SEC Staff Legal Bulletin: SLB 14A

July 12, 2002

Division of Corporation Finance Securities and Exchange Commission

Action: Publication of CF Staff Legal Bulletin

Date: July 12, 2002

Summary: This staff legal bulletin provides information for companies and shareholders regarding rule 14a-8 of the Securities Exchange Act of 1934.

Supplementary Information: The statements in this staff legal bulletin represent the views of the Division of Corporation Finance. This bulletin is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.

Contact Person: For further information, please contact Keir D. Gumbs at (202) 942-2900.

Rule 14a-8 provides an opportunity for a shareholder owning a relatively small amount of a company's securities to have his or her proposal placed alongside management's proposals in that company's proxy materials for presentation to a vote at an annual or special meeting of shareholders. The rule generally requires the company to include the proposal unless the shareholder has not complied with the rule's procedural requirements or the proposal falls within one of the rule's 13 substantive bases for exclusion.

Rule 14a-8(i)(7) is one of the substantive bases for exclusion in rule 14a-8. It provides a basis for excluding a proposal that deals with a matter relating to the company's ordinary business operations. The fact that a proposal relates to ordinary business matters does not conclusively establish that a company may exclude the proposal from its proxy materials. As the Commission stated in Exchange Act Release No. 40018, proposals that relate to ordinary business matters but that focus on "sufficiently significant social policy issues . . . would not be considered to be excludable because the proposals would transcend the day-to-day business matters."1

In the 2001-2002 proxy season, shareholders submitted proposals to several companies relating to equity compensation plans. Some of these proposals requested that the companies submit for shareholder approval all equity compensation plans that potentially would result in material dilution to existing shareholders. We received four no-action requests from companies seeking to exclude these proposals from their proxy materials in reliance on rule 14a-8(i)(7). In each instance, we took the view that the proposal could be excluded in reliance on rule 14a-8(i)(7) because the proposal related to general employee compensation, an ordinary business matter.2

The Commission has stated that proposals involving "the management of the workforce, such as the hiring, promotion, and termination of employees," relate to ordinary business matters.3 Our position to date with respect to equity compensation proposals is consistent with this guidance and the Division's historical approach to compensation proposals. Since 1992, we have applied a bright-line analysis to proposals concerning equity or cash compensation:

• We agree with the view of companies that they may exclude proposals that relate to general employee compensation matters in reliance on rule 14a-8(i)(7);4 and
• We do not agree with the view of companies that they may exclude proposals that concern only senior executive and director compensation in reliance on rule 14a-8(i)(7).5

The Commission has previously taken the position that proposals relating to ordinary business matters "but focusing on sufficiently significant social policy issues . . . 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."6 The Division has noted many times that the presence of widespread public debate regarding an issue is among the factors to be considered in determining whether proposals concerning that issue "transcend the day-to-day business matters."7

We believe that the public debate regarding shareholder approval of equity compensation plans has become significant in recent months. Consequently, in view of the widespread public debate regarding shareholder approval of equity compensation plans and consistent with our historical analysis of the "ordinary business" exclusion, we are modifying our treatment of proposals relating to this topic.8 Going forward, we will take the following approach to rule 14a-8(i)(7) submissions concerning proposals that relate to shareholder approval of equity compensation plans:9

• Proposals that focus on equity compensation plans that may be used to compensate only senior executive officers and directors. As has been our position since 1992, companies may not rely on rule 14a-8(i)(7) to omit these proposals from their proxy materials.
• Proposals that focus on equity compensation plans that may be used to compensate senior executive officers, directors and the general workforce. If the proposal seeks to obtain shareholder approval of all such equity compensation plans, without regard to their potential dilutive effect, a company may rely on rule 14a-8(i)(7) to omit the proposal from its proxy materials. If the proposal seeks to obtain shareholder approval of all such equity compensation plans that potentially would result in material dilution to existing shareholders, a company may not rely on rule 14a-8(i)(7) to omit the proposal from its proxy materials.
• Proposals that focus on equity compensation plans that may be used to compensate the general workforce only, with no senior executive officer or director participation. If the proposal seeks to obtain shareholder approval of all such equity compensation plans, without regard to their potential dilutive effect, a company may rely on rule 14a-8(i)(7) to omit the proposal from its proxy materials. If the proposal seeks to obtain shareholder approval of all such equity compensation plans that potentially would result in material dilution to existing shareholders, a company may not rely on rule 14a-8(i)(7) to omit the proposal from its proxy materials.

Companies and shareholders with questions about this bulletin are encouraged to call Keir D. Gumbs, Office of Chief Counsel of the Division of Corporation Finance, at (202) 942-2900.

---

1	See Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 40018 (May 21, 1998).
2	See Adobe Systems (February 1, 2002) (proposal requesting that Adobe's Board of Directors "submit all equity compensation plans (other than those that would not result in material potential dilution) to shareholders for approval"); see also Cadence Design Systems (March 20, 2002); AutoDesk, Inc. (April 1, 2002); Synopsys, Inc. (April 1, 2002).
3	See Exchange Act Release No. 40018 (May 21, 1998).
4	See e.g., Bio-Technology General Corporation (April 28, 2000).
5	See e.g., Battle Mountain Gold Company (February 13, 1992).
6	See Exchange Act Release No. 40018 (May 21, 1998).
7	See e.g., Transamerica Corporation (January 10, 1990) and Aetna Life and Casualty Company (February 13, 1992).
8	This bulletin addresses only the specific matter of shareholder proposals relating to shareholder approval of equity compensation plans. We are not addressing or commenting on any other positions concerning shareholder proposals relating to equity compensation or cash compensation.
9	We recognize that the New York Stock Exchange and the Nasdaq Stock Market have, or are in the process of adopting, rules to require companies listed or quoted by them to provide for shareholder approval of some equity compensation plans. This bulletin does not address those rules.

http://www.sec.gov/interps/legal/cfslb14a.htm

Last Reviewed or Updated: July 15, 2002