The best way to draft, submit and defend resolutions well

For first-time or novice shareholders, the best way to draft and defend resolutions is to work with experienced shareholder activists (see links to Shareholder Activists and Networks) or hire an attorney who specializes in shareholder resolutions, and is familiar with SEC regulations and appropriate wording for resolutions. (For example, many members of the public interest community have hired Cornish Hitchcock to assist them in filing and defending proposals at various companies on various issues.) An attorney will be able to do research on similar resolutions and help you through what can be a complicated process. As each rejected shareholder resolution creates a precedence for following years, all shareholder activists have an obligation to ensure that their resolutions are well-crafted and defended.

An easy way to find out your company's filing deadline

To find the company's most recent proxy statement on the web, go to the SEC's online EDGAR database and search in the quick forms lookup. Select form DEF from the dropdown menu and type in the name of the company you are researching. The most recent proxy statement will tell you when the deadline is for filing a resolution for the upcoming year; filing deadlines are usually in the fall. You can also research past shareholder resolutions by looking through previous years' DEF forms.

Ensuring you meet eligibility requirements

• Make sure you don't submit more than one resolution at the company (although you can co-file proposals)
• Some investors who initially bought more than $2000 worth of stock may not be eligible for filing a resolution later, as the value of stocks go up and down. Check how much your shares are worth at the time of filing.
• Make sure you have held the stock for at least one year by the date you submit the proposal (deadlines for submitting proposals are found in the previous year's proxy statement)
• Make sure you own voting stock, usually common stock
• If your broker or bank holds shares for you (i.e. you didn't buy the stock from the company directly), make sure your broker's letter states how many shares of voting stock you own, and when you started owning them.
• If resubmitting the resolution, make sure you won enough votes last year (3% of the vote for resubmitting the second year, 6% to resubmit the third year, 10% to resubmit the fourth year)

The company must physically receive your resolution by close of business on the due date. Don’t wait until the last minute to turn it in. Send the resolution via UPS, Federal Express or receipt mail to ensure that someone at the company signs for it. If you're in a rush, fax it to the corporate secretary's office and keep your fax log; follow it up with a hard copy via UPS or some other track-able delivery service.

Make sure your filing letter contains…

• A salutation to (addressed to) the corporate secretary
• Name and address of shareholder and the number of shares owned
• A sentence saying that you own shares in value of more than $2,000 and have held the shares for over a year
• A sentence saying that you intend to hold these shares through the date of the annual meeting
• A reference to and attachment with proof that you own the shares
• If more than one shareholder is filing the resolution, make sure that all filers indicate who the primary filer, or point person, is. Each filer sends a separate cover letter, verification of ownership, and a copy of the identical resolution.
• Click here to see a sample filing letters.

• The proposal: Word your proposal in the form of a "request" or "recommendation"
• The supporting statement: Outline your argument and provide background on the issue and reasons to support the resolution. Make sure you can back up any factual statements; state opinions as such, and make sure that you can prove your beliefs are reasonable and based in fact. Historically, the SEC has allowed some references to websites. Some shareholders prefer to use a series of "Whereas" statements instead of or in addition to a supporting statement.
• Length: Make sure the proposal and supporting statement is written in 500 words or less.
• Exclusions: Avoid drafting an invalid proposal. Shareholder resolutions can be excluded, or thrown out, if the company proves that your resolution:
• is improper under state law,
• would cause the company to violate laws,
• is in violation of proxy rules (including rules which prohibit false and misleading statements),
• deals with a personal grievance,
• is irrelevant based on proportion of company business,
• asks for the company to do something outside of its power,
• deals with "ordinary business,"
• relates to an election of a board member,
• conflicts with the company's proposal,
• is already "substantially implemented,"
• duplicates another resolution,
• did not gain enough votes for resubmission, or
• relates to specific amounts of dividends.

 
Bringing out the shareholder value perspective

Shareholders activists offer resolutions as a means of having a dialogue with the company and with fellow shareholders on important issues affecting the company. For activists not familiar with the shareholder resolution process, this may require some shifting of the gears in terms of how arguments are presented, given the investment context in which proposals are discussed, as well as the overlay of SEC regulations governing this area.

Drafting a resolution requires using a vocabulary more familiar to investors and couching one's arguments in terms of how your view about proper corporate policies will add value to the shareholders' assets in the long term. For example, advocates of tighter controls on overseas sweatshops may be tempted to discuss the moral and ethical implications of child labor or abusive practices. While some investors may find such arguments effective, the more persuasive argument to investors may be that revelations in the news media that company X is using child labor can have an adverse effect on the company's reputation among consumers and could therefore hurt the bottom line. See for example, resolutions at Unocal or Kodak that focus on financial liabilities of irresponsible behavior.

In some respects we are dealing with competing views of shareholder value. Some companies pursue practices that are environmentally insensitive or otherwise harmful out of a belief that these practices will produce significant short-term gains. Shareholder activists, by contrast, often take a longer-term view, namely, that it is not in the long-term economic interest of companies to pursue practices that are insensitive to environmental, labor or human rights concerns. The goal is to find ways to express one's views on corporate practices in ways that bring home to investors the fact that these practices may be harmful to the company.

Typical requests

Common shareholder resolutions…

• Ask for information. A shareholder may ask a company to "provide a report at reasonable expense, excluding confidential information on [a particular issue]." See for example, a Mobil proposal on climate change and a Raytheon proposal on foreign military sales, both of which asked for reports. Many institutional investors who generally may not vote in favor of environmental or military issues may be supportive of proposals asking for information disclosure. Some proponents ask for a specific policy change rather than information.  For more information, see 'Ask to establish a policy' in the section below.
• Address corporate governance issues. Mainstream investors are generally quite supportive of corporate governance resolutions because companies with good governance structures tend to be more responsive to shareholder concerns and needs. For an excellent investor-related corporate governance site go to corpgov.net.  Socially-oriented shareholders often link social issues to corporate governance issues. See for example, a General Electric resolution linking executive compensation to financial and environmental performance, and a Maxxam resolution on cumulative voting that talks about environmental and labor issues.

One of the most common ways a company gets your resolution "thrown out" is by claiming that they are already implementing what the resolution asks for (in which case, you must prove otherwise), or claiming that your resolution addresses "ordinary business." The SEC deems ordinary business matters too mundane to be governed by shareholders. For other grounds for exclusion, click here.

Shrewd shareholder activists will deliberately craft their resolution to prevent the SEC from awarding a "no action" letter (a letter stating that the SEC will take no enforcement action if the company omits your proposal from the proxy statement) on the basis of ordinary business.

• Ask to establish a policy. A common way of wording such a proposal is: "the shareholders request that that Board of Directors establish a policy to [stop or start doing something]." See for example, a resolution with PECO Energy to refuse plutonium for commercial reactors, and a Boeing resolution on establishing a human rights policy for operations in China. Explicitly asking for a policy is one way to make sure your resolution deals with policy and not ordinary business issues.
• Passing the two-part test: The SEC uses a two-part test to determine if the resolution deals with an issue that is mundane and /or devoid of any policy significance. To back up your claim that your resolutions is of policy significance, amass news clips (from mainstream media sources) on the topic, and broaden your proposal to address the issue in a company-wide manner so that your topic is not mundane.
• The changing definition of "ordinary business": The SEC has been fairly friendly in considering environmental matters as policy issues; but employment issues have been historically more problematic. For example, CEO salaries and plant closings at one time were considered ordinary business, but now they are considered policy issues and fair game for resolutions.

• Policy issue: In 1998, shareholders requested that the Board of Dillard's Inc. prepare a report on the actions the company was taking to ensure that it does not and will not do business with foreign suppliers who use forced/convict/illegal child labor or don't comply with applicable labor laws. The 1998 Dillard's Resolution made it past the SEC.
• Ordinary business matter: In 1998, shareholders filed a similar resolution, requesting that the Board of Wal-Mart report on compliance with its standards for suppliers. The shareholders specifically asked that the report cover policies to implement ongoing wage adjustments to ensure a living wage. This proposal was too specific and was considered by the SEC to be a wage issue, a topic constituting ordinary business. Click here to view documents from the Wal-Mart proxy fight.

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