The Securities and Exchange Commission (SEC) recently proposed three amendments to Rule 14a-8 under the Securities Exchange Act of 1934, which governs what proposals made by a public company’s shareholders must be included in that company’s annual proxy statement and voted on by its shareholders. If enacted, the amendments would limit some methods that companies currently use to exclude shareholder proposals from those proxy statements.
Rule 14a-8 requires companies to include a shareholder proposal if the proposal complies with certain procedural and substantive requirements. Rule 14(a)-8(i) lists 13 substantive bases on which companies may exclude shareholder proposals. Three of those are the subject of the proposed amendments: the Substantive Implementation Test (Rule 14a-8(i)(10)); the Duplication Test (Rule 14a-8(i)(11)); and the Resubmission Test (Rule 14a-8(i)(12)).
In its proposing release, the SEC indicated the proposed amendments are intended to make the exceptions more consistent and predictable, but also to “facilitate shareholder suffrage and communication between shareholders and the companies they own … on important issues…”
Substantial implementation – a change in focus to “Essential Elements”
Since 1983, Rule 14a-8(i)(10) has allowed for a proposal to be excluded if “the company has already substantially implemented the proposal.” Under the proposed rule, in order to make the rule’s application more consistent and predictable, a proposal could be excluded only if the company has already implemented the essential elements of the proposal. In other words, instead of determining whether or not a proposal was already mostly completed by a company, the SEC will make a factual determination as to what the “essential elements” of the proposal are (which it intends to accomplish primarily by looking at the specificity of the proposal and its primary stated objectives) and whether all of those primary objectives have already been addressed by the company.
In its release, the SEC noted multiple scenarios in which it has previously concurred that a proposal was substantially implemented and thus excludable, but would not be excludable under the new language. For example, if a proposal calls for reports from the board of directors about a certain topic and the company had already issued a similar report by management, if the SEC determines that an essential element of the proposal is that the report come from the board rather than from management, it would not be excludable. Notably, the SEC did not provide any examples of proposals that were not previously excludable that would be excludable under this proposed construction.
Duplication—going from substantially duplicative to “the same"
Rule 14a-8(i)(11) allows a company to exclude a shareholder proposal if “the proposal substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting.” The SEC claims in its release that the current rule favors proposals that are submitted first, as subsequent proposals may be duplicates of the earlier proposals, and it may encourage shareholders to send in proposals as quickly as possible in order to get their proposal included.
The proposed amendment would add a key qualifier to limit the rule’s exclusive effect. A company could only exclude a proposal that substantially duplicates another proposal already to be included in its proxy if it “…addresses the same subject matter and seeks the same objective by the same means as…” the already included proposal. In other words, proposals that have the same principal focus or subject matter may nevertheless not be considered duplicates if the proposals have differing means of achieving their objectives. For example, if a shareholder makes a proposal that a company publish in a newspaper a detailed statement of political contributions or attempts to influence legislation, while another shareholder requests a report to shareholders identifying the company’s process for identifying and prioritizing public policy advocacy activities, the two proposals would not be considered duplicates by the SEC staff, and the company would be required to include both of these proposals in its proxy statement. The SEC notes that this would require companies to include multiple similar proposals addressing the same subject matter (which would allow shareholders to pick and choose from proposals on the same or similar topics that call for a range of actions).
Resubmission—going to the “the same” test as Duplication
Under Rule 14a-8(i)(12), shareholder proposals that appear in a proxy statement must meet a certain level of shareholder support to be eligible for resubmission in a subsequent year. If the support tests are not met, companies have the right to exclude that proposal, as well as proposals that deal in “substantially the same subject matter”, for five years.
Under the proposed amendment, which utilizes the same qualification proposed for the Duplication Test described above, the two proposals would have to “addresses the same subject matter and seek the same objective by the same means.” This would make the criteria for exclusion under 14a-8(i)(11) and 14a-8(i)(12) consistent and significantly narrower.
Request for comment
The SEC has requested comments to its proposed amendments, specifically requesting comment regarding the following:
- Is it appropriate to identify the essential elements of a proposal as a basis for determining substantial implementation and, if so, is the SEC’s proposed analytical framework to determine substantial implementation appropriate? If not, are there other approaches to consider?
- Would the new duplication language that allows for multiple proposals with the same issue create confusion if multiple contradictory proposals on the same topic are included? If so, what are limits the SEC can implement to reduce confusion and contradictory results, such as numerical limits per topic?
The proposed amendments are published in the Federal Register on July 27, 2022, and the SEC is seeking comments on the proposed amendment by September 12, 2022. We would expect that, due to the likelihood that these changes would increase the number of shareholder proposals that would be required to be included in proxy statements, that there will be a large number of comments.
The SEC is looking to broaden shareholder rights through the proposed amendments, and each of the amendments, if implemented, would appear to reduce a company’s ability to exclude shareholder proposals on the basis of these rules.