Release No. 34-5276

Adoption of Amendments to Proxy Rules.

Comments of the Chairman

 SEC Release of January 17, 1956

Chairman J. Sinclair Armstrong of the Securities and Exchange Commission * * * has announced the adoption by the Commission of a revision of its proxy rules (Regulation X-14) governing proxy contests with respect to the election or removal of directors.  Adopted under the Securities Exchange Act of 1934 and applicable particularly to companies whose securities are listed on national securities exchanges, the new rules become effective January 30, 1956.

 "We of the Commission believe," Chairman Armstrong commented, "that this amendment of the proxy rules represents an important step forward under the Federal Securities Exchange Act for protection of investors in securities listed on national securities exchanges.  Proxy fights for control of management of corporate affairs represent contests for the control and management of many millions of dollars of corporate assets.  These assets, in turn, are represented by millions of dollars of outstanding securities held by public investors.  Being owners of the enterprise, public investors have the right under our system of corporate democracy to elect directors of their own choice who will be responsible for the stewardship of the company's affairs.

"As owners of the business, with millions of dollars of invested savings, investors naturally have a great stake in the outcome of corporate elections.  The careful and intelligent exercise of their voting rights is of the utmost importance if persons best qualified, by reason of background, experience and ability, to advance the best interests of the company and its stockholders are to be selected.  This is particularly true in the setting of a proxy contest, where opposing factions are vying for the favor of the investors' votes and where statements and counter-statements, charges and counter-charges sometimes appear designed more to confuse than to enlighten.

Purpose of Revision

"The adoption of the new rules is designed to aid public investors in the exercise of their voting rights by providing them with detailed factual information about the participants (both the nominees for election as directors and those actively participating in their election campaign).  This includes information regarding their identity and background, their interest in securities of the issuer, and certain other information having a bearing upon the contest.  The Commission's action is the culmination of several years' concentrated study and review of soliciting material filed in connection with proxy contests during that period.

"Since the proxy rule revision proposal was first announced in August, 1955, we have had the benefit of many well-considered and constructive comments from the public for which the Commission is grateful.  We have received and reviewed comments submitted in writing upon the original, August, 1955, amendment proposal and the modified proposal published December 14, 1955, and those advanced orally at the public hearing held November 17, 1955.  We have also considered all of the testimony, proceedings and reports of the Senate Banking and Currency Committee, and its Subcommittee on Securities, bearing on the proxy problem and resulting from that Committee's Stock Market Study in 1955.

Freedom of Press, Radio and Television

"I also want to re-emphasize," Chairman Armstrong said, "that the Commission's proxy rules affect only participants in proxy solicitations, and do not in any way apply to or restrict the complete freedom of the press, radio and television.  The rules adopted today make it clear that speeches, press releases and radio or television scripts are not required to be filed with the Commission prior to use or publication.  The new rules require, however, that copies of such speeches, releases and scripts as constitute proxy soliciting material shall be filed with or mailed for filing to the Commission not later than the date such material is used or published, and may be filed in advance if the person proposing to use it wishes to do so.  Such material is to be deemed proxy material when used by participants in proxy contests and will be subject to the rules against false and misleading statements."

Election or Removal of Directors

Being designed especially to clarify the applicability of the proxy rules to proxy contests with respect to the election or removal of directors, the new rules have been expanded to spell out more precisely the procedure to be followed and the information to be given.  Among the more important changes is an amendment of the definition of the terms "solicit" and "solicitation" to make it clear that the furnishing of a form of proxy or other communication to security holders "* * * under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy . . ." constitutes a solicitation within the meaning of the rules.  Thus, statements made for the purpose of inducing security holders to give, revoke, or withhold a proxy by any person who has solicited or intends to solicit proxies, whether or notfo79,533such statements are accompanied by an express request to give, revoke or withhold a proxy may involve a solicitation within the meaning of the regulation, depending upon the particular facts and circumstances.

In this connection, Chairman Armstrong pointed out that:  "It is not the intention of the Commission and it is not the purpose of the amendments to require the filing under the proxy rules of the types of communications normally sent to security holders during the course of a year, such as semi-annual and quarterly reports and other communications containing information and comment with respect to the company's business.  For many years, the proxy rules have provided that the annual report, a copy of which must be furnished to security holders, is not deemed to be proxy material.  As a result of the Commission's experience in a number of cases, the rules have been amended to provide that if any portion of the report is devoted to an attack or comment upon an opposition solicitation or opposition group, that portion of the report must be filed as proxy material in advance of publication."

Published Material in Connection with a Solicitation

Another important change has to do with reprints or reproductions of letters, advertisements, and other previously published material preparatory to or in connection with a solicitation which, under the foregoing definition of "solicitation," may involve the publication or distribution of proxy material which is subject to and should be filed with the Commission in advance of use.

The proxy rules for some years have required the issuer to mail out proxy material for a security holder when requested to do so or in lieu thereof to furnish the security holder with a reasonably current list of security holders.  Under an amended rule, the security holder's material must be mailed not later than the earlier of (1) a day corresponding to the first date on which the management's material was released to security holders for the last annual meeting, or (2) the first date in which solicitation was made on behalf of the management.  Also, in a footnote to Rule X-14A-9 which prohibits the making of solicitations which, at the time and in the light of the circumstances under which they are made, are false or misleading, the Commission illustrates certain types of statements which may be misleading within the meaning of the rule, depending upon the facts and circumstances of the particular case.

Validity of Section 14(a)

Chairman Armstrong also called attention to a recent decision of the United States Court of Appeals for the Second Circuit, decided January 11, 1956, sustaining the validity of Section 14(a) of the Securities Exchange Act of 1934, and the Commission's proxy rules as heretofore in effect under that section of the Federal statute, against contentions that the statutory authority and the rules of the Commission thereunder were "unconstitutional" as unauthorized delegations of legislative power and otherwise.  The opinion of the Court contained the following language:

"Appellants argue that §14(a) of the Securities Exchange Act of 1934, 15 U. S. C. §78n(a), and regulations adopted thereunder are unconstitutional as unauthorized delegations of legislative power and otherwise; but these contentions have no merit.  American Power & Light Co. v. S. E. C., 329 U. S. 90; Yakus v. United States, 321 U. S. 414.  Furthermore, the Commission's proxy rules as applied either to management or to insurgent stockholder groups are clearly authorized by the statute.

"Appellants' fundamental complaint appears to be that stockholder disputes should be viewed in the eyes of the law just as are political contest, with each side free to hurl charges with comparative unrestraint, the assumption being that the opposing side is then at liberty to refute and thus effectively deflate the `campaign oratory' of its adversary.  Such, however, was not the policy of Congress as enacted in the Securities Exchange Act.  There Congress has clearly entrusted to the Commission the duty of protecting the investing public against misleading statements made in the course of a struggle for corporate control."

Statement of the Commission

Exchange Act Release No. 5276

The Securities and Exchange Commission has adopted certain amendments to its proxy rules contained in Regulation X-14 under the Securities Exchange Act or 1934. Notice of the proposed amendments and an invitation to submit comments and suggestions thereon were published on August 23, 1955.  Thereafter, pursuant to notice published on November 4, 1955, a public hearing was held on November 17.  On the basis of the comments and suggestions received from the public and the testimony in the public hearing, a revised draft of the proposed amendments was prepared and published for comment on December 14, 1955.

The Commission has now considered all of the comments and suggestions received and has determined that the proposed amendments should be adopted with certain modifications therein.  [Text of amendments omitted]

Principal Purpose of Amendments

The principal purpose of the amendments is to clarify the applicability of Regulation X-14 to proxy contests with respect to the election or removal of directors.  Accordingly, the rules have been expanded to spell out more specifically the procedure to be followed and the information to be given in the case of such contests.  The more important changes made in the rules are described below:

"Solicit" Defined

The definition of the terms "solicit" and "solicitation" has been amended to make it clear that the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy constitutes a solicitation within the meaning of the rules.  Thus, statements made for the purpose of inducing security holders to give, revoke, or withhold a proxy with respect to a matter to be acted upon by security holders of an issuer, including an election of directors, by any person who has solicited or intends to solicit proxies, whether or not such statements are accompanied by an express request to give, revoke, or withhold a proxy may involve a solicitation within the meaning of the regulation, depending upon the particular facts and circumstances.

Status of Reports to Security Holders

There was some concern expressed by persons commenting on this aspect of the amendments that all semi-annual and quarterly reports and other communications containing information and comment concerning the business of the character normally sent to security holders by corporate management during the course of a fiscal year might be deemed to involve a solicitation and to be proxy material under the revised definition.  This problem is not a new one and has previously existed under the rules.  It is not the intention of the Commission and its is not the purpose of the amendments to subject such communications to the proxy rules.  In some situations, for example, where a proxy contest continues from one year to another, the communications of both sides may constitute continuing solicitations which should be subject to the standards of the rule.  In the ordinary case, it is not believed that this matter presents any real problem and the Commission has no desire to require the filing of the types of communications normally sent to security holders during the year.

Advertisement in Connection with a Solicitation

The publication of reprints or reproductions of letters, advertisements, and other previously published material preparatory to or in connection with a solicitation, whether prior to or following a request that security holders give, revoke, or withhold a proxy, may involve the publication or distribution of proxy material which is subject to and should be filed with the Commission pursuant to the provisions of the rules.

Speeches, Press Releases and Radio and Television Scripts

In order to clarify the applicability of the rules to soliciting material in the form of speeches, press releases, and radio or television scripts, a new provision has been added providing that such material may be, but is not required to be, filed with the Commission prior to its use.  However, such material must be filed not later than the date it is used or published.

Status of Annual Report

For many years, the proxy rules have provided that the annual report, a copy of which must be furnished to security holders, is not deemed to be proxy material.  As a result of the Commission's experience in a number of cases, the rules have been amended to provide that if any portion of the report is devoted to an attack or comment upon an opposition solicitation or opposition group, that portion of the report must be filed as proxy material in advance of publication.

Mailing Communications for Security Holders

Under the proxy rules as they have been in effect for some years, the issuer is required to mail out proxy material for a security holder when requested to do so or in lieu thereof to furnish the security holder with a reasonably current list of security holders.  Where the issuer elects to mail the material rather than furnish such a list, the rules have heretofore required that it must do so with reasonable promptness after receiving the material, but need not do so prior to the first day on which the solicitation is made on behalf of the management.  Under the amended rules the security holder's material must be mailed not later than the earlier of (1) a day corresponding to the first date on which the management's material was released to security holders for the last annual meeting, or (2) the first date on which solicitation was made on behalf of the management.

False or Misleading Statements

Rule X-14A-9 prohibits the making of solicitations which at the time and in the light of the circumstances under which they are made are false or misleading with respect to any material fact or which omit to state any material fact necessary in order to make the statements therein not false or misleading.  The amendments add a note to this rule which illustrates certain types of statements which may be misleading within the meaning of the rule, depending upon the facts and circumstances of the particular case.

Election or Removal of Directors

The specific requirements with respect to contests are set forth in a new rule X-14A-11.  The general effect of this rule is to require in case of a contest with respect to the election or removal of directors, that the participants in the contest shall file with the Commission specific information regarding their identity and background, their interest in securities of the issuer and certain other information having a bearing upon the contest.  A new schedule 14B sets forth the information required to be included in such statements.  A summary of such information is required to be included in the proxy material of the particular participant or group on whose behalf the solicitation is made.

Effective Date

The amendments are adopted pursuant to sections 14(a) and 23(a) of the Act.  In view of the length of time the amendments have been under consideration, the wide publicity given them and the desirability of having them become effective as soon as practicable, the Commission has determined that the amendments shall become effective January 30, 1956.

By the Commission.