On November 5, 2019, a divided Securities and Exchange Commission proposed amendments to Exchange Act Rule 14a-8, the shareholder-proposal rule. Rule 14a-8 requires companies that are subject to the federal proxy rules to include shareholder proposals in their own proxy statements to shareholders, subject to certain procedural and substantive requirements. Rule 14a-8 is meant to enable shareholder-proponents inexpensively and easily to present their proposals to all shareholders and to have proxies solicited for their proposals, while preventing excessive or inappropriate use of the system. The comment period for the proposed amendments ended on February 3, 2020.
The proposed amendments to Rule 14a-8 affect the following five requirements and limitations related to shareholder proposals:
Ownership Requirements: Rule 14a-8(b) currently states that in order to be eligible to submit a proposal, a shareholder must have continuously held at least $2,000 in market value or 1% of the company’s securities for one year prior to the submission. The proposed amendments increase these ownership requirements, conditioning eligibility to submit a proposal on a shareholder continuously holding: (1) $2,000 of the company’s securities entitled to vote on the proposal for at least three years; or (2) $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or (3) $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
Documentation Requirements: Rule 14a-8 does not currently address a shareholder’s ability to submit a proposal for inclusion in a company’s proxy materials through a representative. Instead, this practice has been governed by state agency law. The proposed amendments add a variety of documentation requirements for shareholders using a representative to submit a proposal, including that documentation: (1) identifies the company to which the proposal is directed; (2) identifies the annual or special meeting for which the proposal is submitted; (3) identifies the shareholder-proponent and the designated representative; (4) includes the shareholder’s statement authorizing the designated representative to submit the proposal; (5) identifies the specific proposal to be submitted; (6) includes the shareholder’s statement supporting the proposal; and (7) is signed and dated by the shareholder.
Company Engagement Requirements: Rule 14a-8 also does not currently require that a shareholder engage with the company before submitting a proposal. The proposed amendments add a shareholder engagement component to the eligibility criteria. Specifically, a shareholder must submit a statement that he or she is able to meet with the company in person or via telephone between 10 and 30 calendar days after submission of the shareholder’s proposal, the shareholder’s contact information and day and times when the shareholder is available for discussions with the company.
Limitation on Number of Proposals: Rule 14a-8(c) currently limits “each shareholder” to one proposal per shareholders’ meeting. The proposed amendments would apply the one-proposal rule to “each person” rather than “each shareholder.”
Limitation on Resubmissions: Rule 14a-8(i)(12) currently permits companies to exclude from their proxy materials resubmitted proposals if the proposal received (1) less than 3 percent of the vote if proposed once within the preceding five calendar years; (2) less than 6 percent of the vote on its last submission if proposed twice previously within the preceding five calendar years; or (3) less than 10 percent of the vote on its last submission if proposed three times or more within the preceding five calendar years. The proposed amendments would replace the resubmission thresholds of 3, 6, and 10 percent with new thresholds of 5, 15, and 25 percent, respectively. They would also add a new provision to the rule that would allow companies to exclude proposals that have been submitted at least three times in the preceding five years if they received less than 50 percent of the vote and support declined by more than 10 percent when the proposal was last voted on.
SEC Chairman Jay Clayton stated that the proposed amendments are meant to modernize regulations, some of which have not been updated for decades, to adjust to market developments. Specifically, the Chairman noted that over the last 20 years, large and multi-faceted proxy voting advice businesses have formed to provide services to investment advisers managing trillions of dollars in assets for retail investors, making the proxy advisers third-party market participants with influence similar to auditors, rating agencies and research analysts. The Chairman also stated that in the 65 years since the resubmission requirements have been updated, the split of retail and institutional shareholders has flipped from 90 percent retail / 10 percent institutional to 20 percent retail / 80 percent institutional, and communications technology has developed to allow broad and costless dissemination and instant access and contact. In light of these changes, the proposed amendments seek to rebalance the benefits and burdens to all shareholders while retaining the ability of small, medium and long-term shareholders to continue to enter and engage in the shareholder proposal process.
Commissioners Jackson and Lee voted against the proposal stating that the proposal “shields CEOs from accountability to investors” and “would operate to suppress the exercise of shareholder rights.”
Issuers broadly expressed approval for the proposed amendments, which the SEC’s analysis stated would reduce the number of proposals by about 37% and save public companies tens of millions of dollars a year in corporate expenses.
Institutional investors’ reactions were markedly less favorable. In a public comment submitted to the SEC, one investment manager objected to the proposed rules as limiting the rights of shareholders to engage with corporations and having the potential to prevent relevant issues from being raised, to the detriment of companies, shareholders, broader stakeholders, and the public at large.
Proxy advisers shareholder organizations were also critical of the proposal. The President of Institutional Shareholder Services, a proxy advisory firm, noted that institutional investors, which hire proxy advisers, had not called for the new, more onerous rules, and that the SEC should listen to and address the concerns of investors it is charged with protecting. The Shareholder Rights Group urged the SEC to reject the proposed amendments to Rule 14a-8, stating the amendments, and the proposed amendments to proxy rules for proxy voting advice, would be harmful to the interests of investors, pose systemic risk, and jeopardize progress on sustainable and responsible business practices in the U.S. and global economy.
The proposed amendments may shift the balance of power in engagements between shareholders and companies over environmental, social, and governance (ESG) issues. In recent years, investors have become increasingly engaged in ESG issues such as deforestation, workplace discrimination, water risk, and climate change. Shareholder proposals are a primary mechanism used by investors to engage corporate management and to communicate their views on corporate ESG risks. A significant proportion of shareholder proposals are voluntarily withdrawn in return for commitments from the company to address the issue of concern. Reducing the abilities of shareholders to submit proposals risks making such proposals a less effective strategy in disputes with companies over ESG issues.
When the SEC will adopt the proposed amendments to Rule 14a-8 is not currently known. The issues have inspired significant interest from market participants. Many commenters thus far simply asked that the Commission extend the comment period for 120-days, which it has not done. It is clear that however the Rule is ultimately modified, there will be robust opinions offered for the staff’s consideration. In 2019, the average amount of time between a proposed rule and final rule was approximately 13 months.