Daryl V. Miller/Comment SHAREHOLDER ACTIVISM UNDER THE PROPOSED CHANGES TO RULE 14a- 8 OF THE SECURITIES EXCHANGE ACT OF 1934 I. Introduction In recent years, numerous and diverse individuals and organizations have "seized on the shareholder proposal rule, Rule 14a-8 of the federal securities laws, as their weapon of choice" to advance concerns and to push for changes in company policies relating to everything from equal employment issues to nuclear power operations and nearly every conceivable topic in between.<1> Rule 14a-8's popularity results from the rule's requirement that shareholder proposals, which comply with the numerous qualifications and requirements set out by the rule, be included on the company's proxy materials.<2> In short, Rule 14a-8 provides shareholders with a company subsidized means of reaching other shareholders through the company's "proxy mechanism."<3> On September 18, 1997 The Securities and Exchange Commission voted unanimously to propose a "revamped" shareholder proposal rule which could potentially influence shareholder activism for years to come.<4> Along with other less dramatic modifications, the proposed changes would make it more difficult to re-submit proposals that received an insignificant percentage of votes on earlier submissions, and would introduce an innovative "override" mechanism permitting 3% of the share ownership to override a company's decision to exclude a proposal from its proxy materials.<5> Additionally, of particular significance, under the proposed rule the SEC's controversial "Cracker Barrel" decision would effectively be reversed.<6> Since the proposed changes were introduced last September, they have generated a great deal of debate between proponents for the changes and those opposed to their adoption. For example, in expressing his support of the changes, SEC Chairman Arthur Levitt said he feels the package of changes would allow for effective shareholder communications and would "eliminate the abusive gamesmanship that has obscured the true purpose" of Rule 14a-8.<7> Conversely, in sharp contrast to Chairman Levitt's view most of the comment letters received by the SEC have been highly critical of the proposals.<8> Some individuals in fact have gone so far as to refer to the proposed new version of 14a-8 as the "stockholder gag rule."<9> Because as former SEC Commissioner Steven Wallman stated, while concurring on the issuance of the proposals with Chairman Levitt, "the practical impact of what can be accomplished through shareholders appropriately engaged in their corporations' affairs is enormous," it is important that the SEC correctly balance the often divergent interests of all concerned parties when reforming Rule 14a-8.<10> This Comment will first examine the SEC's current application of Rule 14a-8 and analyze how that application will differ upon the adoption of the proposed changes. Secondly, in order to more fully understand the merits and shortcomings of the proposed changes, the changes will be retroactively applied to a selected subset of shareholder proposals from the 1996 proxy season. By examining how the 1996 results would have differed from the actual results had the proposed changes been in effect, the true impact of the proposed changes will become clear. Finally, after examining the true ramifications of the proposed changes, a position in favor of the proposals' adoption will be asserted. II. The SEC's Current Application Of Rule 14a-8 A. General Provisions Each year between three hundred and four hundred companies receive a total of approximately nine hundred proposals which shareholders wish to see included on the companies' proxy materials.<11> Rule 14a-8 states that "if any security holder of a registrant notifies the registrant of his intention to present a proposal for action at a forthcoming meeting of the registrant's security holders, the registrant shall set forth the proposal in its proxy statement."<12> Although Rule 14a-8 through this provision provides shareholders with a relatively inexpensive way to communicate with other shareholders, the rule does not "create an open forum for shareholder communications."<13> In fact, a company can exclude a proposal from its proxy materials if the proposal or its proponent fails to meet any of the eligibility or content requirements set out by the rule.<14> If a company asserts that a proposal received from a shareholder proponent may be properly omitted because of an eligibility or content requirement flaw, the company must submit the reason(s) for its decision to the Commission for review.<15> During this process, management bears the burden of proving to the SEC that its decision is correct.<16> Upon reviewing the company's reasoning for its decision to omit the proposal under 14a-8, the SEC staff will issue a "no action" letter if the staff agrees with management's reasons for exclusion. A "no action" letter, while not legally binding, will in all likelihood, effectively justify a company's decision to exclude a proposal from its proxy materials.<17> B. Eligibility Requirements For a proposal to be included on a company's proxy materials, the proponent of the proposal must first meet several eligibility requirements. Under the current application of the rule, any shareholder who has owned (and continues to own) either 1% or $1,000 in market value of the company's securities for at least one year is entitled to submit a proposal to the company's management.<18> When a proponent submits a proposal to the registrant, the rule requires that the proponent provide the company a written statement containing his name, address, and the number of the registrant's voting securities that he holds.<19> In addition to these ownership requirements, Rule 14a-8 also requires that in order to be included on the company's proxy materials the proposal be submitted in a timely fashion.<20> Although what is considered to be "timely" may vary from case to case it is generally 120 days in advance of the date that the company released its proxy statement to shareholders in the previous year.<21> C. Content Requirements Despite meeting the basic eligibility requirements of Rule 14a-8, a proposal may still be omitted by a company if the proposal falls within any one of 13 circumstances set out by the rule.<22> Each of these 13 circumstances, their application by companies, and their interpretation by the SEC are individually important. It is mainly because of problems relating to the application and interpretation of these provisions that changes to 14a-8 were initially proposed. Specifically, under the SEC's current application of 14a-8, management may omit a shareholder proposal from the company's proxy materials under any of the following circumstances: 1. Improper under state law: if the proposal is, under the laws of the company's domicile, not a proper subject for action by security holders, management may exclude the proposal.<23> Under most circumstances if a proposal is phrased in a mandatory form it is almost always excludable; however proposals which are advisory in nature are generally not excludable.<24> Because of this requirement shareholder proposals will frequently request management to conduct a study or report on a particular matter instead of attempting to compel any specific action on management's behalf.<25> 2. Violation of state, federal or foreign law: if when implemented the proposal would require the registrant to violate any state, federal or foreign law to which the registrant is subject, management may properly omit the proposal.<26> 3. Contrary to SEC's proxy rules: if the proposal violates any of the Commission's other proxy regulations management may exclude the proposal.<27> This provision encompasses the general anti-fraud prohibitions of Rule 14a- 9 which prohibit false or misleading statements in proxy materials.<28> In fact, the most common reason cited by management to justify exclusion under the current application of 14a-8 is that the proposal or its supporting statement is false and misleading and thus in violation of Rule 14a-9.<29> 4. Redress of personal claim or grievance: if the proposal relates to the redress of a personal claim or grievance against the registrant, or if the proposal is designed to benefit a proponent's personal interest and not the other security holders at large, management may omit the proposal from the proxy materials.<30> This exclusion is often applied to the "frequent phenomenon of proposals by disgruntled employees" who are seeking other avenues to pursue their disputes with management.<31> However, what exactly should be considered a "personal claim" is often difficult to tell solely from examining a proposal and its accompanying supporting material. This difficulty in classifying proposals has fueled a considerable amount of debate as to what should and what should not be considered a "personal claim." As the rule is currently applied, it appears that the registrant may present for SEC examination extrinsic evidence as to the true intent of the proponent when deciding whether or not to exclude a proposal under this provision.<32> 5. Not significantly related to company's business: management may omit a proposal if it relates to operations which account for less than 5% of the company's total assets, less than 5% of the company's net earnings or less than 5% of its gross sales; provided the proposal is not otherwise significantly related to the company's business.<33> During the 1970's and 80's, matters relating to ethical or social issues were often held by the SEC to be "otherwise significantly related" despite not being significant from an economic perspective.<34> However, the current application of the provision seems to have gradually returned to a predominantly economic significance test.<35> 6. Matters beyond company power: management may properly omit a proposal that deals with a matter which is beyond the company's power to effectuate.<36> 7. Ordinary business operations: a proposal which relates to the ordinary business operations of the company may be properly excluded because such concerns should be under the exclusive control of management.<37> Because of the difficulty in determining what exactly constitutes "ordinary business," this provision has been the center of a considerable amount of debate and controversy. It has been arguably the application of this provision in particular, and the dissatisfaction which has resulted therefrom, that has led to the current effort to reform 14a- 8.<38> Prior to 1992, the SEC staff considered nearly all "politically sensitive" proposals to be policy matters rather than ordinary business concerns, and thus nearly always appropriate for inclusion on proxy materials.<39> In 1992 however, in an effort to balance its approach to this provision, the SEC issued its most famous and perhaps most controversial no action letter. That letter, issued to Cracker Barrel Old Country Store, Inc. on October 13, 1992 effectively reversed the SEC's prior application of the "ordinary business" exclusion by announcing that "the fact that a shareholder proposal concerning a company's employment policies and practices for the general workforce is tied to a social issue will no longer be viewed as removing the proposal from the realm of ordinary business operations of the registrant."<40> The controversy in the Cracker Barrel case centered around a decision by Cracker Barrel's management in 1991 to issue a press release in which the restaurant chain announced that "it is inconsistent with our concept and values, . . . to continue to employ individuals . . . whose sexual preferences fail to demonstrate normal heterosexual values."<41> After this announcement, because of the large amount of public protests and negative media coverage, Cracker Barrel "rescinded its anti-gay policy;" however, it did not rehire the former employees, nor did it expressly include "sexual orientation" among inappropriate hiring criteria in its employment manual.<42> In late 1991, the New York City Employees' Retirement System (NYCERS), a Cracker Barrel shareholder, expressed its desire to include on the company proxy materials for the 1992 shareholders' meeting a proposal which would expressly prohibit discrimination on the basis of sexual orientation.<43> When Cracker Barrel's management decided that it wanted no part of the proposal, it sought SEC approval to omit the proposal from its proxy materials. The resulting no action letter issued by the SEC has since come to be known as the SEC's controversial "Cracker Barrel position."<44> In the time since the SEC's Cracker Barrel was upheld in court, the SEC has routinely issued no-action letters allowing companies to omit from company proxy materials proposals under Rule 14a-8(c)(7) involving employment related issues which also have social policy implications.<45> The nearly automatic exclusion by companies of proposals concerning significant social policy issues from their proxy materials under the protection of 14a-8(c)(7) has raised vehement calls for the immediate reversal of the Cracker Barrel decision.<46> 8. Election to office: a company may properly omit any proposal which relates to the election of a particular person to the board of directors.<47> This provision is included among the possible reasons for management to exclude a proposal in order to prevent minority and dissident shareholders from "clogging the company's proxy statement with their own slates of directors."<48> 9. Counter proposals: if a proposal is counter to a proposal to be submitted by the registrant at the shareholder meeting, management may elect to exclude the proposal.<49> Without this provision a company could conceivably be forced to include all shareholder opinions and positions in opposition to each management suggestion. 10. Moot: management may exclude any proposal which has been rendered moot by events subsequent to its submission by a shareholder.<50> 11. Duplicate proposals: if a proposal is substantially duplicative of a proposal previously submitted to the registrant, and the registrant will include the previous proposal, management can exclude the additional proposal.<51> 12. Insufficient support at prior meetings: if a proposal is substantially the same as a proposal previously submitted to the registrant within the preceding five years management may omit the proposal if the proposal received an insufficient level of support in its prior submissions.<52> In most cases there are rarely arguments as to the level of support a given proposal received at a prior meeting; however, there are often conflicts as to whether a proposal is in fact "substantially the same."<53> 13. Relates to specific amounts of dividends: when a proposal relates to the specific amount of cash or stock dividends to be issued by the company, management may properly exclude the proposal from the proxy materials.<54> D. Recent Application Since its introduction over sixty years ago, both Rule 14a-8 and the SEC's administration over its provisions have faced criticism from many different sources. The source of criticism often depends on what is perceived as the current level of stringency with which the SEC applies the rule or a particular provision of the rule. For example, if the SEC is perceived as being too lenient with respect to the number of proposals it feels to be proper under the rule, criticism will likely come from company managers frustrated by the intrusion of shareholders into corporate operations.<55> On the other hand, as has recently been the case, when the SEC is perceived as needlessly excluding proposals, criticism is likely to come from disgruntled shareholders.<56> The nearly constant criticism of the rule, and the SEC's application thereof, has forced experts in area of security regulation to admit that "the rule today is in chaos."<57> In response to the seemingly growing number of complaints from disgruntled shareholders and frustrated managers alike, Congress in 1996 approved the National Securities Markets Improvement Act in which it called upon the Commission to study and improve the process by which shareholders gain access to proxy statements.<58> The changes to 14a-8 which were unanimously proposed by the Commission in September, are a direct consequence of these efforts. III. Proposed Changes To Rule 14a-8 A. Possible Alternatives When the SEC began its congressionally mandated study to improve the shareholder proposal process one of the first decisions to be made was whether to abandon the current system entirely or to maintain the current system but with modifications. In making this decision, several alternative systems were proposed.<59> One such system, which was viewed favorably by companies, would have restricted companies' ability to exclude proposals by requiring companies to include in their proxy materials all proposals that are allowed under state law and that do not concern the election of directors, but would have limited proposals to a numerical maximum.<60> Another alternative presented was for the SEC to withdraw completely from the process, leaving regulation of shareholder proposals to each state.<61> This alternative however was supported by only 8% of companies and 5% of individual shareholders who were surveyed.<62> Although shareholders and companies could not seem to agree on any of the alternatives proposed, a majority of both groups were in favor of maintaining the existing system, either with or without reforms.<63> Given the results of its initial survey, the SEC decided that the best approach for it to follow in attempting to improve the shareholder proposal process would be to essentially maintain the current workings of the present system while making modifications to some of the circumstances in which companies can properly exclude a proposal under 14a-8. B. Proposed Amendments When the Commission presented its proposed modifications in September of 1997, it believed that it was presenting a balanced "package" of reforms that would establish a "clearer more predictable framework" for both shareholders and managers to operate within.<64> Although the proposed rule essentially maintains the same basic operational framework as the current rule, the proposed version of 14a-8 recasts the rule into a question and answer format.<65> This formatting, rather than substantive, change was implemented so that "the hundreds of shareholders and companies who refer to the rule each year can more easily understand its requirements."<66> Although the question and answer format dramatically changes the rule's appearance, and affects the wording of most of the provisions where management can exclude shareholder proposals under 14a-8, it should have little effect on the rule's day to day operations.<67> The major changes to 14a- 8 which will affect the day to day operation of the rule essentially effect several of the major reasons for exclusion under 14a-8(c).<68> 1. Redress of personal claim or grievance Under current application of 14a-8(c)(4) as discussed above, the registrant may present evidence to the SEC staff as to the true intent of the proponent when seeking approval to exclude a proposal under this provision.<69> In the past the Commission recognized that this exclusion is "perhaps the most subjective provision and definitely the most difficult for the staff to administer" because it "requires the staff to make determinations essentially involving the motivation of the proponent in submitting the proposal."<70> In recognition of the difficulty that the SEC staff faces in making a determination under the current application of 14a-8(c)(4), under the proposed version, the staff would concur with an exclusion by a company only if the proposal or its supporting material "on its face" related to a personal grievance or special interest.<71> If a company were to submit a "neutral" proposal for exclusion under this provision, the staff would automatically issue a "no view" response rather than support or disapprove of the company's exclusion.<72> In other words, this change would effectively relieve the SEC staff of the burden of making subjective decisions under this provision and would instead place that burden on the court system. 2. Not significantly related to company's business Since 14a-8(c)(5) was first adopted this provision has suffered because of the subjective nature of the "otherwise significantly related" clause.<73> Because of the subjective nature of this clause, the "otherwise significantly related" portion of (c)(5) often dominates the rest of the provision.<74> Under the proposed revision, the "otherwise significantly related" clause would be eliminated and a purely economic standard would apply. Specifically, a company would be permitted to exclude proposals which relate to matters concerning less than $10 million in revenue or total costs, depending on which is more applicable to a given proposal.<75> The revision is designed to establish a clearer, more predictable criteria for excluding proposals as well as to make it easier for companies to exclude economically insignificant proposals.<76> 3. Ordinary business operations Although its decisions involving 14a-8(c)(7) often generate considerable controversy, the SEC believes that it applies the ordinary business exclusion to proposals relating to social policy issues with "the most well- reasoned standards possible, given the complexity of the task."<77> Despite its belief that its decisions reflect sound reasoning, and despite continued support from a majority of companies, under the proposed revision of 14a- 8(c)(7), the SEC would explicitly reverse its controversial Cracker Barrel decision.<78> Instead of automatically allowing companies to exclude employment related proposals focusing on significant social policy issues, the SEC staff would return to the case by case analysis that prevailed prior to the 1992 Cracker Barrel decision.<79> Although the reversal of the Cracker Barrel position is undoubtedly the most significant change from the current version of 14a-8, the effect of the reversal may not be as great as it may appear at first glance. To begin, the effect of the proposed reversal will be limited because the Cracker Barrel decision only affects employment related proposals raising significant social policy issues. As such, other categories of proposals under the exclusion such as proposals on general business operations and straightforward employment proposals would continue to receive the same analysis from the SEC as is presently applied.<80> Additionally, a reversal of the Cracker Barrel decision is likely to have only limited impact given the fact that during the 1997 proxy season, the SEC received only 30 submissions involving employment related proposals tied to social issues.<81> 4. Insufficient support at prior meeting Under the revised version of 14a-8(c)(12) the resubmission thresholds would be increased from their current levels to 6% on the first submission, 15% on the second submission, and 30% on the third.<82> The SEC feels that these new levels are appropriate to "counter-balance other proposals that would expand the range of proposals companies must include in their proxy materials."<83> 5. Override mechanism The proposed version of 14a-8 would include as one of its more unusual changes, an "innovative override provision."<84> Unlike the other major areas of reform, the proposed override mechanism is not a modification of one of the circumstances under which management can exclude a proposal under subsection (c) of 14a-8. The override mechanism does however have the potential to substantially influence what proposals management must include under subsection (c) of 14a-8. Specifically, under the revised rule, a shareholder proponent would be permitted to override management's decision to exclude a proposal under 14a- 8(c)(5) [not significantly related] or (c)(7)[ordinary business operations] if the shareholder demonstrates that at least 3% of the company's outstanding voting shares support the submission of the proposal for a shareholder vote.<85> According to the SEC, the requirement that a proponent obtain the support of 3% of fellow shareholders would serve two purposes. First, the level of required support should be high enough to ensure that the proposals receiving this level of support are sufficiently relevant to be deserving of inclusion on the proxy materials.<86> Secondly, the percentage should not be so high as to effectively make the override mechanism unattainable.<87> A recent SEC review of filings required by the agency revealed that in 69% of listed equity issues, institutional holdings are sufficiently high that a proponent would need to elicit the support of only one holder to reach 3% of the corporation's outstanding shares.<88> In order to help control the number of proposals that shareholders could potentially force onto company proxy statements, the proposed override mechanism would limit each shareholder to the endorsement of only one proposal sponsored by another shareholder.<89> Of course, however, because the current application of 14a-8 does not include any type of override provision, there is no way to predict how often shareholders will take advantage of the override provision to force companies to include proposals which the companies would otherwise be permitted to exclude.<90> C. Implications Of 14a-8 Revisions Improvements in the shareholder proposal process could potentially benefit shareholders and management alike in numerous ways. If the proposed revisions to 14a-8 successfully expand the range of proposals that companies must include in their proxy materials, the proposed revisions would likely make a company's managers more responsible to shareholders. A more responsible management team could lead to improvements in company operations and could ultimately bring about improvements in stock price. At the same time, management could potentially benefit from the revisions if the integrity and efficiency of the process is improved. By increasing management's ability to confidently exclude economically insignificant proposals, or proposals which lack substantial shareholder support, the revised rule could potentially reduce both time and economic compliance costs.<91> Thus the goal of the revisions should be to devise a process which quickly and efficiently eliminates inappropriate proposals, while simultaneously insuring the inclusion of important and relevant proposals. Of course, while the goal of the proposed reforms is to address the concerns of both managers and shareholders simultaneously, successfully accomplishing this goal will be extremely difficult. This task will be especially difficult to accomplish given the fact that, as Elyssa MacChold, the director of the Council of Institutional Investors has stated, "[t]here is a tense balance between the groups each wanting to make sure that they are not giving up more than the other."<92> IV. The Effects Of The Prospective Reforms On 1996 Shareholder Proposals A. Retroactive Analysis When Congress ordered the SEC to review the shareholder proposal process, it effectively placed the Commission in the extremely precarious position of attempting to please both shareholders and management simultaneously. Despite the fact that, as noted above, the SEC believes it has presented a "balanced package" of reforms, tension and conflicts between shareholder and management groups have delayed the implementation of all 14a-8 reform efforts.<93> This comment, by retroactively applying the proposed changes in 14a-8 to prior shareholder proposals, attempts to examine whether the proposed reforms to 14a-8 will drastically alter the operation of 14a-8 to the extent that the level of controversy and conflict created by their proposal would suggest. Because the reforms proposed by the SEC in September are by their very nature only suggestions which have not been field tested, no one can truly predict, as the SEC has repeatedly emphasized, what their exact impact on the shareholder proposal process will be.<94> However, this comment hopes that in retroactively applying the proposed changes in 14a-8 to a group of proposals submitted during a previous proxy season, the true effect which the proposed changes will have if implemented can be ascertained by comparing how proposals would have been handled in that prior proxy season, had the proposed provisions been in effect, with how the proposals were actually handled during that particular time period. B. Limiting The Data In order to successfully illustrate by retroactive application how the proposed changes would have altered a prior proxy season, it was first necessary to select a particular proxy season and then attempt to reduce the data within that proxy season to a manageable and comprehendible level. For this study, proposals made during the 1996 proxy season were selected.<95> After deciding upon the 1996 proxy season, a subset of the proposals made during that season was selected for analysis.<96> Out of the numerous proposals submitted by shareholders, it was decided to focus on "social policy shareholder proposals," as defined by the Investor Responsibility Research Center ("IRRC"), which were submitted through the first five months of 1996.<97> Social policy related proposals were chosen over other groups of proposals, such as corporate governance related proposals, because it is often the "social" proposals which generate the emotional and ideological conflicts between shareholders and management.<98> Additionally, because of the important role that the Cracker Barrel controversy has played in spurring the current reform efforts, it was felt that analyzing the effects of the proposed changes on similar employment related proposals which raise significant social policy issues was of particular importance. C. The 1996 Proxy Season Through May 1996, as reported by the IRRC, shareholders presented to 153 different corporations a total of 258 social policy proposals.<99> Of the 258 proposals received 38% were eventually voted on by shareholders (of the 98 proposals voted on, only 2 were approved); 32% were omitted from the proxy materials by the companies with SEC approval; and 30% were withdrawn by their proponents before voting occurred.<100> 1. Unaffected Proposals The proposed changes to 14a-8 will, of course, not affect all shareholder proposals differently than the current version of the rule. Just as not all future shareholder proposals will be affected by the modifications to 14a-8; many of the 1996 proposals would not have met with different results had the proposed revisions been in place during the 1996 proxy season. In analyzing the scope of the ramifications that will result from any changes to 14a-8, a logical first step to take is to eliminate from the data set those proposals which would not have been affected by the changes. Of the 258 social policy proposals, 109 or 42% of the proposals, would not have been significantly affected by the proposed changes. The vast majority (69%) of the unaffected proposals consist of proposals that were withdrawn by their proponents either before management attempted to exclude them or before they were voted on by the shareholders.<101> In most cases, the proposals were likely withdrawn after the proponent and management reached a compromise on the subject. Unfortunately, because these agreements were reached in private, the exact nature of the agreements is also in most cases, like that of an out of court settlement, private. Thus, it is impossible to tell which side in most of the cases had a stronger bargaining position, and whether or not that position would have been affected had the proposed changes to 14a-8 applied. Because it is impossible to individually track and quantify the results of the withdrawn proposals, it is also impossible to ascertain if the proposed changes to 14a-8 would have so drastically weakened or strengthened a party's bargaining position to the extent that a compromise would have been prevented, and a vote or attempted exclusion instead forced upon the parties. However, although this possibility exists, it is safe to assume that, because management and the shareholder proponents in these cases were able to reach acceptable compromises, both groups considered the subject matter of the proposals to be both relevant and important to the company. It would be an unusual case indeed in which management would attempt to exclude a proposal, which it feels has merit, from a shareholder vote simply because a change in the rules may give it the power to do so. Therefore, in most cases one can conclude that the proposed changes in 14a-8 would not have affected the social policy proposals which were withdrawn by their proponents during the 1996 proxy season. The remaining proposals which would not have been affected by the suggested changes to 14a-8, consist of 31 proposals that were actually omitted by management under the current application of 14a-8. However, because these proposals were omitted under parts of the rule that will not be modified by any of the proposed changes, these proposals would have also faced exclusion by management under the new version of the rule.<102> 2. Affected Proposals If the proposed revisions to 14a-8 were applicable to the 1996 proxy season approximately 58% of all the social policy related proposals examined could have been affected.<103> The first group of the proposals in this category were those that were excluded in 1996 under 14a- 8(a)(1), because of proponent eligibility problems. Because the revised version of 14a-8(a)(1) increases the eligibility requirements, the five proposals that were excluded under (a)(1) would have also been excluded had the proposed amendments been in operation.<104> However, what worries some opponents to the proposed amendments is that the new stricter eligibility requirements will cause some of the proposals which would normally be voted on, to be excluded. The new version of (a)(1) however was not designed to have a major impact on the shareholder proposal process. Rather, the revisions were suggested mainly to insure that the qualification amounts in the provision remain current, given the appreciation in market values and inflation since the time when the original version of the provision was adopted.<105> Since the eligibility requirements under the proposed rule in actuality do not depart substantially from the current requirements after adjustments for inflation and market appreciation are considered, the revisions to (a)(1) will likely have little effect on the shareholder proposal process. The remaining proposals that could have been affected by the proposed changes are those which were omitted by management under one of the five reformed provisions discussed in part III of this comment, or those that were actually voted upon by shareholders in 1996. Because of the individual characteristics applicable to each of these provisions, and the potentially divergent impacts that each may have on future proxy seasons, it is necessary to examine each of these six areas individually. a. Redress of personal claim or grievance Of the 258 social policy proposals tracked by the IRRC and examined here, 2 were omitted from company proxy materials in 1996 because of the 14a-8(c)(4) exclusion relating to personal grievances.<106> If the amended version of (c)(4) had been in place during 1996 proxy season, the SEC likely would have concurred in the company's decision to omit in one of the cases, and would have likely issued a "no view" response in the other case. The first case involved a proposal submitted to Allied Signal, Inc. by David Adland and eight other former Allied Signal employees.<107> The proposal advocated the rehiring of personnel and reimbursing the rehired personnel for all income, and benefits lost while not employed by Allied Signal.<108> The SEC stated in its no-action letter that the "[p]roposal clearly relates to the redress of personal claims, . . . and is intended to provide a personal benefit to the Proponents."<109> Because the proposal presented by Mr. Adland "on its face" related to a personal grievance, it would continue to receive the same response from the SEC under the proposed version of 14a-8(c)(4).<110> The other proposal omitted under (c)(4) involved a proposal submitted by A.L. Quintas to Phillips Petroleum.<111> The proposal requested that the company strengthen its code of ethics by giving all employees equal opportunities.<112> In his supporting statement however, Mr. Quintas repeatedly complained of his own improper discharge, harassment, and unfair treatment as evidence of why the company needed to strengthen its ethical code.<113> In issuing its no-action letter the SEC seized on this language to reason that Quintas was attempting to address a personal grievance and "his frustration", and thus agreed with the company's decision to omit the proposal.<114> However, had the proposed version of (c)(4) been in place at the time this proposal was submitted, the SEC probably would not have been able to justify issuing a no-action letter. Instead, under the proposed version of the rule, the Commission would have been forced to issue a "no view" letter, since the proposal does not address a personal grievance "on its face." Phillips of course could have still omitted the proposal from its proxy materials, provided it believed that it could support its position in court, which in this case it probably could have done with little difficulty. Provided that the proposals examined here are indicative of the average proposal affected by (c)(4), the new version of the provision may present some interesting situations. On the one hand, the SEC is removed from its role of making subjective decisions concerning the degree of personal grievance involved. On the other hand however, if the proponents of these proposals are willing to take their case to court to see their proposal included, an additional layer of unnecessary bureaucracy may be added to the shareholder proposal process by this change. How companies and shareholders will ultimately handle proposals under this provision will likely be decided by the market. In short, if a company feels that it can successfully omit a proposal and possibly defend that decision in court for less money than it will cost it to include the proposal with the proxy materials, it will follow that course. At the same time, shareholders will of course also be forced to make a similar decision, by weighing the costs and benefits of a possible court battle. Although this same decision is essentially made under the current version of (c)(4) by companies considering exclusion vs. inclusion, the current version of (c)(4) places very little cost on the shareholder to make an initial proposal.<115> Thus, the new version of (c)(4) may ultimately provide for a more equitable division of the total costs and benefits associated with a proposal, while still arriving at the same final conclusion with regard to most proposals. b. Not significantly related to company's business Of the 258 social policy proposals examined here, only one was omitted from company proxy materials under 14a- 8(c)(5) because it concerned a subject matter not significantly related to the company's business.<116> The fact that only one proposal out of 258 was omitted under the current application of (c)(5) clearly demonstrates, as was discussed above, the dominate impact of the "otherwise significantly related" clause on the application of (c)(5). The revised version of (c)(5) would, of course, eliminate the use of the "otherwise significantly related" clause, and thus increase the ability of companies to omit proposals in many cases. Not surprisingly, had the revised version of (c)(5) been in place in 1996 the omitted proposal would have also been excluded from the company's proxy materials. However, what is surprising is that the specific proposal in question here may have eventually secured its place on the company's proxy materials faster under the revised application of (c)(5) than under the current application.<117> The proposal omitted under (c)(5) was presented by the Interfaith Center on Corporate Responsibility ("ICCR"), to PepsiCo, and requested that the company withdraw from Burma.<118> In issuing its no-action letter the SEC noted that PepsiCo's involvement in Burma accounted for substantially less than five percent of the company's total revenue, earnings, and assets.<119> The SEC was however able to issue a no-action letter in this case because, unlike the vast majority of cases submitted for exclusion under (c)(5), the SEC felt this case was not otherwise related to any policy issues significant to the company's business. The SEC believed that PepsiCo's situation was somewhat unique because the company's operations in Burma consisted of only a joint venture with a private Burmese citizen, and were not affiliated with the Burmese government.<120> In fact, PepsiCo owned merely a 40% minority ownership stake in a company wholly owned by a private entrepreneur that was in direct competition with the government owned soft drink operations.<121> Therefore, since the SEC felt that policy issues significant to the company's operations were not negatively impacted, under the current rule the proposal's only chance for inclusion would be in the unlikely event that operations in Burma accounted for five percent of PepsiCo's revenues.<122> However, under the revised version of (c)(5) if PepsiCo's operations in Burma accounted for more than $10 million of revenue, the proposal could make its way onto the proxy materials. The possibility that PepsiCo's operations in Burma could generate $10 million in revenue is of course a much more likely scenario. In fact, considering that PepsiCo's revenues attributable to Burma were estimated to be approximately $8 million at the time of the IRRC's proposal, it is quite possible that PepsiCo's current revenues from Burma are now substantially in excess of $10 million.<123> Although in the case examined here, it is more likely that PepsiCo would have to include the disputed proposal under the new version of (c)(5), many shareholder groups are likely to argue that this case represents an abnormality. In short these groups will likely argue that by eliminating the otherwise significantly related clause, companies will find it much easier to eliminate proposals which while perhaps economically insignificant, nevertheless represent important subjects. These groups have a valid point; the revised version of (c)(5) will certainly make it easier for companies to exclude some types of proposals. However, this is a trade-off whose time has come.<124> The company subsidized shareholder proposal process has simply become too expensive to justify continuing to allow minority groups the luxury of forcing the inclusion of economically insignificant proposals onto company proxy statements at the expense of, and to the detriment of shareholders in general.<125> c. Ordinary business operations Thirty-four of the 258 social policy proposals examined here were omitted from company proxy materials in 1996 because of the 14a-8(c)(7) exclusion relating to ordinary business operations.<126> Because the reversal of the Cracker Barrel decision contemplated in the proposed revision of (c)(7) affects only employment related proposals which raise significant social policy issues, not all of the 34 proposals omitted under the current application of (c)(7) would have been affected by the proposed revision. In fact of the 34 proposals, only 8 of the proposals would have likely been affected had the revised version of (c)(7) been in operative in 1996.<127> Of the 8 affected proposals, 3 requested that their respective companies review international workplace standards. Although these proposals can obviously be linked to significant social policy issues it is even debatable whether the SEC will determine that these proposals should have been affected by the reversal of Cracker Barrel, given the Commission's announced stance on maquiladora proposals.<128> Therefore, had the proposed changes to (c)(7) been in place in 1996, there is a very real possibility that only 5 of the 34 proposals omitted under the current application of (c)(7) would have been included on company proxy materials. The 5 proposals that would have had their fortunes reversed by the proposed version of (c)(7) raise significant social policy issues that most persons would agree have the potential to greatly influence a company's operations.<129> Specifically, the 5 proposals centered around equal employment, affirmative action, and other similar discrimination related topics.<130> Because the revision of (c)(7) would be successful in preventing companies from automatically excluding some very significant proposals, while not opening the proverbial flood gates, the revision should be adopted regardless of the fate that the other proposed revisions eventually meet.<131> In fact, were the SEC to adopt this particular provision, its decision would likely receive little criticism from shareholders given their overwhelming level of shareholder support for the provision.<132> At the same time, while management groups are likely to criticize the provision's adoption this criticism will be tempered by the fact that the management will in most cases support the overall package of changes to 14a-8. d. Insufficient support at prior meeting Of the proposals examined for this comment, nine were omitted under 14a-8(c)(12) from their company's respective proxy materials in 1996 because they had received an insufficient level of support from shareholders at a previous meeting.<133> Because the revised version of (c)(12) increases the resubmission thresholds from their current levels to 6%, 15%, and 30% on a proposal's first, second, and third submission respectively, these nine proposals would have obviously also been excluded in 1996 had the revised version of (c)(12) been applicable.<134> Because it is self apparent that any proposal that would be omitted under the current version of (c)(12) will also be omitted under the revised version, the more interesting question to ask about the possible impact of the revised version of (c)(12) is how it will affect proposals in its second year of operation. In other words, for our purposes here, how would the proposals that were voted on in 1996 been affected differently upon resubmission had the revisions also been in operation in 1997. Of the 258 proposals examined here, ninety-eight were voted on in 1996. Of those ninety-eight, two were approved by the shareholders; therefore, ninety-six proposals were eligible for resubmission in 1997. Under the current application of (c)(12), eighty-seven (91%) of those proposals would have been eligible for resubmission in 1997 based on the levels of support received in 1996.<135> However, if the revised version of (c)(12) had been applicable, only fifty-three (55%) of the proposals would have been eligible for resubmission.<136> Thus, had the proposed version of (c)(12) been adopted in 1996, 36% of the proposals which would have been eligible for resubmission under the current version of the provision would have been excluded. The fact that over a third fewer proposals would have been eligible for resubmission to shareholders is quite significant. However, the fact that these proposals will be excluded under the revised version should be considered a positive change. The SEC is correct in its belief that "a proposal that has not achieved these levels of support has been fairly tested and stands no significant chance of obtaining the level of voting support required for approval."<137> Because in all likelihood, there is little realistic chance that a proposal which does not even capture 6% of the vote will be approved by shareholders any time in the near future, it is appropriate that the other shareholders should not have to bear the cost of including this proposal on the company proxy materials year after year. Additionally, given some of the other amendments such as the proposed reversal of Cracker Barrel and the proposed "override mechanism" which will increase the number of proposals that the company and other shareholders must subsidize, this provision is appropriate to help balance the reform package between the interests of shareholders and management.<138> e. Override mechanism The revised version of 14a-8 will allow shareholders who can demonstrate that 3% of the company's outstanding shares support a proposal excluded under (c)(5) or (c)(7), to include that proposal on the proxy material by overriding management's decision. Under this provision, thirty-five of the 258 proposals examined here would have been potentially affected by the provision, had it been applicable in 1996.<139> However, if the override provision would have been applicable in 1996, it must be assumed that the revised versions of both (c)(5) and (c)(7) would have also been applicable. Taking this into account, the number of proposals under consideration here that could have been affected had the override mechanism been operative in 1996 changes slightly. As was discussed above, the revised version of (c)(5) will in all likelihood allow management the freedom to omit a greater number of insignificant proposals, thus making the override provision potentially applicable to a greater number of proposals. On the other hand, the revised version of (c)(7) will potentially force the inclusion of a greater number of proposals onto to company proxies, therefore making the proposed override provision applicable to fewer proposals. The exact impact that the modified versions of (c)(5) and (c)(7) will have on the breadth of applicability of the new override provision will depend mainly on how broadly the SEC applies the reversal of Cracker Barrel within its enforcement of (c)(7). If the reversal of Cracker Barrel is seen as having wide ramifications, the impact of the override provision will be tempered somewhat. However the more likely scenario, based on the SEC's comments thus far, is that the Cracker Barrel reversal will be strictly construed.<140> If Cracker Barrel is strictly construed, the overall impact of the override provision will be relatively more substantial when considered as part of the entire reform package, and not merely as a single isolated reform. Implicit in this conclusion is the belief that when the effects of (c)(5) and (c)(7) are considered together, the total number of proposals potentially subject to exclusion by management will likely increase in the aggregate under the revised version of 14a-8. Of all the revisions proposed for 14a-8, the override mechanism is perhaps the one that most clearly represents the interests of the shareholders. By allowing shareholders to override management decisions, the revision reaffirms the basic underlying principle of the corporate form of business organization: the shareholders are the ultimate residual owners of the entity. As the ultimate owners of the corporation, shareholders, who often are the group with the greatest investment at risk, should be able to direct the corporation as they see fit. Because they often have the greatest investment at risk, this personal vested interest will direct them to make decisions that will benefit themselves, and will ultimately benefit the corporation. Based on this logic, one could argue that any shareholder should be able to force the inclusion of any proposal that he sees fit onto the company's proxy materials. However, despite the fact that in most cases shareholders generally only support proposals which they feel help to maximize shareholder wealth in the long term, there is always the possibly that the "lunatic fringe" of shareholders will present proposals that do not have the ultimate good of the corporation in mind.<141> The 3% support provision of the override mechanism is designed appropriately to prevent this "lunatic fringe" from forcing the inclusion of such proposals. By setting the required support at 3%, it is likely that only proposals which have substantial merit (despite management beliefs to the contrary) will find their way onto the proxy materials through this procedure. A 3% interest in a publicly traded corporation today represents quite a substantial investment, as was demonstrated above with the no-action letter issued to PepsiCo.<142> Because 3% of a public company represents such a large investment, only proponents which truly believe in the merits of their proposal will be able to successfully make use of the mechanism. In other words, only proponents which are willing to "put their money where their mouths are" will find this provision helpful. This is not to say however that the small investor will be shut out by this mechanism. To the contrary, because of the ever increasing role of large institutional investors in today's markets, many if not most publicly traded companies have substantial portions of their outstanding shares controlled by several institutions.<143> The small investor who has had his proposal rejected by management, yet feels that his proposal will benefit the company significantly, merely has to present and "sell" his proposal to one of these large institutional shareholders. If the small investor is truly correct in believing that his proposal will benefit the company at large, it is a pretty safe bet that an institutional investor, with a substantially larger investment on the line, will support the proposal's inclusion. Of course, the small investor will have to take some steps such as contacting other shareholders and presenting his proposal on his own; however, the extra effort required by such steps insures that only proposals with true merit will find their way onto the proxy materials. In short, when only proposals with true merit are ultimately included on the proxy materials, everyone from the largest to the smallest shareholder will benefit in the long term. f. Voted on proposals Ninety-eight of the social policy proposals examined for this comment were voted on by shareholders during the 1996 proxy season.<144> Not surprisingly, the ninety-eight proposals covered numerous subject areas. Because of the often individualistic nature of proposals which eventually appear on company proxy materials after surviving attempts by management to exclude them, it is nearly impossible to directly make any general conclusions as to how the proposed 14a-8 would have affected the ninety-eight proposals actually voted on, had the revisions been applicable. However, it is possible to indirectly make some predictions as to how the proposed rule will affect some of the categories of proposals that were voted on in 1996. The majority of the ninety-eight proposals voted in 1996 fell into seven categories.<145> By randomly examining one proposal from each of these seven categories, a prediction can be made as to how the rest of the proposals falling into that category would have been affected had the revised 14a-8 been applicable. Upon concluding how the major categories of voted on proposals in 1996 would have been effected by the revised rule, it is possible to predict some of the general effects which a revised 14a-8 will have on proposals that would currently be included on company proxy materials. The seven significant categories of voted on proposals, and how those categories would have been affected had the revised rule been applicable are as follows: 1. Tobacco related proposals: The proposal examined for this category was submitted by Catholic Healthcare West, to H.B. Fuller a maker of cigarette packaging and adhesives which glue the filter to the cigarette and which glue cigarette papers together.<146> The proposal, like most of the shareholder proposals related to tobacco in general, requests that the company withdraw from the tobacco industry altogether.<147> Assuming that the proposal meets all of the eligibility and content requirements not affected by the revised version of 14a-8 set out in part II of this comment, there is nothing in the revised version of 14a-8 that will act specifically to keep proposals such as this out of a company's proxy materials.<148> Of course, with the elimination of the "otherwise significantly related" language of (c)(5) proposals in this category which do not concern significant economic issues could be omitted. However, with the qualification amount set at the relatively low level of $10 million, most proposals which would be voted on under the current rule, including the one examined here would not be impacted by the modification to (c)(5). 2. Reports on political contributions Seven of the nine proposals voted on in 1996 which requested political contribution reports were submitted by Evelyn Davis from the Watergate Office Building in Washington D.C..<149> The specific proposal examined for our purposes here was submitted by Ms. Davis to Exxon, and requested the company to publish a detailed statement in various national newspapers of each contribution made by the company to any political party, campaign or candidate within the preceding fiscal year.<150> With the elimination of the "otherwise significantly related" language in the revised version of (c)(5) it appears that management could potentially omit proposals such as this, if the company contributes less than $10 million per year to political groups. Exxon in this particular case admitted to making "limited contributions" but did not release the exact dollar amount of its annual contributions, and it is therefore impossible to tell how this specific proposal would be handled under the revised rule.<151> In short, whether proposals that fall into this category will continue to be voted on by shareholders under a revised 14a-8 depends on the level of contributions made by the company. Appropriately, this conclusion means that under the revised rule, for proposals that fall into this category only those that are economically significant will be able to utilize company resources, for their inclusion on the proxy materials. 3. Reports on equal employment The proposal examined here that represents this category was submitted by Immaculate Heart Missions, Inc., to American Brands and requested that the company prepare and distribute a report listing among other things the number of discrimination complaints and lawsuits concerning race and gender filed against the company.<152> Within the revised version of 14a-8, there is nothing that would result in a greater likelihood of exclusion for proposals such as the one examined here.<153> In fact, given the proposed reversal of Cracker Barrel; for proposals within this category which concern employment related matters tied to social policies, it is likely that the new rule will actually result in a greater probability of inclusion. 4. Endorse CERE'S environmental principles Eight of the proposals voted on in 1996 which were examined for this comment requested their respective companies to implement The Coalition for Environmentally Responsible Economies' ("CERE'S) principles.<154> The proposal examined here as a representative of this category was submitted by the Missionary Oblates of Mary Immaculate to GTE Corp., and called for the company to endorse the CERE'S environmental principles and annually publish a report showing efforts to comply with those principles.<155> Based on the revision to (c)(5) it appears as if proposals in this category will be subject to omission by management from company proxy materials under the proposed version of 14a-8. This position is however subject to change depending on how broadly or narrowly the SEC staff decides to consider the elimination of the "otherwise significantly related" clause from (c)(5). The SEC has already stated that the removal of the "otherwise significant" language from (c)(5) will only apply to quantifiable matters.<156> The question remains however whether the SEC staff will consider compliance with these demands to be a quantifiable matter. In other words, a company will likely be able to omit the proposal if it is classified as a quantifiable matter by the SEC, provided that the cost of producing such a requested report does not exceed the economic threshold of $10 million established by (c)(5). However, if the SEC considers the matter non-quantifiable it will likely continue to require inclusion of the proposal as a matter "otherwise significantly related" to the company's business. 5. Endorse the MacBride principles All seven of the proposals voted on in 1996 which requested the endorsement of the MacBride principles were submitted by the New York City Employees Retirement System, and are thus nearly identical.<157> The MacBride principles are a set of recommendations originally formulated by Dr. Sean MacBride which serve as guidelines for corporations to follow for assistance in reaching equal employment goals in Northern Ireland.<158> The treatment and analysis of proposals within this category under the revised version of 14a-8 will be nearly identical to the treatment of proposals in the previous category advocating the endorsement of the CERE'S principles. In other words, because of the proposed revision of (c)(5) it appears as if proposals in this category could be properly omitted from proxy statements by management under the new rule.<159> Like the proposals relating to the CERE'S principles, the proposals within this category will be drastically affected by the SEC's decision of whether or not such matters are quantifiable under (c)(5). However, unlike the CERE'S proposals, even if the SEC decides to prohibit omission for these proposals under (c)(5), it is likely that most of these proposals will be omitted by management under the higher resubmission threshold requirements of (c)(12). For example, the proposal examined here as a representative of this category, had been submitted to Dun & Bradstreet and voted on by company shareholders every year since 1989.<160> Despite the fact that the proposal received the approval of 14.7% of company shareholders in its final year of submission, such a level of support while sufficient under the current version of (c)(12) would be inadequate, and therefore justify omission, under the revised version.<161> 6. Nuclear Power Operations The proposal examined as a representative of this category was submitted by the Sisters, Servants of the Immaculate Heart of Mary to DTE Energy.<162> Like all of the proposals which were voted on within this category in 1996, the proposal requested that the company discontinue its nuclear power generating operations.<163> Assuming that this proposal specifically, and proposals within this category in general, meet all of the eligibility and content requirements unaffected by the revisions to 14a-8, there is nothing in the revised version of 14a-8 that will cause proposals in this category to be treated differently than they are under the current application of the rule. Although under (c)(5) the "otherwise significantly related" language is omitted in the revised version, this provision is in nearly all cases inapplicable to proposals within this category because of the large investments necessary to facilitate nuclear power generation. For example, in the case of DTE Energy, the proposal advocates the closing of the Fermi nuclear plant.<164> DTE's management points out that the shareholders of DTE have invested $3.9 billion in the particular plant mentioned in the proposal.<165> Obviously, proposals concerning such large amounts of money, more than adequately satisfy (c)(5)'s $10 million threshold requirement for economic significance. 7. Human rights guidelines The proposals applicable to this category request that management establish specific human rights guidelines and requirements to be used in determining which countries of the world the company should operate within. In most cases, the proposals further request that after these guidelines are established, the company terminate current operations within any country that does not qualify under established guidelines.<166> Under the revised application of 14a-8, and specifically under (c)(5), management will continue to be obligated to include these proposals on company proxy materials. This obligation of course being contingent on the operations within the applicable countries accounting for more than $10 million in revenue or expenses annually. Unlike some of the other categories examined here however, there is little question that the SEC will consider proposals within this category to be quantifiable matters and therefore subject exclusively to pure economic evaluations. Therefore, given the scope and size of most public corporations today, it is probable that most proposals related to such human rights concerns will indeed continue to be included on company proxy materials under the revised version of 14a-8. After examining how each of the major categories of social policy proposals voted on in 1996 would have been affected differently had the revised provisions of 14a-8 been applicable, some conclusions can be drawn. To begin, all of the proposals examined here which were voted on in 1996 will continue to make their way onto company proxy statements provided they concern an economically significant amount of resources. Secondly, although in most cases, proposals are likely to concern economically significant matters, those that do not, can be quickly and confidently excluded by management under the revised rule. Finally, despite the fact that the revised rule on its face will exclude economically insignificant proposals and allow management to confidently and quickly dispose of other insignificant proposals, it is clear that initial determinations by the SEC staff as to initial which categories of proposals concern quantifiable matters and which do not will greatly shape the degree to which the proposed rule is both effective and beneficial. V. Conclusion: Why The SEC Should Adopt The Proposed Version Of 14a-8 Just as the SEC voted last September to unanimously propose a revised version of 14a-8, it should unanimously vote to adopt the "revamped" version when it is finally submitted for a full Commission vote sometime in the next few months. The revised version of 14a-8 offers many benefits over the current rule for both shareholders and managers. In general, shareholders will benefit from an easier to understand format, the reversal of the Cracker Barrel decision, and the ability to control a proposal's final destiny with the advent of the override mechanism. Managers on the other hand will be able to quickly and efficiently exclude the economically insignificant proposals that seem to clog the proxy process year after year. As this comment has demonstrated, in keeping with the demands of both shareholders and managers, the revised rule will not make earth shattering changes to the overall application of the current rule. Nor will the SEC dramatically alter its position as unofficial arbitrator between shareholders and management. However, the changes that the revisions do bring about will be quite significant in their own right. Specifically, the revision of (c)(4) to allow for exclusion of proposals only when a proposal "on its face" relates to a personal grievance, eliminates the need for the SEC staff to make subjective, and at times erroneous decisions, and instead allows the market to ultimately determine whether or not a proposal is excluded. By eliminating the "otherwise significantly related" language in (c)(5) the revised rule insures that only economically significant matters will usurp the company resources that ultimately belong to all shareholders, and not merely those with personal agendas. In modifying (c)(7) to reverse the Cracker Barrel decision, the revision finally corrects a decision that perhaps should have never been made in the first place. By increasing the resubmission thresholds, the revised version of (c)(12) eliminates the constant pestering and wasting of corporate resources caused by certain perpetually unpopular proposals. Finally, in providing shareholders with a workable yet fair override provision the revised rule insures that shareholders can by their own choice control a meritorious proposal's destiny. Chairman Levitt was certainly correct in believing that the package of proposed changes will "eliminate the abusive gamesmanship that has obscured the true purpose" of 14a-8, and ultimately allow for effective and efficient shareholder communication with management.<167> In short, the revised 14a-8 is simply: A rule everyone can live with. **ENDNOTES** <1>: See Randall S. Thomas & Kenneth J. Martin, Should Labor Be Allowed To Use Rule 14a-8?, 4 (July 7, 1997) (unpublished manuscript on file with Randall S. Thomas, Professor of Law at the University of Iowa College of Law, Iowa City, IA 52242, and Kenneth J. Martin, Associate Professor of Finance at the College of Business and Economics at New Mexico State University, Las Cruces, NM 88003). <2>: Proposals of Security Holders, 17 C.F.R. 240.14a-8 (1997). <3>: See Alan R. Palmiter, The Shareholder Proposal Rule: A Failed Experiment In Merit Regulation, 45 Ala. L. Rev. 879 (1994). <4>: SEC Proposes Reversal of `Cracker Barrel' In Revamped Shareholder Proposal System, 29 Sec. Reg. & L.Rep. (BNA) 1285 (Sept. 19, 1997). <5>: Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. 50,682 (1997) (to be codified at 17 C.F.R. pt. 240). <6>: Id. at 50,682. Under the proposed changes, shareholder proposals relating to "ordinary business" would once again be treated subjectively as they were prior to the 1992 SEC no-action letter that allowed Cracker Barrel Old Country Store Inc. to exclude an employment- related shareholder proposal even though social policy concerns were raised by the proposal. SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1285. <7>: See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <8>: Between September 19, 1997 and January 2, 1998 the SEC received several hundred comment letters from investment groups, individual shareholders, students, and others expressing various thoughts on the proposed changes. These comment letters were posted by the SEC at : See Letter from Margaret Groarke, to Arthur Levitt, Chairman of the Securities and Exchange Commission (Jan. 5, 1998) : Concurrence of Commissioner Steven M.H. Wallman (S7-25-97) (Sept. 18, 1997). : See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. The Investor Responsibility Research Center ("IRRC") monitors proposals at approximately 1,500 companies each year and the American Society of Corporate Secretaries ("ASCS") tracks proposals at approximately 1,950 companies. <12>: Proposals of Security Holders, 17 C.F.R. 240.14a-8. The SEC feels that the rule enhances investor confidence in the securities markets by providing a means for shareholders to communicate with management and with other shareholders. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,698. <13>: Palmiter, The Shareholder Proposal Rule, supra note 3, at 886. <14>: See Proposals of Security Holders, 17 C.F.R. 240.14a-8. <15>: See Proposals of Security Holders, 17 C.F.R. 240.14a-8(d). Under the current application of 14a-8, a company that receives a proposal has no obligation to make a submission to the SEC unless it intends to exclude the proposal. From September 30, 1996 to September 26, 1997 the SEC received submissions under 14a-8 from 245 different companies. See Amendments to Rules on Shareholder Proposals, supra note 5 at 50,697. <16>: See Thomas & Martin, supra note 1, at 22. <17>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. The staff response is not legally binding, and does not necessarily reflect the view of the Commission. For this reason, either party is free to institute a private action to obtain a legally binding decision from a federal court on the excludability of a challenged proposal. See id. In the past, when a company received a "no action" letter from the SEC stating that the Commission would not pursue enforcement action if the company omitted a proposal, the company generally was safe in assuming that it would not be exposed to legal action if it omitted the proposal from its proxy material. See Michael J. Connell, Preparation of Annual Disclosure Documents 1997: Shareholder Proposals, 970 PLI/Corp 397, 400 (1997). This assumption however may not be as safe as it once was, given the recent decision in New York City Employees' Retirement System v. SEC, in which the court concluded that no action letters from the SEC are merely opinions of the SEC staff, and deserve little deference from the courts. New York City Employees' Retirement System v. SEC, 45 F.3d 7, 12 (2d Cir. 1995). <18>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(a)(1). Although any shareholder which owns the required amount of securities is eligible to submit a resolution to management, each shareholder is only permitted to submit one proposal. See Proposals of Security Holders, 17 C.F.R. 240.14a-8(4). Additionally, any supporting statements in connection with the proposal may not exceed 500 words in length. See Proposals of Security Holders, 17 C.F.R. 240.14a-8(4)(b)(1) (1997). <19>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(a)(2). <20>: Proposals of Security Holders, 17 C.F.R. 240.14a- 8(a)(3). <22>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c). <23>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(1). <24>: See Connell, Shareholder Proposals, supra note 17, at 405. <25>: See Lewis D. Solomon & Alan R. Palmiter, Corporations: Examples and Explanations  19.5.2 (2d ed. 1994). <26>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(2). <27>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(3). <28>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(3). <29>: See Connell, supra note 17, at 406. <30>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(4). <31>: See Solomon & Palmiter, Corporations: Examples and Explanations, supra note 25, at 292. <32>: See Michael J. Connell, supra note 24, at 407. <33>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(5). <34>: See Solomon & Palmiter, Corporations: Examples and Explanations, supra note 25, at 290. A particularly famous case that supported the "not significantly related" language of this provision was Lovenheim v. Iroquois Brands, 618 F.Supp. 554 (D.D.C. 1985). In Lovenheim, the court held that a shareholder proposal concerning the cruelty involved in force feeding geese in order to produce pate could not be omitted from the company's proxy materials despite the fact that significantly less than 5% of the company's sales and profits were derived from this activity. Id. at 562. <35>: See Connell, supra note 17, at 407. <36>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(6). In the past the Commission has construed this provision in a very narrow manner. See Connell, supra note 24, at 408. <37>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(7). <38>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <39>: See Connell, supra note 17, at 409. <40>: Cracker Barrel Old Country Store, Inc., SEC No-Action Letter, 1992 SEC No-Act. Lexis 984. The opinion set forth in the no- action letter was appealed to federal court where it was reversed. See New York City Employees' Retirement System (NYCERS) v. SEC, 843 F. Supp. 858, 880 (S.D.N.Y. 1994). However, on appeal the Circuit Court again reversed the decision and upheld the SEC no-action letter. See NYCERS v. SEC, 45 F.3d 7 (2d Cir. 1995). <41>: NYCERS v. SEC, 45 F.3d at 9. <42>: See id. <43>: See id. at 10. <44>: See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <45>: See id. <46>: See id. at 1285. <47>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(8). However, this provision cannot be used by management to exclude proposals that suggest procedures under which to hold elections or suggest requirements for nominees (for example a proposal which suggests requiring future directors to own company shares), provided that the proposal is constructed such that it does not affect the election to take place at the immediately upcoming shareholders' meeting. See Connell, supra note 17, at 410. <48>: See Solomon & Palmiter, Corporations: Examples and Explanations, supra note 25, at 291. <49>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(9). <50>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(10). This exclusion applies when management feels that the company is already doing what the shareholder suggests or where the company feels that the proposal has been "substantially implemented." Whether or not a proposal is "moot" is a factual determination that can only be made on a case by case basis. See Connell, supra note 17, at 411. <51>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(11). Like many of the other reasons for exclusion, what exactly qualifies under this provision must be determined on a case by case basis by members of the SEC staff. <52>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(12). The level of support required to prevent management from excluding a proposal varies depending on the number of times a proposal has been submitted to the shareholders for a vote. A proposal can be omitted if during the preceding five years it has been submitted: (i) at only one meeting and received less than three percent of the total votes cast, (ii) at only two meetings and received less than six percent of the total votes, (iii) at three or more meetings and received less than ten percent of the total votes on its latest submission. See id. <53>: See Connell, supra note 17, at 412. <54>: Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(13). <55>: The SEC recently completed a survey of some of America's largest corporations in order to ascertain how corporate America feels about the current shareholder proposal process and the SEC staff's role within the process. Eight companies with over half a million shareholders responded. G.E. and AT&T reported that they are "satisfied" with the process. Hewlett Packard said it is "very satisfied." IBM, GTE, Procter & Gamble, and Exxon said they are "unsatisfied," and Bell Atlantic said it is "very unsatisfied." However with respect to the Cracker Barrel decision, all of the large firms agreed with the decision that employment proposals that raise broader policy issues should not be included in proxy statements. See Proxies: Some of Surveyed Firms Show Consensus On `Cracker Barrel,' Other Issues, 29 Sec. Reg. & L.Rep. (BNA) 567 (Apr. 25, 1997). Among all companies responding to the SEC questionnaire, 40% ranked as their top reform goal the reduction of the types of proposals that they must include on their proxy statements. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <56>: A perception that the SEC is responding to shareholder proposals with general feelings of hostility or tolerance likely results from the recognition of trends in SEC no action letters. One such documented trend is the fact that the SEC "is now thirty percent more likely to permit the exclusion of proposals urging greater corporate social responsibility than was the case ten years ago." Palmiter, The Shareholder Proposal Rule, supra note 3, at 883. What may be surprising to some is that this trend was discovered before the Cracker Barrel decision was upheld in court and may now therefore be even more pronounced. In response to a questionnaire distributed in February 1997 to shareholders, 63% of those responding ranked as the top goal of reform the expansion of the categories of proposals that companies must include on their proxy materials. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <57>: See Palmiter, The Shareholder Proposal Rule, supra note 3, at 883. <58>: Proposed Shareholder Proposal Rule Would `Cripple' Dialogue, Coalition Warns, 29 Sec. Reg. & L.Rep. (BNA) 1723 (Dec. 12, 1997). See also National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290,  510(b), 110 Stat. 3416 (1996). Specifically, the Commission was required to study (1) whether shareholder access to proxy statements pursuant to 14a-8 was impaired by recent statutory, judicial, or regulatory changes and (2) the ability of shareholders to have proposals relating to corporate practices and social issues included as part of a company's proxy materials. Id. <59>: Former SEC Commissioner Steven Wallman has been an outspoken proponent for changes to 14a-8 for several years. Wallman's personal proposal, although containing drastic modifications from the current law, essentially maintains the current structure and functioning of the rule, and is therefore not discussed here. See Wallman Proposes Broad Changes To SEC's Shareholder Proposal Rule, 29 Sec. Reg. & L.Rep. (BNA) 1244 (Oct. 11, 1996). <60>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,684. This proposal was supported by 63% of the companies surveyed; however, its support among shareholders was only 9%. Id. A similar alternative under which (without "merit-based" regulation) proposals submitted under 14a-8 would be limited to seven per company, with priority given to those shareholders with the largest holdings in cases where more than seven proposals were presented was originally proposed by Alan R. Palmiter in 1994. See Palmiter, The Shareholder Proposal Rule, supra note 3, at 885. <61>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,684. At first glance this alternative appears to be a plausible alternative given the fact that the current rule defers to state law on the central question of whether a proposal is a proper matter for shareholder action. See Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(1). <62>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <63>: See id. at 50,684. Among those surveyed by the SEC 73% of company respondents and 75% of shareholder respondents favored this approach over the other alternatives. Id. <64>: See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <65>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,684. <66>: Id. In a survey conducted by the SEC, 65% of individual shareholder respondents indicated that they believe shareholders generally do not understand the current version of 14a-8. See id. <67>: For example, currently 14a-8(c)(7) allows exclusion of proposals relating to a company's "ordinary business." Proposals of Security Holders, 17 C.F.R. 240.14a-8(c)(7). Under the proposed version, the "ordinary business" language would be changed to permit exclusion where "the proposal relates to specific business decisions normally left to the discretion of management." This modification is intended to make the "ordinary business" exclusion easier to understand, and is not intended to modify how the exclusion is applied. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,685. <68>: In addition to the major changes included in the modifications to the specific exclusions of 14a-8(c), the proposed version of 14a-8 would also increase the ownership requirement to $2,000 from its current level of $1,000. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,694. <69>: See Connell, supra note 17, at 407. <70>: Proposed Amendments to Rule 14a-8 Under The Securities and Exchange Act of 1934; Relating to Proposals By Security Holders, 47 Fed. Reg. 47,420, 47,427 (1982). <71>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,686. <72>: See id. If a company were to receive a "no view" response from the SEC, it could still omit the proposal from its proxy materials if it believed that it had the necessary proof to defend its position in court. <73>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,686. <74>: Because of the "otherwise significant" language of the provision, even if a proposal represents less than 5% of a company's assets or sales, it is still often included on the proxy materials. In fact, between September 1996 and September 1997 only two proposals were successfully excluded using 14a-8(c)(5). See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,686. <75>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,686. The proposed revision would use 3% of the company's revenue or assets as the applicable threshold for smaller companies where 3% of either assets or revenues represents a figure smaller than $10 million. Id. <76>: To prevent the revised version of (c)(5) from excluding proposals which may be important despite having a low economic impact, the SEC has proposed four safeguards: (1) the exclusion would apply only to quantifiable matters (2) the economic threshold would be significantly reduced from the current level of 5% to help counter the elimination of the "otherwise significant" language (3)the exclusion would apply only to proposals related to the purchase or sale of products and services and not matters involving the company's internal governance (4) any inflexibility that would result from a purely economic standard would be offset by the adoption of the override provision. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,687. <77>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,688. <78>: See id. Although the Cracker Barrel decision is supported by an estimated 91% of companies, the SEC feels its reversal is justified given the "package of reforms" proposed under the revised version of 14a-8. Former Commissioner Steven Wallman, in calling for the immediate reversal of Cracker Barrel, however, has suggested that "the notion of holding the reversal of Cracker Barrel hostage to the success or failure of an overall reform effort" would be a drastic mistake. See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1285. <79>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,688. Many people familiar with the shareholder proposal process, including Commissioner Isaac Hunt have questioned the wisdom of placing the SEC staff in the position of line drawing on what social policy concerns deserve inclusion in company proxy materials. See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <80>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,688. In fact, the SEC has already stated for example that reversal of the Cracker Barrel decision would not automatically result in the inclusion of proposals focusing on wage and other issues for companies with Mexican maquiladora operations. Additionally, the SEC has hinted that proposals which attempt to micro manage company operations by seeking intricate detail or the imposition of specific time frames to implement complex policies will continue to be excluded under the revised rule. <81>: See id. at 50,696. Admittedly there is no way to tell how many additional proposals will be submitted involving employment related social issues, if proponents feel more confident about the chances of seeing their proposals included on the proxy materials. <82>: See id. at 50,689. <83>: See id. The SEC also justifies these higher thresholds by pointing out that proposals which do not generate at least these levels of support over the course of three submissions will have been "fairly tested" and stand little chance of obtaining a level of support needed for their adoption. Former Commissioner Wallman however has urged that shareholders will be adversely impacted by the increased resubmission thresholds, and in particularly by the "very high level of 30 percent in the third year." See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <84>: See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286. <85>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,690. Proponents utilizing the override would be required to demonstrate to the company, more than 120 days before the date on which the company's proxy statement was released in connection with the prior year's shareholder meeting, that their proposal has received the support of holders of 3% of the company's shares entitled to vote on the proposal at the upcoming meeting. To accommodate these requirements, 14a-8's current timing requirements would be amended to provide a proponent with a chance to learn from the SEC whether a proposal is properly excludable before attempting to invoke the override procedure. As it is currently written, 14a-8 does not include any mechanism for overriding a management decision to exclude a proposal for any reason listed in 14a-8. See Proposals of Security Holders, 17 C.F.R.  240.14a-8. <86>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,690. <87>: See id. <88>: See id. <89>: See id. <90>: See id. at 50,696. During the most recent proxy season, the SEC staff concurred in the exclusion of approximately 100 proposals under 14a-8(c)(7) and (c)(5) which would have been potentially subject to the proposed override mechanism. Id. at 50,698. <91>: Although the SEC does not have data which demonstrates the marginal cost of including an additional shareholder proposal on a company proxy statement, the average cost reported to the SEC by companies to include shareholder proposals on their proxy materials was $49,563. See id. at 50,699. Additionally, the SEC has reported that companies on average spend $36,603 per year determining whether to include or exclude shareholder proposals and in following SEC procedures related to proposals that the company wishes to exclude. See id. <92>: See Philip Scipio, Companies, Investors May Agree on Proxy Reform, Investor Relations Business, Jan. 27, 1997, available in 1997 WL 8783793. <93>: Although the reform proposals were originally presented by the SEC in September of 1997 for possible inclusion in the 1998 proxy season, tension and conflict have eliminated the possibility of the rules affecting the 1998 proxy season. In fact, as of the writing of this comment, the proposals had still not been submitted for the full Commission vote which was originally scheduled to take place in October 1997. See Michael Schroeder, SEC Considers New Proposal On Resolutions, Wall St. J., Jan. 16, 1998, at A1. <94>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,702 (emphasizing that the SEC currently lacks reliable empirical data on the magnitude and frequency of any such effects). <95>: The 1996 proxy season was selected because of two main factors: (1) the current version of 14a-8 was also in effect in 1996, thus any effects which are observed can also be expected to occur when and if the proposed changes are actually adopted by the SEC, and (2) the data available at the time of this writing for the 1996 proxy season is relatively complete in comparison to the data presently available for the recently completed 1997 proxy season. <96>: To make the analysis manageable, it was important to reduce the number of proposals included in the study given the fact that companies receive approximately 900 proposals each year which shareholders wish to see included on the companies' proxy materials. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <97>: See Checklist of 1996 Shareholder Resolutions, Corp. Soc. Issues Rep., Apr./May 1996, at 15, 15-19 (listing the social policy shareholder proposals that IRRC tracked during the 1996 proxy season). <98>: By their very nature, social policy proposals often are related to propositions, which while perhaps an important aspect of company policy, are also personally related to some other aspect of a shareholder's life. For example, proposals by church affiliated groups often seek to influence companies to operate in a manner that is consistent with deeply rooted beliefs. <99>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. Typically, proxy seasons run from approximately July 1st to the following June 30th of each year, with the majority of shareholder proposals being presented in the fall of each year in hopes of eventually being voted on at the annual shareholder's meeting which is typically held in the spring. Thus, the 1996 proxy season last from July 1, 1995 to June 30, 1996. <100>: See id. Specifically, the 258 social policy shareholder submissions resulted in the following: 75 withdrawn by proponent 3 not voted upon because of company mergers 98 voted on by shareholders 5 omitted [a-1] eligibility of proponent 5 omitted [a-3] timeliness 3 omitted [a-4] number of proposals / word limit 1 omitted [b-1] supporting statement word limit 14 omitted [c-3] false or misleading statement 2 omitted [c-4] personal claim or grievance 1 omitted [c-5] not significantly related 34 omitted [c-7] ordinary business 7 omitted [c-10] moot proposal 1 omitted [c-11] duplicate proposal 9 omitted [c-12] insufficient votes prior meeting. <101>: The 75 proposals withdrawn by their proponents before a vote or exclusion were presented to 63 different companies. The proposals related to many of the same topics which were either voted upon or excluded at other companies such as: environmental concerns (6), Northern Ireland operations (6), foreign labor standards (5), equal employment (10), tobacco (12), and foreign military sales (4). In addition to the 75 proposals withdrawn by their proponents, 3 proposals in the 1996 proxy season were not voted on because the applicable companies involved entered mergers before voting could occur. Because these mergers would have occurred regardless of the status of the shareholder proposal process, it is safe to assume that these proposals would also not have been affected by the changes in 14a-8. <102>: The 31 social policy proposals that would continue to be excluded under the new rule fall under the following provisions which will remain applicable: 5 (a-3); 3 (a-4); 1 (b-1); 14 (c-3); 7 (c-10); 1 (c-11). <103>: During the 1996 proxy season, of the 258 social policy proposals made, 149 were either voted on by the shareholders, and therefore could potentially be excluded under a modified provision, or were originally omitted under one of the provisions of 14a-8 which is to be modified. <104>: For a discussion of the proposed version of 14a-8(a)(1), the minimum ownership requirement increases from $1,000 to $2,000, see supra note 68. <105>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,694. An actual inflation adjustment from the time of the rule's adoption in 1983 would cause the minimum ownership requirement to increase to $1,600. The SEC proposed $2,000 in order to account for future inflation as well as the great market appreciation that has occurred since 1983. <106>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <107>: See Allied Signal, Inc., SEC No-Action Letter, 1995 SEC No-Act. Lexis 920. <108>: See id. <109>: See id. <110>: Although the proposal would probably continue to receive the same no-action response from the SEC under (c)(4), under the proposed version of 14a-8, the SEC would not also support the omission of this proposal with a reference to 14a-8(c)(7) as it did in the original letter because of the proposed reversal of the Cracker Barrel decision. <111>: See Phillips Petroleum Company, SEC No-Action Letter, 1996 SEC No-Act. Lexis 222. <112>: See id. <113>: See id. <114>: See id. <115>: Of course, although the current version of the rule places little cost on shareholders initially, it also provides shareholders with little chance other than in the proposal itself in which to defend their position. <116>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <117>: This proposition is "surprising" given the fact that the revised version of (c)(5) has been widely criticized by shareholders who feel that in its revised format (c)(5) gives companies too much latitude under which to exclude proposals. For a discussion of shareholder criticism, see supra note 8. <118>: See PepsiCo, Inc., SEC No-Action Letter, 1995 SEC No-Act. Lexis 162. The IRRC did not believe in the policies of the government which was controlling Burma, and requested the PepsiCo terminate operations in Burma until political prisoners were released and political power transferred to a democratically-elected government. <119>: See id. <120>: See id. <121>: See id. <122>: Given that PepsiCo's operations in Burma accounted for approximately .02% of PepsiCo's total annual revenue of approximately $24 billion in 1994 (the last year in which complete data was available at the time of the IRRC's proposal), it is highly unlikely that operations in Burma will ever account for more than 5% of PepsiCo's total operations. See id. <123>: In publicly available reports, PepsiCo does not disclose revenue per country on a regular basis unless it must do so for a specific purpose, such as supporting its reasoning for omitting shareholder proposals. Because per country revenue numbers are not consistently reported, it is impossible to say exactly what PepsiCo's current revenues are with respect to Burma. <124>: As explained previously in note 76, the SEC has proposed several safeguards in order to limit the revised provision's effect on proposals which may be important despite having a low economic impact. Of these safeguards, it is debatable, as critics of the revision point out, as to how effective the 3% override provision will be in situations such as the present case where acquiring a 3% stake in a company the size of PepsiCo would require an investment in the neighborhood of nearly $4 billion. (As of February 5, 1998, PepsiCo was trading at 35 7/16 on the NYSE and had 3,600,000,000 shares outstanding. See Wall St. J., Feb. 5, 1998, at C5.) However, as was previously explained, a shareholder only needs the support of 3% of the company's shares and does not necessarily have to purchase a 3% interest. Thus, if a shareholder truly believes that their proposal will provide merits and benefits to the company, they will acquire support from others on their own. Under this procedure management will only have to include proposals which have merit significant to the point that their respective proponents are willing to support them with resources other than words. <125>: For an explanation of the average cost of the shareholder proposal process to companies see supra note 91. <126>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <127>: See id. Of the twenty-six proposals omitted under the current application of (c)(7) that would remain unaffected by the proposed modifications, four involved proposals related to maquiladora operations. Although, with proposals relating to maquiladora operations, one of the main concerns is employment conditions, the SEC has already stated that the reversal of the Cracker Barrel decision would not automatically result in the inclusion of such proposals. See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. 50,688. The remaining twenty-two proposals unaffected by the revisions to (c)(7) concerned various dissimilar matters related to ordinary business concerns of their respective companies. For example, Mattel was able to omit under (c)(7) a proposal calling for the company to redesign its Barbie doll. See Checklist of 1996 Shareholder Resolutions, supra note 97, at 18. Additionally, Alliant Techsystems was able to omit a proposal calling for it to end work on land mines. See id. at 15. <128>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. 50,688. Although technically the proposals requesting companies to review international workplace standards in general are different on the surface from those requesting a review of maquiladora operations in Mexico specifically, the subject matter is for all practical purposes the same. Thus, how much weight the SEC staff decides to give to this technical difference will determine how proposals requesting reviews of international operations will be handled under the revised version of (c)(7). The weight given by the staff to the difference may in all likelihood be directly related to the public's perception of the (c)(7) revision. For example, if the application of the revised (c)(7) is perceived by the public as not having enough of an impact, (which is a very real possibility given the limited impact shown by this study of the revised version) it is possible that proposals requesting reviews of international workplace employment conditions may find their way onto company proxy materials. Of course, it is also likely that the SEC could elect not to follow its pre-announced maquiladora position when the revisions are actually adopted. However, given the strong opposition of corporate America to the revision of (c)(7) to begin with, this possibility seems to be more remote in light of the need to balance the effects of the proposed rules on management and shareholders. <129>: "Most people" of course does not include the specific management insiders that decided to omit the proposal from the company proxy materials to begin with. <130>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. The five affected proposals concerned the following: (1) rescind affirmative action programs; (2) no contractor/employment discrimination; (3) create high performance workplace; (4) report on equal employment; (5) report on standards at suppliers. <131>: Former Commission Steven Wallman has also urged the SEC to modify its application of (c)(7) regardless of how the Commission decides to handle the other provisions. See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1285. <132>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,683. <133>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <134>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,689. <135>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. This result was arrived at by making the assumption that 1996 was the first year in which any of the voted on proposals were submitted. Thus, if a proposal received more than 3% of the vote it was considered to be eligible for submission to the company in the following year. <136>: The same assumptions were made for the revised version of (c)(12) as were made for the current version of the provision except that, in order to be considered eligible for resubmission a proposal was required to receive 6% approval. <137>: Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,689. It becomes even more apparent that proposals receiving this level of support have little realistic chance of being approved when one considers that only 2.04% (2 of 98) of all voted on proposals examined here were approved by the shareholders. <138>: See id. <139>: The thirty-five proposals potentially affected consisted of the one proposal omitted under (c)(5) and the thirty-four proposals omitted under (c)(7). <140>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. 50,688. <141>: I use the term "lunatic fringe" to refer to the small percentage of shareholders who invest in companies not with the goal of achieving a fair return on their investment, but rather to find a stage from which "to vent their spleen about irrelevant matters." Palmiter, The Shareholder Proposal Rule, supra note 3, at 888. <142>: For a discussion of the market value of PepsiCo, see supra note 124. <143>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,690. <144>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <145>: Sixty-four percent (63 out 98) of the proposals voted on in 1996 fell into the following categories or requested the following action: (17) tobacco related, (9) report on political contributions, (8) report on equal employment, (8) endorse the Ceres environmental principles, (7) implement the MacBride principles in Northern Ireland, (7) nuclear power related, and (7) human rights related. <146>: See H.B. Fuller, DEF14A, WL EDGAR Database, Filing 96531972 (Apr. 18, 1996). <147>: See id. at 88. <148>: In order to be affected by the revised version of 14a-8 in a manner differently than the proposal would be affected under the current version of 14a-8, a proposal must be subject to one of the five modifications explained in part III of this comment. The specific proposal examined here would not have been affected by the revised resubmission threshold set out by (c)(12) assuming that this was the first year in which this proposal was submitted because the proposal was approved by 10.8% of the votes cast, and thus qualifies for resubmission. See Checklist of 1996 Shareholder Resolutions, supra note 97, at 17. <149>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <150>: See Exxon Corp., DEF14A, WL EDGAR Database, Filing 96533720 (Apr. 24, 1996) at 21. <151>: Id. Under the current version of 14a-8 the proposal was eligible for resubmission; however, under the revised version of 14a-8 the proposal would not have been eligible for resubmission since it received the approval of only 5.2% of votes cast. See Checklist of 1996 Shareholder Resolutions, supra note 97, at 16. <152>: See American Brands Inc., DEF14A, WL EDGAR Database, Filing 96533820 (May 1, 1996). <153>: This statement does not consider the higher resubmission requirements contemplated by the revised rule. In the specific case of the proposal examined here, the new resubmission thresholds would not used to exclude the proposal upon resubmission since the proposal was approved by 10.6% of shareholders in 1996. See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <154>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <155>: See GTE Corp., DEF14A, WL EDGAR Database, Filing 96532456 (Apr. 17, 1996). The CERE'S principles suggest that a company should work toward: (1) protection of the biosphere, (2) sustainable use of natural resources, (3) waste reduction and disposal, (4) energy conservation, (5) risk reduction, (6) safe products and services, (7) environmental restoration, (8) informing the public, (9) management commitment, and (10) audits and reports. <156>: See Amendments to Rules on Shareholder Proposals, 62 Fed. Reg. at 50,688. <157>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. Note, this is the same shareholder group that first gained notoriety in the early 1990's for its involvement in the Cracker Barrel case. <158>: See Dun & Bradstreet Ltd., DEF 14A, WL EDGAR Database, Filing 96533326 (Apr. 16, 1996) at 35. <159>: Proper omission is of course based on the assumption that the proposal in question is considered by the SEC staff to be a quantifiable matter, which is related to less than $10 million annually. <160>: See supra note 158, at 38. <161>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 16. <162>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <163>: See DTE Energy, DEF 14A, WL EDGAR Database, Filing 96537494 (Apr. 22, 1996) at 70. <164>: See id. <165>: See id. at 72. <166>: See Checklist of 1996 Shareholder Resolutions, supra note 97, at 15. <167>: See SEC Proposes Reversal of `Cracker Barrel', supra note 4, at 1286.