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.
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.