United States: SEC Proposes Changes To Requirements For Shareholder Proposals In Proxy Statements

On November 5, the SEC released its widely anticipated proposed changes to some of the procedural requirements for shareholder proposals to be included in management's proxy statement under Exchange Act Rule 14a-8.1 The proposed changes, which a divided SEC released concurrently with proposed new rules about proxy advisory firms2 , come nearly a year after the SEC hosted a roundtable to solicit stakeholder views on the proxy process3 and a related SEC invitation for public comment on the proxy process. The SEC first adopted Rule 14a-8 (formerly, Rule X-14A-7) in 1942 to require management to include in its annual proxy statement any shareholder proposal that was "a proper subject for action by the security holders." Since 1942, it and related rules governing shareholder proposals have been amended several times to impose and update substantive and procedural limitations on the ability of a shareholder to include a proposal for a vote in management's proxy statement. These rules have generated strong and opposing views over the decades because many companies view them as overly permissive, giving very small shareholders with agendas unrelated to shareholder value access to "valuable real estate" in management's proxy statement, while shareholders, including some large institutional shareholders, point to very important governance reforms that have their origins in shareholder proposals. The SEC since 2001 has also provided interpretive guidance about Rule 14a-8 through Staff Legal Bulletins (SLBs), which in recent years have mainly addressed the substantive grounds on which a company can exclude a proposal.4 In this latest release, the SEC addresses procedural requirements that it has not publicly reviewed in more than 20 years. The release proposes five changes to Rule 14a-8 that we discuss in further detail below.

Ownership Requirements

Proposed Rule

To be eligible to submit a proposal, Rule 14a-8(b) currently requires a shareholder to have held a minimum amount of a company's stock ($2,000 worth or 1% of the outstanding) for at least one year. The proposed amendments:

Rationale

One criticism of the current $2,000 economic stake requirement is that it is not indexed to inflation, resulting in what some perceive to be an insignificant investment commitment for a shareholder relative to what it was in 1998, when this element of the rule was last updated. In the release, the SEC suggests that the proposed changes are meant to require a shareholder to demonstrate a significant and long-term interest in a company to be able to submit (and resubmit) a proposal.

Considerations

Practically, if adopted, these changes alone are not likely to have an impact on most companies that have received proposals on a multi-year basis from the most prolific shareholder proponents, who likely satisfy the revised three-year test. They would, however, protect newly public companies for at least three years postIPO from having to grapple with proposals from shareholders that typically have maintained a $2,000 stake solely for the purpose of making shareholder proposals.

Companies have sometimes expressed frustration with shareholder proposals backed by multiple proponents due to a lack of transparency about the identity and role of each proponent – including which ones have authority to engage or to withdraw a proposal. The release encourages proponents to be clear about cofilers and identify a lead filer in initial communications with a company, but stops short of imposing formal requirements.

Proposals Submitted Through a Representative

Proposed Rule

Rule 14a-8 does not currently regulate a shareholder's use of a representative to administer and negotiate its proposal, which is a common practice. The proposed changes would not prohibit the appointment of a representative, but would require a shareholder that does appoint one to provide the company with written documentation of the appointment, including certain required information such as the identity of the representative, details regarding the proposal to be submitted and a shareholder statement supporting the proposal.

Rationale

The SEC acknowledges in the release that stakeholders have raised many questions about the representative process, and the lack of clear requirements makes this area ripe for abuse by representatives that wish to advance their own proposals but do not individually satisfy the eligibility requirements. The revised rule, if adopted, would formalize existing guidance in SLB 14I, which has some similar requirements as the proposed rule (although the proposed rule requires some additional information). The proposed procedural requirements were introduced to eliminate some of the uncertainty and burden companies bear in evaluating shareholder-representative arrangements.

Considerations

While these changes may seem minor and easy to comply with, they would be formal requirements and presumably the failure to comply with any required line item would render a proposal ineligible if not amended within the required time.

One-Proposal Limit

Proposed Rule

The proposal would amend Rule 14a-8(c) to apply the existing one-proposal limit to each person rather than each shareholder. Unlike the current rule, it would therefore prevent any individual from acting as a representative for more than one shareholder proposal or as a proponent of one proposal and representative for a different proposal in a proxy.

The release does clarify that the amendment is not intended to prevent shareholders from seeking the advice or assistance of advisors in preparing a shareholder proposal and an advisor may continue to provide assistance to multiple shareholders.

Rationale

The SEC continues to believe that a one-proposal limitation is appropriate and the change is intended to prevent evasion of it.

Considerations

This proposed rule – together with those above, and particularly the representative clarification – reflects the SEC's focus on the role of representatives. At the end of the proposed rule, the SEC seeks comment on whether it should eliminate altogether the ability of shareholders to appoint a representative.

Required Shareholder Engagement

Proposed Rule

The proposed rule would require a shareholder proponent to provide a written statement that he or she is available to meet with the company in person or via teleconference and include specific availability windows during the period between 10 and 30 days after submission. The statement would also include the shareholder's contact information. The representative, if any, is also required to submit the same information.

Rationale

Engagement between proponents and companies has increased in recent years, and during the 2019 proxy season nearly half of the initially submitted environmental and social proposals were withdrawn by proponents after successful engagement. The SEC notes in the release that it believes engagement produces beneficial change for all stakeholders and reduces expense for companies and administrative burdens on the SEC staff. It has also expressed concern that the no-action process may inhibit productive engagement, for example by discouraging a shareholder that believes it has a strong basis to include its proposal in the proxy statement from seeking to attain its objective through engagement rather than the public forum of a shareholder resolution.

Considerations

While required engagement might be beneficial, the proposed rule does not include an enforcement mechanism.

Minimum Support Thresholds for Resubmission

Proposed Rule

A company is currently permitted to exclude a shareholder proposal that deals with substantially the same subject matter as a proposal voted on in the last five years if the proposal did not receive a minimum level of support. The proposed amendments would raise the minimum support thresholds as follows:

In addition, if a proposal was voted on three or more times in the last five years and received more than 25% support, but that support declined by more than 10% between votes, the company could also exclude it.

Rationale

The current resubmission thresholds were last reviewed by the SEC in 1997 but have not been revised since 1954. As part of its review of the proxy process, the SEC found that only about 6.5% of resubmitted proposals over a recent seven year period eventually received majority support. It also found that resubmitted proposals that met the proposed thresholds were more likely to have eventually garnered majority support.

Considerations

The proposed changes to the resubmission thresholds reflect some SEC sympathy for management complaints regarding diversion of time and resources to "zombie" proposals. But while the proposed rule does not include exceptions, the request for comment does suggest a willingness to consider alternatives and a need to better understand the cost to companies associated with proposal resubmissions.

Putting the Proposed Changes in Context

One of the most interesting aspects of the proposed changes comes from that place in the back of the release that readers often gloss over – the economic analysis. The SEC in this particular release relies heavily on data produced by retroactive application of the proposed changes to the results of shareholder votes over a recent historical period.

Action by the Commission on the procedural elements of Rule 14a-8 was inevitable at some point, in particular because the submission threshold was never pegged to inflation. The SEC has sought to find a balanced solution – addressing the concerns of public companies with respect to the disproportionate dedication of resources to the proxy process, and the concerns of shareholders wanting to effect change. The result appears to be a data-driven attempt by the SEC to find a middle ground.

This practical approach may reflect an SEC trend toward reliance on quantifiable data, particularly with respect to sensitive Rule 14a-8 issues. In recent years we have seen no-action relief granted with respect to the aggregation limit for proxy access only to companies submitting quantitative data to back their arguments. In addition, in SLB 14J the SEC staff clarified that quantitative data would be a persuasive factor in evaluating board analysis provided as evidence for a company's no-action request on the basis of economic relevance and ordinary business. As companies navigate interactions with SEC staff regarding shareholder proposals, it is worth evaluating whether quantitative analytical data supporting their positions is available, even in areas that the staff has not yet indicated are likely to be significantly influenced by data-driven support.

Footnotes

1. SEC Release No. 34-87458 (Nov. 5, 2019), available at https://www.sec.gov/rules/proposed/2019/34-87458.pdf.

2. See our alert memo Proxy Advisory Firms — The SEC Drops the Other Shoe, available at https://www.clearygottlieb.com/news-and-insights/publication-listing/proxy-advisory-firms-the-sec-drops-the-othershoe?search=.

3. See our blog post SEC Proxy Developments in 2018, available at https://www.clearygottlieb.com/news-andinsights/publication-listing/sec-proxy-developments-in-2018-bod-2019?search=.

4. For the last staff legal bulletin regarding Rule 14a-8, see Shareholder Proposals: Staff Legal Bulletin No. 14K (CF), available at https://www.sec.gov/corpfin/staff-legal-bulletin14k-shareholder-proposals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions