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Understanding Shareholder Resolutions And Why They're Rejected

Aug 17, 2007
Shareholders can bring a proposal for certain resolutions as part of the company's annual meeting procedures. In order to file a proposal a shareholder must own at least $2,000 worth of shares or roughly 1% of all shares in a company and own these shares for a minimum period of one year as per the rules of the US Securities and Exchange Commission (SEC). The Securities and Exchange Commission protects the interest of the company and the shareholders. A resolution must usually be submitted 120 days before the date on which the company releases the previous year's proxy statements to the shareholders. The entitled shareholder may file one resolution per year and it cannot be longer than 500 words. The resolution proposed must be clearly written and have background material that justifies the need to implement the proposed resolutions. The shareholder may send a draft to the company and get a clear idea as to whether the company objects to the proposed resolution partially or fully. The resolution must be submitted along with a cover letter to the Chief Executive Officer (CEO) of the company. The secretary of the corporation is the one who deals with shareholder resolutions. It is recommended to file the resolution well in advance in order to negotiate with the corporation and to prepare for the annual meeting. It is also advisable to send a copy of the proposed resolution to the SEC too. A corporation may decide to vote on the resolution, or object partially or fully and may send its reasons to the SEC regarding the company's decision on the proposed resolution. The SEC allows the corporation 13 reasons to reject a proposal.

Reasons for a Company to Reject a Proposal

1. The company considers the proposal not a proper subject for taking action. This depends on the applicability under the State laws.

2. The proposal would require the company to violate state and federal laws.

3. The proposal contradicts the company's proxy rules and regulations.

4. The proposal benefits only the shareholder who proposed the resolution and not all the other shareholders, or if it is written out of a grudge against the company.

5. The proposal accounts for only 5% or less of the company's assets at the end of the recent fiscal year, or less than 5% of the net earnings and gross sales at the end of the recent fiscal year.

6. The proposal involves issues outside the company's control.

7. The proposal relates to the conduct of ordinary business operations of the company.

8. The proposal concerns an election to office.

9. The proposal is counter to a resolution to be submitted by the company at the annual meeting.

10. The proposal has been rendered moot.

11. The proposal is a duplicate of another proposal submitted earlier by another shareholder, which is going to be voted on at the annual meeting.

12. The proposal is a duplicate of any proposal submitted within the preceding 5 calendar years.

13. The proposal relates to specific amounts of cash or stock dividends.

The Need to Consider Proposals in a Timely Manner
The shareholders must be quick to act since the company has until the last 60 days before the annual meeting to disclose the proxy statements. The company has to notify the SEC that it is omitting and rejecting the proposal based on the 13 reasons and the SEC will review the situation and decide if the company has the right to do that based on the rules. The Internet and the variety of software available today are helping the shareholders and corporations regarding the implementation of corporate resolutions in a timely manner.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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