On November 5, 2019, the SEC proposed amendments to Exchange Act Rule 14a-8, the shareholder proposal rule. This rule requires companies that are subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The proposed amendments seek to modernize the shareholder proposal rule by updating the criteria that a shareholder must satisfy to be eligible to require a company to include a proposal in its proxy statement and by updating the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings.
Wednesday, November 06. 2019
Rule 14a-8 permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several specified substantive or procedural requirements or if the shareholder proponent does not satisfy certain eligibility or procedural requirements. Updating this rule is being undertaken as part of the SEC’s ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights. Much of the rule’s procedural and substantive requirements have not been reviewed by the SEC in over 20 years, and the proposed rules aim to address and modernize the criteria for use of the shareholder proposal process through the company’s proxy statement.
More specifically, the proposed amendments would:
- update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement
- update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
- modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings.
Proposed amendments to Rule 14a-8(b)
The proposed amendments to the eligibility requirements under 14a-8(b) would replace the current ownership requirements with a tiered approach that provides three options for demonstrating an ownership stake through a combination of the amount of securities a shareholder owns and the length of time those securities have been held. A shareholder would be eligible to submit a Rule 14a-8 proposal if the shareholder has continuously held at least:
- $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
- $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.
The proposed amendments retain the current $2,000 threshold for shares held continuously for at least three years while adding two additional eligibility options that are indicative of a shareholder having an economic stake of investment interest in the company that would justify requiring the company to include such a shareholder’s proposal in its proxy statement.
In addition to this tiered approach to eligibility, the SEC is proposing to eliminate the current 1 percent ownership threshold, which they report has not been historically utilized by shareholders when submitting
The proposed rule would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds to submit a Rule 14a-8 proposal. Shareholders would continue to be permitted to co-file or co-sponsor shareholder proposals as a group if each shareholder-proponent in the group meets an eligibility requirement. In such cases, the SEC is also seeking comment on whether the rules should be revised to require groups of co-filers to identify a lead filer to act as a primary point of contact for the proposal and to authorize the lead filer to negotiate with the company or withdraw the proposal on the co-filers’ behalf.
The changes to the eligibility requirements of Rule 14a-8 would also require shareholders that use a representative to submit a proposal for inclusion in a company’s proxy statement to provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf. Such documentation would: identify the company to which the proposal is directed; identify the annual or special meeting for which the proposal is submitted; identify the shareholder-proponent and the designated representative; include the shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf; identify the specific proposal to be submitted; include the shareholder’s statement supporting the proposal; and be signed and dated by the shareholder. The amendments are meant to make clear that the representative has been authorized to act on the shareholder’s behalf while affirming that shareholder’s support of the proposal and safeguarding the integrity of the hareholder-proposal process.
The final proposed change to Rule 14a-8(b) adds a shareholder engagement component to the current eligibility criteria. This change would require a statement from each shareholder-proponent that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days and no more than 30 calendar days after submission of the shareholder proposal. As part of this statement, the shareholder-proponent would be required to include contact information as well as specific business days and times that he or she will be available to discuss the proposal with the company.
Proposed amendments to Rule 14a-8(c)
Rule 14a-8(c) provides that “each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.” The SEC continues to believe that this limit is appropriate. However, the amendments to Rule 14a-8c seek to apply to the one-proposal rule to “each person” rather than to “each shareholder”. The amended rule would 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.”
Under the proposed rule, a shareholder-proponent would not be able to submit one proposal in his or her own name and simultaneously serve as a representative to a different proposal on another shareholder’s behalf for consideration at the same meeting. A representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders.
The goal of the amendment is to apply the rule more consistently to shareholders and representatives of shareholders. The amendment does not intend to prevent shareholders from seeking assistance and/or advice from lawyer, investment advisers, or others. Providing such assistance in drafting proposals or navigating the shareholder-proposal process to more than one shareholder would still be permissible. However, if the provider of such services submits a proposal, it would become subject to the limit and would not be permitted to submit more than one proposal in total.
Proposed amendments to Rule 14a-8(i)(12)
The SEC continues to believe that a resubmission threshold is appropriate for the shareholder-proposal process. Under the current rule, proposals that are not supported by up to approximately 97 percent
of votes cast on the first submission, 94 percent on the second submission, and 90 percent on the third or subsequent submissions remain eligible for resubmission. The proposed revisions to Rule 14a-8(i)(12) would replace the current resubmission thresholds of 3, 6, and 10 percent with new thresholds of 5, 15, and 25 percent, respectively, and add an additional provision to the rule that would allow companies to exclude proposals that have been submitted three or more
times in the preceding five years if they received more than 25 percent, but less than 50 percent, of the vote and support declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote.
Under the proposed rules, a shareholder proposal may be excluded from a company’s proxy materials if it deals with substantially the same subject matter as a proposal, or proposals, previously included in a company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and that 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 times or more.
In addition to raising the resubmission thresholds, the SEC is proposing to amend Rule 14a-8(i)(12) to add a new provision to allow companies to exclude proposals that have 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 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. The purpose of this requirement would be to relieve management and shareholders from having to repeatedly consider and bear the costs related to matters for which shareholder interest has declined.
You can read the full text of the proposed amendments here.
You can submit comments using the form available on the SEC’s website or by e-mailing firstname.lastname@example.org with the reference number (S7-23-19) in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, please remember to include reference number S7-23-19.
The SEC will post all comments on their website (https://www.sec.gov/rules/proposed.shtml) and will also be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm.
The public comment period will be open for 60 days after publication in the Federal Register.