At an open meeting on September 23, 2020, the U.S. Securities and Exchange Commission (SEC) voted to adopt amendments to certain procedural requirements and to the resubmission thresholds under the shareholder-proposal rule.1 Similar to the amendments proposed late last year (and discussed in our previous Alert), the final amendments, among other things, 1) replace the current ownership requirement, for purposes of eligibility to submit a shareholder proposal, with a tiered approach based on the amount of securities owned and length of time held, 2) require certain documentation when a proposal is submitted by a representative on a shareholder's behalf, 3) encourage companies and shareholders to meet to discuss the proposal, 4) amend the one-proposal rule to apply to each person rather than each shareholder, and also to apply to representatives, and 5) increase the resubmission thresholds.
Tiered Ownership Requirement. Under the existing rule, to be eligible to submit a proposal, a shareholder must own at least $2,000 in market value, or one percent, of a company's voting securities for at least one year. The final amendments provide for a tiered approach to ownership requirements, with a shareholder being eligible to submit a proposal if the shareholder continuously held at least:
- $2,000 of the company's voting securities for at least three years;
- $15,000 of the company's voting securities for at least two years; or
- $25,000 of the company's voting securities for at least one year.
Any shareholder that held at least $2,000 of a company's voting securities for at least one year as of the effective date of the final amendments will continue to be eligible to submit proposals to the applicable company during a transition period if the shareholder continues to maintain a minimum investment of $2,000 of the company's voting securities through the date that the proposal is submitted to the company.
In addition, under the final amendments, shareholders are not permitted to aggregate their shares in order to meet the ownership requirements.
Additional Documentation for Submissions by Representatives. The final amendments codify existing SEC staff practice requiring that shareholders that use a representative to submit a proposal provide documentation that:
- identifies the company to which the proposal is directed;
- identifies the meeting for which the proposal is submitted;
- identifies the shareholder and the representative;
- includes the shareholder's statement authorizing the representative to submit the proposal or 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.
The adopting release notes that in cases where the shareholder is an entity, and thus is only able to act through an agent, compliance with this new requirement would "not be 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." Examples of the foregoing, as provided in the adopting release, were a corporation's chief executive officer who submits a proposal on behalf of the corporation or an adviser to an investment company who submits a proposal on behalf of the investment company.
Shareholder-Company Engagement. The final amendments include a new requirement to encourage dialogue between companies and shareholders. Under the final amendments, shareholders must provide a written statement to the company concerning their ability to meet with the company in person or via teleconference during the period from 10 to 30 calendar days after submission of the shareholder proposal. This statement must include the shareholder's contact information and the days and specific times (i.e., must be more than one day and time) that the shareholder is available to meet with the company to discuss the proposal. The days and times provided by the shareholder must be during the regular business hours of the company's principal executive offices, or between 9:00 a.m. and 5:30 p.m. on business days in the time zone of the company's principal executive offices if the regular business hours are not disclosed in the company's proxy statement. Of note, the adopting release explains that the contact information and availability for engagement must be that of the shareholder, not the representative of the shareholder (if any); however, the representative would be able to participate in discussions between the shareholder and the company.
One Proposal Limit. The final amendments revise the existing one-proposal limit to apply to each person rather than each shareholder and broaden this rule to prohibit 1) a shareholder from submitting a proposal in its own name and also acting as a representative and submitting a proposal on behalf of another shareholder at the same company, and 2) a representative from submitting more than one proposal at a particular company (including where the representative is representing different shareholders). The adopting release notes that this limitation applies to representatives submitting proposals on a shareholder's behalf but does not apply to representatives (e.g., lawyers, investment advisers) providing other assistance or advice. In addition, this limitation "is not intended to limit a representative's ability to present proposals on behalf of multiple shareholders at the same shareholders' meeting," assuming that all other procedural and substantive requirements are satisfied.
Resubmission Thresholds. The final amendments increase the resubmission thresholds relating to shareholder proposals as follows:
| Existing Resubmission Thresholds |
New Resubmission Thresholds |
| If a shareholder proposal deals with substantially the same subject matter as a proposal (or proposals) previously included in the company's proxy materials within the past five years, then a company may exclude the proposal from its proxy materials for any meeting held within three calendar years of the last time that it was included if the proposal received: ) |
A shareholder proposal is 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 past five years if the most recent vote occurred within the past three years and the most recent vote was: |
| Less than 3 percent of the vote if proposed once within the preceding five calendar years |
Less than 5 percent of the votes cast if previously voted on once |
| Less than 6 percent of the vote if proposed twice previously within the preceding five calendar years |
Less than 15 percent of the votes cast if previously voted on twice |
| Less than 10 percent of the vote if proposed three times or more previously within the preceding five calendar years |
Less than 25 percent of the votes cast if previously voted on three or more times |
What to Do Now?
The final amendments will become effective 60 days following their publication in the Federal Register and will be applicable for an annual or special meeting to be held on or after January 1, 2022.
[1] The shareholder-proposal rule is 17 CFR 240.14a-8 under the Securities Exchange Act of 1934, often referred to as Rule 14a-8. Under the shareholder-proposal rule, companies required to comply with the federal proxy rules are required to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements.
