SEC Proposes Sweeping Changes to Proxy Solicitation and Shareholder Proposal Rules

Proposed amendments to the SEC’s proxy solicitation rules would make a proxy advisor’s reliance on the proxy rule exemptions contingent on the proxy advisor:

• Providing clients with enhanced, more standardized disclosures about conflicts of interest.
• Giving a company, and certain other soliciting persons, the opportunity to review and provide feedback on draft proxy voting advice before disseminating it to clients.
• Including in its proxy voting advice a hyperlink to the company’s or other eligible soliciting person’s views on the advice, if requested by the company or other soliciting person.

The SEC also proposes to:

• Codify its interpretation that the furnishing of proxy voting advice by proxy advisors generally constitutes a “solicitation” subject to the proxy rules.
• Clarify that the omission of certain information from proxy voting advice may, depending on the particular facts and circumstances, potentially violate the antifraud provisions of the proxy rules.

These proposed amendments are designed to ensure that investors who rely on proxy voting advice receive accurate, transparent and complete information on which to base their voting decisions. The SEC stated that it endeavored to propose amendments that would not impose undue costs or delays that could adversely affect the timely provision of proxy voting advice.

Proposed amendments to the SEC’s shareholder proposal rules would:

• 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.
• 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) including contact information and propose available dates and times for the meeting.
• Require additional documentation from a shareholder-proponent who uses a representative to submit a shareholder proposal regarding the representative’s authority to act on its behalf and details about the shareholder-proponent’s identity, role and interest in the proposal.
• 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 vote thresholds for resubmitting substantially similar shareholder proposals 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 preceding three years. As proposed, a company could also 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.

These proposed amendments are intended to facilitate constructive engagement between companies and shareholders and help prevent misuse of the shareholder proposal process. The proposals were informed, in part, by extensive feedback the SEC Staff received during its November 2018 roundtable on the proxy process and hundreds of comment letters submitted since then. To continue its efforts in this area, SEC Chair Jay Clayton asked the SEC Staff to prepare recommendations about “proxy plumbing” and the use of universal proxies.

Each rule proposal was approved by a 3-to-2 vote, with Chair Clayton and the SEC’s two Republican commissioners voting in favor. The dissenting commissioners argued that the proposed amendments would severely limit the ability of shareholders to hold company management accountable, vote in reliance on proxy voting advice and utilize the shareholder proposal process.

The SEC will accept public comments on each rule proposal for 60 days following its publication in the Federal Register.

Summary of Proposed Amendments

Proposed Amendments to Proxy Rule Exemptions for Proxy Voting Advice

Conditions to Proxy Advisors Being Able to Rely on Proxy Rule Exemptions

Under the proxy rules, unless an exemption applies, a person engaging in a proxy solicitation must generally comply with certain filing and information requirements designed to ensure that shareholders solicited by the person receive materially complete and accurate information. Exchange Act Rule 14a-2(b) exempts certain types of proxy solicitations from the filing and information requirements of the proxy rules. Proxy advisors typically rely on the exemptions set forth in Rule 14a-2(b)(1) and (b)(3). The SEC proposes to make such reliance subject to certain limitations and conditions described below.

Proposed Condition #1: Enhanced Conflict of Interest Disclosures

First, in order to rely on the exemptions, proxy advisors would be required to provide more detailed and standardized disclosures about material conflicts of interest to enable their clients to assess the objectivity and reliability of their proxy voting advice. Proposed Rule 14a-2(b)(9)(i) would require proxy advisors to include the following disclosures in their proxy voting advice:

• Any material interests, direct or indirect, of the proxy advisor (or its affiliates) in the matter or parties concerning which it is providing the advice.
• Any material transaction or relationship between the proxy advisor (or its affiliates) and (1) the company (or any of its affiliates), (2) another soliciting person (or its affiliates) or (3) a shareholder-proponent (or its affiliates) in connection with the matter covered by the proxy voting advice.
• Any other information regarding the interest, transaction or relationship of the proxy advisor (or its affiliate) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction or relationship. Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction or relationship.

The SEC warned that boilerplate language would not be sufficient to satisfy the proposed condition. It advised that disclosure should be “sufficiently detailed,” which may include the identity of the parties or affiliates or the approximate dollar amount involved in the interest, transaction or relationship at issue.

The conflict of interest disclosures would be required to be included in the proxy advisor’s proxy voting advice, whether delivered in a written report or conveyed through any electronic voting platform or other electronic medium.

Proposed Condition #2: Standardized Review and Feedback Period for Draft Proxy Voting Advice

The SEC proposes to give all companies and other soliciting persons the right to review draft proxy advice before it is disseminated to clients. This would allow them to identify factual errors or methodologic weaknesses in the proxy advisors’ analysis that could undercut the reliability of the proxy voting recommendations. In order to rely on the exemptions, proposed Rule 14a-2(b)(9)(ii) would require that before issuing their proxy voting advice to clients, proxy advisors must give companies (and certain other soliciting persons) an opportunity to review and provide feedback on the draft proxy voting advice, subject to the company (or other soliciting person) filing its definitive proxy statement at least 25 calendar days prior to the date of the shareholder meeting. As shown in the table below, the length of time the company (or soliciting person) has to review the draft proxy voting advice and provide feedback will depend on how far in advance of the meeting date the company files its definitive proxy statement.

As proposed, a proxy advisor would have to deliver no earlier than the expiration of the applicable review and feedback period, and no later than two business days before delivering proxy voting advice to clients, a final notice that includes the proxy voting advice it intends to deliver to clients, which may incorporate revisions the proxy advisor made to the advice after the review and feedback period.

A proposed note to the rule would permit proxy advisors to require companies (or other soliciting persons) to enter into confidentiality agreements for materials exchanged during the review and feedback period.

Finally, under proposed Rule 14a-2(b)(9)(iv), proxy advisors could rely on the exemptions from the proxy rules where failure to comply with the new conditions was immaterial or unintentional if (1) the proxy advisor made a good faith and reasonable effort to comply and (2) if feasible, the proxy advisor uses reasonable efforts to substantially comply with the condition as soon as practicable after becoming aware of its noncompliance.

Proposed Condition #3: Hyperlink to Company’s Views on Draft Proxy Advice

The SEC also proposes as a condition to reliance on the exemptions that, if requested by a company (or certain other soliciting persons), a proxy advisor must include in its proxy voting advice a hyperlink (or analogous electronic medium) directing the recipient of the advice to a written statement that sets forth the company’s (or soliciting person’s) views on the advice. This new option under proposed Rule 14a-2(b)(9)(iii) would only be available to a company (or soliciting person) that filed its definitive proxy statement at least 25 calendar days prior to the date of the shareholder meeting. It would enable clients to review the views of the proxy advisor and the company (if provided) simultaneously when making voting decisions and give companies an alternative (or a supplement) to the current practice of filing additional definitive proxy materials highlighting their views in response to proxy voting advice.

The rule proposal contemplates a one-year transition period after the publication of a final rule to give proxy advisors sufficient time to develop processes and systems to comply with the proposed new conditions.

Proxy Voting Advice Generally Constitutes a “Solicitation”

 In August 2019, the SEC published a new interpretation and guidance regarding the applicability of the federal proxy rules to proxy voting advice.³  It reiterated that the furnishing of proxy voting advice by proxy advisors generally constitutes a “solicitation” as defined in Exchange Act Rule 14a-1(l), which includes a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” The SEC proposes to codify this interpretation by explicitly adding to the definition of “solicitation” in Rule 14a-1(l) “[a]ny proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person that markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.” The SEC also proposes to amend Rule 14a-1(l)(2) to codify its longstanding view that proxy voting advice furnished only in response to an unprompted request would not constitute a “solicitation.”

Examples of Information That May be Misleading if Omitted from Proxy Voting Advice

 Currently Rule 14a-9 includes four examples of the type of information that a person engaged in a proxy solicitation may, depending upon the particular facts and circumstances, need to disclose to avoid a potential violation of the antifraud provisions of the proxy rules. The SEC proposes to add as an example of information that could be misleading if omitted from proxy voting advice certain material information, such as the proxy advisor’s methodology, sources of information, conflicts of interest or use of standards that materially differ from relevant standards or requirements that the SEC sets or approves. The proposed addition, which largely codifies current SEC guidance on the applicability of Rule 14a-9 to proxy voting advice, is designed to give clients more insight as to the processes and methodologies proxy advisors use to formulate their proxy voting recommendations.

Proposed Amendments to Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8

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.

Significantly Increased Ownership Thresholds for Submitting Shareholder Proposals

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). Proposed amendments would 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. The dollar amounts in the proposed minimum thresholds are based on the market value of a company’s securities entitled to vote on the proposal. As proposed, a shareholder could satisfy any one of the minimum thresholds to be eligible to submit a shareholder proposal, and would be required to provide the company with a written statement that it intends to continue to hold the requisite amount of securities through the shareholder meeting date. Under proposed Rule 14a-8(b)(1)(v), shareholders would not be allowed to aggregate their holdings to meet a minimum ownership threshold.

Commitment From Shareholder-Proponent to Engage With the Company About the Proposal

Proposed Rule 14a-8(b)(1)(iii) would 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. As proposed, the shareholder-proponent would have to provide contact information and propose business days and specific times that he or she is available to discuss the proposal with the company.

Written Documentation Required for Representatives Submitting Proposals on Behalf of Shareholders

If a shareholder-proponent chooses to use a representative to submit a proposal on its behalf, proposed Rule 14a-8(b)(1)(iv) would require the shareholder-proponent to provide the company with a written statement evidencing the representative’s authority to act on its behalf and addressing the shareholder-proponent’s identity, role and interest in the proposal. The specific requirements for the written statement are set forth in the table below.

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 proposes to amend Rule 14a-8(c) to explicitly state, “Each 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 proposed, the rule would prevent a person from submitting one proposal in his or her own name and submitting a different proposal for consideration at the same meeting on another shareholder’s behalf as his or her representative. It would also prohibit 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 preceding five years if the most recent vote occurred within the preceding three years and the most recent vote received in favor of the proposal was below specified thresholds. The current thresholds for resubmitting shareholder proposals have been in place since 1954, despite the significant market changes that have occurred since then. The SEC proposes to significantly increase the resubmission thresholds in Rule 14a-8(i)(12) as shown in the table below.

Proposed Rule 14a-8(i)(12)(ii) would also allow a company to exclude a shareholder proposal if a substantially similar proposal has been voted on three or more times in the past five years (even if it received at least 25% of the votes cast on its most recent submission) if the most recently voted on proposal (1) received less than 50% of the votes cast and (2) experienced a decline in shareholder support of 10% or more of the votes cast compared to the immediately preceding vote. The SEC’s proposing release included an example of the effect of this “momentum requirement” which is set forth in the table below.

¹“Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice,” SEC Release No. 34-87457 (Nov. 5, 2019), available here.

²“Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8,” SEC Release No. 34-87458 (Nov. 5, 2019), available here.

³The guidance was summarized in our Sidley Update titled “SEC Publishes New Guidance on Investment Advisers’ Proxy Voting Responsibilities and Reliance on Proxy Advisors” (Aug. 27, 2019), available here.