On July 13, 2022, the U.S. Securities and Exchange Commission (SEC) proposed rule amendments that would update certain substantive bases for exclusion of shareholder proposals under the SEC’s shareholder proposal rule, Exchange Act Rule 14a-8.1 The proposed amendments would revise three of the substantive bases for exclusion: the “substantial implementation” exclusion in Rule 14a-8(i)(10), the “duplication” exclusion in Rule 14a-8(i)(11), and the “resubmission” exclusion in Rule 14a-8(i)(12). The proposed amendments would provide the following:
- A proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal.”
- A proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.”
- A proposal constitutes a resubmission if it “substantially duplicates” a prior proposal, using the same test proposed in the previous bullet.
The SEC most recently adopted amendments to the shareholder proposal rule in 2020, which significantly increased the eligibility requirements for submitting and resubmitting shareholder proposals. These amendments are summarized in the Sidley Update available here. In 2021, the SEC released Staff Legal Bulletin No. 14L, which rescinded some previously issued guidance and articulated a framework for the application of certain bases for exclusion under Rule 14a-8. This guidance is summarized in the Sidley Update available here. The proposed amendments represent a continuation of the SEC’s efforts to streamline the no-action review process and provide market participants with clear, objective, and specific frameworks for evaluating whether or not a shareholder proposal is excludable under Rule 14a-8. As with the recent amendments and guidance, the proposed amendments are intended to promote more consistency and predictability in the shareholder proposal process and facilitate communication between shareholders and companies.
The proposed amendments were approved by a 3-to-2 vote, with SEC Chair Gary Gensler and the SEC’s two Democratic Commissioners voting in favor. The dissenting Commissioners argued that the proposed amendments would only serve to narrow the bases for exclusion in favor of shareholder proponents and introduce more uncertainty by creating new standards, thus opening up the shareholder proposal process to even greater risk of misuse. They also claimed it would be imprudent to consider further changes to the shareholder proposal rule before the full effects of the prior 2020 amendments can be determined.
The SEC will accept public comments on the proposed rules for 30 days following the proposing release’s publication in the Federal Register or September 12, 2022, whichever is later.
Summary of the Proposed Amendments
Revision of the “Substantial Implementation” Exclusion Under Rule 14a-8(i)(10)
Currently, under Rule 14a-8(i)(10), companies can exclude a shareholder proposal that “the company has already substantially implemented.”2 The proposed amendment would specify that a shareholder proposal is considered substantially implemented if “the company has already implemented the essential elements of the proposal.” The proposed amendment would maintain the “substantial” implementation standard but provide an interpretive framework for its application.
The analysis under this framework would focus on the specific elements of a proposal as an indication of whether a company’s specific actions are sufficiently responsive to a proposal such that it would be considered substantially implemented. The proposing release recognizes that a degree of substantive analysis may be required to determine which elements of a proposal are “essential” and whether those elements have been addressed. It also acknowledges that such determinations would be informed at least in part by a proposal’s degree of specificity as well as its stated primary objectives.
Notably, the release states that a proposal may be considered substantially implemented even if a company has not implemented all of the elements or implemented them precisely as requested. In the same vein, a company can exclude a proposal only if it has implemented all of the essential elements.
Revision of the “Duplication” Exclusion Under Rule 14a-8(i)(11)
Currently, under Rule 14a-8(i)(11), companies can exclude a shareholder proposal that “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.”3 The proposed amendment would specify that a proposal substantially duplicates another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” The proposed amendment is a departure from the current framework, which centers on an analysis of the principal thrust or focus of a proposal.
According to the SEC, the proposed amendment would provide a clearer standard and improve efficiency and transparency into the no-action process. Moreover, it would eliminate the first-mover advantage often associated with the current standard and enable shareholders to consider later-received proposals that address the same subject matter as an earlier proposal but seek different objectives or different means. Despite the intended benefits, the SEC acknowledges in its release that the proposed amendment could lead to a company’s proxy materials containing multiple shareholder proposals dealing with the same or similar issues, which could create greater inconsistency and unpredictability.
Revision of the “Resubmission” Exclusion Under Rule 14a-8(i)(12)
Currently, under Rule 14a-8(i)(12), companies can exclude a shareholder proposal that “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 it was voted on at least once in the past three years and did not receive at least (i) 5% of the vote if previously voted on once, (ii) 15% of the vote if previously voted on twice, or (iii) 25% of the vote if previously voted on three or more times.4 The proposed amendment would realign the resubmission standard with the duplication standard by changing what constitutes a resubmission from a proposal that addresses “substantially the same subject matter” as a prior proposal to a proposal that “substantially duplicates” another proposal in that it “addresses the same subject matter and seeks the same objective by the same means.”
The proposing release is careful to explain that a proposal need not be substantially the same or identical to warrant exclusion. However, it must not only address the same subject matter but also seek the same objective by the same means. The proposed amendment’s focus on specific objectives and means sought is an attempt to alleviate the potential “umbrella” effect of the exclusion by recognizing that there may be different objectives and means of addressing the same subject matter or substantive concerns.
Reaffirmation of the “Ordinary Business” Exclusion Under Rule 14a-8(i)(7)
The SEC’s proposing release does not seek to amend the ordinary business exclusion in Rule 14a-8(i)(7)5 and explicitly reaffirms the standards articulated in the SEC’s 1998 adopting release with regard to determining whether a proposal relates to ordinary business for purposes of the rule.6
1“Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8,” SEC Release No. 34-95267 (Jul. 13, 2022), available here.
217 CFR 240.14a-8(i)(10).
37 CFR 240.14a-8(i)(11).
417 CFR 240.14a-8(i)(12).
57 CFR 240.14a-8(i)(7).
6“Amendments To Rules On Shareholder Proposals,” SEC Release No. 34-40018 (May 21, 1998), available here.
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