The Securities and Exchange Commission's Division of Corporation Finance has issued its first series of responses to several no-action requests by public companies seeking to exclude shareholder proposals from the companies' proxy statements.

In its first batch of letters posted on March 7, the SEC responded to a series of no-action requests regarding questions about Rule 14a-8 of the Exchange Act, which allows certain eligible shareholders to use the company proxy statement to nominate directors. (In-depth coverage about those no-action requests can be found here). Specifically, the letters address what circumstances constitute a basis for exclusion.

In some cases, the SEC allowed companies to omit the requested materials from their proxies, whereas in others, it did not. Consequently, the shareholder proposals demonstrate how the specific language in the proposals can affect the outcome.

For example, two circumstances in which the SEC allowed for exclusions included:

Proposals that contain “separate and distinct” matter from shareholder nominations: Bank of America, Goldman Sachs, and Textron each sought to exclude proxy access proposals on the basis that the submissions included two proposals, instead of one, in violation of Rule 14a-8(c). While one part of the proposal sought proxy access for a shareholder nominee, another part of the proposal related to events that would not be considered a change in control.

The SEC agreed with each company that the submissions included a “separate and distinct” matter from the proposal relating to the inclusion of shareholder nominations for director in the companies' proxy materials. Accordingly, the SEC said it would not recommend enforcement action if the companies omit the submissions from their proxy materials.

Vague and indefinite proposals: Chiquita, Sprint Nextel, and MEMC Electronic Materials argued that “vague and indefinite” shareholder proposals seeking proxy access may be excluded. Specifically, the proposals stated that the companies' proxy materials must include shareholder nominees who satisfy Rule 14a-8(b) “eligibility requirements,” but they did not describe what those specific eligibility requirements are.

The SEC agreed that the language was vague and indefinite, noting that many shareholders may not be familiar with the eligibility requirements and, thus, would not be able to determine with any reasonable certainty exactly what actions or measures the proposals require. Accordingly, the SEC said it would not recommend enforcement action if the companies omit the submissions from proxy materials.

Unsuccessful Exclusions

Not every company succeeded in its request for exclusion. Charles Schwab, Wells Fargo, and Western Union, for example, each sought to exclude “false and misleading” material on the grounds that the proxy statements included inoperative hyperlinks to the shareholders' Websites, which were intended to provide the companies with additional information.

Even though the Websites were inoperative at the time of the proposals' submissions, the proponents did provide the companies with the content that would be included on the Website, with the intent of making the Websites operative when the companies filed their 2012 proxy materials. For these reasons, the SEC concluded that the companies were not able to demonstrate that the material is materially false or misleading and cannot be omitted from their proxy materials.

In another example in which the SEC rejected an exclusion requirement, KSW sought a no-action letter regarding a proposal that sought to amend its bylaws to require KSW to include in its proxy materials the name of any person nominated for election to the board by a shareholder or a group of shareholders who beneficially owned 2 percent or more of the KSW's outstanding common stock. KSW argued that it already had substantially implemented the proposal as a basis for exclusion by allowing shareholders who own 5 percent or more of its outstanding common stock to include such a nomination.

The SEC disagreed, however, noting that the difference in ownership thresholds meant the proposal has not been substantially implemented under Rule 14a-8(i)(10). Accordingly, the SEC said it did not believe KSW may omit the proposal from its proxy material.

The question of what constitutes a basis for exclusion is not over yet. “As usual, the SEC Staff has attempted to resolve issues on the narrowest grounds possible when a controversial issue is involved,” Steve Quinlivan, a shareholder of law firm Leonard, Street and Deinard, noted in a client alert. “[T]hese proposals will live to see another day, as proponents work around small defects cited by the staff to permit exclusion.”