April 24, 2009

The Coming Battle: Aggregation of Ownership to Meet SEC Thresholds

With the SEC’s reconsideration of shareholder access looming (which would likely include a minimum ownership threshold to place nominees on a ballot), the issue of whether one investor can combine ownership of multiple shareholders to meet a minimum threshold under the SEC’s rules becomes an increasingly important issue.

So far, this issue has been debated mostly in the Rule 14a-8(b) context, where a number of companies have sought exclusion of shareholder proposals submitted by individuals represented by John Chevedden. I have heard complaints from a number of members who worry that the combined effect of recent no-action responses may lead to potentially abusive results.

With a few exceptions in prior proxy seasons, the Corp Fin Staff consistently has rejected arguments that nominal proponents are merely strawmen and that the “agent” is the real party-in-interest. And the Staff often allows (eg. this recent AMR no-action letter) co-proponents – none of whom owned sufficient shares to qualify under Rule 14a-8(b) on their own – to aggregate their shares to satisfy the minimum requirements. Remember that the Staff’s no-action responses depend on the particular facts presented – and the arguments made.

I’m hearing from a lot of members worried about the risk that these Staff positions impose, particularly a position that could be viewed to allow anyone to essentially “borrow” shares from passive individual shareholders and submit a proposal on behalf of those holders. In addition, they are worried that anyone can – via the representation of other shareholders – submit multiple proposals to the same company in a single year. These members note that these activities arguably violate Rule 14a-8.

Given that the SEC will likely address this issue in its upcoming shareholder access rulemaking (as it has done as part of its prior access proposals), it seems appropriate that the SEC request comment on this issue in both the Rule 14a-8 and shareholder access contexts due to its importance.

A First: Reincorporating to North Dakota

Thanks to Michelle Leder of for pointing out the first company – American Railcar – to reincorporate to North Dakota. Here’s the proposal from the company’s preliminary proxy statement; note that Carl Icahn owns a majority stake in the company.

As we have blogged about before, North Dakota changed its laws in ’07 so that they are among the most shareholder-friendly. And some shareholders have urged a group of companies to reincorporate there, through the shareholder proposal process, etc.

Last Day for Early Bird Rates: “4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference”

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Here is the Conference registration form – and here is the agenda. These Conferences have been accredited by RiskMetrics for director education.

– Broc Romanek