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SEC Proposes New Amendments to Modernize Shareholder Proposal Rules

On November 5, the Securities and Exchange Commission voted to propose amendments to Rule 14a-8 of the Securities Exchange of 1934 (Exchange Act) to address required share ownership thresholds for a proponent to submit a shareholder proposal, update the “one proposal” rule to clarify the rule that a person can only submit one proposal per meeting and amend the vote support thresholds required for a proponent to resubmit a shareholder proposal at subsequent shareholder meetings.

Rule 14a-8 requires that registrants holding a shareholder meeting subject to the proxy rules include proposals submitted by shareholders in their proxy statement, subject to the shareholder and the proposal satisfying certain procedural and substantive requirements. In announcing the proposed amendments, the SEC noted that market practice and the use of shareholder proposals has evolved significantly since the relevant rules were last amended. The process for submitting proposals, and for registrants to exclude proposals, has been the subject of considerable attention by the SEC, by registrants and by investors in recent years. In particular, the SEC noted that in 2018 alone it received more than 250 no-action requests relating to shareholder proposals.

Eligibility and Ownership Thresholds

Under current Rule 14a-8(b) a shareholder must continuously hold at least $2,000 or 1 percent of a registrant’s securities for at least one year in order to be eligible to submit a proposal for inclusion in the registrant’s proxy statement for its shareholder meeting. This threshold was last amended in 1998 when it was raised from $1,000 to the current $2,000. The proposed amendments would eliminate the 1 percent threshold option and create a new tiered dollar threshold as follows: either 1) continuous ownership of at least $2,000 of securities for at least three years; 2) continuous ownership of at least $15,000 of securities for at least two years; or 3) continuous ownership of at least $25,000 of securities for at least one year. The new thresholds are designed to demonstrate long-term investment in the registrant by the shareholder proponent seeking to submit a proposal.

In addition, the proposed amendments would require that a shareholder proponent submitting a proposal through a representative provide the registrant documentation demonstrating that the representative is authorized to act on behalf of the shareholder proponent and provide a meaningful degree of assurance as to the identity, role and interest in the proposal by the underlying proponent. The shareholder proponent would be required to sign the verification documentation.

Under the proposed amendments, any shareholder proponent seeking to submit a shareholder proposal would be required to state that the proponent is able to meet with the registrant, either in person or via teleconference, no less than 10 days nor more than 30 days after submitting the proposal. The proponent would have to provide contact information and business days and times when the proponent would be available to discuss the proposal with the registrant. According to the SEC, this new proposal is designed to encourage greater dialogue between the shareholder proponent and the registrant and possibly lead to more efficient and less costly resolutions to matters underlying the shareholder proposals.

One Proposal Rule

Rule 14a-8(c) provides that a shareholder may submit no more than one proposal to a registrant for any particular shareholder meeting. Under the proposed amendments the rule would be expanded to apply to “each person” submitting a proposal either “directly or indirectly” as opposed to just “each shareholder.” This would prevent a shareholder proponent from submitting one proposal in the proponent’s own name and a second proposal as a representative of a different shareholder.

Resubmission Thresholds

Currently, Rule 14a-(8)(i)(12) allows a registrant to exclude a shareholder proposal from its proxy statement under certain circumstances if the proposal deals with substantially the same subject matter as another proposal that has been previously included in the registrant’s proxy statement within the preceding five years. In particular, the registrant may exclude such a resubmission for any meeting within three years of the last time the proposal was submitted if the proposal received less than 3 percent of the vote if proposed once within the preceding five years, less than 6 percent of the vote if proposed twice within the preceding five years and less than 10 percent of the vote if proposed three times or more within the preceding five years. The amended rule would increase these thresholds to 5 percent, 15 percent and 25 percent, respectively.

In addition, the SEC has proposed a new rule that would allow a registrant to exclude a shareholder proposal that has been previously voted on three or more time in the last five years, even if it satisfied the 25 percent threshold the last time the matter was vote on, if the proposal received support of less than 50 percent of the votes cast and support for the proposal declined 10 percent or more compared to the prior vote.

Not surprisingly, reaction to the proposed amendments has been mixed, with the US Chamber of Commerce supporting the proposed amendments and the Council of Institutional Investors opposing the proposed amendments.

The SEC’s proposing release is available here.

©2019 Katten Muchin Rosenman LLP

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Brian Hecht Corporate Lawyer Katten
Partner

Brian Hecht is a Corporate partner in Katten's New York office. He offers broad transactional experience in capital markets transactions, mergers and acquisitions and corporate governance matters. Within capital markets, Brian's practice focuses on initial public offerings, high yield offerings, spin-offs, tender offers and investment grade debt offerings. Within mergers and acquisitions, he represents private equity funds and public companies in both public and private acquisitions and divestitures.

Prior to joining Katten, Brian was a...

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Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a selection of Mark’s engagements.

  • Representation of hospitality company in connection with its initial public offering and listing on NYSE, as well as ongoing counseling with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed public company in the banking industry in connection with strategic transactions, capital raising transactions, compliance with securities laws and NYSE rules, disclosure and corporate governance matters, including strategic acquisitions, notes offering and at-the-market offering.
  • Representation of clean tech manufacturer for industrial equipment in connection with alternative public offering and listing on NASDAQ, as well as ongoing counseling with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed issuer in connection with selling stockholder block trades.
  • Representation of NYSE-listed industrial manufacturer with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed medical device company with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
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Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

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