98-14121. Amendments To Rules On Shareholder Proposals  

  • [Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
    [Rules and Regulations]
    [Pages 29106-29121]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-14121]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    17 CFR Part 240
    
    [Release No. 34-40018; IC-23200; File No. S7-25-97]
    RIN 3235-AH20
    
    
    Amendments To Rules On Shareholder Proposals
    
    AGENCY: Securities and Exchange Commission.
    
    ACTION: Final Rule.
    
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    SUMMARY: The Securities and Exchange Commission (``we'' or 
    ``Commission'') is adopting amendments to its rules on shareholder 
    proposals. The amendments recast rule 14a-8 into a Question & Answer 
    Format that both shareholders and companies should find easier to 
    follow, and make other modifications to existing interpretations of the 
    rule. We are also amending rule 14a-4 to provide clearer ground rules 
    for companies' exercise of discretionary voting authority, and making 
    related amendments to rule 14a-5.
    
    EFFECTIVE DATE: The amendments are effective June 29, 1998.
    
    FOR FURTHER INFORMATION CONTACT:
    Frank G. Zarb, Jr., of Sanjay M. Shirodkar, Division of Corporation 
    Finance, (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 adopting amendments to 
    rules 14a-8,\1\ 14a-4,\2\ and 14a-5 \3\ under the Securities Exchange 
    Act of 1934 (the ``Exchange Act'').\4\
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        \1\ 17 CFR 240.14a-8.
        \2\ 17 CFR 240.14a-4.
        \3\ 17 CFR 240.14a-5.
        \4\ 15 U.S.C. 78a et seq.
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    I. Executive Summary
    
        With modifications, we are adopting some of the amendments to our 
    rules on shareholder proposals that we initially proposed on September 
    18, 1997.\5\ As explained more fully in this release, we modified our 
    original proposals based on our consideration of the more than 2,000 
    comment letters we received from the public.\6\
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        \5\ See our Proposing Release, Exchange Act Release No. 29093 
    (Sept. 18, 1997) [62 Fed. Reg. 50682].
        \6\ The comment letters are available for inspection and copying 
    in the Commission's Public Reference Room in file number S7-25-97. 
    Comments that were submitted electronically are available on the 
    Commission's website (www.sec.gov).
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        Our proposed changes evoked considerable public controversy, as 
    have our earlier efforts to reform these rules. Some shareholders and 
    companies expressed overall support for our proposals.\7\ Certain of 
    our proposals, however, were viewed as especially controversial, and 
    generated strong comments in favor, as well as heavy opposition.\8\
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        \7\ See, e.g., Comment Letters From Teachers Insurance and 
    Annuity Assoc./College Retirement Equities Fund, Nov. 19, 1997 
    (``TIAA-CREF Letter''); California Public Employees' Retirement 
    System, Nov. 10, 1997 (``CALPERS Letter''); American Society of 
    Corporate Secretaries, Dec. 8, 1997 (``ASCS Letter''); the Business 
    Roundtable, Dec. 9, 1997 (``BRT Letter''); Barclays Global 
    Investors, Dec. 4, 1997; Georgeson & Company Inc., Dec. 31, 1997 
    (``Georgeson Letter'').
        \8\ See, e.g., New York City Employees Retirement System, Nov. 
    5, 1997 (``NYCERS Letter''); Interfaith Center on Corporate 
    Responsibility, Dec. 23, 1997 (``ICCR Letter''); American Bar Ass'n, 
    Dec. 23, 1997 (``ABA Letter''); Labor Policy Ass'n, Nov. 17, 1997 
    (``LPA Letter'').
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        The amendments adopted today:
         Recast rule 14a-8 into a Question & Answer format that is 
    easier to read;
         Reverse the Cracker Barrel no-action letter on employment-
    related proposals raising social policy issues;
         Adopt other less significant amendments to rule 14a-8; and
         Amend rule 14a-4 to provide shareholders and companies 
    with clearer guidance on companies' exercise of discretionary voting 
    authority.
        These reforms, in our view, will help to improve the operation of 
    the rules governing shareholder proposals and will address some of he 
    concerns raised by shareholders and companies over the last several 
    years on the operation of the proxy process.
        We have decided not to adopt other elements of our original 
    proposals, due in part to strong concerns expressed by commenters. We 
    are not adopting our original proposals to increase the percentage of 
    the vote a proposal needs before it can be resubmitted in future years; 
    \9\ to streamline the exclusion for matters considered irrelevant to 
    corporate business;\10\ or to modify our administration of the rule 
    that permits companies to exclude proposals that further personal 
    grievances or special interests.\11\ We are also not adopting the 
    proposed ``override'' mechanism that would have permitted 3% of the 
    shareownership to override a company's decision to exclude proposals 
    under certain of the bases for exclusion set forth under Question 9 of 
    amended rule 14a-8.\12\
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        \9\ See paragraph (12) under Question 9, formerly rule 14a-
    8(c)(12) [17 CFR 240.14a-8(c)(12)].
        \10\ Paragraph (5) under Question 9, former rule 14a-8(c)(5)[17 
    CFR 240.14a-8(c)(5)].
        \11\ Paragraph (4) under Question 9, former rule 14a-8(c)(4)[17 
    CFR 240.14a-8(c)(4)].
        \12\ The mechanism had been included in Paragraph 10 of rule 
    14a-8 as proposed to be amended. See Proposing Release.
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        Some of the proposals we are not adopting share a common theme: to 
    reduce the Commission's and its staff's role in the process and to 
    provide shareholders and companies with a greater opportunity to decide 
    for themselves which proposals are sufficiently important and relevant 
    to the company's business to justify inclusion in its proxy materials. 
    However, a number of commenters resisted the idea of significantly 
    decreasing the role of the Commission and its staff as informal 
    arbiters through the administration of the no-action letter process. 
    Consistent with these views, commenters were equally unsupportive of 
    fundamental alternatives to the existing rule and process that, in 
    different degrees, would have decreased the Commission's overall 
    participation.
        While we have tried to provide the most fair, predictable, and 
    efficient system possible, these rules, even as amended, will continue 
    to require us to make difficult judgments about interpretations of 
    proposals, the motives of those submitting them, and the policies to 
    which they relate. We will continue to explore ways to improve the 
    process as opportunities present themselves.
    
    II. Plain-English Question & Answer Format
    
        We had proposed to recast rule 14a-8 into a more plain-English 
    Question & Answer format.\13\ We are adopting that proposal, and the 
    amended rule will be
    
    [[Page 29107]]
    
    the Commission's first in question and answer format. Most commenters 
    who addressed this proposal expressed favorable views, believing that 
    it would make the rule easier for shareholders and companies to 
    understand and follow.\14\
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        \13\ Unless specifically indicated otherwise, none of these 
    revisions are intended to signal a change in our current 
    interpretations.
        \14\ See, e.g., CALPERS Letter; State Teachers' Retirement Sys. 
    (California), Jan. 12, 1998; Ethics in Investment Committee of the 
    Sisters of Charity of Saint Elizabeth Station, Nov. 19, 1997; Mr. H. 
    Carl McCall, Comptroller of the State of New York, Dec. 24, 1997; 
    American Corporate Counsel Assoc., Dec. 31, 1997 (``ACCA Letter''); 
    ASCS Letter; Eastman Kodak Co., Nov. 25, 1997; Banc One Corp., Dec. 
    9, 1998. Some commenters, however, did not believe that the new 
    format would significantly improve the rule's operation. See, e.g., 
    ABA Letter; New York State Bar Assoc., Dec. 10, 1997 (``New York 
    State Bar Letter'').
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        In addition to the other amendments described in this release, we 
    have made some minor revisions to the language we had proposed to 
    conform with the new plain English format. For example, on the proposed 
    revisions to paragraph (1) under Question 9, which is former rule 14a-
    8(c)(1),\15\ commenters stated, and we agree, that the reference to 
    ``the state of the company's incorporation'' may appear narrower than 
    the actual scope of the rule because some entities that may be subject 
    to the rule, such as partnerships, are not ``incorporated.'' \16\ 
    Accordingly, the rule as adopted refers to ``the laws of the 
    jurisdiction of the company's organization.''
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        \15\ Rule 14-8(c)(1) [17 CFR 240.14a-8(c)(1)].
        \16\ See ABA Letter; ICCR Letter; Investment Company Institute, 
    Dec. 30, 1997 (``ICI Letter'').
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        We are adopting minor plain--English revisions to paragraphs (2), 
    (3), and (4) under Question 9, former rules 14a-8(c)(2),\17\ 
    (c)(3),\18\ and (c)(4). Because we are not adopting the proposed 
    substantive amendments to paragraph (5), former rule 14a-8(c)(5), we 
    are making only minor, non-substantive modifications to the language of 
    that rule so that it conforms to the new plain-English approach.
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        \17\ Rule 14a-8(c)(2) [17 CFR 240.14a-8(c)(2)].
        \18\ Rule 14a-8(c)(3) [17 CFR 240.14a-8(c)(3)].
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        We are adopting the revisions to former rule 14a-8(c)(6),\19\ now 
    paragraph (6) under Question 9, as proposed.\20\
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        \19\ Rule 14a-8(c)(6) [17 CFR 240.14a-8(c)(6)].
        \20\ One commenter thought the proposed language could be read 
    as precluding companies from excluding proposals that companies lack 
    power to implement. See ABA Letter. To the contrary, the revised 
    rule continues to refer to situations where a company lacks 
    ``power'' to implement the proposal. Thus, for example, exclusion 
    may be justified where implementing the proposal would require 
    intervening actions by independent third parties. See, e.g., SCEcorp 
    (Dec. 20, 1995) (proposal that unaffiliated fiduciary trustees amend 
    voting agreements). Under current staff interpretations, however, 
    exclusion would not normally be justified if the proposal merely 
    requires the company to ask for cooperation from a third party. See, 
    e.g., Northeast Utilities System (Nov. 7, 1996) (proposal that the 
    company ask a third party to coordinate annual meetings held by 
    public companies).
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        While we are making minor conforming changes to the language of 
    paragraph (7) under Question 9, formerly rule 14a-8(c)(7),\21\ we have 
    decided not to adopt the proposed language changes to this rule, or the 
    list of illustrative examples, other than to replace the reference to 
    ``registrant'' with ``company.'' \22\ We had proposed to revise the 
    rule's language because we thought that the legal term-of-art 
    ``ordinary business'' might be confusing to some shareholders and 
    companies. The term refers to matters that are not necessarily 
    ``ordinary'' in the common meaning of the word, and is rooted in the 
    corporate law concept providing management with flexibility in 
    directing certain core matters involving the company's business and 
    operations. Several companies and shareholders nonetheless objected to 
    the proposed revisions, particularly the elimination of the ``ordinary 
    business'' language, on the ground that most participants in the 
    shareholder proposal process are now so familiar with the ``ordinary 
    business'' language that they might misconstrue the revisions as 
    signaling an interpretive change.\23\ Indeed, since the meaning of the 
    phrase ``ordinary business'' has been developed by the courts over the 
    years through costly litigation and essentially has become a term-0f-
    art in the proxy area, we recognize the possibility that the adoption 
    of a new term could inject needless costs and other inefficiencies into 
    the shareholder proposal process.
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        \21\ Rule 14a-8(c)(7) [17 CFR 240.14a-8(c)(7)].
        \22\ Two commenters suggested that we include a non-exclusive 
    list of examples of matters particular to investment companies that 
    would be excludable per se under the ordinary business exception. 
    See ICI Letter; Gordon Altman Butowsky Weitzen Shalov & Wein, Dec. 
    16, 1997. We have not followed the suggestion. We believe that 
    investment companies are not sufficiently different from other types 
    of issuers to make it appropriate for us to designate a predefined 
    set of topics that would be excepted from the shareholder proposal 
    process established under Rule 14a-8.
        \23\ See, e.g., ICCR Letter; Jessie Smith Noyes Foundation, Nov. 
    14, 1997 (``Jessie Smith Noyes Letter''); Long View Collective 
    Investment Fund, Jan. 5, 1998 (``Long View Letter''); ABA Letter; 
    The Chase Manhattan Corp., Jan. 14, 1998 (``Chase Manhattan 
    Letter'').
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        We are adopting with one modification the proposed language changes 
    to paragraph (8) under Question 9, formerly rule 14a-8(c)(8).\24\ The 
    rule as proposed would have permitted companies to exclude a proposal 
    that ``relates to an election for membership on the company's board of 
    directors.'' Based on a suggestion from one commenter, in order to 
    account for non-corporate entities with principal governing bodies 
    bearing names other than the ``board of directors,'' the rule as 
    adopted refers explicitly to elections to an ``analogous governing 
    body.'' \25\
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        \24\ Rule 14a-8(c)(8) [17 CFR 240.14a-8(c)(8)].
        \25\ See ABA Letter.
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        We are adopting as proposed our revisions to paragraph (9) under 
    Question 9, formerly rule 14a-8(c)(9).\26\ As amended, the rule permits 
    a company to exclude a proposal that ``directly conflicts with one of 
    the company's own proposals to be submitted to shareholders at the same 
    meeting.'' \27\
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        \26\ Rule 14a-8(c)(9) [17 CFR 240.14a-8(c)(9)].
        \27\ One commenter thought that the word ``directly'' may appear 
    to signal a narrowing of the exclusion. See ABA Letter. We believe 
    that the revisions accurately convey our current interpretations of 
    the rule; of course, by revising the rule we do not intend to imply 
    that proposals must be identical in scope or focus for the exclusion 
    to be available. See, e.g., SBC Communications (Feb. 2, 1996) 
    (shareholder proposal on calculation of non-cash compensation 
    directly conflicted with company's proposal on a stock and incentive 
    plan).
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        We are adopting as proposed the revisions to paragraphs (10) and 
    (11) under Question 9, formerly rules 14a-8(c)(10) \28\ and 14a-
    8(c)(11).\29\ The revisions to paragraph (10) reflect an interpretation 
    that we adopted in 1983.\30\
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        \28\ Rule 14a-8(c)(10) [17 CFR 240.14a-8(c)(10)].
        \29\ Rule 14a-8(c)(11) [17 CFR 240.14a-8(c)(11)].
        \30\ In Exchange Act Release No. 20091 (Aug. 16, 1983) [48 FR 
    38218], we stated that a proposal may be excluded under the rule if 
    it has been ``substantially implemented.''
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        Although we are not adopting proposed substantive revisions to 
    paragraph (12), formerly rule 14a-8(c)(12),\31\ we are adopting non-
    substantive revisions to conform the rule to the new plain-English 
    approach.
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        \31\ As explained in Section VI below, we have decided not to 
    modify the percentage of the shareholder vote that a proposal must 
    receive in order to be entitled to re-submission in future years.
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        The Commission, through the Division of Corporation Finance (the 
    ``Division''), anticipates establishing a special electronic mailbox 
    only for rule 14a-8 correspondence through which both shareholders and 
    companies will be permitted to make electronic submissions under this 
    rule, including follow-up correspondence.
    
    III. The Interpretation of Rule 14a-8(c)(7): The ``Ordinary 
    Business'' Exclusion
    
        We proposed to reverse the position announced in the 1992 Cracker 
    Barrel no-action letter concerning the Division's approach to 
    employment-related shareholder proposals raising social policy 
    issues.\32\ In that letter, the Division announced that
    
        \32\ See Cracker Barrel Old Country Stores, Inc. (Oct. 13, 
    1992).
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        The fact that a shareholder proposal concerning a company's 
    employment
    
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    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 
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    governed by the employment-based nature of the proposal.
    
        We are adopting our proposal to reverse the Cracker Barrel 
    position, which provided that all employment-related shareholder 
    proposals raising social policy issues would be excludable under the 
    ``ordinary business'' exclusion.\33\ The Division will return to its 
    case-by-case approach that prevailed prior to the Cracker Barrel no-
    action letter.
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        \33\ The reversal is effective as of May 21, 1998, and will 
    apply to future Division no-action responses. It will apply to any 
    rule 14a-8 no-action submission that the Division has received 
    before May 21, 1998 if the Division has not issued a corresponding 
    no-action response by the close of business on May 20, 1998.
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        In applying the ``ordinary business'' exclusion to proposals that 
    raise social policy issues, the Division seeks to use the most well-
    reasoned and consistent standards possible, given the inherent 
    complexity of the task. From time to time, in light of experience 
    dealing with proposals in specific subject areas, and reflecting 
    changing societal views, the Division adjusts its view with respect to 
    ``social policy'' proposals involving ordinary business. Over the 
    years, the Division has reversed its position on the excludability of a 
    number of types of proposals, including plant closings,\34\ the 
    manufacture of tobacco products,\35\ executive compensation,\36\ and 
    golden parachutes.\37\
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        \34\ See Pacific Telesis Group (Feb. 2, 1989).
        \35\ See Phillip Morris Companies, Inc.  (Feb. 13, 1990).
        \36\ See Reebok Int'l Ltd. (Mar. 16, 1992).
        \37\ See Transamerica Corp. (Jan. 10, 1990).
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        We believe that reversal of the Division's Cracker Barrel no-action 
    letter, which the Commission had subsequently affirmed,\38\ is 
    warranted. Since 1992, the relative importance of certain social issues 
    relating to employment matters has reemerged as a consistent topic of 
    widespread public debate.\39\ In addition, as a result of the extensive 
    policy discussions that the Cracker Barrel position engendered, and 
    through the rulemaking notice and comment process, we have gained a 
    better understanding of the depth of interest among shareholders in 
    having an opportunity to express their views to company management on 
    employment-related proposals that raise sufficiently significant social 
    policy issues.
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        \38\ See Letter dated January 15, 1993 from Jonathan G. Katz, 
    Secretary to the Commission, to Sue Ellen Dodell, Deputy Counsel, 
    Office of Comptroller, City of New York.
        \39\ See e.g., Investors Focus on Diversity at Texaco Annual 
    Meeting: Company Faces 94 Discrimination Filings, The Washington 
    Post, May 14, 1997; Shareholders Press Shoney's on Bias Issue, The 
    New York Times, Dec. 26, 1976).
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        Reversal of the Cracker Barrel no-action position will result in a 
    return to a case-by-case analytical approach. In making distinctions in 
    this area, the Division and the Commission will continue to apply the 
    applicable standard for determining when a proposal relates to 
    ``ordinary business.'' The standard, originally articulated in the 
    Commission's 1976 release, provided an exception for certain proposals 
    that raise significant social policy issues.\40\
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        \40\ See Exchange Act Release No. 12999 (Nov. 22, 1976) [41 FR 
    52994].
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        While we acknowledge that there is no bright-line test to determine 
    when employment-related shareholder proposals raising social issues 
    fall within the scope of the ``ordinary business'' exclusion, the staff 
    will make reasoned distinctions in deciding whether to furnish ``no-
    action'' relief. Although a few of the distinctions made in those cases 
    may be somewhat tenuous, we believe that on the whole the benefit to 
    shareholders and companies in providing guidance and informal 
    resolutions will outweigh the problematic aspects of the few decisions 
    in the middle ground.
        Nearly all commenters from the shareholder community who addressed 
    the matter supported the reversal of this position.\41\ Most commenters 
    from the corporate community did not favor the proposal to reverse 
    Cracker Barrel, though many indicated that the change would be 
    acceptable as part of a broader set of reforms.\42\
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        \41\ See e.g., Calvert Group, Nov. 26, 1997 (``Calvert 
    Letter''); Center for Responsible Investing, Rec'd Nov. 3, 1997; 
    Captains Endowment Assoc., Rec'd Nov. 6, 1997; Social Investment 
    Forum, Jan. 2, 1998 (``Social Investment Forum Letter'').
        \42\ See, e.g., ASCS Letter; ACCA Letter; BRT Letter; 
    AlliedSignal Inc., Nov. 24, 1997; Ashland Inc., Nov. 21, 1997; LPA 
    Letter; Sullivan & Cromwell, Dec. 29, 1997 (``Sullivan & Cromwell 
    Letter'').
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        Going forward, companies and shareholders should bear in mind that 
    the Cracker Barrel position related only to employment-related 
    proposals raising certain social policy issues. Reversal of the 
    position does not affect the Division's analysis of any other category 
    of proposals under the exclusion, such as proposals on general business 
    operations.
        Finally, we believe that it would be useful to summarize the 
    principal considerations in the Division's application, under the 
    Commission's oversight, of the ``ordinary business'' exclusion. 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 at an annual shareholders meeting.
        The policy underlying the ordinary business exclusion rests on 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 sufficiently significant social policy issues 
    (e.g., significant discrimination matters) generally would not be 
    considered to be excludable, because the proposals would transcend the 
    day-to-day business matters and raise policy issues so significant that 
    it would be appropriate for a shareholder vote.\43\
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        \43\ See, e.g., Reebok Int'l Ltd. (Mar. 16, 1992) (noting that a 
    proposal concerning senior executive compensation could not be 
    excluded pursuant to rule 14a-8(c)(7)).
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        The second consideration relates to the degree to which the 
    proposal seeks to ``micro-manage'' the company by probing too deeply 
    into matters of a complex nature upon which shareholders, as a group, 
    would not be in a position to make an informed judgment.\44\ This 
    consideration may come into play in a number of circumstances, such as 
    where the proposal involves intricate detail, or seeks to impose 
    specific time-frames or methods for implementing complex policies.
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        \44\ Exchange Act Release No. 12999 (Nov. 22, 1976).
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        A similar discussion in the Proposing Release of the primary 
    considerations underlying our interpretation of the ``ordinary 
    business'' exclusion as applied to such proposals raised some questions 
    and concerns among some of the commenters. Because of that concern, we 
    are providing clarification of that position.\45\ One aspect of that
    
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    discussion was the basis for some commenters' concern that the reversal 
    of Cracker Barrel might be only a partial one. More specifically, in 
    the Proposing Release we explained that one of the considerations in 
    making the ordinary business determination was the degree to which the 
    proposal seeks to micro-manage the company. We cited examples such as 
    where the proposal seeks intricate detail, or seeks to impose specific 
    time-frames or to impose specific methods for implementing complex 
    policies. Some commenters thought that the examples cited seemed to 
    imply that all proposals seeking detail, or seeking to promote time-
    frames or methods, necessarily amount to ``ordinary business.'' \46\ We 
    did not intend such an implication. Timing questions, for instance, 
    could involve significant policy where large differences are at stake, 
    and proposals may seek a reasonable level of detail without running 
    afoul of these considerations.\47\
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        \45\ The exclusion has been interpreted previously by the 
    Commission. See, e.g., Exchange Act Release No. 20091 (Aug. 16, 
    1983) [48 FR 38218]; Exchange Act Release No. 12999 (Nov. 22, 1976) 
    [41 FR 52994]; Exchange Act Release No. 4950 (Oct. 9, 1953) [18 FR 
    6646]. It has also been interpreted by the courts. See, e.g., Grimes 
    v. Ohio Edison Co., 992 F.2d 455 (2d Cir. 1993); Roosevelt v. E.I. 
    Du Pont De Nemours & Co., 958 F.2d 416 (D.C. Cir. 1992); Medical 
    Committee for Human Rights v. SEC, 432 F.2d 659 (D.C. Cir. 1970); 
    New York City Employee's Retirement Sys. v. SEC, 843 F. Supp. 858, 
    rev'd 45 F.3d 7 (2d Cir. 1995); Amalgamated Clothing and Textile 
    Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 891 
    (S.D.N.Y. 1993).
        \46\ See, e.g., ICCR Letter; LongView Letter; Letter from 
    Professor Harvey J. Goldschmid of Columbia University School of Law, 
    and Ira M. Millstein, Senior Partner, Weil, Gotshal & Manges LLP, 
    Dec. 23, 1997 (``Goldschmid and Millstein Letter''). Compare Chase 
    Manhattan Letter.
        \47\ See, e.g., Roosevelt v. E.I. Du Pont De Nemours & Co., 958 
    F.2d at 424-427 (one-year difference in timing of CFC production 
    phase-out does not implicate significant policy, but longer period 
    might implicate significant policy). In Amalgamated Clothing and 
    Textile Workers Union, 821 F. Supp. at 891, the court required Wal-
    Mart to include a proposal in its proxy materials that sought 
    information on the company's affirmative action policies and 
    practices, although it also required the proponents to make certain 
    revisions designed to ensure that the proposal did not seek 
    excessive detail.
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        Further, in a footnote to the same sentence citing examples of 
    ``micromanagement,'' we included a citation to Capital Cities/ABC, 
    Inc., (Apr. 4, 1991) involving a proposal on the company's affirmative 
    action policies and practices.\48\ Some commenters were concerned that 
    the citation might imply that proposals similar to the Capital Cities 
    proposal today would automatically be excludable under ``ordinary 
    business'' on grounds that they seek excessive detail. Such a position, 
    in their view, might offset the impact of reversing the Cracker Barrel 
    position. However, we cited Capital Cities/ABC, Inc. only to support 
    the general proposition that some proposals may intrude unduly on a 
    company's ``ordinary business'' operations by virtue of the level of 
    detail that they seek. We did not intend to imply that the proposal 
    addressed in Capital Cities, or similar proposals, would automatically 
    amount to ``ordinary business.'' Those determinations will be made on a 
    case-by-case basis, taking into account factors such as the nature of 
    the proposal and the circumstances of the company to which it is 
    directed.
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        \48\ See Proposing Release, Footnote 79.
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    IV. Rule 14a-4: Discretionary Voting Authority
    
        We had proposed amendments to rule 14a-4, and related amendments to 
    rule 14a-5, to provide clearer guidelines for companies' exercise of 
    discretionary voting authority in connection with annual shareholder 
    meetings.\49\ We are adopting our proposals with some modifications.
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        \49\ Discretionary voting authority is the ability to vote 
    proxies that shareholders have executed and returned to the company, 
    on matters not specifically reflected on the proxy card, and on 
    which shareholders have not had an opportunity to vote by proxy. 
    While not necessarily limited to annual meetings involving the 
    election of directors, this has been the context in which companies 
    have expressed concerns about proponents' attempts to ``end run'' 
    around the rule 14a-8 process.
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        As we explained in the Proposing Release, rule 14a-4 did not 
    clearly address the exercise of discretionary voting authority if a 
    shareholder proponent chooses not to use rule 14a-8's procedures for 
    placing his or her proposal in the company's proxy materials. This may 
    occur if the proponent notifies the company in advance of the meeting 
    of his or her intention to present the proposal from the floor of the 
    meeting, and commences his or her own proxy solicitation, without ever 
    invoking rule 14a-8's procedures. Our amendments to rule 14a-4(c)(1), 
    and new paragraphs 14a-4 (c)(2) and (c)(3), are designed to provide 
    companies with clearer guidance on the scope of permissible 
    discretionary voting power in the context of a non-14a-8 proposal.
    
    A. Rule 14a-4(c)(1)
    
        We are adopting essentially as proposed new rule 14a-4(c)(1), which 
    replaces a ``reasonable time'' standard with a clear date after which 
    notice to the company of a possible shareholder proposal would not 
    jeopardize a company's ability to exercise discretionary voting 
    authority on that new matter when and if raised at the annual meeting. 
    Most commenters who addressed this proposal expressed favorable 
    views.\50\ Amended paragraph 14a-4(c)(1) allows a company voting 
    discretionary authority where the company did not have notice of the 
    matter by a date more than 45 days before the month and day in the 
    current year corresponding to the date on which the company first 
    mailed its proxy materials for the prior year's annual meeting of the 
    shareholders, or by a date established by an overriding advance notice 
    provision.\51\
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        \50\ See, e.g., ICCR Letter; TIAA-CREF Letter; LongView Letter, 
    BRT Letter; ACCA Letter; Barclays Global Investors, Dec. 4, 1997; 
    United Brotherhood of Carpenters and Joiners of America 
    (``Carpenters Letter''); International Union of Operating Engineers, 
    Dec. 29, 1997 (``Engineers Letter''); International Brotherhood of 
    Teamsters, Dec. 23, 1997 (``Teamsters Letter''). A few commenters 
    did not favor the proposal. See e.g., Gannett Corp., Nov. 20, 1997; 
    CALPERS Letter; Union of Needletrades, Industrial and Textile 
    Employees, Jan. 2, 1998 (``UNITE Letter'').
        \51\ An advance notice provision is a requirement in a company's 
    charter or bylaws that a shareholder proponent notify the company of 
    his/her intention to present a proposal a certain number of days or 
    weeks prior to the shareholders' meeting or the mailing of proxies.
    ---------------------------------------------------------------------------
    
        As an example, assume a company mailed this year's proxy materials 
    on March 31, 1998 for an annual meeting on May 1, 1998. Next year, the 
    company also schedules an early May annual meeting. The notice date 
    established by new rule 14a-4(c)(1) for non-14a-8 proposals is 45 days 
    before March 31, or February 14. Thus February 14, 1999 would represent 
    the notice date for the purposes of amended rule 14a-4(c)(1) unless a 
    different date is established by an overriding advance notice provision 
    in the company's charter or bylaws.\52\
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        \52\ As amended, rule 14a-5(e) requires companies to disclose 
    this date in each annual meeting proxy statement or its equivalent. 
    See Section V below.
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        A few commenters thought that advance notice of 45 days might 
    provide an insufficient amount of time for some companies with longer 
    printing and mailing schedules.\53\ However, we do not believe that it 
    is necessary to extend the 45-day advance notice period, since most 
    companies should have some flexibility under state law to prolong the 
    period through advance notice provisions. We stated in the Proposing 
    Release that we did not intend to interfere with the operations of 
    state law authorized definitions of advance notice set forth in 
    corporate bylaws and/or articles of incorporation, and a number of 
    commenters supported this approach.\54\ Accordingly, an advance notice 
    provision would override the 45-day period under rule 14a-4, resulting
    
    [[Page 29110]]
    
    in a shorter \55\ or longer period.\56\ The rule continues to require 
    inclusion of a specific statement, in either the proxy statement or 
    proxy card, of an intent to exercise discretionary voting authority in 
    these circumstances.
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        \53\ See, e.g., ACCA Letter; Citicorp, Dec. 23, 1997 (``Citicorp 
    Letter'').
        \54\ See, e.g., Air Products and Chemicals, Inc., Dec. 22, 1997; 
    NationsBank, Nov. 21, 1997; BRT Letter; Sullivan & Cromwell Letter. 
    Other commenters who generally supported proposed new paragraph 14a-
    4(c)(1) did not note an objection to this aspect of the rules 
    operation. See e.g., Carpenters Letter, Longview Letter; Engineers 
    Letter; ICCR Letter; TIAA-CREF Letter.
        \55\ A company that mails its proxy materials before the 
    expiration of the period established by an advance notice bylaw 
    would continue to be subject to the notice even though it has 
    already mailed its proxies.
        \56\ One commenter suggested that we move the parenthetical 
    referring to the effect of advance notice provisions from the middle 
    of the first sentence of paragraph 14a-4(c)(1) as proposed to the 
    end of that sentence in order to clarify that an advance notice 
    provision would override the 45-day period established by the rule 
    whether the provision runs from the meeting date or from the mailing 
    date. See Sullivan & Cromwell Letter. We agree and have made the 
    revision.
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        Paragraph 14a-4(c)(1) as adopted continues to incorporate a 
    ``reasonable time'' standard if the company did not hold an annual 
    meeting of shareholders during the prior year, or if the date of the 
    annual meeting has changed by more than 30 days from the prior year. 
    While one commenter suggested an alternative mechanism designed to 
    provide a more specific ``default'' date, we were concerned that such 
    an alternative approach might make the rule unjustifiable complex.\57\
    ---------------------------------------------------------------------------
    
        \57\ See Sullivan & Cromwell Letter.
    ---------------------------------------------------------------------------
    
    B. Rule 14a-4(c)(2)
    
        Proposed new paragraph 14a-4(c)(2) addressed a company's ability to 
    exercise discretionary voting authority for an annual shareholders' 
    meeting notwithstanding its receipt of ``timely'' advance notice of a 
    non-14a-8 shareholder proposal as defined by paragraph 14a-4(c)(1).\58\ 
    We are adopting new paragraph (c)(2), but with some modifications of 
    the original proposal.
    ---------------------------------------------------------------------------
    
        \58\ A few commenters also thought that we should further 
    clarify that new paragraph 14a-4(c)(2) comes into play only if the 
    company receives timely notice of a non-14a-8 proposal for the 
    purposes of paragraph (c)(1). We added clarifying language to the 
    end of paragraph (c)(1) and the beginning of paragraph (c)(2) in 
    response to these comments.
    ---------------------------------------------------------------------------
    
        As originally proposed, paragraph 14a-4(c)(2) would have permitted 
    the exercise of discretionary voting authority by company management if 
    the company's proxy materials were to include: (i) in the proxy 
    statement, a discussion of the nature of the matters as to which 
    adequate advance notice has been received, and how the company intends 
    to exercise its discretion to vote on each such matter should it be 
    presented to shareholders at the meeting, 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 designated matter(s). The pre-conditions to 
    reliance on the rule are discussed below.
    1. Proxy Statement Disclosure
        On the first pre-condition of the proposed rule, requiring 
    disclosure of the nature of potential non-14a-8 shareholder proposals, 
    a number of commenters objected to our use of the word ``discussion.'' 
    \59\ In their view, the word ``discussion'' appears to signal a 
    departure from the Division's current position expressed in its Idaho 
    Power and Borg-Warner no action letter responses.\60\ Under those no-
    action responses, companies must only ``advise'' shareholders of, 
    rather than ``discuss,'' the nature of proposals that may be raised. 
    Because we intended no departure from the disclosure element of the 
    Division's no-action position, paragraph (c)(2) as adopted replaces the 
    word ``discussion'' with ``advice.'' We remind you that the disclosure 
    prescribed by amended rule 14a-4(c)(2), as with any disclosure item, 
    must take into account the disclosure requirements of the proxy anti-
    fraud rule.\61\
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        \59\ See e.g., Chevron Corp, Nov. 25, 1997; USX Corp., Dec. 18, 
    1997.
        \60\ Idaho Power Co. (Mar 13, 1996); Borg-Warner Security Corp. 
    (Mar. 14, 1996).
        \61\ See rule 14a-9 [17 CFR 240.14a-9].
    ---------------------------------------------------------------------------
    
    2. No Separate Voting Box
        On the second pre-condition of proposed paragraph 14a-4(c)(2), a 
    number of commenters objected to the inclusion of a separate voting 
    ``box'' permitting shareholders to withhold discretionary authority 
    from management on a non-14a-8 shareholder proposal as to which 
    adequate advance notice had been received in the context of an annual 
    meeting or its equivalent. Some stated that a voting box permitting 
    shareholders to withhold discretionary voting authority in some 
    circumstances may be confusing if shareholders are also independently 
    solicited by the proponent in support of the same proposal.\62\ We 
    agree that inclusion of the proposed box on companies' proxy cares may 
    be confusing in some circumstances.\63\
    ---------------------------------------------------------------------------
    
        \62\ See, e.g., Georgeson Letter; ICCR Letter; UNITE Letter; 
    Davis, Cowell & Bowe, LLP, Jan. 2, 1998. One commenter gave the 
    following example. An insurgent sends out a proxy card seeking 
    shareholder votes on its shareholder resolution. A shareholder who 
    receives the insurgent's card votes in favor of the proposal, and 
    executes and returns the insurgent's card. But then the company 
    either solicits, or resolicits, the same shareholder, and includes a 
    ``withhold'' box on management's proxy card relating to the same 
    non-14a-8 proposal. Since the shareholder does not wish to grant 
    management discretionary voting authority on the proposal, it checks 
    the box. But then, in the commenter's view, it may be unclear 
    whether the shareholder has executed a subsequent proxy that revokes 
    the shareholder's execution of the insurgent's card under applicable 
    state law. See ICCR Letter at 32-33.
        \63\ A few commenters from the shareholder community suggested 
    that we overcome possible confusion by requiring companies to permit 
    shareholders to vote ``for'' or ``against'' non-14a-8 proposals. 
    Commenters from the corporate community that addressed the matter 
    opposed such an approach, and we believe that the amendments adopted 
    today adequately accomplish our goal of providing clearer guidelines 
    in this area. Contrary to the statements by some commenters, it is 
    not necessarily a precondition for the exercise of discretionary 
    voting authority under the Division's current no-action letters that 
    companies include an extra item on their proxy cards permitting 
    shareholders to vote ``for'' or ``against'' non-14a-8 proposals. See 
    Idaho Power and Borg-Warner.
    ---------------------------------------------------------------------------
    
        Other commenters objected to the separate voting box because they 
    believe that the potential availability of the box would in effect 
    create a new system for submitting shareholder proposals without having 
    to comply with the restrictions under rule 14a-8.\64\ In their view, 
    the prospect of obtaining a voting box with a cross-reference to 
    disclosure of the nature of the potential proposal in the proxy 
    statement would encourage the submission of more shareholder proposals 
    outside rule 14a-8's mechanisms.
    ---------------------------------------------------------------------------
    
        \64\ See, eg., BRT Letter; ASCS Letter; J.C. Penny Company, Dec. 
    19, 1997; Champion Int'l Corp., Dec. 18, 1997; International Paper, 
    Nov. 19, 1997.
    ---------------------------------------------------------------------------
    
        Accordingly, we have decided not to include the new voting box as 
    part of new rule 14a-4(c)(2). A shareholder's execution of a proxy card 
    will confer discretionary voting authority if the requirements of the 
    rule are satisfied.
    3. Percentage of Shareholders to be Solicited
        Several commenters also objected to proposed new paragraph 14a-
    4(c)(2) on grounds that it would permit a company to exercise 
    discretionary voting authority at an annual shareholders meeting even 
    if the shareholder proponent had independently solicited the percentage 
    of shareholders required to carry the proposal.\65\ These commenters 
    believe that a company should not be permitted to vote uninstructed 
    proxies if the proponent has put the proposal ``in play'' by providing 
    a proxy statement and form of proxy to a significant percentage of the 
    company's sharehownership. On this point, proposed paragraph 14a-
    4(c)(2) represented a departure from the
    
    [[Page 29111]]
    
    ``percentage of shares solicited'' standard articulated in the 
    Division's Idaho Power and Borg-Warner no-action positions.
    ---------------------------------------------------------------------------
    
        \65\ See, e.g., Mr. Jack Sheinkman, Vice-Chair Amalgamated Bank 
    of New York, and President Emeritus Amalgamated Clothing and Textile 
    Workers Union AFL-CIO, CLC, Nov. 7, 1997; Service Employees Int'l 
    Union, Dec. 31, 1997; Engineers Letter; Carpenters Letter; National 
    Electrical Benefit Fund, Dec. 22, 1997 (``NEBF Letter'').
    ---------------------------------------------------------------------------
    
        In response to these comments, and in light of our decision not to 
    adopt the proposal to require that the Company include an additional 
    box on its proxy cards for withholding discretionary voting authority, 
    we have decided to codify the ``percentage of shares solicited'' 
    standard of the Division's current no-action positions. The final rule 
    therefore precludes a company from exercising discretionary voting 
    authority on matters as to which it has received adequate advance 
    notice if the proponent provides the company as part of that notice 
    with a statement that it intends to solicit the percentage of 
    shareholder votes required to carry the proposal, followed with 
    specified evidence that the stated percentage had actually been 
    solicited.
        As we explained in the Proposing Release, this aspect of the 
    Division's no-action position had been the source of uncertainty for 
    companies. A company may not know whether a shareholder intends to 
    begin to solicit proxies independently, or how many shareholders will 
    be solicited if a solicitation is actually commenced. We understand 
    that in a number of instances companies were forced to guess whether 
    its ability to exercise discretionary authority had been restricted. A 
    number of commenters from both the corporate and shareholder 
    communities suggested that we overcome the potential for uncertainty by 
    requiring proponents to provide advance written notice if they intend 
    to deliver a proxy statement and form of proxy to holders of at least 
    the minimum number of the company's voting shares that is required to 
    carry the proposal, including measures to help ensure that such notice 
    is bona fide.\66\
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        \66\ See, e.g., NEBF Letter, Carpenters Letter; UNITE Letter, 
    Engineers Letter; Long View Letter; Citicorp Letter; Questar Corp., 
    Dec. 31, 1997; Harrah's Entertainment, Inc., Dec. 31, 1997; see also 
    Goldschmid and Millstein Letter.
    ---------------------------------------------------------------------------
    
        We have revised new paragraph (c)(2) to reflect these comments, and 
    the rule as adopted requires a shareholder proponent to provide the 
    company with written notice within the timeframe established by 
    paragraph 14a-4(c)(1), that is, earlier than 45 days or in compliance 
    with advance notice provisions. In order to help ensure that the notice 
    has been provided in good faith, paragraph 14a-4(c)(2) as adopted also 
    requires the proponent to repeat the statement (that it intends to 
    solicit proxies to prevail) in its proxy materials to underscore the 
    applicability of rule 14a-9, the anti-fraud rule. To further emphasize 
    this point, and to provide interested parties with the ability to 
    proceed against a proponent that does not fulfill its good faith 
    promise to solicit the required number of shareholders, the rule 
    requires the proponent to provide the company with a statement from the 
    solicitor or other person with knowledge indicating that the proponent 
    has taken the steps necessary to solicit the percentage of the 
    company's shareownership required to approve the proposal. A statement 
    executed by the shareholder insurgent will satisfy this requirement 
    only to the extent that it was actually involved in carrying out the 
    solicitation.
    
    C. Rule 14a-4(c)(3)
    
        We are also adopting a new paragraph 14a-4(c)(3) to further clarify 
    the rule's operation in connection with special shareholders' meetings 
    and other solicitations. Rules 14a-4(c)(1) and 14a-4(c)(2) as proposed 
    to be amended, and as adopted, establish a clearer framework for 
    companies' exercise of discretionary voting authority for annual 
    shareholder meetings or their functional equivalents. We did not intend 
    for that framework to apply to other solicitations, or to solicitations 
    by persons other than management, such as special meetings or consent 
    solicitations unrelated to the election of directors, which would 
    continue to be governed by the ``reasonable time'' standard that had 
    applied to all solicitations under former rule 14a-4(c)(1). Although 
    there does not appear to have been confusion among commenters on this 
    point, new paragraph (c)(3), and new introductory language to new 
    paragraphs (c)(1) and (c)(2), should help clarify the point.
        Tracking much of the language of former paragraph 14a-4(c)(1), new 
    paragraph (c)(3) provides for the exercise of discretionary voting 
    authority ``[f]or solicitations other than for annual meetings or for 
    solicitations by persons other than the registrant, [on] matters which 
    the persons making the solicitation do not know, a reasonable time 
    before the solicitation, are to be presented at the meeting, if a 
    specific statement to that effect is made in the proxy statement or 
    form of proxy.'' \67\
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        \67\ See United Mine Workers versus Pittston Co., [1989-1990 
    Transfer Binder] Fed. Sec. L. Rep. (CCH) P 94,946 (D.D.C. Nov. 24, 
    1989); and Larkin versus Baltimore Bancorp, 769 F. Supp. 919 (D. Md. 
    1991).
    ---------------------------------------------------------------------------
    
    D. Filing in Preliminary Form
    
        Finally, in the Proposing Release, we stated that during the 1996 
    proxy season the Division permitted several companies to avoid filing 
    proxy materials in preliminary form despite receipt of adequate advance 
    notification of a non-14a-8 shareholder proposal, so long as these 
    companies disclosed in their proxy statements the nature of the 
    proposal and how management intended to exercise discretionary voting 
    authority if the proposal were actually to be presented to a vote at 
    the meeting. We also stated that, in light of the proposed amendments 
    to rule 14a-4, we might reverse that informal position, so that 
    companies receiving notice of a non-14a-8 proposal before the filing of 
    their proxy materials would be required to file their materials in 
    preliminary form to preserve discretionary voting authority under rule 
    14a-4(c)(2). A number of commenters opposed reversal of the position, 
    stating that in ordinary circumstances little would be gained by staff 
    review of this material, and that potential delays resulting from 
    preliminary filings could unjustifiably interfere with companies' 
    mailing schedules.\68\ The Division has decided not to reverse its 
    position at this time, but may evaluate the position again in the 
    future after monitoring proxy filings under the amended rules.
    ---------------------------------------------------------------------------
    
        \68\ See, e.g., ABA Letter; BRT Letter; ASCS Letter; Goldschmid 
    and Millstein Letter. A few commenters within the shareholder 
    community supported reversal of the position. See, e.g., Engineers 
    Letter; Carpenters Letter.
    ---------------------------------------------------------------------------
    
    V. Other Amendments
    
        We are adopting other modifications to rules 14a-8 and 14a-5.
        We are adopting as proposed the answer to Question 1 of the amended 
    rule defining a proposal as a request or requirement that the board of 
    directors take an action.\69\ One commenter objected to the proposal on 
    grounds that the definition appeared to preclude all shareholder 
    proposals seeking information.\70\ In formulating the definition, it 
    was not our intention to preclude proposals merely because they seek 
    information, and the fact that a proposal seeks only information will 
    not alone justify exclusion under the definition.
    ---------------------------------------------------------------------------
    
        \69\ For favorable comments, see, e.g., TIAA-CREF Letter; ABA 
    Letter; GE Stockholders' Alliance, Oct. 16, 1997. But see, e.g., 
    ICCR Letter.
        \70\ See Calvert Letter.
    ---------------------------------------------------------------------------
    
        Also as proposed, we are increasing the dollar value of a company's 
    voting shares that a shareholder must own in order to be eligible to 
    submit a shareholder proposal--from $1,000 to $2,000--to adjust for the 
    effects of inflation since the rule was last revised.\71\ There was 
    little opposition to
    
    [[Page 29112]]
    
    the proposed increase among commenters, although several do not believe 
    the increase is great enough to be meaningful, especially in light of 
    the overall increase in stock prices over the last few years.\72\ 
    Nonetheless, we have decided to limit the increase to $2,000 for now, 
    in light of rule 14a-8's goal of providing an avenue of communication 
    for small investors. There was no significant support for any 
    modifications to the rule's other eligibility criteria, such as the 
    one-year continuous ownership requirement.
    ---------------------------------------------------------------------------
    
        \71\ See The answer to Question 2.
        \72\ See, e.g., ASCS Letter; ABA Letter; BRT Letter; see also 
    ICCR Letter.
    ---------------------------------------------------------------------------
    
        A number of commenters supported, and few opposed, our proposal to 
    establish a uniform 14-day period in which shareholders would be 
    required to respond to a company's notification that the shareholder 
    has failed to comply with one or more procedures under rule 14a-8, such 
    as the submission deadlines and the rule's for establishing proponent 
    eligibility.\73\ We are adopting the 14-day period as proposed. In 
    response to one commenter's suggestion, we have added a sentence to the 
    rule clarifying that a company need not provide notice of a deficiency 
    that cannot be remedied. If the company intends to exclude the 
    proposal, it nonetheless would later have to make a submission under 
    rule 14a-8, and provide a copy to the proponent.\74\
    ---------------------------------------------------------------------------
    
        \73\ See, e.g., ABA Letter; ASCS Letter; TIAA-CREF Letter; GE 
    Stockholders' Alliance, Oct. 16, 1997. But see ICCR Letter; 
    Carpenters Letter.
        \74\ See Rule 14a-8(j)(Question10).
    ---------------------------------------------------------------------------
    
        We are also adopting amendments to rule 14a-5(e), with a few 
    modifications from our proposals. As proposed to be amended, that rule 
    would require companies to disclose the date after which proposals 
    submitted outside the framework of rule 14a-8 are considered untimely 
    for the purposes of amended rule 14a-4(c)(1).\75\
    ---------------------------------------------------------------------------
    
        \75\ See Section IV above. The new information, if applicable, 
    would be disclosed under Item 5 of Form 10-Q or 10-QSB (``Other 
    Information'').
    ---------------------------------------------------------------------------
    
        Two commenters objected to our proposal to amend rule 14a-5(e) to 
    require disclosure of the date by which shareholders must notify the 
    company of any non-14a-8 proposals under amended rule 14a-4(c)(1).\76\ 
    They were concerned that disclosure of the date would appear to 
    formalize a new system for submitting shareholder proposals in 
    competition with the mechanisms of rule 14a-8, and would encourage the 
    submission of proposals outside of that process. We do not agree that 
    mere disclosure of the date would likely have that effect, and we 
    believe that disclosure is necessary because shareholders often would 
    not have enough information to deduce the date reliably on their own. 
    We are also adopting the other proposed modifications to rule 14a-5(e) 
    designed to streamline the rule's operation.
    ---------------------------------------------------------------------------
    
        \76\ See ABA Letter; New York State Bar Letter.
    ---------------------------------------------------------------------------
    
        One commenter pointed out that it is unclear from the rule as 
    drafted whether the new disclosure in the company's proxy statement 
    should reflect the ``default'' date under amended rule 14a-4(c)(1), or 
    instead the date established by an overriding advance notice provision, 
    if any.\77\ We have revised the rule to clarify that companies should 
    disclose the date established by an overriding advance notice 
    provision, and in the absence of such a provision, the ``default'' date 
    for submitting non-14a-8 proposals, which normally would be 45 days 
    before the date the company mailed its proxy materials for the prior 
    year. Because the rule also requires companies to disclose the deadline 
    for submitting rule 14a-8 proposals, companies' disclosure should 
    clearly distinguish between the two dates.
    ---------------------------------------------------------------------------
    
        \77\ See W.R. Grace & Co., Oct. 28, 1997.
    ---------------------------------------------------------------------------
    
        Finally, in the answer to Question 8 of amended rule 14a-8, we 
    proposed to include an advisory that the proponent or the proponent's 
    representative make sure that he/she follows applicable procedures 
    proper under state law for appearing at the meeting and/or presenting 
    the proposal. Most commenters who addressed the proposal viewed the 
    advisory as a helpful aid.\78\ We have included the advisory as 
    proposed.
    ---------------------------------------------------------------------------
    
        \78\ See, e.g., CALPERS Letter; ICCR Letter; ASCS Letter.
    ---------------------------------------------------------------------------
    
    VI. Proposals Not Adopted
    
        We have decided not to adopt some of our original proposals, due in 
    part to concerns expressed by some commenters. These proposals 
    generally received support from some commenters, but equally strong 
    opposition from others.
    
    Personal Grievance Exclusion
    
        Paragraph (4) under Question 9, formerly rule 14a-8(c)(4), permits 
    companies to exclude proposals furthering personal grievances or 
    special interests. We had proposed to modify the way the Division 
    administers the rule so that the staff would concur in the exclusion of 
    a proposal on this ground only if the proposal on its face were to 
    relate to a personal grievance or special interest. In other 
    circumstances, under our proposal, the Division would express ``no 
    view'' in its no-action response. The proposal reflected our view that 
    the Division's ability to make the necessary factual findings is 
    limited in the context of evaluating an otherwise ``facially neutral'' 
    proposal, and that companies and shareholders themselves possess much 
    of the factual information relevant to the applicability of the 
    ``personal grievance'' exclusion.
        Shareholders expressed serious concerns about this proposal.\79\ A 
    number of commenters from the shareholder community were concerned that 
    companies might use the increased flexibility provided by a ``no view'' 
    no-action response to exclude proposals that do not in actuality 
    further personal grievances of special interests. In their view, a 
    shareholder, in these circumstances, might be forced to incur the 
    expense of litigation to prevent exclusion of the proposal. Some 
    shareholders, for instance, were concerned that companies might rely on 
    the rule to exclude proposals focusing on social policy matters.\80\ We 
    agree that the proposal might increase the likelihood of disputes 
    between shareholders and companies. We have therefore decided not to 
    implement the proposal, and will continue to administer the rule 
    consistently with our current practice of making case-by-case 
    determinations on whether the rule permits exclusion of particular 
    proposals.
    ---------------------------------------------------------------------------
    
        \79\ See e.g., ICCR Letter; Teamsters Letter; Captains Endowment 
    Ass'n, rec'd Nov. 6, 1997; Davis, Cowell & Bowe LLP, Jan. 2, 1998 
    (``Davis, Cowell & Bowe Letter'').
        \80\ Social issue proposals are generally not excludable under 
    paragraph (4). In 1983, we amended the rule to clarify that it would 
    not apply, without other factors, to exclude a proposal ``relating 
    to an issue in which proponent was personally committed or 
    intellectually and emotionally interested.'' Exchange Act Release 
    No. 20091 (Aug. 16, 1983)[48 FR 38218].
    ---------------------------------------------------------------------------
    
    Resubmission Thresholds
    
        If a proposal fails to receive a specified level of support, 
    paragraph (12) under Question 9, formerly rule 14a-8(c)(12), 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 had proposed to 
    raise the percentage thresholds respectively to 6%, 15%, and 30%.
        Many commenters from the shareholder community expressed serious 
    concerns about this proposal.\81\
    
    [[Page 29113]]
    
    We have decided not to adopt the proposal, and to leave the thresholds 
    at their current levels.
    ---------------------------------------------------------------------------
    
        \81\ See, e.g., ICCR Letter; NYCERS Letter; Calvert Letter; 
    Social Investment Forum Letter; the School Sisters of Notre Dame, 
    Oct. 20, 1997; the Conference on Corporate Responsibility of Indiana 
    and Michigan, Oct. 14, 1997; CALPERS Letter (indicating that it 
    might support more modest increases in the thresholds); but see 
    TIAA-CREF Letter (supporting the increases at the levels proposed). 
    These commenters were concerned that the increases would operate to 
    exclude too great a percentage of proposals--particularly those 
    focusing on social policy issues which tend to receive lower 
    percentages of the shareholder vote.
    ---------------------------------------------------------------------------
    
    Proposed Override Mechanism
    
        We had proposed a new mechanism that would have permitted 3% of a 
    company's shareownership to override the ``ordinary business'' 
    exclusion and the ``relevance'' exclusion, paragraphs (7) and (5) under 
    Question 9.
        Several commenters opposed the proposal.\82\ Other commenters 
    supported the override concept as proposed, but expressed concerns 
    about specific aspects, including whether the proposed 3% threshold may 
    be too low and lead to erosion of the ``ordinary business'' and 
    ``relevance'' exclusions that would be subject to an override.\83\ Some 
    shareholders thought the opposite, that 3% support of a company's 
    shareownership would be too difficult for a shareholder proponent to 
    obtain.
    ---------------------------------------------------------------------------
    
        \82\ Former paragraphs (c)(7) and (c)(5) of rule 14a-8. See, 
    e.g., ABA Letter; ACCA Letter; LPA Letter; AT&T, Dec. 24, 1997; 
    Household Int'l, Inc., Jan. 6, 1998; Federal Express Corp., Jan. 2, 
    1998; ICI Letter (concerned that proposal if adopted might be costly 
    and disruptive for investment companies).
        \83\ See, e.g., ASCS Letter; BRT Letter; FMC Corp., Dec. 5, 
    1997; Ford Motor Company, Dec. 23, 1997; New York State Bar Letter.
    ---------------------------------------------------------------------------
    
        We have decided not to adopt the proposed ``override'' mechanism. 
    Because we are not adopting the ``override,'' we also are not adopting 
    ancillary amendments designed to help implement the mechanism, 
    including the proposed qualified exemption under the proxy rules, the 
    proposed safe harbor from the beneficial ownership reporting 
    requirements under section 13(d) of the Exchange Act, and the proposed 
    shortening of companies' deadlines for making their rule 14a-8 no-
    action submissions to the Division.
    
    The ``Relevance'' Exclusion
    
        Paragraph (5) under Question 9 permits companies to exclude 
    proposals
    
        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.
    
        We had proposed to revise the rule to apply a purely economic 
    standard. Under the proposal, the exception for proposals that are 
    ``otherwise significantly related'' would have be deleted. A company 
    would have been 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.
        Few commenters indicated strong support for the proposed 
    amendments, and we are not making any substantive changes to the rule. 
    Many commenters within the corporate community agreed in concept with 
    our proposal to base the rule on an objective economic standard, and to 
    eliminate the subjective ``not otherwise significantly related'' part 
    of the rule.\84\ But most of those commenters thought that the proposed 
    $10 million threshold was so low that companies would too infrequently 
    be in a position to rely on the exclusion. Comments from the 
    shareholder community were mixed.\85\ Some shareholders opposed the 
    elimination of the ``not otherwise significantly related'' part of the 
    rule, while other shareholders expressed varying degrees of support for 
    the approach, with some expressing concern that companies might apply 
    the rule to exclude proposals on subjects that are difficult to 
    quantify, despite the ``safeguards'' that we included as part of the 
    proposed amendments.
    ---------------------------------------------------------------------------
    
        \84\ See, e.g., ASCS Letter; BRT Letter; Unocal Corp., Nov. 24, 
    1997.
        \85\ See, e.g., TIAA-CREF Letter; CALPERS Letter; Carpenters 
    Letter; Jessie Smith Noyes Letter; NYCERS Letter; ICCR Letter.
    ---------------------------------------------------------------------------
    
    Statements in Opposition: Commission Review
    
        Finally, we had proposed eliminating rule 14a-8(e), which requires 
    a company to provide a proponent with an advance copy of any statement 
    in opposition to the proposal that it intends to include in its proxy 
    materials. This provision also provides a mechanism for shareholders to 
    bring materially false or misleading statements to the Division's 
    attention. A number of commenters from the shareholder community 
    opposed elimination of these procedures because they believed that the 
    potential for proponent objections deters companies from making 
    materially false or misleading statements, and encourages negotiation 
    between the company and proponent.\86\ We have decided not to adopt 
    that proposal, and are retaining the mechanisms of former rule 14a-8(e) 
    in the context of the answer to Question 13 of amended rule 14a-8.
    ---------------------------------------------------------------------------
    
        \86\ See, e.g., ICCR Letter; LongView Letter. See also ICI 
    Letter.
    ---------------------------------------------------------------------------
    
    VII. Final Regulatory Flexibility Analysis
    
        We have prepared this Final Regulatory Flexibility Analysis under 5 
    U.S.C. 603 concerning the amendments to rules 14a-8, 14a-4, and 14a-5 
    as a follow-up to the Initial Regulatory Flexibility Analysis 
    (``IRFA'') that we prepared in connection with the Proposing 
    Release.\87\ We received few comments, and no significant empirical 
    data, in response to the requests for further information included in 
    the IRFA.
    ---------------------------------------------------------------------------
    
        \87\ See Proposing Release, Section V.
    ---------------------------------------------------------------------------
    
        The purpose of the amendments is to streamline the operation of the 
    rule, and address concerns raised by both shareholder and corporate 
    participants. We are adopting the amendments pursuant to Sections 14 
    and 23 of the Exchange Act \88\ and Section 20(a) of the Investment 
    Company Act of 1940 \89\ (Investment Company Act'').
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        \88\ 15 U.S.C. 78m, 78n, & 78u.
        \89\ 15 U.S.C. 80a-1 et seq.
    ---------------------------------------------------------------------------
    
        Specifically, we are:
         Recasting rule 14a-8 into a more plain-English Question & 
    Answer format;
         Reversing the Craker Barrel interpretive position on 
    employment-related proposals raising significant social policy issues; 
    and
         Amending rule 14a-4 to provide shareholders and companies 
    with clearer guidance on companies' exercise of discretionary voting 
    authority.
        We have decided not to adopt other elements of our original 
    proposals. We are not adopting  our original proposals to:
         Increase the percentage of the vote a proposal must 
    receive before it can be resubmitted in future years if it is not 
    approved;
         Streamline the exclusion for matters considered irrelevant 
    to corporate business,\90\
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        \90\ Paragraph (5) under Question 9, former rule 14a-8(c)(5).
    ---------------------------------------------------------------------------
    
         Modify our administration of the rule permitting companies 
    to exclude proposals furthering personal grievances of special 
    interests; or
         Implement an ``override'' mechanism that would have 
    permitted 3% of the share ownership to override a company's decision to 
    exclude a proposal under certain of the bases for exclusion set forth 
    under Question 9 of amended rule 14a-8.\91\
    ---------------------------------------------------------------------------
    
        \91\ Because we are not adopting the proposed ``override'', we 
    also are not adopting certain measures, designed to enable 
    shareholders to use it, including the proposed qualified exemption 
    from the proxy rules, and safe harbor from beneficial ownership 
    reporting obligations under Section 13(d) of the Exchange Act.
    
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    [[Page 29114]]
    
        The amendments will 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.\92\ 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.\93\ 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.
    ---------------------------------------------------------------------------
    
        \92\ 17 CFR 240.0-10.
        \93\ 17 CFR 270.0-10.
    ---------------------------------------------------------------------------
    
        Therefore, we believe approximately 250 small entity investment 
    companies may be affected by the amendments.
    
    Plain-English Question & Answer Format
    
        Our revision of rule 14a-8 to create a more understandable Question 
    & Answer format should help decrease the time and expense incurred by 
    both shareholders and companies attempting to comply with its 
    provisions companies frequently consult with legal counsel in preparing 
    no-action 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.
        No comments submitted empirical data demonstrating how much it 
    costs companies to consider and prepare an individual no-action 
    submission under rule 14a-8. Question 13 of a Questionnaire that we 
    made available in February 1997 \94\ 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 they wish 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 of making a determination whether to include a 
    proposal reported by 80 companies averaged approximately $37,000.\95\ 
    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, depending on the 
    number of proposals received and how many the company seeks to exclude 
    under the staff no-action letter process.
    ---------------------------------------------------------------------------
    
        \94\ See Proposing Release, Footnote 14.
        \95\ 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.
    ---------------------------------------------------------------------------
    
        Because the rule's added clarity may make it easier for 
    shareholders to understand the procedures for submitting shareholder 
    proposals, the amendments may encourage shareholders to submit more 
    shareholder proposals to companies each year. In turn, companies may be 
    required to make more rule 14a-8 no-action submissions to the 
    Commission.
        In the period from September 30, 1996 to September 30, 1997, we 
    received submissions from a total of 245 companies, and only 6 (i.e., 
    2%) were ``small businesses.'' While we received no empirical data on 
    the number of small businesses that receive shareholder proposals each 
    year, one commenter with substantial experience submitting shareholder 
    proposals to companies reported that small companies seldom receive 
    shareholder proposals.\96\
    ---------------------------------------------------------------------------
    
        \96\ ICCR Letter at 9.
    ---------------------------------------------------------------------------
    
        We also received no empirical information in response to our 
    request for data on the marginal cost of including an additional 
    shareholder proposal in companies' proxy materials. However, the 
    Questionnaire asked each company respondent how much money on average 
    it spends in the aggregate 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 approximately 
    $50,000.\97\ By contrast, one commenter noted that the cost for 
    companies, excluding the largest corporations, should average about 
    $10,000 per proposal.\98\ 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.
    ---------------------------------------------------------------------------
    
        \97\ 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.
        \98\ See ICCR Letter at 9-10.
    ---------------------------------------------------------------------------
    
        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. Accordingly, any costs of including an 
    additional proposal should be offset, at least partially, by not having 
    to make a rule 14a-8 submission. No commenters responded to our request 
    for empirical data on the potential cost savings.
    
    Reversal of Cracker Barrel
    
        In the 1992 Cracker Barrel no-action letter, the Division stated 
    that henceforth it would concur in the exclusion of all employment-
    related shareholder proposals raising social policy issues under rule 
    14a-8(c)(7), the ``ordinary business'' exclusion. Before the 
    announcement of the position, the Division analyzed employment related 
    proposals tied to social issues on a case-by-case basis, concurring in 
    the exclusion of some, but not others. Reversal of the position will 
    result in a return to the case-by-case analysis that prevailed before 
    the position was announced.
        Our decision to reverse the Cracker Barrel position on employment-
    related shareholder proposals may therefore result in an increase in 
    the number of employment-related proposals tied to social issues that 
    are submitted to companies each year, and that companies must include 
    in their proxy materials. During the 1997 proxy season, the Division 
    received approximately 30 submissions involving employment-related 
    proposals tied to social issues, none from ``small businesses.'' \99\
    ---------------------------------------------------------------------------
    
        \99\ No commenters provided information on the likely impact 
    reversal of the position will have on the number of shareholder 
    proposals submitted to companies each year.
    ---------------------------------------------------------------------------
    
        While it is unclear whether the number of proposals submitted to 
    small businesses and included in their proxy statements will increase 
    as a result of the reversal of Cracker Barrel, we have analyzed under 
    ``Plain English Question & Answer Format'' above the potential costs to 
    companies of considering and including additional proposals in their 
    proxy materials.
    
    Discretionary Voting Authority
    
        The amendments to rule 14a-4 should favorably affect companies, 
    including ``small businesses,'' because they would provide clearer 
    ground rules as to the ability to exercise discretionary voting power 
    when a shareholder presents a proposal without invoking rule 14a-8. We 
    do not routinely record information on the number of ``small 
    businesses'' that receive non-rule 14a-8 proposals
    
    [[Page 29115]]
    
    each year, since non-14a-8 proposals do not necessarily lead to a 
    submission to the Commission. The Investor Responsibility Research 
    Center (``IRRC'') has reported to the Commission staff, however, that 
    it is aware of a total of 19 independent proxy solicitations during 
    calendar years 1996 and 1997 in support of non-14a-8 proposals, and 
    none appear to have involved ``small businesses.'' In addition, one 
    commenter indicated that, since 1991, there have been 66 independent 
    shareholder solicitations in support of shareholder resolutions.\110\ 
    None of the companies subject to the 66 solicitations appear to have 
    been ``small businesses.''
    ---------------------------------------------------------------------------
    
        \100\ UNITE Letter.
    ---------------------------------------------------------------------------
    
        To the extent that ``small businesses'' receive such proposals, we 
    believe that the amendments to rule 14a-4 will favorably affect them by 
    reducing uncertainty, and decreasing the likelihood that such companies 
    would have to incur the delay and expense of rescheduling the 
    shareholders meeting, or resoliciting shareholders. Some commenters 
    thought that the proposal to require companies wishing to preserve 
    voting authority to include an extra voting box on their proxy cards 
    might encourage the submission of more non-14a-8 shareholder proposals. 
    We have decided not to adopt that aspect of our original proposal. Some 
    shareholders thought that the amendments as proposed might effectively 
    inhibit independent proxy solicitations because they would have 
    permitted companies to retain voting authority even if the shareholder 
    solicited the percentage of shareownership required to carry the 
    proposal. We also have decided not to adopt that aspect of our original 
    proposal.
        Under our amendments to rule 14a-4, a company wishing to preserve 
    discretionary voting authority on certain proposals that might be 
    presented to a vote may be required to advise shareholders of the 
    nature of such proposals. We note, however, that this precondition is 
    consistent with the Division's no-action positions predating the 
    adoption of the amendments. No commenters provided empirical data on 
    incremental costs likely to result from this amendment to rule 14a-4. 
    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, and that adding more than three-fourths of a 
    page could increase costs by about $1,500 for an average sized company.
        Under our amendments to rule 14a-4, a shareholder undertaking an 
    independent proxy solicitation would be required to provide a company 
    with advance written notice of its intention to solicit the percentage 
    of the company's shareownership to carry the proposal, followed by 
    other measures to help ensure that the notice has been provided in good 
    faith. These amendments would impose no additional costs on companies 
    receiving such notice, since no action by them is required. The 
    amendments should impose only de minimis additional costs on 
    shareholders who undertake independent proxy solicitations.\101\
    ---------------------------------------------------------------------------
    
        \101\ In order to comply, an insurgent is required to send to 
    the company advance written notice of its intention to solicit the 
    percentage of a company's shareownership required to carry the 
    proposal, followed by evidence of the solicitation, and to include 
    what should in most cases amount to little more than an additional 
    sentence in the insurgent's proxy statement.
    ---------------------------------------------------------------------------
    
        Our 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 considered significant alternatives to the proposed amendments 
    for small entities with a class of securities registered under the 
    Exchange Act. We considered, for instance, exempting 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 II of this release, we are 
    recasting and reformatting rule 14a-8 into a more understandable, 
    Question & Answer format. As explained in Section IV above, we are 
    adopting clearer guidelines for companies' exercise of discretionary 
    voting authority under rule 14a-4. These modifications should simplify 
    and facilitate compliance by all companies, including small entities. 
    We do not believe that there is any appropriate way further to 
    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 are amending are not specifically designed 
    to achieve certain levels of performance. 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.
    
    VIII. Cost-Benefit Analysis
    
        This cost-benefit analysis follows a preliminary analysis request 
    for comments and empirical information included in the Proposing 
    Release.\102\ We received few comments and no significant empirical 
    data, in response to our requests for further information.
    ---------------------------------------------------------------------------
    
        \102\ See Proposing Release, Section VI.
    ---------------------------------------------------------------------------
    
        The amendments to the rules on shareholder proposals 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 make the rule understandable to the numerous 
    shareholders and companies that refer to the rule each year, ensure 
    that companies include certain employment-related proposals raising 
    significant social policy issues in their proxy materials, and 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.
        Specifically, we are:
         Recasting rule 14a-8 into a more plain-English Question & 
    Answer format;
         Reversing the Cracker Barrel interpretive position on 
    employment-related proposals raising significant social policy issues; 
    and
         Amending rule 14a-4 to provide shareholders and companies 
    with clearer guidance on companies' exercise of discretionary voting 
    authority.
    
    [[Page 29116]]
    
        We have decided not to adopt other elements of our original 
    proposals. We are not adopting our original proposals to:
         Increase the percentage of the vote a proposal must 
    receive before it can be resubmitted in future years if it is not 
    approved;
         Streamline the exclusion for matters considered irrelevant 
    to corporate business;\103\
    ---------------------------------------------------------------------------
    
        \103\ Paragraph (5) under Question 9, former rule 14a-8(c)(5).
    ---------------------------------------------------------------------------
    
         Modify our administration of the rule permitting companies 
    to exclude proposals furthering personal grievances of special 
    interests; or
         Implement an ``override'' mechanism that would have 
    permitted 3% of the share ownership to override a company's decision to 
    exclude a proposal under certain of the bases for exclusion set forth 
    under Question 9 of amended rule 14a-8.\104\
    ---------------------------------------------------------------------------
    
        \104\ Because we are not adopting the proposed ``override'', we 
    also are not adopting certain measures designed to enable 
    shareholders to use it, including the proposed qualified exemption 
    from the proxy rules, and safe harbor from beneficial ownership 
    reporting obligations under Section 13(d) of the Exchange Act.
    ---------------------------------------------------------------------------
    
        We have considered whether the amendments we are adopting would 
    promote efficiency, competition and capital formation. 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.
    
    Plain-English Question & Answer Format
    
        Our revision of the rule to create a more understandable Question & 
    Answer format should help decrease the time and expense incurred by 
    both shareholders and companies attempting to comply with its 
    provisions. Companies frequently consult with legal counsel in 
    preparing no-action 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.
        No commenters submitted empirical data demonstrating how much it 
    costs companies to consider and prepare an individual no-action 
    submission under rule 14a-8. 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 
    they wish 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 approximately $37,000.\105\
    ---------------------------------------------------------------------------
    
        \105\ 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.
    ---------------------------------------------------------------------------
    
        Because the revised rule's added clarity may make it easier for 
    shareholders to understand the procedures for submitting shareholder 
    proposals, the amendments may encourage shareholders to submit more 
    shareholder proposals to companies each year. In turn, companies may be 
    required to make more rule 14a-8 no-action submissions to the 
    Commission. A study conducted by one commenter reports that, each year, 
    shareholder proposals come to a vote at 226 companies from among the 
    1,500 largest U.S. companies.\106\
    ---------------------------------------------------------------------------
    
        \106\ See Shareholder Rights Analysis: The Impact of Proposed 
    SEC Rules on Resubmission of Shareholder Resolutions, Social 
    Investment Forum Foundation, Dec. 10, 1997.
    ---------------------------------------------------------------------------
    
        We also received no information in response to our request for data 
    on the marginal cost of including an additional shareholder proposal in 
    companies' proxy materials. However, the Questionnaire asked each 
    company respondent how much money on average it spends in the aggregate 
    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 approximately $50,000.\107\ By contrast, one commenter 
    thought that this estimate is too high, although large companies in his 
    view would incur relatively higher costs.\108\
    ---------------------------------------------------------------------------
    
        \107\ 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.
        \108\ See ICCR Letter at 9-10.
    ---------------------------------------------------------------------------
    
        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.\109\ Accordingly, any costs of including an 
    additional proposal should be offset, at least partially, by not having 
    to make a rule 14a-8 submission. No commenters responded to our request 
    for empirical data on the potential cost savings.
    ---------------------------------------------------------------------------
    
        \109\ In the period from September 30, 1996 to September 30, 
    1997, we received approximately 400 submissions under rule 14a-8.
    ---------------------------------------------------------------------------
    
    Reversal of Cracker Barrel
    
        In the 1992 Cracker Barrel no-action letter, the Division stated 
    that henceforth it would concur in the exclusion of all employment-
    related shareholder proposals raising social policy issues under rule 
    14a-8(c)(7), the ``ordinary business'' exclusion. Before the 
    announcement of the position, the Division analyzed employment related 
    proposals tied to social issues on a case-by-case basis, concurring in 
    the exclusion of some, but not others. Reversal of the position will 
    result in a return to the case-by-case analysis that prevailed before 
    the position was announced.
        Our decision to reverse the Cracker Barrel position on employment-
    related shareholder proposals may therefore result in an increase in 
    the number of employment-related proposals tied to social issues that 
    are submitted to companies each year, and that companies must include 
    in their proxy materials. During the 1997 proxy season, the Division 
    received approximately 30 submissions involving employment-related 
    proposals tied to social issues.\110\
    ---------------------------------------------------------------------------
    
        \110\ No commenters provided information on the likely impact 
    reversal of the position will have on the number of shareholder 
    proposals submitted to companies each year.
    ---------------------------------------------------------------------------
    
        We have analyzed under ``Plain English Question & Answer Format'' 
    above the potential costs to companies of considering and including 
    additional proposals in their proxy materials.
        Shareholder proposals could have a positive or negative impact, or 
    no impact, on the price of a company's securities.\111\ Relatively few 
    shareholder proposals are approved by shareholders each year, and the 
    few that are approved typically focus on corporate governance matters 
    rather than social issues.\112\ Based on information provided to us by 
    IRRC, we understand that for calendar year 1997, 22 proposals obtained
    
    [[Page 29117]]
    
    shareholder approval out of a total of 376 proposals submitted to 
    shareholder votes. Ten were proposals to repeal classified boards 
    (i.e., boards with staggered terms). Ten sought redemption of 
    companies' shareholder rights plans. One focused on ``golden 
    parachute'' payments to executives (i.e., large payments typically 
    contingent upon corporate change of control). One sought to restrict 
    director pension benefits.
    ---------------------------------------------------------------------------
    
        \111\ See, e.g., Michael P. Smith, Shareholder Activism by 
    Institutional Investors: Evidence from CalPERS, The Journal of 
    Finance, Vol. LI, No. 1, March 1996; Sunil Wahal, Pension Fund 
    Activism and Firm Peformance, Journal of Financial and Quantitative 
    Analysis, Vol. 31, No. 1, March 1996.
        \112\ 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.
    ---------------------------------------------------------------------------
    
        Proposals addressing corporate governance matters tend to receive 
    the most substantial shareholder support and may have an identifiable 
    impact on shareholder wealth. Examples are proposals on voting and 
    nomination procedures for board members, and proposals to restrict or 
    eliminate companies' shareholder rights plans (i.e., ``posion pills''). 
    The amendments we are adopting do not focus on those type of proposals, 
    and should not affect shareholders' ability to include them in 
    companies proxy materials. Additionally, shareholder proposals on 
    social issues may improve investor confidence in the securities markets 
    by providing investors with a sense that as shareholders they have a 
    means to express their views to the management of the companies in 
    which they invest.
    
    Discretionary Voting Authority
    
        The amendments to rule 14a-4 should favorably affect companies 
    because they should provide clearer ground rules as to the ability to 
    exercise discretionary voting power when a shareholder presents a 
    proposal without invoking rule 14a-8.
        We do not collect information on the number of companies that 
    receive non-rule 14a-8 proposals each year, since such proposals do not 
    necessarily lead to a submission to the Commission. However, IRRC has 
    reported to the Commission staff that, during the 1997 calendar year, 
    it is aware of only two independent solicitations in support of non-
    14a-8 shareholder resolutions, down from 17 solicitations for calendar 
    year 1996. In addition, one commenter indicated that, since 1991, there 
    have been 66 independent shareholder solicitations in support of 
    shareholder resolutions.\113\
    ---------------------------------------------------------------------------
    
        \113\ UNITE Letter.
    ---------------------------------------------------------------------------
    
        To the extent ``small businesses'' receive such proposals, we 
    believe that the amendments to rule 14a-4 will favorably affect them by 
    reducing uncertainty, and decreasing the likelihood of incurring the 
    delay and expense of rescheduling the shareholders meeting and/or 
    resoliciting shareholders. Reducing the potential for uncertainty 
    should also help to decrease the likelihood of related litigation.
        One company estimated the cost of sending supplemental proxy 
    material to its shareholders at about $170,000.\114\ Thus, if the 
    amendments permit companies to avoid resolicitations on five occasions, 
    the savings would amount to about $850,000.\115\
    ---------------------------------------------------------------------------
    
        \114\ See Harrah's Entertainment, Inc., Dec. 31, 1997
        \115\ We have no basis for estimating reliably how many 
    resolicitations, if any, are likely to be avoided in any given year 
    as a result of the amendments.
    ---------------------------------------------------------------------------
    
        Another commenter submitted information on the legal costs of 
    representing insurgent shareholders in connection with court actions 
    under the proxy rules.\116\ According to that commenter, attorneys' 
    fees and costs incurred by the insurgent ranged from $17,517 to 
    $75,421. It is not clear whether these actions involved rule 14a-5 or 
    discretionary voting authority, and they do not include the legal costs 
    of other parties or any other associated expenses.
    ---------------------------------------------------------------------------
    
        \116\ Davis, Cowell & Bowe Letter at 4.
    ---------------------------------------------------------------------------
    
        Some commenters thought that the proposal to require companies 
    wishing to preserve voting authority to include an extra voting box on 
    their proxy cards might encourage the submission of more non-14a.8 
    shareholder proposals, as well as confusion among shareholders. We have 
    decided not to adopt that aspect of our original proposal. Other 
    commenters thought that the proposals might effectively inhibit 
    independent proxy solicitations because they would have provided 
    companies with a means to retain voting authority even if the 
    shareholder solicited the percentage of shareownership required to 
    carry the proposal. We also have decided not to adopt that aspect of 
    our original proposal.
        Under our amendments to rule 14a-4, a company, wishing to preserve 
    discretionary voting authority on certain proposals that might be 
    presented to a vote, may be required to advise shareholders of the 
    nature of such proposals. We note, however, that this precondition is 
    consistent with the Division's no-action positions predating the 
    adoption of these amendments. No commenters provided empirical data on 
    incremental costs likely to result from these amendments to rule 14a-4. 
    Daniels Financial Printing informed the staff that is most cases adding 
    up to three-fourths of a page in the proxy statement would not increase 
    the cost to the company, and that adding more than three-fourths of a 
    page could increase costs by about $1,500 for an average sized company.
        Under our amendments to rule 14a-4, a shareholder undertaking an 
    independent proxy solicitation would be required to provide a company 
    with advance written notice of its intention to solicit the percentage 
    of the company's shareownership to carry the proposal, followed by 
    other measures to help ensure that the notice has been provided in good 
    faith. These amendments would impose no additional costs on companies 
    receiving such notice, since no action by them is required. The 
    amendments should impose only de minimis additional costs on a 
    shareholder undertaking an independent proxy solicitation.\117\
    ---------------------------------------------------------------------------
    
        \117\ In order to comply, an insurgent is required to send to 
    the company advance written notice of its intention to solicit the 
    percentage of a company's shareownership required to carry the 
    proposal, followed by evidence of the solicition, and to include 
    what should in most cases amount to little more than an additional 
    sentence in the insurgent's proxy statement.
    ---------------------------------------------------------------------------
    
        Our amendment to rule 14a-5 would require companies to disclose an 
    additional data 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.
        Section 23(a) of the Exchange Act \118\ requires the Commission to 
    consider any anti-competitive effects of any rules it adopts thereunder 
    and the reasons for its determination that any burden on competition 
    imposed by such rules is necessary or appropriate to further the 
    purposes of the Exchange Act. The Commission has considered the impact 
    this rulemaking will have on competition and believes that the 
    amendments will not impose a significant burden on competition.
    ---------------------------------------------------------------------------
    
        \118\ 15 U.S.C. 78w(a)
    ---------------------------------------------------------------------------
    
    IX. Paperwork Reduction Act
    
        Regulation 14A \119\ 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 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.
    ---------------------------------------------------------------------------
    
        \119\ 17 CFR 240.14a-101.
    
    ---------------------------------------------------------------------------
    
    [[Page 29118]]
    
        The amendments to rules 14a-8, 14a-4(c), and 14a-5 should make it 
    easier for shareholder proponents to include in companies' proxy 
    materials employment-related shareholder proposals raising significant 
    social policy matters, and provide companies subject to the proxy rules 
    with clearer ground rules for the exercise of discretionary voting 
    authority. The amendments should also make rule 14a-8 easier to 
    understand the follow. 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 
    received no Paperwork Reduction Act comments relating to the 
    amendments.
        As set forth in the Proposing Release,\120\ 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. Sec. 3501 et seq.). The Commission had submitted the 
    amendments to those rules to the Office of Management and Budget 
    (``OMB'') for review in accordance with 44 U.S.C. Sec. 3507(d) and 5 
    CFR. 1320.11. The title for the collection of information is 
    ``Regulation 14A.'' Except as explained below, the amendments should 
    have no impact on the total estimated burden hours for Regulation 
    14A.\121\
    ---------------------------------------------------------------------------
    
        \120\ See Proposing Release, Section VII.
        \121\ 17 CFR 240.14a-101.
    ---------------------------------------------------------------------------
    
        As originally proposed, amended rule 14a-4 would have in some 
    circumstances required companies to include an extra voting box in 
    their proxy cards in order to preserve discretionary voting authority. 
    We are not, however, adopting that requirement, which we believe would 
    have increased the total annual burden by only a negligible amount, or 
    not at all.\122\ We are adopting a requirement under rule 14a-4 that a 
    shareholder insurgent in some circumstances provide a company with 
    advance written notice of its intention to solicit the percentage of a 
    company's shareownership necessary to approve the proposal, followed by 
    evidence of the solicitation, and by negligible additional disclosures 
    in the insurgent's proxy statement.\123\ We estimate that these 
    additional requirements, in the context of other amendments adopted 
    today, will increase the annual burden under Regulation 14A for a 
    shareholder insurgent by approximately one hour per shareholder 
    proponent, and that approximately 10 proponents will have to comply 
    each year. Accordingly, we have increased our estimated total 
    compliance burden for Regulation 14A by a total of 10 hours, to 810,935 
    hours.
    ---------------------------------------------------------------------------
    
        \122\ See Section IV above.
        \123\ Id.
    ---------------------------------------------------------------------------
    
        Providing the information required by Regulation 14A is mandatory 
    under Section 14(a) of the Exchange Act. The information will not be 
    kept confidential. Unless a currently valid OMB control number is 
    displayed on the Schedule 14A, the Commission may not sponsor or 
    conduct or require response to an information collection. The OMB 
    control number is 3235-0059. The collection is in accordance with 44 
    U.S.C. Sec. 3507.
    
    X. Statutory Basis And Text of Amendments
    
        We are adopting amendments to Rules 14a-8, 14a-4, and 14a-5 under 
    the authority set forth in Sections 13, 14 and 23 of the Securities 
    Exchange Act of 1943, 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 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, 78j-1, 78k, 
    78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
    78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
    80b-11, unless otherwise noted.
    * * * * *
        a. By amending Sec. 240.14a-4 by revising the introductory text 
    of paragraph (c) and paragraph (c)(1), redesignating paragraphs 
    (c)(2) through (c)(5) as paragraphs (c)(4) through (c)(7), and 
    adding new paragraphs (c)(2) and (c)(3), to read as follows:
    
    
    Sec. 240.14a-4  Requirements as to proxy.
    
    * * * * *
        (c) A proxy may confer discretionary authority to vote on any of 
    the following matters:
        (1) For an annual meeting of shareholders, if the registrant did 
    not have notice of the matter at least 45 days before the date on which 
    the registrant first mailed its proxy materials for the prior year's 
    annual meeting of shareholders (or date specified by an advance notice 
    provision), and a specific statement to that effect is made in the 
    proxy statement or form of proxy. If during the prior year the 
    registrant did not hold an annual meeting, or if the date of the 
    meeting has changed more than 30 days from the prior year, then notice 
    must not have been received a reasonable time before the registrant 
    mails its proxy materials for the current year.
        (2) In the case in which the registrant has received timely notice 
    in connection with an annual meeting of shareholders (as determined 
    under paragraph (c)(1) of this section), if the registrant includes, in 
    the proxy statement, advice on the nature of the matter and how the 
    registrant intends to exercise its discretion to vote on each matter. 
    However, even if the registrant includes this information in its proxy 
    statement, it may not exercise discretionary voting authority on a 
    particular proposal if the proponent:
        (i) Provides the registrant with a written statement, within the 
    time-frame determined under paragraph (c)(1) of this section, that the 
    proponent intends to deliver a proxy statement and form of proxy to 
    holders of at least the percentage of the company's voting shares 
    required under applicable law to carry the proposal;
        (ii) Includes the same statement in its proxy materials filed under 
    Sec. 240.14a-6; and
        (iii) Immediately after soliciting the percentage of shareholders 
    required to carry the proposal, provides the registrant with a 
    statement from any solicitor or other person with knowledge that the 
    necessary steps have been taken to deliver a proxy statement and form 
    of proxy to holders of at least the percentage of the company's voting 
    shares required under applicable law to carry out the proposal.
        (3) For solicitations other than for annual meetings or for 
    solicitations by persons other than the registrant, matters which the 
    persons making the solicitation do not know, a reasonable time before 
    the solicitation, are to be presented at the meeting, if a specific 
    statement to that effect is made in the proxy statement or form of 
    proxy.
        3. 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
    
    [[Page 29119]]
    
    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 processes of Sec. 240.14a-8 is considered untimely, either 
    calculated in the manner provided by Sec. 240.14a-4(c)(1) or as 
    established by the registrant's advance notice provision, if any, 
    authorized by applicable state law.
        (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 shareholders of such change, and the new dates 
    referred to in paragraphs (e)(1) and (e)(2) of this section, by 
    including a notice, under Item 5, 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.
        4. 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 statement and identify the proposal in its form 
    of proxy when the company 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 this 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, which you intend to present at a meeting of the 
    company's shareholders. 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, the 
    company must also provide in the form of proxy means for shareholders 
    to specify by boxes a choice between approval or disapproval, or 
    abstention. 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 must 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 as a shareholder, 
    the company can verify your eligibility on its own, although you will 
    still have to provide the company with a written statement that you 
    intend to continue to hold the securities through the date of the 
    meeting of shareholders. 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 or updated forms, 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 30 days 
    from last year's meeting, you can usually find the deadline in 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 controversy, 
    shareholders should submit their proposals by means, including 
    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
    
    [[Page 29120]]
    
    Questions 1 through 4 of this section? (1) The company may exclude 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, or transmitted 
    electronically, no later than 14 days from the date you received the 
    company's notification. A company need not provide you such notice of a 
    deficiency if the deficiency cannot be remedied, such as if you fail to 
    submit a proposal by the company's properly determined deadline. If the 
    company intends to exclude the proposal, it will later have to make a 
    submission under Sec. 240.14a-8 and provide you with a copy under 
    Question 10 below, Sec. 240.14a-8(j).
        (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 all 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 excluded? Except as otherwise noted, 
    the burden is on the company to demonstrate that it is entitled to 
    exclude 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 the proper state law procedures for attending 
    the meeting and/or presenting your proposal.
        (2) If the company holds it shareholder meeting in whole or in part 
    via electronic media, and the company permits you or your 
    representative to present your proposal via such media, then you may 
    appear through electronic media 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 will be permitted 
    to exclude all 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 exclude my 
    proposal? (1) Improper under state law: If the proposal is not a proper 
    subject for action by shareholders under the laws of the jurisdiction 
    of the company's organization;
    
        Note to paragraph (i)(1): Depending on the subject matter, some 
    proposals are not considered proper under state law if 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 to which it 
    is subject;
    
        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 could 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 is not shared by the other 
    shareholders at large;
        (5) Relevance: If the proposal relates to operations which account 
    for less than 5 percent of the company's total assets at the end of its 
    most recent fiscal year, and for less than 5 percent of its net earning 
    sand gross sales for its most recent fiscal year, and is not otherwise 
    significantly related to the company's business;
        (6) Absence of power/authority: If the company would lack the power 
    or authority to implement the proposal;
        (7) Management functions: If the proposal deals with a matter 
    relating to the company's ordinary business operations;
        (8) Relates to election: If the proposal relates to an election for 
    membership on the company's board of directors or analogous governing 
    body;
        (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 exclude 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 3% of the vote if proposed once within the preceding 
    5 calendar years;
        (ii) Less than 6% of the vote on its last submission to 
    shareholders if proposed twice previously within the preceding 5 
    calendar years; or
        (iii) Less than 10% of the vote on its last submission to 
    shareholders if proposed three times or more previously within the 
    preceding 5 calendar years; and
        (13) Specific amount of dividends: If the proposal relates to 
    specific amounts of cash or stock dividends.
        (j) Question 10: What procedures must the company follow if it 
    intends to exclude my proposal? (1) If the company intends to exclude a 
    proposal from its proxy materials, it must file its reasons with the 
    Commission 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 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 of the following:
        (i) The proposal;
        (ii) An explanation of why the company believes that it may exclude 
    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.
    
    [[Page 29121]]
    
        (k) Question 11: 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 should submit six paper copies of 
    your response.
        (l) Question 12: 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.
        (m) Question 13: What can I do if the company includes in its proxy 
    statement reasons why it believes shareholders should not vote in favor 
    of my proposal, and I disagree with some of its statements?
        (1) The company may elect to include in its proxy statement reasons 
    why it believes shareholders should vote against your proposal. The 
    company is allowed to make arguments reflecting its own point of view, 
    just as you may express your own point of view in your proposal's 
    supporting statement.
        (2) However, if you believe that the company's opposition to your 
    proposal contains materially false or misleading statements that may 
    violate our anti-fraud rule, Sec. 240.142-9, you should promptly send 
    to the Commission staff and the company a letter explaining the reasons 
    for your view, along with a copy of the company's statements opposing 
    your proposal. To the extent possible, your letter should include 
    specific factual information demonstrating the inaccuracy of the 
    company's claims. Time permitting, you may wish to try to work out your 
    differences with the company by yourself before contacting the 
    Commission staff.
        (3) We require the company to send you a copy of its statements 
    opposing your proposal before it mails its proxy materials, so that you 
    may bring to our attention any materially false or misleading 
    statements, under the following timeframes:
        (i) If our no-action response requires that you make revisions to 
    your proposal or supporting statement as a condition to requiring the 
    company to include it in its proxy materials, then the company must 
    provide you with a copy of its opposition statements no later than 5 
    calendar days after the company receives a copy of your revised 
    proposal; or
        (ii) In all other cases, the company must provide you with a copy 
    of its opposition statements no later than 30 calendar days before its 
    files definitive copies of its proxy statement and form of proxy under 
    Sec. 240.14a-6.
    
        Dated: May 21, 1998.
    
        By the Commission.
    Margaret McFarland,
    Deputy Secretary.
    [FR Doc. 98-14121 Filed 5-27-98; 8:45 am]
    BILLING CODE 8010-01-P
    
    
    

Document Information

Effective Date:
6/29/1998
Published:
05/28/1998
Department:
Securities and Exchange Commission
Entry Type:
Rule
Action:
Final Rule.
Document Number:
98-14121
Dates:
The amendments are effective June 29, 1998.
Pages:
29106-29121 (16 pages)
Docket Numbers:
Release No. 34-40018, IC-23200, File No. S7-25-97
RINs:
3235-AH20: Amendments to the Shareholder Proposal Rule
RIN Links:
https://www.federalregister.gov/regulations/3235-AH20/amendments-to-the-shareholder-proposal-rule
PDF File:
98-14121.pdf
CFR: (5)
17 CFR 240.14a-4
17 CFR 240.14a-5
17 CFR 240.14a-6
17 CFR 240.14a-8
17 CFR 240.14a-9