Yesterday, the U.S. Securities and Exchange Commission (SEC) adopted controversial rule amendments that significantly increase the eligibility requirements for submitting and resubmitting shareholder proposals under Exchange Act Rule 14a-8.1 The amendments to the SEC’s shareholder proposal rules:
- significantly increase the eligibility requirements for submitting a shareholder proposal from ownership of at least $2,000 or 1% of a company’s securities for at least one year to a tiered approach depending on the level of ownership and the relevant holding period: at least $2,000 if held for at least three years, at least $15,000 if held for at least two years and at least $25,000 if held for at least one year
- prohibit shareholders from aggregating their holdings to satisfy the heightened ownership thresholds
- require additional documentation from a shareholder who uses a representative to submit a shareholder proposal regarding the representative’s authority to act on its behalf and details about the shareholder’s identity, role and interest in the proposal
- require each shareholder-proponent to (1) state that he or she is able to meet with the company, in person or by telephone, no less than 10 nor more than 30 calendar days after submitting a shareholder proposal to discuss the proposal and (2) provide contact information and propose multiple specific dates and times he or she is are available for the meeting
- clarify that one person may not submit more than one proposal, directly or indirectly, to a company for the same shareholder meeting
- significantly increase the prior shareholder support thresholds for resubmitting substantially similar shareholder proposals at the same company from 3/6/10% to 5/15/25% for matters voted on once, twice or three or more times, respectively, in the past five years if the most recent vote occurred within the past three years.
The final amendments were adopted substantially as proposed by the SEC in November 2019. Notably, the SEC chose not to adopt a controversial “momentum requirement” included in the proposal that would have enabled a company to exclude a shareholder proposal that has been voted on three or more times in the past five years if the proposal (1) received less than 50% of the votes cast and (2) experienced a 10% or more decline in shareholder support compared to the immediately preceding vote.
The amendments are intended to facilitate constructive engagement between companies and shareholders and help prevent misuse of the shareholder proposal process. They were informed, in part, by extensive feedback the SEC Staff received during its November 2018 roundtable on the proxy process and many comment letters submitted since then, including on the November 2019 rule proposal. The current ownership thresholds for initial submissions and the shareholder support thresholds for resubmissions have been in place since 1998 and 1954, respectively, despite the significant market and technological changes that have occurred since then.
The final amendments were adopted by a 3-to-2 vote, with Chair Jay Clayton and the SEC’s two Republican commissioners voting in favor. The dissenting commissioners, Caroline Crenshaw and Allison Herren Lee, argued that the amendments will severely limit the ability of individual shareholders with smaller investments to utilize the shareholder proposal process – particularly because they may not aggregate their holdings. They also expressed concern about the impact the amendments may have on shareholder proposals on environmental and social topics, which they note have seen a marked increase in number and support in the past decade.
The amendments will become effective 60 days following publication in the Federal Register and will apply to any shareholder proposal submitted for an annual meeting or special meeting held on or after January 1, 2022. A transition period in the final rules will permit a shareholder who, at the time the final rules take effect, has continuously held at least $2,000 of a company’s voting securities for at least one year to submit a proposal for the company’s annual or special meeting to be held before January 1, 2023, as long as the shareholder maintains at least its current holdings through the date the proposal is submitted to the company. As currently required, the shareholder must also provide the company with a written statement of its intention to continue to hold $2,000 of voting securities through the date of the meeting for which the proposal is submitted.
Summary of Rule Amendments
In recent years, the SEC has received increasing calls to reform the shareholder proposal submission process. Among other things, critics claim that the current submission thresholds are too low, which has resulted in a small number of individual investors filing proposals at a broad range of companies to pursue their own special interests, at a significant cost to the targeted companies. In the adopting release, the SEC estimated that 170 shareholders – 38 individuals and 132 institutions – submitted shareholder proposals that appeared in 2018 proxy statements, which is an “extremely small” percentage of the estimated 65 million investors in U.S. public companies.
Significantly Increased Ownership Thresholds for Submitting Shareholder Proposals; No Aggregation
Currently a shareholder-proponent must hold at least $2,000 or 1% of the company’s securities for at least one year to submit a shareholder proposal under Rule 14a-8(b). The amendments will delete the “1% of the company’s securities” threshold altogether and replace the “$2,000 for at least one year” requirement with three alternative ownership thresholds as shown in the table below.
|Increased Ownership Thresholds for Submitting a Shareholder Proposal|
|Current Minimum Threshold||Minimum Thresholds|
|≥$2,000 or 1% of a company’s securities for at least 1 year||≥$2,000 for at least 3 years|
|≥$15,000 for at least 2 years|
|≥$25,000 for at least 1 year|
Through the amended thresholds, the SEC aims to limit the use of the shareholder proposal process to shareholders who have demonstrated a sufficient economic interest and investment interest in the company. The dollar amounts in the new thresholds are based on the market value of a company’s securities entitled to vote on the proposal. A shareholder can satisfy any one of the minimum thresholds to be eligible to submit a shareholder proposal and, as under the current rules, will be required to provide the company with a written statement that it intends to continue to hold the requisite amount of securities through the date of the shareholder meeting for which the proposal is submitted.
Under new Rule 14a-8(b)(1)(vi), shareholders will not be allowed to aggregate their holdings with those of another shareholder or group of shareholders to meet a minimum ownership threshold necessary to be eligible to submit a proposal. As in the past, shareholders may co-file or co-sponsor proposals as a group if each shareholder-proponent meets one of the eligibility requirements.
Written Documentation Required for Representatives Submitting Proposals on Behalf of Shareholders
If a shareholder chooses to designate a representative to submit a proposal on its behalf, new Rule 14a-8(b)(1)(iv) will require the shareholder to provide the company with a written statement evidencing the representative’s authority to act on its behalf and addressing the shareholder’s identity, role and interest in the proposal. The specific requirements for the written statement are set forth in the table below.
|Content of Written Statement Now to be Required if a Shareholder Designates a Representative to Submit a Shareholder Proposal|
A shareholder-proponent using a representative to submit a shareholder proposal on its behalf must provide the company with written documentation that:
Shareholder-proponents who use representatives have already been providing most of this information pursuant to prior SEC Staff guidance.2 New to the final rules are the requirements for the shareholder to provide a statement authorizing the designated representative to submit the proposal and otherwise act on the shareholder’s behalf and the shareholder’s statement supporting the proposal.
The final rules clarify that a shareholder-proponent that is an entity need not comply with this requirement as long as the representative’s authority to act on the shareholder’s behalf is apparent and self-evident such that a reasonable person would understand that the agent has authority to submit the proposal and otherwise act on the shareholder’s behalf (e.g., a CEO submitting a proposal on behalf of the corporation or a general partner submitting a proposal on behalf of the partnership).
Commitment From Shareholder-Proponent to Engage With the Company About the Proposal
New Rule 14a-8(b)(1)(iii) will require each shareholder-proponent to provide the company with a written statement that it is able to meet with the company, either in person or via teleconference, no less than 10 nor more than 30 calendar days after submission of the shareholder proposal. The shareholder-proponent must provide contact information and propose multiple business days and specific times that he or she is available to discuss the proposal with the company. The final rules clarify that the proposed times must fall within regular business hours of the company’s principal executive offices (either as disclosed in the company’s most recent proxy statement or between 9:00 a.m. and 5:30 p.m. in the relevant time zone). If shareholders co-file a proposal, each co-filer must either (1) agree to the same dates and times of availability or (2) identify a single lead filer who will propose available dates and times to engage on behalf of all co-filers. The contact information and availability must be that of the shareholder-proponent, not a designated representative, if any, although a representative may participate in the meeting between the shareholder and the company regarding the proposal.
Person-Specific Limits on the “One-Proposal” Rule
Rule 14a-8(c) currently states that each “shareholder” may submit no more than one proposal for a particular shareholder meeting. The SEC amended Rule 14a-8(c) to explicitly state that “[e]ach person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders’ meeting.”
As amended, the rule prevents a person from submitting one proposal in his or her own name and a different proposal for consideration at the same meeting on another shareholder’s behalf as his or her representative. It also prohibits a person from acting as a representative for multiple shareholders and submitting more than one proposal to be considered at the same meeting.
Significantly Increased Thresholds for Resubmitting Shareholder Proposals
A company may exclude a shareholder proposal addressing substantially the same subject matter as a proposal previously included in the company’s proxy materials within the past five years if the most recent vote occurred within the past three years and the most recent vote received in favor of the proposal was below specified thresholds. The final rules significantly increase the resubmission thresholds in Rule 14a-8(i)(12) as shown in the table below.
|Increased Thresholds for Resubmitting a Shareholder Proposal Based on Prior Shareholder Support|
|Current Minimum Support Threshold||New Minimum Support Threshold|
|If voted on once||3%||5%|
|If voted on twice||6%||15%|
|If voted on 3 or more times||10%||25%|
For example, a shareholder proposal submitted for the first time would need to receive at least 5% support from voting shareholders to be eligible to be resubmitted within the next three years. Shareholder proposals that have been submitted two or three times in the past five years would have to receive at least 15% and 25% support, respectively, to be eligible to be resubmitted within the next three years. If the minimum support thresholds for resubmission are not reached, the company will be able to exclude the proposal.
When applying this rule, the calculation of the voting results should include votes for and against a proposal but not abstentions or broker non-votes. Furthermore, voting results should not be rounded up for purposes of determining whether the relevant threshold has been met.
To support the heightened thresholds, the SEC pointed to an SEC Staff review of resubmitted shareholder proposals that received majority support from 2011 and 2018. Of those proposals, 90% had received majority support, and 98% had received greater than 5% support, in their first submission. Of the proposals that received majority support on their third or subsequent submissions, approximately 95% received greater than 15% support on their second submission and 100% received greater than 25% support on their third or subsequent submissions.
1 “Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8,” SEC Release No. 34-89964 (Sep. 23, 2020), available here.
2 SEC Staff Legal Bulletin No. 14I (Nov. 1, 2017), available here.
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