformat rule 14a-8 into a more understandable, 
Question & Answer format. As described above, some of the proposed 
amendments should enable companies, including small businesses, to 
exclude certain additional proposals from their proxy materials. As 
explained in section III.H., we also propose clearer guidelines for 
companies' exercise of discretionary voting authority under rule 14a-4. 
If adopted, these modifications should simplify and facilitate 
compliance by all companies, including small entities. We do not 
currently believe that there is any appropriate way to further 
facilitate compliance by small entities without compromising the 
current purposes of the proxy rules.
    We also considered the use of performance rather than design 
standards. The rules that we propose to modify are not specifically 
designed to achieve certain levels of performance.

[[Page 50698]]

Rather, they are designed to serve other policies, such as to ensure 
adequate disclosure of material information, and to provide a mechanism 
for shareholders to present important and relevant matters for a vote 
by fellow shareholders. Performance standards accordingly would not 
directly serve the policies underlying the rules. We do not believe 
that any current federal rules duplicate, overlap, or conflict with the 
rules that we propose to amend.
    We request your written comments on any aspect of this Initial 
Regulatory Flexibility Analysis. We particularly seek comment on: (i) 
The number of small entities that would be affected by the proposed 
amendments; (ii) the expected impact of, the proposals as discussed 
above; and (iii) how to quantify the number of small entities that 
would be affected by, and how to quantify the impact of, the proposed 
amendments. We ask commenters to describe the nature of any impact and 
provide empirical data supporting the extent of the impact.

VI. Cost-Benefit Analysis

    The proposed rule changes should improve the efficiency of the 
process for determining which shareholder proposals must be included in 
proxy materials distributed by companies. They should help to ensure 
that a company includes shareholder proposals that are relevant to the 
company and likely to receive the support of a significant percentage 
of the company's shareholders. The proposed rule changes would also 
provide clearer guidelines for a company's exercise of discretionary 
voting authority when notified that a shareholder intends to present a 
proposal without invoking rule 14a-8's mechanisms.
    We currently do not believe that the proposed changes would 
adversely affect capital formation, market efficiency, competition, or 
investors' confidence in the integrity of the securities markets. Rule 
14a-8 requires companies to include shareholder proposals in their 
proxy materials, subject to specific bases for excluding them. We 
believe that the rule enhances investor confidence in the securities 
markets by providing a means for shareholders to communicate with 
management and among themselves on significant matters. By expanding 
the range of proposals that companies must include in their proxy 
materials, the proposed amendments to rule 14a-8 could make a company's 
managers more responsible to the shareholders. That, in turn, could 
better align the interests of the company's management with that of 
shareholders, possibly resulting in an improvement in the company's 
operations and the market price for its shares. Shareholder proposals 
could have a positive or negative impact, or no impact, on the price of 
a company's securities.\125\ We are currently examining this issue, and 
we invite comment on the expected shareholder wealth impact of the 
rule.
---------------------------------------------------------------------------

    \125\ See, e.g., Michael P. Smith, Shareholder Activism by 
Institutional Investors: Evidence from CalPERS, The Journal of 
Finance, Vol. L1, No. 1, March 1996; Sunil Wahal, Pension Fund 
Activism and Firm Performance, Journal of Financial and Quantitative 
Analysis, Vol. 31, No. 1, March 1966.
---------------------------------------------------------------------------

    At the same time, other amendments would improve the integrity and 
efficiency of the shareholder proposal process by increasing companies' 
ability to exclude economically insignificant proposals, or proposals 
lacking significant shareholder support.
    We currently do not know whether the proposed amendments would on 
balance significantly affect the cost of complying with the rules. Not 
all companies receive shareholder proposals each year. And a company 
that receives a proposal has no obligation to make a submission under 
rule 14a-8 unless it intends to exclude the proposal from its proxy 
materials. In the period from September 30, 1996 to today, we received 
approximately 400 submissions under rule 14a-8.
    Some of the proposed amendments to rule 14a-8 may broaden the range 
of proposals that companies must include in their proxy materials, 
requiring companies to include more proposals than they have in the 
past. This includes the proposal to reverse the Cracker Barrel position 
on employment-related shareholder proposals raising social policy 
issues, and the proposal to permit holders of 3 percent of the 
company's shares to override the exclusions under paragraphs (5) and 
(7) under proposed Question 9.
    This year, the Division received approximately 30 submissions of 
proposals implicating the Cracker Barrel position on employment-related 
proposals tied to social issues. Reversal of that position could 
encourage more shareholders to submit these types of proposals to 
companies each year, and we do not know whether the modification would 
result in a significant increase in the number of such proposals. We 
request your comments, including any supporting empirical information 
on this question.
    Because rule 14a-8 currently does not include a mechanism like the 
proposed ``override,'' we presently have no reliable means to predict 
how often shareholders would in the future take advantage of the 
override to force companies to include proposals that they would 
otherwise be permitted to exclude. During the last proxy season, the 
staff concurred in the exclusion of almost 100 proposals under two 
grounds for omitting proposal that would be subject to the proposed 
override (rules 14a-8 (c)(7) and (c)(5)). We request your comments and 
supporting empirical data on the potential impact of the override on 
the total number of proposals companies are required to include in 
their proxy materials.
    Other proposed revisions, however, would enhance companies' ability 
to exclude economically insignificant proposals. As revised, paragraphs 
(5) under proposed Question 9 would permit companies to exclude 
proposals on matter relating to the lesser of $10 million in total 
costs or gross revenues, or 3 percent of total assets or gross revenues 
(whichever is higher). Because companies' submissions under current 
rule 14a-8 have not addressed these criteria, we presently have no 
reliable means to estimate their future impact on the number of 
proposals companies are required to include in their proxy materials. 
Unlike current rule 14a-8(c)(5), however, the proposed revision would 
enable companies to exclude proposals based solely on economic 
criteria, which may permit companies to exclude proposals that they are 
not permitted to exclude under the current rule. On the other hand, 
because the proposed economic thresholds are significantly lower than 
the current thresholds, if the revisions are adopted companies may be 
unable to exclude some proposals that they are currently permitted to 
exclude. We request your comments, preferably supported by empirical 
data, on the nature and magnitude of the potential impact of these 
proposed revisions.
    We expect the proposed modifications to paragraph (12) under 
proposed Question 9 to cause a decrease in the total number of 
proposals companies must include in their proxy materials each year. 
Current rule 14a-8(c)(12) permits a company to exclude a proposal 
focusing on substantially the same subject matter as a prior proposal 
that failed to receive at least 3 percent of the vote on its first 
submission, 6 percent on the second, and 10 percent on the third. We 
propose to increase the thresholds to 6 percent, 15 percent, and 30 
percent respectively. Because companies' submissions under current rule 
14a-8 have not addressed these criteria, there is no reliable way to 
estimate their future impact on the number of proposals companies would

[[Page 50699]]

be required to include in their proxy materials. Nevertheless, we 
expect that the revisions will increase the number of proposals that 
companies are permitted to exclude. We request your comments, 
preferably supported by empirical data, on the potential impact of this 
proposal.
    Rule 14a-8(c)(4) permits companies to exclude proposals relating to 
personal grievances or special interests. We propose to modify our 
administration of the rule to express ``no view'' if the proposal does 
not on its face relate to the grievance or interest. We request your 
comments on the potential impact of this proposal on the number of 
proposals companies are required to include in their proxy materials 
each year.
    We do not know whether the proposed revisions to rule 14a-8 would 
significantly alter the overall number of proposals companies are 
required to include each year. We request your comments, preferably 
supported by empirical information, on whether the proposed amendments, 
considered together, would in practice cause a significant overall 
increase or decrease in the number of proposals companies must include 
in their proxy materials each year.
    We do not have empirical data demonstrating the marginal cost of 
including an additional shareholder proposal in companies' proxy 
materials. However, question 14 of the Questionnaire asked each company 
respondent how much money on average it spends on printing costs (plus 
any directly related costs, such as additional postage and tabulation 
expenses) to include shareholder proposals in its proxy materials. 
While individual responses may have accounted for the printing of more 
than one proposal, the average cost reported by 67 companies was 
$49,563.\126\ We seek comment on whether this estimated cost is 
accurate; if not accurate, we ask commenters to submit more accurate 
cost data.
---------------------------------------------------------------------------

    \126\ See note 123 above.
---------------------------------------------------------------------------

    In addition, because a company that includes a proposal is not 
required to make a submission to the Commission under rule 14a-8, any 
incremental costs of including an additional proposal should be offset 
by savings on the submission. We do not know the extent to which any 
additional incremental costs would be offset by savings, and we 
therefore request your comments and empirical data on additional 
incremental savings, and the degree to which they would offset 
additional costs. Question 13 of the Questionnaire asked respondent 
companies how much money they spend on average each year determining 
whether to include or exclude shareholder proposals and following 
Commission procedures in connection with any proposal that it wishes to 
exclude (including internal costs as well as any outside legal and 
other fees). While individual responses may have accounted for 
consideration of more than one proposal, the costs reported by 80 
companies averaged $36,603.\127\ We seek comment on whether this 
estimated cost is accurate; if not accurate, we ask commenters to 
submit more accurate cost data.
---------------------------------------------------------------------------

    \127\ See note 124 above.
---------------------------------------------------------------------------

    The proposed amendments to rule 14a-4 would provide clearer ground 
rules for companies' exercise of discretionary voting authority when a 
company receives a shareholder proposal outside the rubric of rule 14a-
8. We believe that these amendments would therefore eliminate much of 
the uncertainty that some companies experience in these circumstances, 
and decrease the likelihood a company will have to incur the delay and 
expense to resolicit its shareholders, or to reschedule its meeting of 
shareholders. We request your comments and empirical information on the 
potential effects of these proposed revisions to rule 14a-4.
    Under the proposed revisions to rule 14a-4, a company wishing to 
preserve discretionary voting authority on certain possible proposals 
my be required to include in its proxy materials an additional 
discussion that, among other things, describes the proposals. It may 
also be required to include an additional box on its proxy card 
permitting shareholders to withhold discretionary voting authority on 
the proposals if they are raised. We request your comments and 
empirical data on any incremental cost resulting from these proposed 
requirements. Automatic Data Processing, Inc. informed the staff that 
tabulation of an additional box on the proxy card permitting 
shareholders to withhold discretionary authority would likely cause no 
increase in the cost of its tabulation services. Daniels Financial 
Printing informed the staff that in most cases adding up to three-
fourths of a page in the proxy statement would not increase the cost to 
the company. That is because up to an extra three-fourths of a page can 
normally be incorporated without increasing the page length by 
reformatting the document. Daniels reported that adding more than 
three-fourths of a page could increase costs by about $1,500 for an 
average sized company. We seek comment on whether these estimated costs 
are accurate, and on the degree to which such costs may vary based on 
timing considerations, such as the proximity to the company's planned 
mailing date. If you believe that they are not accurate, we ask you to 
submit cost data.
    The proposed amendments to rules 14a-2 and 13d-5 are ancillary to 
the amendments to rule 14a-8. Proposed rule 14a-2(b)(2) would provide 
an exemption from the proxy rules for shareholders attempting to comply 
with the proposed new ``override'' mechanism in rule 14a-8. The 
override would permit the holders of 3% of the company's voting shares 
to override the operation of two bases for excluding proposals. 
Proposed rule 13d-5 would provide relief for such shareholders for the 
purposes of Section 13(d). Because these amendments would be exemptive, 
we do not expect that they would be responsible for any additional 
costs or other burdens. We nonetheless request your comments on the 
accuracy of these views.
    As discussed in section III.I., the proposed amendment to rule 14a-
5 would require companies to disclose an additional date in their proxy 
statements. Disclosure of the date should require no more than an 
additional sentence, and therefore should result in no, or negligible, 
additional printing costs. We nonetheless request your comments on the 
accuracy of this view.
    Finally, current rule 14a-8(e) provides a mechanism for a proponent 
to challenge the Division's statement in opposition to a proposal if 
the proponent believes that the statement contains materially false or 
misleading statements in violation of rule 14a-9. The elimination of 
the rule will likely save companies, including small entities, the 
expense of responding to challenges under the rule. This proposal is 
discussed more fully in section III.I. We request your comments on 
these views.

VII. Paperwork Reduction Act

    Certain provisions of rules 14a-8, 14a-4, and 14a-5 contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), and the 
Commission has submitted proposed revisions to those rules to the 
Office of Management and Budget (``OMB'') for review in accordance with 
44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for the collections of 
information are ``Amendments to Shareholder Proposal Rules.''

[[Page 50700]]

    Schedule 14A,\128\ and the Commission's related proxy rules, 
including rules 14a-8, 14a-4, and 14a-5, were adopted pursuant to 
Section 14(a) of the Exchange Act. Section 14(a) directs the Commission 
to adopt rules ``as necessary or appropriate in the public interest or 
for the protection of investors, to solicit or to permit the use of his 
name to solicit any proxy or consent or authorization in respect of any 
security (other than an exempted security) registered pursuant to 
section 12 of this rule title.'' Schedule 14A prescribes information 
that a company must include in its proxy statement to ensure that 
shareholders are provided material information relating to voting 
decisions.
---------------------------------------------------------------------------

    \128\ 17 CFR 240.14a-101.
---------------------------------------------------------------------------

    The Commission currently estimates that Schedule 14A results in a 
total annual compliance burden of 782,964 hours.\129\ The burden was 
calculated by multiplying the estimated number of entities filing 
Schedule 14A annually (approximately 9,321) by the estimated average 
number of hours each entity spends completing the form (approximately 
84 hours). The Commission staff estimated the number of entities that 
would complete and file the form based on the actual number of filers 
during the Commission's most recently completed fiscal year. The staff 
estimated the average number of hours each entity spends completing the 
form by contacting a number of law firms and other persons regularly 
involved in completing the form.
---------------------------------------------------------------------------

    \129\ This reflects an increase from previous estimates of total 
compliance burden. The increase results solely from an increase in 
the number of entities filing on Schedule 14A each year. The 
increase is not attributable to any of the proposals described in 
this release.
---------------------------------------------------------------------------

    The amendments to rules 14a-8, 14a-4(c), and 14a-5, if adopted, 
would make it easier for shareholder proponents to submit a broader 
range of proposals, and provide companies subject to the proxy rules 
with clearer grounds and more flexibility to exclude proposals that 
fail to attract significant shareholder support, or that are 
economically insignificant. As a result, the Commission anticipates any 
additional burden to be offset by a corresponding reduction in the 
number of hours respondents need to comply with Schedule 14A.
    The amendments focus primarily on rule 14a-8, which requires 
companies to include shareholder proposals in their proxy materials, 
subject to certain bases for excluding them. Not all companies receive 
shareholder proposals each year. Furthermore, a company that receives a 
shareholder proposal has no obligation to make a submission under rule 
14a-8 unless it intends to exclude the proposal from its proxy 
materials. In the period from September 30, 1996 to today, we received 
submissions from a total of 245 companies, concerning approximately 400 
proposals.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to: (i) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information, (iii) determine 
whether there are ways to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) evaluate whether there are 
ways to minimize the burden to collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549, with reference to File No. S7-25-97. The Office of 
Management and Budget is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 \130\ (``SBREFA''), we also are requesting information on 
the potential impact of the proposed amendments on the economy on an 
annual basis. You should provide empirical data to support your views. 
Under SBREFA, the proposals must be submitted to Congress before they 
take effect. If they amount to a ``major rule,'' then effectiveness of 
the rules will be delayed 60 days pending Congressional review. We have 
not yet reached a conclusion on whether the proposals amount to a 
``major rule,'' and we request your comments, supported by empirical 
data, on that issue.
---------------------------------------------------------------------------

    \130\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

    A rule is ``major'' if it has resulted, or is likely to result in 
(i) an annual effect on the economy of $100 million or more; (ii) a 
major increase in costs or prices for consumers or individual 
industries; or (iii) significant adverse effects on competition, 
investment, or innovation.
    We presently do not believe that there is a basis for concluding 
that the proposals will result in a major increase in costs or prices 
for consumers or individual industries. The proposals, which relate to 
the disclosures in public companies' proxy statements, and their 
exercise of discretionary voting authority, are not designed to, and 
should not, have any impact on consumer prices. As noted in the Cost-
Benefit Analysis in section VI above, the costs associated with 
including shareholder proposals in companies' proxy materials averages 
less than $50,000.\131\ The costs associated with excluding a proposal 
under rule 14a-8 averages less than $37,000.\132\
---------------------------------------------------------------------------

    \131\ See note 123 above.
    \132\ See note 124 above.
---------------------------------------------------------------------------

    Similarly, we presently do not believe the proposals will have any 
adverse effects on competition, investment, or innovation. The 
proposals should improve the efficiency and effectiveness of a channel 
of communication between companies and shareholders.
    We have not yet reached a conclusion on whether the proposals will 
have an annual effect on the economy of $100 million or more, and we 
request your comments, supported by empirical data, on the proposals' 
potential overall annual effect.
    Some of the proposed amendment to rule 14a-8 may broaden the range 
of proposals that companies must include in their proxy materials, 
requiring companies to include more proposals than they have in the 
past. This includes our proposal to reverse the Cracker Barrel position 
on employment-related shareholder proposals raising social policy 
issues, and our proposal to permit holders of 3% of a company's voting 
shares to override the exclusions under paragraphs (5) and (7) under 
proposed Question 9.
    This year, the Division received approximately 30 submissions on 
proposals implicating the Cracker Barrel position on employment-related 
proposals tied to social issues. Reversal of that position could 
encourage more shareholders to submit these types of proposals to 
companies each year. We request your comments, preferably supported by 
empirical data, on the

[[Page 50701]]

potential impact on the number of employment-related proposals 
submitted to companies each year, and any related costs resulting from 
this proposal.
    Because rule 14a-8 currently does not include an ``override'' 
mechanism, we have no reliable means to predict how often shareholders 
would in the future take advantage of the mechanism to force companies 
to include proposals that they would otherwise be permitted to exclude. 
We request your comments and supporting empirical data on the potential 
impact of the proposed override on the number of proposals companies 
are required to include in their proxy materials. Although in many 
cases garnering sufficient support for the override may require 
substantial efforts, we expect that shareholders will successfully use 
the override several times each year.
    Other proposed revisions, however, would enhance companies' ability 
to exclude economically insignificant proposals. As revised, paragraph 
(5) under proposed Question 9 would permit companies to exclude 
proposals on matters relating to the lesser of $10 million in total 
costs or gross revenues, or 3% of total assets or gross revenues 
(whichever is higher). Because companies' submissions under current 
rule 14a-8 have not addressed these criteria, we have no reliable means 
to estimate the future impact of these proposed amendments on the 
number of proposals companies are required to include in their proxy 
materials. Unlike the current rule 14a-8(c)(5), however, companies 
would be permitted to exclude proposals based solely on economic 
criteria, which may permit companies to exclude proposals that they are 
not permitted to exclude under the current rule. On the other hand, 
because the proposed economic thresholds are lower than the current 
thresholds, if the revisions are adopted, companies may be unable to 
exclude some proposals that they are currently permitted to exclude. We 
request your comments, preferably supported by empirical data, on the 
nature and magnitude of the potential impact of this proposed revision.
    We expect the proposed modifications to paragraph (12) under 
proposed Question 9 to cause a decrease in the total number of 
proposals companies must include in their proxy materials each year. 
Current rule 14a-8(c)(12) permits a company to exclude a proposal 
focusing on substantially the same subject matter as a prior proposal 
that failed to receive at least 3% of the vote on its first submission, 
6% on the second, and 10% percent on the third. We propose to increase 
the thresholds to 6%, 15%, and 30%, respectively. Because companies' 
submissions under current rule 14a-8 do not address these proposed 
increased thresholds, there is no reliable way to estimate their future 
impact on the number of proposals companies are required to include in 
their proxy materials. Nonetheless, we expect that the revisions will 
increase the number of proposals that companies are permitted to 
exclude. We request your comments, preferably supported by empirical 
data, on the potential impact of this proposal.
    Rule 14a-8(c)(4) permits companies to exclude proposals relating to 
personal grievances or special interests. We propose to modify our 
administration of the rule to express ``no view'' if the proposal does 
not on its face relate to the grievance or interest. We request your 
comments on the potential impact of this proposal on the number of 
proposals companies are required to include in their proxy materials 
each year.
    We do not know whether the proposed revisions to rule 14a-8 would 
on balance significantly alter the overall number of proposals 
companies are required to include in their proxy materials. We request 
your comments and empirical data on this question. We do not presently 
have empirical data demonstrating the marginal cost of including an 
additional shareholder proposal in companies' proxy materials. However, 
question 14 of the Questionnaire asked each company respondent how much 
money on average it spends on printing costs (plus any directly related 
costs, such as additional postage and tabulation expenses) to include 
shareholder proposals in its proxy materials. While individual 
responses may have accounted for the printing of more than one 
proposal, the cost reported by 67 companies averaged $49.563.\133\
---------------------------------------------------------------------------

    \133\ See note 123 above.
---------------------------------------------------------------------------

    In addition, because a company that includes a proposal is not 
required to make a submission to the Commission under rule 14a-8, any 
incremental costs of including an additional proposal should be offset 
by savings on the submission. We do not know the extent to which any 
additional incremental costs would be offset by savings, and we 
therefore request your comments and empirical data on additional 
incremental savings, and the degree to which they would offset 
additional costs. Question 13 of the Questionnaire asked respondent 
companies how much money they spend on average each year determining 
whether to include or exclude shareholder proposals and following 
Commission procedures in connection with any proposal that it wishes to 
exclude (including internal costs as well as any outside legal and 
other fees). While individual responses may have accounted for 
consideration of more than one proposal, the costs reported by 80 
companies averaged $36,603.\134\
---------------------------------------------------------------------------

    \134\ See note 124 above.
---------------------------------------------------------------------------

    Revised rule 14a-4(c) would provide companies with clearer 
guidelines for the exercise of discretionary voting authority on 
proposals presented by shareholders who do not invoke rule 14a-8's 
procedures. We do not know how many companies subject to our proxy 
rules receive such proposals each year, and request your comments and 
supporting empirical data on that question.
    We believe the revisions, if adopted, will help some companies 
avoid costs associated with rescheduling their annual meetings, and 
possibly with resolicitations of proxy materials. We do not have 
empirical data to estimate reliably the scope or magnitude of any such 
savings, and we request your comments, preferably supported by 
empirical data, on this question.
    Under the proposed revisions to rule 14a-4, a company wishing to 
preserve discretionary voting authority on certain possible proposals 
may be required to include in its proxy materials an additional 
discussion among other things describing the proposals. It may also be 
required to include an additional box on its proxy care permitting 
shareholders to withhold discretionary voting authority on the 
proposals if they are raised. We request your comments and empirical 
data on any incremental cost resulting from these proposed 
requirements. Automatic Data Processing, Inc. informed the staff that 
tabulation of an additional box on the proxy card permitting 
shareholders to withhold discretionary authority would likely cause no 
increase in the cost of its services. Daniels Financial Printing 
informed the staff that in most cases adding up to three-fourths of a 
page in the proxy statement would not increase the cost to the company. 
That is because up to an extra three-fourths of a page can normally be 
incorporated without increasing the page length by reformatting the 
document. Daniels Financial reported that adding more than three-
fourths of a page could increase costs by about $1,500 for an average 
sized company.
    As discussed in section III.I., the proposed amendment to rule 14a-
5 would require companies to disclose an

[[Page 50702]]

additional date in their proxy statements. Disclosure of the date 
should require no more than an additional sentence, and therefore 
should result in no, or negligible,, additional printing costs. Because 
it is exemptive, the proposed amendment to rule 14a-2 should help some 
shareholders attempting to use the proposed override mechanism to avoid 
the expense of preparing proxy materials, and should impose no 
additional costs. Similarly, because it would provide a safe harbor, 
the proposed amendments to rule 13d-5 should impose no additional 
costs. We request your comments on these views.
    Finally, current rule 14a-8(e) provides a mechanism for a proponent 
to challenge a company's statement in opposition to a proposal if the 
proponent believes that the statement contains materially false or 
misleading statements in violation of rule 14a-9. The elimination of 
the rule will likely save companies, including small entities, the 
expense of responding to challenges under the rule. This proposal is 
discussed more fully in section III.I. We request your comments on 
these views.
    We also believe that certain shareholder proposals may have a 
positive or negative effect, or no effect, on shareholder wealth.\135\ 
By expanding the range of proposals that companies must include in 
their proxy materials, the amendments could make a company's managers 
more responsive to the shareholders. That, in turn, could better align 
the interests of the company's management with that of shareholders, 
possibly resulting in an improvement in the company's operations and 
the market price for its shares. We currently lack reliable empirical 
data on the magnitude and frequency of any such effects. We request 
your comments supported by empirical data on the magnitude and 
frequency of any such effects. We request your comments supported by 
empirical data.
---------------------------------------------------------------------------

    \135\ See note 125 above.
---------------------------------------------------------------------------

    Relatively few shareholder proposals are approved by shareholders 
each year. Based on information provided to us by IRRC,\136\ we 
understand that in the period from January 1, 1997 to date, 19 
proposals obtained shareholder approval out of a total of 234 submitted 
to shareholder votes. Nine were proposals to repeal classified boards. 
Nine sought redemption of companies' shareholder rights plans. One 
focused on ``golden parachute'' payments to executives. Even if a 
proposal does not obtain shareholder approval, however, it may 
nonetheless influence management, especially if it receives substantial 
shareholder support. A proposal may also influence management even if 
it is not put to a shareholder vote. We understand that in some 
instances management has made concessions to shareholders in return for 
the withdrawal of a proposal.
---------------------------------------------------------------------------

    \136\ See note 13 above.
---------------------------------------------------------------------------

    Proposals addressing corporate governance matters tend to receive 
the most substantial shareholder support, and, we believe, are most 
likely to affect shareholder wealth. Examples are proposals on voting 
and nomination procedures for board members, and proposals to restrict 
or eliminate companies' shareholder rights plans. The proposed 
revisions do not focus on those types of proposals, and should not 
significantly affect shareholders' ability to include them in 
companies' proxy materials. As a result, we request your comments on 
the degree to which the proposals would impact shareholder wealth, 
viewing the proposals in isolation and together with other proposals.
    The proposed modification to current rule 14a-8(c)(12) will affect 
all proposals, including corporate governance proposals. Those 
modifications will make it easier for a company to exclude a proposal 
that has failed to receive significant shareholder support in the 
recent past. Because we believe that the revised rule, if adopted, 
would operate to exclude only those proposals on which shareholders 
have already voted at least once previously, and have effectively 
rejected, we do not expect that the revisions to current rule 14a-
8(c)(12) will have any significant impact on shareholder wealth. We 
request your comments, preferably supported by empirical data, on the 
accuracy of these views.

IX. Statutory Basis and Text of Amendments

    We propose amendments to Rules 14a-8, 14a-4, 14a-2, 14a-5, and 13d-
5 under the authority set forth in Sections 13, 14 and 23 of the 
Securities Exchange Act of 1934, and Section 20(a) of the Investment 
Company Act.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 
78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q, 
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, 
unless otherwise noted.
* * * * *
    2. By adding paragraph (b)(3) to Sec. 240.13d-5 to read as follows:


Sec. 240.13d-5  Acquisition of securities.

* * * * *
    (b) * * *
    (3) Notwithstanding paragraph (b)(1) of this section, a group 
formed among the beneficial owners of a class of equity securities 
solely by an understanding, arrangement, or agreement that a 
shareholder proposal should be placed in a registrant's proxy materials 
for a shareholder vote, for the purpose of using the ``override'' 
mechanism provided in Sec. 240.14a-8(j) (Question 10), shall be deemed 
not to have acquired any equity securities beneficially owned by the 
other members of the group for the purposes of Section 13(d)(1) of the 
Act (15 U.S.C. 78m); provided, however, that such understanding, 
arrangement or agreement does not relate to how the holders will vote 
on the proposal if it is ultimately placed in the registrant's proxy 
materials.
    3. By amending Sec. 240.14a-2 by redesignating paragraphs (b)(2) 
through (b)(4) as paragraphs (b)(3) through (b)(5), and by adding a new 
paragraph (b)(2), to read as follows:


Sec. 240.14a-2  Solicitations to which Sec. 240.14a-3 to Sec. 240.14a-
15 apply.

* * * * *
    (b) * * *
    (2) For any solicitation made for the sole purpose of gathering 
support for placing a shareholder proposal in a registrant's proxy 
materials pursuant the ``override'' mechanism provided in Sec. 240.14a-
8(j) (Question 10); provided that such solicitation does not seek proxy 
authority with respect to the vote on the proposal if it is ultimately 
placed in the registrant's proxy materials;
* * * * *
    4. By amending Sec. 240.14a-4 by removing the last sentence in 
paragraph (a)(3) before the note, by revising the introductory text of 
paragraph (c) and paragraph (c)(1), redesignating paragraphs (c)(2) 
through (c)(5) as paragraphs (c)(3) through (c)(6), and

[[Page 50703]]

adding a new paragraph (c)(2), to read as follows:


Sec. 240.14a-4  Requirements as to proxy.

* * * * *
    (c) A proxy may confer discretionary authority to vote on any 
matter presented by a security holder for a vote under the following 
circumstances:
    (1) If the registrant did not have notice of the matter at least 45 
days (or such date specified by an advance notice bylaw) before the 
date on which the registrant first mailed its proxy materials for the 
prior year's annual meeting of shareholders. If the registrant did not 
hold an annual meeting of shareholders the prior year, or if the date 
of the annual meeting has changed more than 30 days from the prior 
year, then notice must be received a reasonable time before the company 
mails its proxy materials for the current year.
    (2) If the registrant includes, in the proxy statement, a 
discussion of the nature of any such matter and how the registrant 
intends to exercise its discretion on each matter, and, in the proxy 
card, a cross-reference to the discussion in the proxy statement and a 
box to withhold discretionary authority on the same matter(s).
    5. By amending Sec. 240.14a-5 by revising paragraph (e), and adding 
paragraph (f), to read as follows:


Sec. 240.14a-5  Presentation of information in proxy statement.

* * * * *
    (e) All proxy statements shall disclose, under an appropriate 
caption, the following dates:
    (1) The deadline for submitting shareholder proposals for inclusion 
in the registrant's proxy statement and form of proxy for the 
registrant's next annual meeting, calculated in the manner provided in 
Sec. 240.14a-8(d) (Question 4); and
    (2) The date after which notice of a shareholder proposal submitted 
outside the rubric of Sec. 240.14a-8 is considered untimely, calculated 
in the manner provided by Sec. 240.14a-4(c)(1).
    (f) If the date of the next annual meeting is subsequently advanced 
or delayed by more than 30 calendar days from the date of the annual 
meeting to which the proxy statement relates, the registrant shall, in 
a timely manner, inform security holders of such change, and the new 
dates referred to in paragraphs (e)(1) and (e)(2) of this section, by 
including a notice in its earliest possible quarterly report on Form 
10-Q (Sec. 249.308a of this chapter) or Form 10-QSB (Sec. 249.308b of 
this chapter), or, in the case of investment companies, in a 
shareholder report under Sec. 270.30d-1 of this chapter under the 
Investment Company Act of 1940, or, if impracticable, any means 
reasonably calculated to inform shareholders.
    6. By revising Sec. 240.14a-8 to read as follows:


Sec. 240.14a-8  Shareholder proposals.

    This section addresses when a company must include a shareholder's 
proposal in its proxy materials when it holds an annual or special 
meeting of shareholders. In summary, in order to have your shareholder 
proposal included on a company's proxy card, and included along with 
any supporting statement in its proxy statement, you must be eligible 
and follow certain procedures. Under a few specific circumstances, the 
company is permitted to exclude your proposal, but only after 
submitting its reasons to the Commission. We structured the section in 
a question-and-answer format so that it is easier to understand. The 
references to ``you'' are to a shareholder seeking to submit the 
proposal.
    (a) Question 1: What is a proposal? A shareholder proposal is your 
recommendation or requirement that the company and/or its board of 
directors take action. Your proposal should state as clearly as 
possible the course of action that you believe the company should 
follow. If your proposal is placed on the company's proxy card, 
shareholders will have an opportunity to case their votes either in 
support of your proposal or against your proposal. Unless otherwise 
indicated, the word ``proposal'' as used in this section refers both to 
your proposal, and to your corresponding statement in support of your 
proposal (if any).
    (b) Question 2: Who is eligible to submit a proposal, and how do I 
demonstrate to the company that I am eligible? (1) In order to be 
eligible to submit a proposal, you must have continuously held at least 
$2,000 in market value, or 1% of the company's securities entitled to 
be voted on the proposal at the meeting for at least one year by the 
date you submit the proposal. You will have to continue to hold those 
securities through the date of the meeting.
    (2) If you are the registered holder of your securities, which 
means that your name appears in the company's records, the company can 
verify your eligibility on its own. However, if like many shareholders 
you are not a registered holder, the company likely does not know that 
you are a shareholder, or how many shares you own. In this case, at the 
time you submit your proposal, you must prove your eligibility to the 
company in one of two ways:
    (i) The first way is to submit to the company a written statement 
from the ``record'' holder of your securities (usually a broker or 
bank) verifying that, at the time you submitted your proposal, you 
continuously held the securities for at least one year. You must also 
include your own written statement that you intend to continue to hold 
the securities through the date of the meeting of shareholders; or
    (ii) The second way to prove ownership applies only if you have 
filed a Schedule 13D (Sec. 240.13d-101), Schedule 13G (Sec. 240.13d-
102), Form 3 (Sec. 249.103 of this chapter), Form 4 (Sec. 249.104 of 
this chapter) and/or Form 5 (Sec. 249.105 of this chapter), or 
amendments to those documents, reflecting your ownership of the shares 
as of or before the date on which the one-year eligibility period 
begins. If you have filed one of these documents with the SEC, you may 
demonstrate your eligibility by submitting to the company:
    (A) A copy of the schedule and/or form, and any subsequent 
amendments reporting a change in your ownership level;
    (B) Your written statement that you continuously held the required 
number of shares for the one-year period as of the date of the 
statement; and
    (C) Your written statement that you intend to continue ownership of 
the shares through the date of the company's annual or special meeting.
    (c) Question 3: How many proposals may I submit? Each shareholder 
may submit no more than one proposal to a company for a particular 
shareholders' meeting.
    (d) Question 4: How long can my proposal be? The proposal, 
including any accompanying supporting statement, may not exceed 500 
words.
    (e) Question 5: What is the deadline for submitting a proposal? (1) 
If you are submitting your proposal for the company's annual meeting, 
you can in most cases find the deadline in last year's proxy statement. 
However, if the company did not hold an annual meeting last year, or 
has changed the date of its meeting for this year more than thirty days 
from last year's meeting, you can find the deadline on one of the 
company's quarterly reports on Form 10-Q (Sec. 249.308a of this 
chapter) or 10-QSB (Sec. 249.308b of this chapter), or in shareholder 
reports of investment companies under Sec. 270.30d-1 of this chapter of 
the Investment Company Act of 1940. In order to avoid confusion, 
shareholders should submit their proposals by means, including

[[Page 50704]]

electronic means, that permit them to prove the date of delivery.
    (2) The deadline is calculated in the following manner if the 
proposal is submitted for a regularly scheduled annual meeting. The 
proposal must be received at the company's principal executive offices 
not less than 120 calendar days before the date of the company's proxy 
statement released to shareholders in connection with the previous 
year's annual meeting. However, if the company did not hold an annual 
meeting the previous year, or if the date of this year's annual meeting 
has been changed by more than 30 days from the date of the previous 
year's meeting, then the deadline is a reasonable time before the 
company begins to print and mail its proxy materials.
    (3) If you are submitting your proposal for a meeting of 
shareholders other than a regularly scheduled annual meeting, the 
deadline is a reasonable time before the company begins to print and 
mail its proxy materials.
    (f) Question 6: What if I fail to follow one of the eligibility or 
procedural requirements explained in answers to Questions 1 through 4 
of this section? (1) The company may omit your proposal, but only after 
it has notified you of the problem, and you have failed adequately to 
correct it. Within 14 calendar days of receiving your proposal, the 
company must notify you in writing of any procedural or eligibility 
deficiencies, as well as of the time frame for your response. Your 
response must be postmarked no later than 14 days from the date you 
received the company's notification.
    (2) If you fail in your promise to hold the required number of 
securities through the date of the meeting of shareholders, then the 
company will be permitted to exclude any of your proposals from its 
proxy materials for any meeting held in the following two calendar 
years.
    (g) Question 7: Who has the burden of persuading the Commission or 
its staff that my proposal can be omitted? Except as otherwise noted, 
the burden is on the company to demonstrate that it is entitled to omit 
a proposal.
    (h) Question 8: Must I appear personally at the shareholders 
meeting to present the proposal? (1) Either you, or your representative 
who is qualified under state law to present the proposal on your 
behalf, must attend the meeting to present the proposal. Whether you 
attend the meeting yourself or send a qualified representative to the 
meeting in your place, you should make sure that you, or your 
representative, follow any applicable procedures that are proper under 
state law for attending the meeting and/or presenting your proposal.
    (2) If the company holds its shareholder meeting in whole or in 
part on the Internet, and the company permits you or your 
representative to present your proposal via the Internet, then you may 
appear through the Internet rather than traveling to the meeting to 
appear in person.
    (3) If you or your qualified representative fail to appear and 
present the proposal, without good cause, the company may omit any of 
your proposals from its proxy materials for any meetings held in the 
following two calendar years.
    (i) Question 9: If I have complied with the procedural 
requirements, on what other bases may a company rely to omit my 
proposal?
    (1) Improper under state law: If the proposal is not a proper 
subject for action by shareholders under the laws of the state of the 
company's incorporation;

    Note to paragraph (i)(1): Depending on the subject matter, some 
proposals are not considered proper under state law if written so 
that they would be binding on the company if approved by 
shareholders. In our experience, most proposals that are cast as 
recommendations or requests that the board of directors take 
specified action are proper under state law. Accordingly, we will 
assume that a proposal drafted as a recommendation or suggestion is 
proper unless the company demonstrates otherwise.

    (2) Violation of law: If the proposal would, if implemented, cause 
the company to violate any state, federal, or foreign law;

    Note to paragraph (i)(2): We will not apply this basis for 
exclusion to permit exclusion of a proposal on grounds that it would 
violate foreign law if compliance with the foreign law would result 
in a violation of any state or federal law.

    (3) Violation of proxy rules: If the proposal or supporting 
statement is contrary to any of the Commission's proxy rules, including 
Sec. 240.14a-9, which prohibits materially false or misleading 
statements in proxy soliciting materials;
    (4) Personal grievance; special interest: If the proposal relates 
to the redress of a personal claim or grievance against the company, or 
any other person, or if it is designed to result in a benefit to you, 
or to further a personal interest, which benefit or interest is not 
shared by the other shareholders at large;
    (5) Relevance: If the proposal relates to a matter involving the 
purchase or sale of services or products which represents $10 million 
or less in gross revenues or total costs, whichever is appropriate, for 
the company's most recently completed fiscal year. However, if 3% of 
the company's gross revenue or total assets, whichever is higher, for 
the company's most recently completed fiscal year, results in a number 
less than $10 million, that number applies instead of $10 million;
    (6) Absence of power/authority: If the company would lack the power 
or authority to implement the proposal;
    (7) Management functions: If the proposal relates to specific 
business decisions normally left to the discretion of management;

    Note to paragraph (i)(7): Examples of such matters include the 
way a newspaper formats its stock tables, whether a company charges 
an annual fee for use of its credit card, the wages a company pays 
its non-executive employees, and the way a company operates its 
dividend reinvestment plan. For an investment company, such matters 
include the decision whether to invest in the securities of a 
specific company.

    (8) Relates to election: If the proposal relates to an election for 
membership on the company's board of directors;
    (9) Conflicts with company's proposal: If the proposal directly 
conflicts with one of the company's own proposals to be submitted to 
shareholders at the same meeting;

    Note to paragraph (i)(9): A company's submission to the 
Commission under this section should specify the points of conflict 
with the company's proposal.

    (10) Substantially implemented: If the company has already 
substantially implemented the proposal;
    (11) Duplication: If the proposal substantially duplicates another 
proposal previously submitted to the company by another proponent that 
will be included in the company's proxy materials for the same meeting;
    (12) Resubmissions: If the proposal deals with substantially the 
same subject matter as another proposal or proposals that has or have 
been previously included in the company's proxy materials within the 
preceding 5 calendar years, a company may omit it from its proxy 
materials for any meeting held within 3 calendar years of the last time 
it was included if the proposal received:
    (i) Less than 6% of the vote if proposed once within the preceding 
5 calendar years;
    (ii) Less than 15% of the vote on its last submission to 
shareholders if proposed twice previously within the preceding 5 
calendar years; or
    (iii) Less than 30% of the vote on its last submission to 
shareholders if proposed three times or more previously

[[Page 50705]]

within the preceding 5 calendar years; and
    (13) Specific amount of dividends: If the proposed relates to 
specific amounts of cash or stock dividends.
    (j) Question 10: If the company demonstrates that my proposal is 
excludable based on the criteria listed in the answer to Question 9, is 
there any other way to have my proposal included in the company's proxy 
materials? (1) Yes. If enough of the company's shareholders support 
inclusion of your proposal in the company's proxy materials, then you 
may override certain of the criteria for excluding your proposal listed 
in answer to Question 9. More specifically, if you demonstrate to the 
company that the holders of 3% of the company's outstanding shares 
entitled to be voted on the proposal at the meeting agree that your 
proposal should be included in the company's proxy materials, then the 
company may not rely on criteria paragraphs (5) or (7) under Question 9 
of this section to omit your proposal for that meeting. In calculating 
the 3%, you may include your own shares even if the proposal is your 
own. The percentage is based on the total number of voting shares 
outstanding for the year before the year for which the meeting is held. 
You should find that number in the company's annual report to 
shareholders for that year.
    (2) However, it is your obligation to demonstrate that you have, or 
have gathered, the required support for including your proposal, by 
providing the company:
    (i) A written statement from each of your supporters stating his or 
her support for the inclusion of your proposal in the company's proxy 
materials for a specific meeting of shareholders. The written statement 
must be executed and dated as of a date no earlier than the date of the 
company's annual meeting for the previous year. If the company did not 
hold a meeting the year before, the statement must be dated no more 
than one year before the scheduled date of the meeting for which the 
proposal is submitted; and
    (ii) A written statement from the record holder of each supporter's 
shares, specifying the number of shares that the supporter held as of 
the date of the statement described in paragraph (j)(2)(i) of this 
section. It is your obligation to collect this evidence from your 
supporters, and to present it to the company in an organized, 
understandable form. You must provide the company with copies of the 
evidence by the due date for submitting a proposal.
    (k) Question 11: How many proposals sponsored by other shareholders 
may I support under the ``override'' mechanism described in the answer 
to Question 10 of this section? At each company, you may support no 
more than one proposal sponsored by other shareholders under the 
``override'' mechanism described in the answer to Question 10 of this 
section. Of course, this does not affect your ability to sponsor your 
own proposal. If the proposal is your own proposal, then it does not 
count against that limit.
    (l) Question 12: What procedures must the company follow if it 
intends to omit my proposal? (1) If the company intends to omit a 
proposal from its proxy materials, it must file its reasons with the 
Commission no later than 40 calender days after the date that it 
receives your proposal, and no later than 80 calendar days before it 
files its definitive proxy statement and form of proxy with the 
Commission. The company must simultaneously provide you with a copy of 
its submission. The Commission staff may permit the company to make its 
submission later than 40 days after receiving your proposal, or 80 days 
before the company files its definitive proxy statement and form of 
proxy, if the company demonstrates good cause for missing the deadline.
    (2) The company must file six paper copies (or alternatively file 
via e-mail to the following address: [email protected]) of the following:
    (i) The proposal;
    (ii) An explanation of why the company believes that it may omit 
the proposal, which should if possible refer to the most recent 
applicable authority, such as prior Division letters issued under the 
rule; and
    (iii) A supporting opinion of counsel when such reasons are based 
on matters of state or foreign law.
    (m) Question 13: May I submit my own statement to the Commission 
responding to the company's arguments? Yes, you may submit a response, 
but it is not required. You should try to submit any response to us, 
with a copy to the company, as soon as possible after the company makes 
its submission. This way, the Commission staff will have time to 
consider fully your submission before it issues its response. You may 
submit either six paper copies of your response, or alternatively, you 
may make your submission via e-mail to the following address: 
[email protected].
    (n) Question 14: If the company includes my shareholder proposal in 
its proxy materials, what information about me must it include along 
with the proposal itself? (1) The company's proxy statement must 
include your name and address, as well as the number of the company's 
voting securities that you hold. However, instead of providing that 
information, the company may instead include a statement that it will 
provide the information to shareholders promptly upon receiving an oral 
or written request.
    (2) The company is not responsible for the contents of your 
proposal or supporting statement.

    Dated: September 18, 1997.

    By the Commission.
Jonathan G. Katz,
Secretary.

Concurrence of Commissioner Steven M.H. Wallman

    The Commission today (Release No. S7-25-97) proposes a ``package'' 
of changes to the current process for submitting shareholder proposals. 
Not only does this process preclude valid shareholder debate on issues 
of significant importance to the companies in which shareholders 
invest, it also imposes burdens on corporations and on this Commission, 
such as requiring the Commission to engage in line-drawing for which it 
is ill-suited. A year ago I proposed changes to the rules to make them 
fairer and to eliminate much of that line-drawing. And I have 
repeatedly called for the reversal of Cracker Barrel--independent of 
any other or more comprehensive reform.
    I recognize and appreciate how difficult it is to craft a solution 
to the problems posed by these rules, and I commend the staff and my 
colleagues for their efforts today. As a practical matter, those who 
are active participants in the shareholder proposal process are small 
in number--especially when compared with the number this Commission 
regulates or influences in other activities. But the practical impact 
of what can be accomplished through shareholders appropriately engaged 
in their corporations' affairs is enormous. Part of what makes our 
economy strong and our corporations successful is our system of active 
shareholders engaged in debate over matters of concern. And those 
matters consistently have included issues relating to corporate 
governance, workplace practices and social issues.
    Because I believe so strongly in the benefits that accrue from 
responsible shareholders acting responsibly, I am concerned by this 
proposed ``package.'' While I concur in the issuance of this release so 
that the debate may begin, I believe this proposal may not have

[[Page 50706]]

sufficient benefits for the shareholder community to outweigh the 
detriments to that community and, therefore, may not be balanced. 
Moreover, I remain opposed as a matter of principle to the notion of 
holding the reversal of Cracker Barrel hostage to the success or 
failure of an overall reform effort. I urge my colleagues again to 
consider its immediate reversal.
    I understand this is a complicated area involving many players with 
often divergent interests. Moreover, not all members of the corporate 
community, or the shareholder community, are affected in the same 
manner by either the current or the proposed process. Some companies 
have never received a shareholder proposal, while others receive a 
multitude on a yearly basis. Likewise, some proponents have no 
difficulty in placing their resolutions in the company's proxy 
statement, while others face a yearly battle to avert exclusion.
    Under today's proposal, if it is adopted, the proponent community 
will obtain some benefit from the reversal, at least in form, of 
Cracker Barrel, as well as a lower economic standard under the 
relevance exclusion, and the availability for the first time of a 
shareholder override. From a practical perspective though, these 
benefits will primarily assist those proponents who currently have 
potential difficulty obtaining access to the proxy statement--such as 
social groups sponsoring social policy proposals related to employment. 
Since most shareholder proposals are not so characterized, this package 
provides little for all other proponents.
    And with regard to social proposals, it remains to be seen whether 
the proposed changes will result in any increased access to the proxy 
statement. While Cracker Barrel may be reversed in form if the 
proposals are adopted, it is unclear from the release whether it will 
be reversed in substance. Although social policy proposals related to 
employment will no longer be automatically excludable, neither will 
they be automatically included.\1\ The return to subjective line-
drawing by the staff, coupled with the shift to a purely economic test 
under the relevance exclusion, leaves open the possibility of continued 
attempts to exclude many social proposals (whether related to 
employment or not).\2\ While theoretically proponents of social 
proposals could be helped by the availability of a shareholder 
override, the burdens of the currently proposed override--a threshold 
set at the high level of 3% \3\ combined with the practical 
difficulties of soliciting or doing a major publicity campaign \4\--
will constrain its practical effectiveness.\5\
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    \1\ The release is unclear on whether new lines will be drawn 
and where those lines will fall.
    \2\ Since the new proposed economic test under the relevance 
exclusion focuses solely on historical financial statement 
components, it also excludes shareholder proposals motivated by far 
more important possible material liabilities or prospective costs, 
such as boycotts, negative publicity or lawsuits. The result is that 
this exclusion could be even more restrictive than Cracker Barrel. 
As an example, if a company employs slave labor in a small plant in 
Asia, a proposal relating to that operation would be excludable 
under this test, notwithstanding the significant potential costs to 
the company and its shareholders from the company's pursuing such a 
policy.
    \3\ Three percent of the outstanding stock of large corporations 
involves dollar amounts in the billions; it is unclear why the 
support of such a large financial stake is necessary before a 
proposal may be placed on the ballot.
    \4\ Moreover, the proposal does not require access to 
shareholder lists (although Rule 14a-7 theoretically may be 
useful)--and may be dependent on adequate relief under Sections 
13(d) and 14 of the Securities Exchange Act of 1934.
    \5\ I am also concerned about the specter that the existence of 
the override--a concept that I originally proposed, but in a 
different context, and that I still independently support--will be 
used as a rationale for the staff's engaging in overly broad 
interpretations of the exclusions under Rule 14a-8 on the grounds 
that, if shareholders want the resolutions included, they can avail 
themselves of the override.
---------------------------------------------------------------------------

    As to detriments, all members of the proponent community will be 
adversely impacted by the increased resubmission thresholds--thresholds 
that, as proposed, will rise to the very high level of 30% in the third 
year--without any practical benefits being provided in return to a 
large percentage of the proponents. Likewise, for those members of the 
proponent community who might use Rule 14a-4 in lieu of rule 14a-8, the 
proposed tightening of Rule 14a-4 will be troublesome. And to the 
extent that any part of the package is changed to decrease the benefits 
or increase the burdens on the proponent community, the lack of balance 
may well become intolerable.
    Although I have strong reservations about this package as a whole 
and about specific provisions,\6\ I vote today to issue this release to 
ensure that debate will ensue on this matter. In its current form, I 
agree that the release can be used to frame the issues and I believe it 
is in the best interests of all of those involved in the shareholder 
proposal process for change to be commenced as soon as possible. My 
hope would be that any changes ultimately adopted will, in fact, 
properly balance the interests of companies and shareholders.\7\
---------------------------------------------------------------------------

    \6\ I also am concerned about the extent of the reliance on the 
Division's Questionnaire as a basis for today's proposals given the 
failure to use scientific sampling in both its design and its 
distribution.
    \7\ As an additional goal, it would be worthwhile to reduce as 
much as possible the staff's role as line-drawers. One alternative 
that could accomplish this goal would be to permit all resolutions 
to be included subject to whatever exclusions the states wished to 
impose as a matter of internal corporate affairs--and the release 
asks questions about this approach. I suspect that both companies 
and shareholders will find this option to be impracticable. If they 
do not, I believe the Commission should give it more thought.
---------------------------------------------------------------------------

    In any event, I must stress my dismay at the failure of this 
Commission to reverse Cracker Barrel. The continuation of Cracker 
Barrel over the past four years has been a terrible mistake--not from a 
practical perspective but rather from a policy perspective. As I have 
stated previously, Cracker Barrel has had little practical effect--most 
proponents of the types of proposals excludable under Cracker Barrel 
either succeed in having the companies include their proposals anyway, 
or otherwise have their concerns addressed and withdraw their proposals 
voluntarily. Nevertheless, Cracker Barrel is bad public policy because 
the wrong message is sent as to what the Commission believes is 
important. I fail to understand why its reversal can only be considered 
as part of any broader reform--after all Cracker Barrel was imposed on 
the proponent community without any reforms for their benefit and has 
tilted the balance, as a matter of principle, over these last four 
years in an unacceptable manner.
    Finally, stepping back from the issue of whether Cracker Barrel 
should be reversed only as part of overall reform or on its own, the 
practical realities are that this reform proposal, with or without 
Cracker Barrel, likely cannot be adopted in time for the 1998 proxy 
season. The specter of continuing Cracker Barrel for yet another proxy 
season should simply be unacceptable. I strongly urge my colleagues to 
do the right thing--reverse Cracker Barrel now, in time for the 1998 
proxy season.
    I respectfully concur in the issuance of this release.

[FR Doc. 97-25448 Filed 9-25-97; 8:45 am]
BILLING CODE 8010-01-M