Keith Higgins, chair of Ropes & Gray’s securities & governance practice, examines SEC Rule 14a-8, the shareholder proposal rule.
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SEC Rule 14a-8, the shareholder proposal rule, allows a shareholder who’s owned at least $2,000 worth of company stock for at least one year to have a proposal included in the company's proxy statement that's distributed to shareholders for an annual meeting.
Business groups this year have come out very strongly against the shareholder proposal rule, saying that companies spend millions of dollars each year dealing with shareholder proposals and countless hours of management time. They point to the fact that a group of about six shareholders, who appear to be acting in concert, account for almost one-third of the shareholder proposals at U.S. public companies every year. The $2,000 threshold, they say, is way too low and companies must include year after year proposals that get almost 90% of the company's shares voted against them.
On the other hand, proponents of the rule cite to the fact that it does provide a voice to individual shareholders and that many leading corporate governance reforms, such as declassifying boards of directors, majority voting for directors, and limitations on poison pills were the result of the shareholder proposal process. And the recent success of proxy access proposals is also cited by the proponents of shareholder proposals as a very positive development.
The SEC should consider making some modest revisions to Rule 14a-8. First, resubmission thresholds should be increased. A proposal that obtains a mere 10% of the vote year after year can be submitted year after year. That level should be raised to something much higher, and 30% is the number most frequently suggested. Although the $2,000 initial threshold is far too low, proposals that would require a threshold of 1% of the outstanding shares seem far too high. The focus instead should be on getting the resubmission threshold right and make the holding period three years rather than just one.
The SEC should also consider tighten up the requirements for submitting proposals on behalf of a shareholder to make sure that the shareholder has truly authorized the specific proposal being made at that specific company for a specific meeting. The SEC should consider allowing companies to redact false or misleading factual statements from a proponent's materials and don't force the SEC's staff to be a referee for that process. Finally, the SEC should reinvigorate the relevance exclusion by allowing companies to exclude proposals that do not relate to operations that account for at least 5% of total assets, sales or earnings of the company regardless of the other significance.
These suggestions are unlikely to satisfy opponents of the rule and they may not be palatable in all respects to proponents of the rule. However, they represent modest and I believe common sense suggestions that could make the shareholder proposal rule work better for all shareholders.