[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted (once again, three to two) to adopt highly controversial amendments to the requirements for submission of shareholder proposals in Rule 14a-8. According to the adopting release, the final amendments are intended to “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders.” The final amendments modify the eligibility criteria for submission of proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. Notably, the submission threshold has not been amended since 1998, and the resubmission threshold since 1954. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post.
The amendments will become effective 60 days after publication in the Federal Register and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final amendments also include special transition provisions with regard to the eligibility ownership thresholds for submission of proposals.
The proposal has been contentious from the get-go among the Commissioners. To those voting in support, in light of significant changes in communications and the mode of retail investing over time, the proposal reflected an appropriate and necessary rebalancing of the costs and interests of shareholder proponents as against the subject companies and the other shareholders (who must share in the costs). For example, Commissioner Elad Roisman maintained that the “thresholds in Rule 14a-8 were always intended to strike a balance. On the one hand the rule offers a powerful tool for a shareholder to bring attention to his or her particular proposal. But, on the other hand, each proposal comes at a cost, since other shareholders bear the expense associated with including a proposal in a company’s proxy statement and they must devote time and attention to considering each proposal.”
To the opponents, the changes restrict yet another mechanism for shareholder oversight of management, particularly affecting smaller holders and proposals related to ESG issues—just as they are increasing in favor—with little cost savings for most companies. For example, Commissioner Allison Lee, who dissented, viewed the rulemaking as the “capstone in a series of policies that will dial back shareholder oversight of management at the companies they own,” putting “a thumb on the scale for management in the balance of power between companies and their owners.” Although the changes purport to be looking after the interests of shareholders, she remarked, the weight of comment letters on the proposals make clear that shareholders “strongly oppose” these changes.
The proposal was also widely debated in the public sphere, drawing a proliferation of comments. One reason is that shareholder proposals have recently assumed an increasingly significant role as investors have begun to intensify their focus on environmental issues, such as climate change, and social issues, such as racial injustice and inequity. The pandemic has also highlighted workforce health and safety issues. Shareholder proposals are viewed by their proponents and others as instrumental in driving companies to address many of these issues and their potential impact on sustainability and long-term shareholder value.
According to a comment letter submitted by Senator Sherrod Brown, the shareholder proposal process has, over many decades, been a mechanism used to challenge injustices and drive corporate responsibility. The proposed changes, he contended, “could silence the consideration of [proposals regarding] gender and racial pay equity, workplace diversity, and racial discrimination and social and economic justice that have increased in recent years and that will undoubtedly be proposed in the future.”
On the other hand, various corporate groups have long pushed the SEC to raise the bar on shareholder proposals. In 2014, the Chamber of Commerce, along with other corporate groups, submitted a rulemaking petition requesting the SEC to increase the resubmission thresholds, citing a “growing crescendo of respected voices…attesting to the unacceptable negative consequences for investors of the overwhelmingly verbose and often senseless assault on the ability of shareholders and portfolio managers to focus on how to manage their securities investments wisely, as well as the diversion of serious management focus away from the best interests of shareholders.”
Changes to shareholder proposal rules
According to the adopting release, although the requirement that companies include shareholder proposals in their proxy statements has benefits for proponents of proposals as well as companies and their shareholders, “the costs of processing, analyzing, and voting on the proponent’s proposal largely are borne by the company and its shareholders. Accordingly, the mechanism for shareholder proponents to require inclusion of their proposals in companies’ proxy materials is not without limits.” While the SEC acknowledged that the proposal had drawn many comments, the SEC ultimately adopted the amendments “substantially as proposed,” with the exception of the proposed “momentum” requirement, which was not adopted, as discussed below.
Ownership eligibility thresholds. Currently, Rule 14a-8(b) requires that, to have a proposal included, the shareholder must have continuously held at least $2,000 in market value, or 1%, of a company’s securities entitled to vote on the proposal for at least one year as of the date of submission of the proposal. The final amendments provide for a tiered approach based on the value and duration of ownership. To have a proposal included in the proxy, the shareholder must demonstrate continuous ownership of at least:
- $2,000 of the company’s securities entitled to vote on the proposal for at least three years (eliminating the 1% test);
- $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
- $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
Shareholders will be prohibited from aggregating their securities with other shareholders to meet the minimum thresholds, although they will be permitted to “co-file” or “co-sponsor” shareholder proposals as a group if each proponent in the group meets one of the eligibility thresholds.
In adopting the amendments, the SEC indicated that it continues to believe that
“the required dollar amount and holding period should be calibrated such that a shareholder has some meaningful ‘economic stake or investment interest’ in a company—and therefore is more likely to put forth proposals reflecting an interest in the company and its shareholders than to use the proxy process to promote a personal interest or general cause—before the shareholder may draw on company and shareholder resources to require the inclusion of a proposal in the company’s proxy statement, and before the shareholder may use the company’s proxy statement to command the time and attention of other shareholders to consider and vote on the proposal.”
The SEC did not believe, given increases in inflation and market value over the last 22 years, that the prior threshold was adequate to “appropriately ensure that the shareholder has a sufficiently meaningful stake in a company today.” Although the alternative of simply raising the dollar amount of securities required to be held for one year was considered, the SEC was aware of “the effect such an increase may have on investors with smaller investments, including those with a demonstrated long-term economic stake or investment interest in the company.” In addition, the SEC believed that increasing the holding period requirement as part of a tiered approach was appropriate. recognizing that sometimes the “length of time owning the company’s securities may be a more meaningful indicator that a shareholder has a sufficient interest that warrants use of the company’s proxy statement.” Further, the SEC did not view the increase in the holding period to be an undue burden in light of the significant costs imposed by proposals on others. What’s more, shareholders that do not meet the thresholds “can nevertheless raise important issues with companies and other shareholders through alternative avenues with greater ease than in the past.” The SEC also took into account the amount that could be saved by the amendments to the ownership thresholds, estimated to be an aggregate annual cost savings of up to $69.8 million per year for all Russell 3000 companies.
As a transitional matter, currently eligible shareholders (under the current $2,000 threshold/one-year minimum holding period requirement) that do not satisfy the new requirements will continue to be eligible to submit proposals for all annual or special meetings held prior to January 1, 2023, provided they continue to hold at least $2,000 of a company’s securities.
With regard to the elimination of the ability to aggregate holdings to satisfy the eligibility thresholds, the SEC contended that “allowing shareholders to aggregate their securities to meet the new thresholds would undermine the goal of ensuring that each shareholder who wishes to use a company’s proxy statement to advance a proposal has a sufficient economic stake or investment interest in the company.”
Proposals submitted on behalf of shareholders. The final amendments require a shareholder who elects to use a representative to submit a shareholder proposal to provide documentation that:
• “Identifies the company to which the proposal is directed;
• Identifies the annual or special meeting for which the proposal is submitted;
• Identifies the shareholder submitting the proposal and the shareholder’s designated representative;
• Includes the shareholder’s statement authorizing the designated representative to submit the proposal and otherwise act on the shareholder’s behalf;
• Identifies the specific topic of the proposal to be submitted;
• Includes the shareholder’s statement supporting the proposal; and
• Is signed and dated by the shareholder.”
In a clarification from the proposal, the final amendments require identification of the “specific topic” of the proposal, as opposed to “the specific proposal,” as originally proposed. The SEC believes that the new requirement “will help safeguard the integrity of the shareholder proposal process and the eligibility restrictions by making clear that representatives are authorized to so act, and by providing a meaningful degree of assurance as to the shareholder proponent’s identity, role, and interest in a proposal that is submitted for inclusion in a company’s proxy statement.” The SEC did not expect the new requirements to interfere with a shareholder-proponent’s ability to use an agent or interfere with a representative’s ability to act as a fiduciary.
In response to comments, the SEC clarified that, for shareholder proponents that are entities, compliance with the amendment is not necessary “if the agent’s authority to act is apparent and self-evident such that a reasonable person would understand that the agent has authority to act,” such as where the agent submits a proposal on behalf of an entity and the agent is the CEO of the submitting corporation, a state official who is the custodian of submitting state or local trust funds, a general partner of a submitting partnership or an adviser to a submitting investment company. However, the agency relationship would not be apparent and compliance would be required where an investment adviser submits a proposal on behalf of a client that is a shareholder; in that case, the relationship is private and generally governed by private contractual arrangements that do not regularly involve submission of proposals.
Shareholder engagement. The SEC believes that shareholder engagement with companies can be an alternative to submission of a shareholder proposal. Accordingly, the SEC contends that requiring shareholder-proponents to indicate their availability to discuss their proposals will facilitate dialogue and perhaps lead to efficient and less costly resolutions of the issues. The final amendments require that shareholder proponents “provide the company with a written statement that they are able to meet with the company in person or via teleconference at specified dates and times that are no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal.” The proponent must also provide contact information (for the proponent, not the representative, if any, unless the proponent is an entity) and specific business days and times of availability during the regular business hours of the company’s principal executive offices if disclosed in the company’s proxy statement, or, if not so disclosed, then between 9:00 a.m. and 5:30 p.m. on business days in the time zone of the company’s principal executive offices. Companies are not required to engage with a shareholder proponent.
One-proposal limit. The amended rule states that each “person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting,” substituting “each person” for “each shareholder.” As a result, a shareholder proponent will not be able to “submit one proposal in its own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting,” or to “submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.”
The purpose of the one-proposal limitation is to limit the company’s expense and to avoid obscuring other material matters in the proxy statement with too many proposals, a rationale that the SEC believes applies equally to representatives of proponents. The amendment is not intended to limit a representative’s ability to physically “present proposals on behalf of multiple shareholders at the same shareholders’ meeting.” Nor will the amendments “prohibit a single representative from representing multiple co-filers in connection with the submission of a single shareholder proposal.”
In addition, “entities and all persons under their control, including employees, will be treated as a ‘person’ for purposes of the amendment.” If shareholders hold shares in joint tenancy, they may submit proposals individually or jointly; however, under the amendments, “the one-proposal limit will apply collectively to all persons having an interest in the same shares.”
Resubmission thresholds. The resubmission thresholds represent the levels of shareholder support that a proposal must receive to be eligible for resubmission at future shareholder meetings of the same company. The SEC proposed to raise those thresholds, which are currently set at 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years. A number of commenters objected to the proposal on the basis “that the new thresholds would stifle or delay adoption of shareholder-initiated reforms to the extent shareholder support develops gradually over time.” Nevertheless, the SEC decided to adopt the amendment as proposed. As amended, a
“shareholder proposal will be excludable from a company’s proxy materials if it addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was:
• Less than 5 percent of the votes cast if previously voted on once;
• Less than 15 percent of the votes cast if previously voted on twice; or
• Less than 25 percent of the votes cast if previously voted on three or more times.”
The amendments are intended to address the SEC’s concern “that the current resubmission thresholds do not adequately distinguish between proposals that have a realistic prospect of obtaining broader or majority support in the near term and those that do not.” Under the current thresholds, the SEC stated, at least 90% of proposals remain eligible for resubmission.
Although some proposals may gain more support upon resubmission, the SEC does not believe that companies and other shareholders should have to bear the costs of repeat submissions for “proposals that have not demonstrated the potential of obtaining broader or majority support in the near term absent a significant change in circumstances. Moreover, if a proposal fails to generate meaningful support on its first submission, and is unable to generate significantly increased support upon resubmission,” the SEC contends that “it is unlikely that the proposal will earn the support of a majority of shareholders in the near term.” That position is based on data from a review of shareholder proposals that received majority votes between 2011 and 2018, which showed that approximately 90% received majority support on the first submissions, and 6% received 40% or more of the votes on the initial submissions. The SEC’s analysis also showed that only approximately 6.5% of proposals that failed to win majority votes on the first submissions ever win majority support in subsequent attempts. In response to the comment that majority support is not always necessary, that proposals are often considered “successful” if they achieve even 30% support, the SEC responded that “the new thresholds may also serve as better indicators of the likelihood that a proposal will result in an agreement between the company and the shareholder-proponent or raise management’s awareness of an issue.”
The SEC also contended that the levels of increase in the resubmission thresholds were appropriate. The increase from 3% to 5% of the initial resubmission threshold is intended to permit “exclusion of proposals that are very unlikely to earn majority support upon resubmission and is intended to serve as a better indicator of proposals that are more likely to obtain majority support than the current threshold.” In the SEC’s analysis of proposals that ultimately received majority support, only 2% failed to receive at least 5% support in the first submission.
The SEC believes that the more significant revisions to the second and third thresholds are also intended to provide “better indicators of proposals that have the possibility of obtaining broader or majority support in the near term than the current thresholds. We believe that proposals receiving these levels of support will have better demonstrated a sustained level of shareholder interest and a broadening of shareholder support to warrant management and shareholder consideration upon resubmission.” According to the SEC’s analysis of resubmitted proposals that ultimately received majority support, “the overwhelming majority garner more than 15 percent on their second submission and more than 25 percent on their third submission.”
Even under the amendments, the SEC maintains that the vast majority of proposals will be eligible for resubmission; based on the analysis of proposals resubmitted between 2011 and 2018, the SEC estimates that approximately 85% would have been eligible for resubmission under the new resubmission thresholds. In addition, the amendments should not “stifle” shareholder-initiated reforms, according to the SEC, because, after a cooling-off period, shareholders will be able to resubmit substantially similar proposals. And shareholders can still engage with the company even during the cooling-off period.
The SEC declined to adopt any alternative vote-counting methodologies, such as for companies with dual-class voting structures. In addition, the SEC also decided against adoption of the proposed “momentum” requirement. That provision would have permitted exclusion “of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal (i) received less than 50 percent of the votes cast and (ii) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.” (See this PubCo post.) Many commenters objected to the proposal, and the SEC ultimately agreed with the criticisms that it could have led to anomalous results and added unnecessary complexity.
SEC Process. Interestingly, in connection with the proposal, the SEC solicited comment on the effectiveness of the SEC’s role in the shareholder proposal process. Although most commenters were generally supportive, —surprise—some criticisms were voiced. For example, the New York State Comptroller indicated that the “frequent changes in staff positions can increase uncertainty and costs for issuers and proponents.” The Business Roundtable wrote that “the vast majority of its members ‘do not believe the [staff’s] “no-action” letter process is administered in a consistent and transparent manner.’” There was also a split of opinion as to whether the “shareholder-proposal process should be allowed to be governed by state law and a company’s bylaws.”
In response, the SEC continued “to believe that changes in staff views may be necessary on occasion. For this reason, and although the staff strives to apply the rule in a consistent and transparent manner, participants in the shareholder-proposal process ‘should not consider the prior enforcement positions of the staff on proposals submitted to other issuers to be dispositive of identical or similar proposals submitted to them.’” The SEC also rejected the notion that “greater oversight by the Commission could help with consistency and transparency,” indicating that the SEC “does not engage in any formal proceedings in connection with shareholder proposal matters.” However, the staff may seek the SEC’s views on some Rule 14a-8 issues, “including certain changes in staff positions.” With regard to the state law issue, the SEC observed that while “Rule 14a-8 provides a federal process for proxy voting and solicitation with respect to a shareholder proposal, matters of corporate organization such as voting rights and whether a proposal is a proper subject for action remain governed by state law.”