SEC Proposes Amendments to Narrow Certain Substantive Bases for Exclusion of Shareholder Proposals Under Rule 14a-8

On July 13, 2022, the Securities and Exchange Commission ("SEC") proposed amendments to Rule 14a-8 of the Securities Exchange Act of 1934, the shareholder proposal rule.¹ The proposed amendments would revise three of the substantive bases for exclusion of shareholder proposals under the rule: the substantial implementation exclusion; the duplication exclusion; and the resubmission exclusion. The public comment period will remain open until September 12, 2022 or 30 days following publication of the proposing release in the Federal Register, whichever is later.

The Proposed Amendments

Rule 14a-8 requires companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, unless the proposal falls under one of the procedural or substantive bases for exclusion. The proposed amendments would make changes to three of the 13 substantive bases for excluding shareholder proposals under Rule 14a-8(i):

• Substantial Implementation. Rule 14a-8(i)(10) currently allows companies to exclude a shareholder proposal that "the company has already substantially implemented." In practice, this exclusion historically enabled proposals to be excluded if a company successfully argued that it had addressed a proposal's essential objectives, even without implementing all of its elements. The proposed amendments would provide that a proposal may be excluded as substantially implemented if "the company has already implemented the essential elements of the proposal." (emphasis added). In explaining this proposed change, the SEC notes that the proposal would permit a shareholder proposal to be excluded as substantially implemented only if the company has implemented all of its essential elements, thereby making it more difficult for companies to exclude proposals under this basis of exclusion.²
• Duplication. Rule 14a-8(i)(11) currently allows companies to exclude a shareholder proposal that "substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting." The proposed amendments would specify that a proposal "substantially duplicates" another proposal if it meets three conditions: (i) it addresses the same subject matter, and (ii) seeks the same objective (iii) by the same means. The SEC demonstrated how this change would, in practice, narrow this basis of exclusion since two proposals would no longer be "substantially duplicative" if they seek different objectives and means, despite addressing the same subject matter.³
• Resubmission. Rule 14a-8(i)(12) currently allows companies to exclude a shareholder proposal that "addresses substantially the same subject matter as a proposal, or proposals, previously included in the company's proxy materials within the preceding five calendar years" (emphasis added) if the matter was voted on at least once in the last three years and did not receive sufficient shareholder support.⁴ The proposed amendments would: (i) provide that a proposal constitutes a resubmission if it "substantially duplicates" a prior proposal; and (ii) define "substantially duplicates" the same way as in the proposed amendments to Rule 14a-8(i)(11) described above, which would align the "resubmission" and "duplication" standards. The proposed new standard would therefor limit this basis of exclusion by requiring that an excludable proposal not only address the same subject matter as a prior proposal, but also that the proposal seek the same objective by the same means.⁵ In other words, the standard for exclusion would focus on the specific objectives and means sought by a proposal with respect to a given subject matter (i.e., the specific actions proposed to deal with a proposal's "substantive concerns"), rather than just its subject matter. Notably, the proposal does not change the resubmission thresholds, which were last adjusted in 2020.

Practical Implications

The ultimate effect of these proposed amendments would be to limit the bases of exclusions for companies when seeking to exclude shareholder proposals, leading to more proposals making it on companies' ballots. In particular, the changes to the conditions of Rule 14a-8(i)(10), the substantial implementation basis of exclusion, would result in proxy access "fix it" proposals (proposals directed at altering existing proxy access bylaws) being included on company ballots, since the SEC noted that "fix it" proposals for elimination of the nominating group size limit, one of the most common "fix it" requests, would be an "essential element" of the proposal, and therefore not excludable by a company with a shareholder group number limit in bylaws (such as the common 20 group number limit). The proposed amendments also seem likely to result in increased numbers of environmental and social proposals avoiding exclusion and for shareholder proponents to continue pushing these agendas using shareholder proposals, because the details and policy nuances relating to proposals on such matters as labor standards, human rights and other social issues, often make such proposals simple to distinguish from one another based on relatively minor differences. It may also become easier for less sophisticated proponents to avoid exclusion, as the SEC has clearly signaled its desire to allow shareholders to vote on more shareholder proposals, including those that are similar to other current or previously presented proposals. At the same time, the proposed changes could lead to both shareholder and company confusion because, as the proposing release notes, application of the proposed new rules could result in the inclusion in a company's proxy materials of multiple shareholder proposals dealing with the same or similar issue but calling on implementation of the proposals through different means. 

The proposed changes follow a 2022 proxy season, which saw a significant decrease in the number of proposals excluded pursuant to no-action requests and in which the Staff took a number of positions that went against long-standing no-action letter precedent. The proposed changes to the rules would codify certain of these positions, which represent a fairly dramatic shift from prior practice, and would render the precedential value of most existing no-action letters on these topics moot. Objections to the proposed changes include the fact that they were proposed while the full effects of the prior 2020 amendments have not yet been determined,⁶ the abbreviated comment period⁷ and the fact that, if adopted, they would be the third change in the SEC's regulatory framework for proxy solicitations in two years.⁸

_{¹ See the press release, fact sheet and proposed rules.
² For example, if a shareholder proposal seeks to amend a proxy access bylaw to allow for an unlimited number of shareholders to aggregate shareholdings to form a nominating group, the SEC notes that this "unlimited number" would be an "essential element" and therefore a company would not be able to defeat the proposal if it had a limit of up to 20 shareholders.
³ For example, the proposing release provided the following two proposals: "(1) a proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation; and (2) a proposal requesting a report to shareholders on the company's process for identifying and prioritizing legislative and regulatory public policy advocacy activities." The Staff had previously concurred that the proposals were substantially duplicative when analyzing the principal thrust or focus of the proposals; however, under the proposed amendment, these proposals would not be deemed substantially duplicative because, although they both address the subject matter of the company's political and lobbying expenditures, they seek different objectives by different means.
⁴ These thresholds are: (i) 5 percent of the votes cast if previously voted on once; (ii) 15 percent of the votes cast if previously voted on twice; or (iii) 25 percent of the votes cast if previously voted on three or more time.
⁵ For example, the proposing release notes that the staff previously had viewed the following proposals as addressing the same subject matter for purposes of the resubmission exclusion: (1) a proposal requesting that the board adopt a policy prohibiting the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a "government service golden parachute"); and (2) a proposal requesting that the board prepare a report to shareholders regarding the vesting of such government service golden parachutes that identifies eligible senior executives and the estimated dollar value of each senior executive's government service golden parachute. Under the proposed amendment to Rule 14a-8(i)(12), although these proposals concern the same subject matter (namely, government service golden parachutes for senior executives), exclusion would not be warranted because they do not seek the same objectives by the same means.
⁶ The 2020 amendments to the shareholder proposal rule increased the eligibility requirements for submitting and resubmitting shareholder proposals. See statements by Commissioner Pierce, available here, and Commissioner Uyeda, available here.
⁷ See statement by Commissioner Pierce, available here.
⁸ The 2020 amendments, as well as the 2020 proxy voting advice amendments and the recently adopted amendments to those new rules, as well as the publication in November 2021 of Staff Legal Bulletin 14L.}

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