On November 5, 2019, the Securities and Exchange Commission (“SEC”) proposed amendments1 to modernize Rule 14a-8 (the “Proposed Rule”), which governs the process for shareholder proposals to be included in a company’s proxy statement. The Proposed Rule would amend shareholder proposal submission requirements under Rule 14a-8 by: (i) updating the eligibility criteria that a shareholder must satisfy to have a shareholder proposal included in a company’s proxy statement; (ii) providing that a single person may not submit multiple proposals at the same shareholders’ meeting, whether as a shareholder or as a representative of a shareholder; and (iii) increasing the levels of required shareholder support a proposal must receive to be eligible for resubmission at the same company’s future meetings.
Proposed Changes to Eligibility Requirements of Rule 14a-8(b)
Ownership Requirements for Submission of a Shareholder Proposal
Under the current Rule 14a-8(b), a shareholder-proponent must hold at least $2,000 or 1% of a company’s securities for at least one year to be eligible to submit a proposal for inclusion in the company’s proxy statement. The Proposed Rule would eliminate the 1% threshold option and create a tiered system under which a shareholder could satisfy any of the following three alternative thresholds to be eligible to submit a proposal:
- 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.
A proponent would need to satisfy one of these requirements individually and could not aggregate holdings with other shareholders, but shareholders would continue to be permitted to co-file or co-sponsor shareholder proposals as a group if each shareholder-proponent in the group meets the Proposed Rule’s eligibility requirements.
Since the adoption of Rule 14a-8(b), the SEC has recognized that the eligibility requirements “aim to strike an appropriate balance such that a shareholder has some meaningful ‘economic stake or investment interest’ in a company before the shareholder may draw upon company resources to require the inclusion of a proposal in the company’s proxy statement.”2 The prosing release expresses the SEC’s concerns that due to economic changes, as well as changes in the frequency, means and ease of engagement between companies and their shareholders, the existing requirements do not demonstrate “enough of a meaningful economic stake or investment interest” to merit inclusion of such a shareholder’s proposal in the company’s proxy statement.
Proposals Submitted on Behalf of Shareholders
Current Rule 14a-8 does not address a shareholder’s ability to submit a proposal through a representative; rather this practice has been 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 Proposed Rule requires shareholder proponents that rely on representatives to submit their shareholder proposals to provide authorizing documentation “attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf.”3 The SEC believes that these changes would help “safeguard the integrity of the shareholder-proposal process” and “reduce some of the administrative burdens on companies associated with confirming the principal-agent relationship.”
Lead Filer Where Shareholders Co-Sponsor a Proposal
While the Proposed Rule did not include a requirement to have a lead filer where shareholders co-sponsor a proposal, the proposing release notes that this practice could facilitate engagement and reduce administrative burdens on companies, co-filers, and the staff. The SEC believes that designating a lead filer and specifying the authority of the lead filer with respect to the proposal is a best practice and requested comment as to whether to revise the rules to require that co-filers identify a lead filer.
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 Proposed Rule includes changes designed to encourage such engagement. Specifically, the Proposed Rule would require:
- a statement from each shareholder-proponent that such shareholder-proponent is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal; and
- the inclusion of contact information and specific dates and times that such shareholder-proponent is available to discuss the proposal with the company.
The SEC believes this proposed step would encourage engagement and potentially enable the parties to reach a “more mutually satisfactory and less burdensome resolution of the matter.”
One Proposal Limit
Current Rule 14a-8(c) provides that “each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.” In order to address potential evasions of this limit, the Proposed Rule would apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal. This would prevent 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 would 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.
Proposed Changes to Resubmission Thresholds
Under current Rule 14a-8(i)(12), a company is not required to include a shareholder proposal in its proxy statement if substantially the same proposal was submitted to shareholders for action at a prior meeting and received support below a specified threshold. The Proposed Rule would increase the current resubmission thresholds under Rule 14a-8(i)(12) by:
- increasing the current 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; and
- adding a provision that would allow companies to exclude proposals that have been submitted three or more times in the preceding five years if: (i) the proposal received more than 25% but less than 50% of the vote on its most recent submission, and (ii) support declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote (the “Momentum Requirement”).
These proposed changes are responsive to concerns that the current resubmission thresholds may allow proposals that have not received widespread support to be resubmitted “with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support”, which burdens both companies and ultimately their shareholders.4 In this context, Chairman Jay Clayton noted that “five individuals accounted for 78% of all the proposals submitted by individual shareholders.”5 The SEC believes that the proposed resubmission thresholds would reduce the costs associated with management’s and shareholders’ repeated consideration of the same proposal while maintaining shareholders’ ability to submit proposals, and that the changes may lead to the submission of proposals that will “evoke greater shareholder interest in, and foster more meaningful engagement between, management and shareholders, as the proposed thresholds would incentivize shareholders to submit proposals on matters that resonate with the broader shareholder base to avoid exclusion under Rule 14a-8(i)(12).” Similarly, the Momentum Requirement would “relieve management and shareholders from having to repeatedly consider, and bear the costs related to, matters for which shareholder interest has declined.” As is currently the case, shareholders could still resubmit substantially similar proposals after a three-year “cooling-off” period.
Market Reaction
The Proposed Rule was approved by a 3-2 vote along party lines. It is anticipated that when the comment period opens, the Proposed Rule will draw a significant number of comments from market participants. Chairman Clayton observed that updating the eligibility thresholds, which have not been revised since 1954, was important to reflect, among other things, the reality that since the 1950s the “retail / institutional shareholder split has flipped from 90% retail / 10% institutional … to 20% retail / 80% institutional in 2017.”6 Commissioner Jackson, however, expressed concerns that “raising the thresholds at firms with dual-class structures would make it easier for executives at those companies to use their outsized voting power to keep shareholder proposals off their ballot.”7 The Proposed Rule has already elicited strong reactions both for and against the suggested changes. The CII rebuked the proposals as apparently “intended to limit shareholders’ voice at public companies in which they invest,”8 while the US Chamber of Commerce applauded them for ensuring that “investors will have access to transparent and unconflicted proxy advice as well as improv[ing]
the proxy submission process.”9
Comments on the Proposed Rule can be submitted 60 days following publication in the Federal Registrar.
1 The proposed rule is available here.
2 In discussing the proposed changes, the SEC noted the high cost to companies associated with management’s consideration of a proposal and/or including a proposal in the proxy statement.
3 Specifically, the Proposed Rule would require 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-proponent and the 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 proposal to be submitted; (vi) includes the shareholder’s statement supporting the proposal; and (vii) is signed and dated by the shareholder.
4 See BRANDON WHITEHILL, CLEARING THE BAR, SHAREHOLDER PROPOSALS AND RESUBMISSION THRESHOLDS, COUNCIL OF INSTITUTIONAL INVESTORS (“CII Report”) (November 2018), available here. Based on their analysis, approximately 94% of proposals remain eligible for resubmission after the initial submission, 90% after the second submission, and 94% after the third or subsequent submission under the current resubmission thresholds. In total, approximately 93% of proposals remain eligible for resubmission under the current resubmission thresholds. Of these eligible proposals that were submitted from 2011 to 2018, approximately 6.5% garnered majority support at some point during that period following initial submission.
5 See “Statement of Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System” (November 5, 2019), available here.
6 Id.
7 See “Statement on Proposals to Restrict Shareholder Voting” (November 5, 2019), available here.
8 See “Leading Investor Group Rebukes SEC for Proposed Rules That Undercut Critical Shareholder Rights” (November 5, 2019), available here.
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