- Proposed amendments to Rule 14a-8 of the Exchange Act would significantly tighten the procedural and substantive requirements of the “shareholder-proposal rule.”
The amendments would:
- Raise the minimum-ownership requirements that a shareholder must satisfy to submit a shareholder proposal for inclusion in an issuer’s proxy statement.
- Revise the “one-proposal rule” to explicitly restrict a single person from submitting multiple shareholder proposals at any single shareholders’ meeting.
- Increase the shareholder-support thresholds that a shareholder proposal must satisfy to be eligible for resubmission at future shareholder meetings.
The Securities and Exchange Commission (the “SEC”) on November 5, 2019 proposed amendments to modernize the shareholder-proposal rule under Rule 14a-8 of the Securities Exchange Act of 1934 (the “Exchange Act”), which sets forth certain procedural and substantive requirements pursuant to which an issuer must include shareholder proposals in its proxy statement.1 The proposed amendments (collectively, the “Proposed Amendments”) would, most notably, update:
- The eligibility requirements for shareholder submissions under Rule 14a-8(b);
- The one-proposal limit under Rule 14a-8(c); and
- The resubmission thresholds under Rule 14a-8(i)(12).
Shareholder-Proposal Rule Amendments
The eligibility requirements in Rule 14a-8(b) currently provide that, to be eligible to submit a proposal for inclusion in an issuer’s proxy statement, a shareholder proponent must have continuously held at least $2,000 in market value or 1% of the issuer’s securities entitled to vote on the proposal for at least one year prior to the date the proposal is submitted.2 These ownership thresholds aim to ensure that a shareholder proponent has some meaningful “economic stake or investment interest” in the issuer.3 Based on concerns that the current thresholds are no longer indicative of a meaningful investment, the SEC has proposed updating the ownership requirements with a three-tiered approach that accounts for both the shareholder’s investment amount and the length of time the investment has been held by such shareholder.
Under the Proposed Amendments, a shareholder would be eligible to submit a proposal for inclusion in an issuer’s proxy materials if the shareholder has continuously held at least:
(i) $2,000 of the issuer’s securities entitled to vote on the proposal for at least 3 years;
(ii) $15,000 of the issuer’s securities entitled to vote on the proposal for at least 2 years; or
(iii) $25,000 of the company’s securities entitled to vote on the proposal for at least 1 year.
The proposed rule would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds to submit a proposal under Rule 14a-8.4
Requirements for Submissions through a Representative
The SEC has also proposed amending Rule 14a-8(b) to require a shareholder using a representative to submit a proposal to provide documentation attesting that such shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf. Typically, the representative submits the proposal to the issuer on the shareholder’s behalf and is subsequently permitted to act on the shareholder’s behalf in connection with the matter. Current practice has raised concerns that in some circumstances it can be difficult to determine whether the shareholder actually supports the proposal submitted on its behalf or if the proposal is in the primary interest of the representative.5 Under the amendment, shareholders would need to provide documentation that includes:
(i) the company to which the proposal is directed;
(ii) the annual or special meeting for which the proposal is submitted;
(iii) the shareholder-proponent and the designated representative;
(iv) the shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf;
(v) the specific proposal to be submitted;
(vi) the shareholder’s statement supporting the proposal; and
(vii) the dated signature of the shareholder.6
Finally, the SEC has proposed including a shareholder-engagement component in Rule 14a-8(b) in an effort to encourage dialogue among shareholders and issuers.7 The amendment would require a statement from each shareholder proponent that he or she 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 the submission of a shareholder proposal. The shareholder would also be required to include his or her contact information and specific business dates and times he or she is available to discuss the proposal with the issuer.8
The one-proposal rule in Rule 14a-8(c) currently provides that “each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.”9 The proposed amendment to the rule extends the one-proposal limitation to “each person” rather than “each shareholder” who submits a proposal at the same shareholders’ meeting.
In effect, the amendment would restrict any individual, including shareholder representatives, from directly or indirectly submitting more than one proposal at any shareholders meeting. For example, pursuant to the Proposed Amendments, a shareholder would not be permitted to submit a proposal as a shareholder-proponent and serve as a representative to submit a different proposal on behalf of another shareholder at the same meeting. Similarly, a representative would be prohibited from submitting more than one proposal at the same meeting, even if each proposal were submitted on behalf of different shareholders.10
Rule 14a-8(i)(12) currently permits issuers to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the issuer’s proxy materials within the preceding 5 calendar years” if the proposal had previously been voted on at least once over the three preceding calendar years and did not receive stipulated minimum levels of shareholder support. The current and proposed levels of support required for resubmission are shown below:
The Proposed Amendments to the resubmission thresholds aim to allow issuers to exclude proposals “that have not received broad support and appear less likely to be on a sustainable path toward achieving majority shareholder support.” These “cooling off” periods are intended to relieve issuers and shareholders of the repeated consideration and costs associated with proposals that have no meaningful support from shareholders.13
The Proposed Amendments also include a new provision in Rule 14a-(i)(12), which the SEC refers to as the “Momentum Requirement.” The Momentum Requirement would permit an issuer to exclude from its proxy materials any shareholder proposal dealing with substantially the same matter as a prior proposal even if the proposal satisfies the 25%-threshold requirement after having been voted on three or more times in the last five calendar years, if:
(i) the proposal received less than a majority of the votes cast in the most recent vote; and
(ii) support for the proposal in the most recent vote declined by 10% or more compared to the vote immediately prior.14
Rationale for the Proposed Amendments
The Proposed Amendments were approved by a divided 3-2 vote. Jay Clayton, Chairman of the SEC, delivered an address in support of the Proposed Amendments, asserting that the amendments would facilitate the meaningful engagement of “small-, medium- and long-term shareholders” and more appropriately balance the burdens and benefits of the proposal process to all shareholders.15 However, dissenting Commissioners expressed concern that the Proposed Amendments would suppress the exercise of shareholder rights, particularly those of smaller shareholders, and inhibit a critical means of CEO accountability.16
The SEC requests public comments on the Proposed Amendments on or before the date that is 60 days after the Proposed Amendments have been published in the Federal Register.17