The Situation: As part of the U.S. Securities and Exchange Commission's ("SEC") continued focus on reforming the proxy process, the SEC proposed new amendments to modernize the shareholder proposal rule, Rule 14a-8 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and to regulate proxy voting advice.
The Result: The proposed amendments update the criteria that a shareholder must satisfy to be eligible to require a company to include a shareholder proposal in its proxy statement and update the proxy voting advice regime in an effort to make it more accurate, transparent, and materially complete, including by amending the definition of "solicitation" under the proxy rules to specifically include proxy advisory firm reports.
Looking Ahead: Comments on the proposed amendments are due January 2020. If adopted, the amendments will not have legal effect this proxy season, but they will play a role in shareholder engagement and potential issuer responses in the proxy seasons ahead.
On November 5, 2019, the SEC announced proposed amendments modifying the eligibility requirements to submit a shareholder proposal, the one-proposal limit, and the resubmission thresholds set forth in Rule 14a-8 under the Exchange Act. In addition, the SEC proposed amendments to ensure that proxy voting advisor businesses, such as ISS and Glass Lewis, offer their clients the information needed to make fully informed decisions and to clarify the potential implications of Rule 14a-9 in the context of the proxy voting advisor business.
Updates to the Shareholder Proposal Rule
"Tiered" Ownership Requirements. The proposed amendments included an update to Rule 14a-8(b)'s initial ownership thresholds for shareholder-proponents. Those thresholds currently require continuously holding at least $2,000, or 1% of a company's securities, for at least one year as of the proposal submission date, with a tiered approach, any one of which a shareholder could satisfy 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.
The proposed rule would also prohibit shareholders from aggregating their securities with other shareholders to meet the ownership requirement.
One Proposal Per Person. The proposed amendments would apply the existing one-proposal rule to "each person" rather than "each shareholder" who submits a proposal. As a result, shareholder-proponents and representatives would be entitled to submit proposals only once at a meeting, either in his or her own name or on behalf of another shareholder.
New Resubmission Thresholds and Excluding Proposals. The proposed amendments also modernize the existing proposal resubmission thresholds to 5%, 15% and 25% (from 3%, 6% and 10%) for matters voted on once, twice or three or more times in the last five years, respectively. Further, the SEC added a new provision allowing for the exclusion of a proposal in certain situations where shareholder support has declined. Specifically, a proposal submitted three or more times in the last five years could be excluded, if: (i) the proposals received more than 25%, but less than 50%, of the vote, and (ii) support declined by more than 10% the last time the same subject matter was voted on compared to the immediately preceding vote.
Additional Documentation and Mandatory Company-Shareholder Engagement. The proposed amendments also require a shareholder-proponent who uses a representative to submit a proposal to provide documentation demonstrating the representative is authorized to act on the shareholder-proponent's behalf and to provide a meaningful degree of assurance regarding the shareholder-proponent's identity, role, and interest in seeking the inclusion of a shareholder proposal in a company's proxy statement. The SEC believes the burden placed here on shareholders would be minimal and would help reduce an additional administrative burden on companies.
The amendments also require each shareholder-proponent to state that he or she is able to meet with the company either in person or via teleconference within a specified time frame after submission of the proposal, along with contact information and availability for when the shareholder-proponent is able to discuss the proposal with the company. The SEC notes this amendment should encourage company-shareholder engagement and facilitate dialogue towards a more satisfactory and less burdensome resolution.
Updates to Proxy Voting Advice
As part of the SEC's ongoing focus on improving the proxy process and the role of proxy advisory firms, the amendment seeks to improve the accuracy, reliability, and transparency of proxy voting advisor businesses and their disclosures.
Codification of the Interpretation of "Solicitation." The proposed amendment codifies the SEC's interpretation that any proxy voting advice that is given by a person who markets his or her expertise as a provider of such advice separate from other forms of investment advice, who offers his or her expertise for a fee, and who recommends that a shareholder vote for, consent to or authorize a matter offered for shareholder approval is a "solicitation" subject to the federal proxy rules. The proposal also codifies the SEC's view that proxy voting advice provided only in response to unprompted requests does not constitute a "solicitation." In sum, the determination of whether proxy advice constitutes a solicitation hinges on whether the investment advisor, asset manager, or person offering advice has marketed their expertise in proxy voting and has, thus, prompted clients to request such advisor's input on proxy voting matters.
Additional Exemptions Regarding Proxy Voting Advice and Response under Rule 14a-2(b)(1) and 14a-2(b)(3). Rule 14a-2(b) provides exemptions from the filing and information requirements placed on persons soliciting proxy votes. The proposed amendment would condition the availability of such exemptions on proxy voting advisor businesses providing:
- Specific and sufficiently detailed information about any direct or indirect material interests, certain material transactions or relationships, any other information that is material to assessing objectivity and any policies and procedures used to identify and address any conflicts of interest arising from such interests, transactions or relationships.
- Registrants and other soliciting persons, such as dissident shareholders engaged in the proxy contest, an opportunity (for a limited period of time dependent on the number of days between when the proxy statement was filed and the date of the shareholder meeting) to review and respond to a business's proxy voting advice before it is issued to the business's clients.
- A final notice of voting advice to registrants and certain other soliciting persons and a two-business day period before the final voting advice is sent to clients in which the registrants and soliciting persons have the option to request that the proxy voting advisor businesses include links in their proxy voting advice to the registrant or soliciting person's written views about the proxy voting advice.
These proposed amendments would also permit proxy voting advisor businesses to require registrants and other soliciting persons to enter into confidentiality agreements about the materials exchanged during the review and response period. Additionally, proxy voting advisor businesses could still rely on the exemptions of Rule 14a-2(b) where their failure to comply was immaterial or unintentional.
Antifraud Standard under Rule 14a-9. Proxy voting advice remains subject to Rule 14a-9's prohibition of materially false or misleading statements or omissions. The SEC has proposed to amend the list in 14a-9 with examples of what, depending on facts and circumstances, may be misleading under the rule, including a failure to disclose material information regarding proxy voting advice, the proxy voting advisor business's methodology, sources of information, conflicts of interest or use of standards or requirements that materially differ from the SEC's standards and requirements.
Two Key Takeaways
- The modernization of the shareholder proposal rules would implement higher eligibility and resubmission thresholds for shareholder proposals, along with additional documentation and other requirements.
- The regulation of proxy voting advice attempts to safeguard the accuracy, transparency, and material completeness of proxy voting advice, without imposing additional undue costs or delays that might adversely affect the timely provision of proxy voting advice.