On September 23, 2020, the Securities and Exchange Commission ("SEC") adopted amendments to modernize Rule 14a-8 (the "Amended Rule")1, which governs the process for shareholder proposals to be included in a company's proxy statement. The amendments change the shareholder proposal submission requirements under Rule 14a-8 by: (i) changing the eligibility criteria that a shareholder must satisfy to include a shareholder proposal in a company's proxy statement; (ii) specifically limiting each person to one proposal for each shareholders' meeting, whether as a shareholder or as a representative of a shareholder; (iii) requiring specified documentation for a representative to submit a proposal on behalf of a shareholder; and (iv) increasing the levels of required shareholder support a proposal must receive to be eligible for resubmission at the same company's future meetings.
The Amended Rule will be effective 60 days following publication in the Federal Registrar and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.
Changes to Eligibility Requirements of Rule 14a-8(b)
Ownership Requirements for Submission of a Shareholder Proposal
Under the prior Rule 14a-8(b), a shareholder-proponent was required to hold at least $2,000 or one percent of a company's securities for at least one year to be eligible to submit a proposal. The Amended Rule creates a tiered system under which a shareholder can satisfy any of the following three alternative thresholds to be eligible to submit a proposal for inclusion in a company's proxy statement:
- Continuous ownership of at least $2,000 of the company's securities for at least three years;
- Continuous ownership of at least $15,000 of the company's securities for at least two years; or
- Continuous ownership of at least $25,000 of the company's securities for at least one year.
The Amended Rule did not change the holding period, which will continue to run from and through the date of the proposal's submission, and a shareholder-proponent must provide the company with a written statement of the shareholder-proponent's intent to hold the required amount through the date of the applicable shareholder meeting.
A proponent must satisfy one of these requirements individually under the Amended Rule, and, in contrast with the practice that has developed under prior Rule 14a-8(b), cannot aggregate holdings with other shareholders. However, shareholders continue to be permitted to co-file or co-sponsor shareholder proposals as a group if each shareholder-proponent in the group meets the rule's eligibility requirements.
The SEC declined to adopt rules requiring that shareholders designate a lead filer when shareholders co-sponsor a proposal, observing that, while designating a lead filer for negotiating with the company is best practice, such a requirement does not appear necessary as co-filers already tend to designate a lead filer. Companies had previously lobbied the SEC on the challenges of managing proposals co-filed by a number of shareholders without a designated lead filer, forcing a company to have to negotiate withdrawals with each co-filer, and creating the potential for holdout co-filers.
Transition Period for Ownership Eligibility Requirements
The Amended Rule provides for a transition period that will allow shareholders meeting specified conditions to rely on Rule 14a-8's prior $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023. Specifically, a shareholder who has continuously held at least $2,000 of a company's securities entitled to vote on the proposal for at least one year as of the effective date of the Amended Rule (i.e., 60 days after publication in the Federal Registrar), and continuously maintains at least $2,000 of such securities from the effective date of the Amended Rule through the date he or she submits a proposal, will be eligible to submit a proposal to such company, and need not satisfy the amended share ownership thresholds described above (under Rule 14a-8(b)(1)(i)(A)-(C)), for an annual or special meeting to be held prior to January 1, 2023.2
Proposals Submitted on Behalf of Shareholders
Prior to these amendments, Rule 14a-8 did not address a shareholder's ability to submit a proposal through a representative; rather this practice was governed by state agency law. To address concerns that representatives might not actually speak and act for a shareholder with a genuine interest in the proposal, the Amended Rule requires shareholder proponents to provide authorizing documentation in writing that meets the requirements of the Amended Rule, including a specific statement that the shareholder authorizes the representative to submit the proposal.3 The SEC believes that these changes will help "safeguard the integrity of the shareholder-proposal process" and "reduce some of the administrative burdens on companies associated with confirming a shareholder's role in the shareholder proposal process."4
Shareholder Engagement Availability
Noting the trend of increasing engagement between companies and shareholders, which may at times obviate the need for a shareholder proposal, the Amended Rule includes changes designed to encourage such engagement. Specifically, the Amended Rule requires a shareholder-proponent, at the time of submitting a proposal, to provide the company with:
- a written statement that the shareholder-proponent is able to meet with the company in person or via teleconference at specified business dates and times5 (i.e., more than one date and time) that are no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal; and
- the shareholder-proponent's contact information.
If the shareholder-proponent's availability changes, the company should be notified and alternative date(s) and time(s) should be provided to the company.
The SEC believes this will encourage engagement and potentially enable the parties to reach a "more mutually satisfactory and less burdensome resolution of the matter."
One Proposal Limit
In order to address potential evasions of the prior limit under Rule 14a-8(c) that "each shareholder may submit no more than one proposal to a company for a particular shareholders' meeting," the Amended Rule applies the one-proposal rule to "each person" rather than "each shareholder" who submits a proposal. This prevents a person from relying on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders' meeting. Similarly, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders.
Changes to Resubmission Thresholds
Under Rule 14a-8(i)(12), a shareholder proposal is excludable from a company's proxy materials if it addressed substantially the same subject matter as a proposal, or proposals, previously included in the company's proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was below a specified threshold. The Amended Rule increases the prior resubmission thresholds of 3% for matters voted on once, 6% for matters voted on twice and 10% for matters voted on three or more times in the last five years to 5%, 15% and 25%, respectively.6
Notably, the Amended Rule does not include the "Momentum Requirement" that had been part of the proposed rules, which would have allowed companies to exclude proposals that had been submitted three or more times in the preceding five years if the proposal received more than 25% but less than 50% of the vote on its most recent submission, and support declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote.7
Practical Considerations
Companies receiving shareholder proposals for meetings held on or after January 1, 2022 should carefully check the eligibility criteria of proponents to ensure that they meet the requisite holding thresholds and should evaluate whether a proposal violates the "one proposal" limit based on the identity of the person making the submission. In addition, given the transition period for meeting the ownership requirements for submission of a shareholder proposal, companies should obtain their shareholder lists as of the effective date of the Amended Rule, in order to be able to confirm whether a shareholder-proponent relying on the transition period in order to submit a proposal for an annual or special meeting to be held prior to January 1, 2023, is in fact eligible to submit a proposal. Moreover, companies receiving proposals from shareholder representatives should confirm that compliant authorization documentation is submitted in accordance with the Amended Rule.
In addition, companies receiving shareholder proposals that have already been submitted to a vote at a prior meeting should confirm whether the proposal received the requisite level of support in order to be eligible for resubmission.
In light of the new shareholder engagement rules, companies should develop a timely and efficient system for reviewing and strategizing on the approach to a shareholder proposal shortly after receiving it. The Amended Rules maintain the deadlines in current Rule 14a-8 that currently dictate a company's response to a shareholder proposal, including the timeline for notifying a shareholder-proponent of procedural deficiencies8 and for submitting a no-action request to the SEC to exclude the proposal.9 While these deadlines tend to restrict companies with regular meeting calendars to execute on their response to a proposal (whether agreeing to include it, negotiating, requesting no-action relief or a combination of these) within 30-45 days from receipt of the proposal, the Amended Rules' requirement that shareholder-proponents be available to engage 10 to 30 calendar days after submission may in practice lead companies to engage with shareholder-proponents even earlier than they would normally do so.
1 The Amended Rule is available here.
2 A shareholder relying on this transition provision must follow the procedures set forth in Rule 14a-8(b)(2) to demonstrate that the shareholder (i) continuously held at least $2,000 of the company's securities entitled to vote on the proposal for at least one year as of the effective date of the Amended Rule and (ii) continuously held at least $2,000 of such securities from the effective date of the Amended Rule through the date the proposal is submitted to the company. The shareholder will also be required to provide the company with a written statement that the shareholder intends to continue to hold at least $2,000 of such securities through the date of the shareholders' meeting at which the proposal will be considered.
3 Specifically, the Amended Rule requires documentation that: (i) identifies the company to which the proposal is directed; (ii) identifies the annual or special meeting for which the proposal is submitted; (iii) identifies the shareholder submitting the proposal and the shareholder's designated representative; (iv) includes the shareholder's statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder's behalf; (v) identifies the specific topic of the proposal to be submitted; (vi) includes the shareholder's statement supporting the proposal; and (vii) is signed and dated by the shareholder.
4 See the adopting release, pg. 40.
5 The times specified should be during the regular business hours of the company's principal executive offices. If these hours are not disclosed in the company's proxy statement, the shareholder-proponent should identify times between 9:00 a.m. and 5:30 p.m. on business days in the time zone of the company's principal executive offices.
6 For example, a proposal would need to achieve support of at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.
7 For a further discussion, see our prior alert, "SEC Proposes Amendments to Modernize Rule 14a-8."
8 14 days after receipt of the proposal under Rule 14a-6(f).
9 80 days before the filing of the definitive proxy statement under Rule 14a-8(j).
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