Background

Rule 14a-8 requires public companies to include shareholder proposals in their own proxy statements, subject to certain procedural and substantive requirements. The Securities and Exchange Commission (“SEC”) has adopted changes to certain of these requirements.

Ownership Threshold and Holding Period Requirement

Under the current rule, to be eligible to submit a proposal, a shareholder must have continuously held at least $2,000 in market value, or one percent of the company’s securities entitled to be voted on the proposal at the meeting, for at least one year as of the date the proposal is submitted. This requirement seeks to strike a balance such that a shareholder has demonstrated some meaningful “economic stake or investment interest” in a company before the shareholder may draw upon company resources to require the inclusion of a proposal in the company’s proxy statement.

Under the amended rule, eligibility to submit a Rule 14a-8 proposal for inclusion in a company’s proxy materials requires that the shareholder satisfy one of three ownership requirements. Holding of smaller amounts of securities are paired with a requirement for a longer holding period. Thus, under the amended rule, in order to submit a Rule 14a-8 proposal, a shareholder must have continuously held at least:

• $2,000 in market value of the company’s stock voting on the proposal for at least three years;
• $15,000 in market value of the company’s stock voting on the proposal for at least two years; or
• $25,000 in market value of the company’s stock voting on the proposal for at least one year.

Shareholders should determine the market value by multiplying the number of securities the shareholder continuously held for the relevant period by the highest selling price (not necessarily the highest closing price) during the 60 calendar days before the shareholder submitted the proposal.

The SEC also eliminated the current one percent ownership test as it was almost never satisfied or utilized. The amended rule will not allow shareholders to aggregate their holdings in order to satisfy the ownership requirements, in recognition of the goal of ensuring that every shareholder who wishes to use a company’s proxy statement to advance a proposal has a sufficient economic stake or investment interest in the company.

Shareholders may 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 co-filers may designate a lead filer as the primary point of contact for the proposal, and each co-filer may authorize the lead filer to negotiate with the company and/or withdraw the proposal on the co-filer’s behalf. Although not required, the SEC believes that, as a best practice, shareholder-proponents should clearly state in their initial submittal letters to the company that they are co-filing the proposal with other proponents, identify the lead filer, and specify whether the lead filer is authorized to negotiate with the company and withdraw the proposal on behalf of the other co-filers. The SEC notes in the adopting release that ambiguities in the nature of coordination on a proposal’s submission could prompt companies to seek exclusion under Rule 14a-8(i)(11). Specifically, if two or more shareholder-proponents submit substantially duplicative proposals but fail to clearly indicate that they intend to co-file or co-sponsor the proposal, the later-received proposal may be susceptible to exclusion under Rule 14a-8(i)(11).^[1]

In some cases, companies receive proposals from persons who do not meet the ownership threshold requirements, but who are acting as representatives of shareholders who do meet such requirements. Prior to the amendments, Rule 14a-8 did not address a shareholder’s ability to submit a proposal for inclusion in a company’s proxy materials through a representative. However, concerns have been raised regarding this practice. For example, it may be difficult to tell whether the shareholder in fact supports the proposal that has been submitted on its behalf. There may be a question as to whether the shareholder has a genuine and meaningful interest in the proposal, or whether the proposal is primarily of interest to the representative, with only an acquiescent interest by the shareholder. This uncertainty may also raise questions about whether the eligibility requirements of Rule 14a-8(b) have been satisfied. It can be burdensome for companies to verify the purported agency relationship where the documentation provided by the person or entity submitting the proposal does not clearly establish that relationship.

To alleviate these concerns, the SEC adopted changes to require shareholders who use a representative to submit a proposal to provide documentation that:

• Identifies the company to which the proposal is directed;
• Identifies the annual or special meeting for which the proposal is submitted;
• Identifies the shareholder submitting the proposal and the designated representative;
• Includes the shareholder’s statement authorizing the designated representative to submit the proposal and 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 new rules clarify that where a shareholder-proponent is an entity, and therefore can only act through an agent, it will not be necessary to comply with the new documentation requirements 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, as where a corporation’s CEO submits a proposal on behalf of the corporation, a partnership’s general partner submits a proposal on behalf of the partnership, or an adviser to an investment company submits a proposal on behalf of the investment company. On the other hand, compliance would be required where an investment adviser submits a proposal on behalf of a client because the relationship between an investment adviser and its client is governed by private contractual arrangements that can vary in scope and do not necessarily entail authority to submit shareholder proposals.

The SEC wishes to encourage company-shareholder engagement in the shareholder proposal process. In some cases, such engagement, including dialogue with management, can accomplish a shareholder’s goals without the burdens associated with actually including a proposal in a company’s proxy statement.

As a result, the SEC adopted changes to require a written statement from each shareholder-proponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. The proposal’s date of submission is the date the proposal is postmarked or transmitted electronically, or the date of hand delivery. The shareholder is required to include contact information as well as business days and specific times that he or she is available to discuss the proposal with the company. The times specified for availability should be within the regular business hours of the company. If the company is not available to engage with the shareholder at any of the shareholder’s specified dates or times, the parties can agree on a different date and time. Companies, however, are not required to engage with any shareholder if they choose not to.

The contact information and availability will have to be that of the shareholder and not of any representative of the shareholder. If the shareholder is an entity, and acts through an agent who has the apparent and self-evident authority to act on behalf of the entity, the contact information and availability can be that of the agent.

Rule 14a-8(c) provides that “each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.” The adopting release makes the point that the rationale for the one-proposal limit applies equally to representatives who submit proposals on behalf of shareholders they represent. Thus, the SEC has adopted amendments to apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal. The amended rule states that “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 amended rule, a shareholder-proponent may not submit a proposal for himself or herself and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Similarly, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if on behalf of different shareholders. The amendment is not intended to prevent shareholders from seeking assistance and advice from lawyers, investment advisers, or others to help them draft shareholder proposals and work through the shareholder-proposal process. The ability to provide this type of assistance to more than one shareholder is not affected.

A shareholder proposal is currently excludable if substantially the same proposal had previously been submitted during the relevant lookback period and received less than 3, 6, or 10 percent of the vote the last time it was voted on if voted on once, twice, or three or more times, respectively. The SEC was concerned that the current resubmission thresholds may allow proposals that have not received widespread support from a company’s shareholders to be resubmitted multiple times with little prospect that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support.

Under amended Rule 14a-8(i)(12), a shareholder proposal would be excludable from a company’s proxy materials if it addresses 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 five 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.

The new rules are effective 60 days after publication in the Federal Register (the “Effective Date”) and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. However, investors who are eligible to submit proposals under the $2,000 threshold/one-year minimum holding period as of the Effective Date, but who do not satisfy the new requirements, will continue to be eligible to submit proposals through a transition period that extends for all annual and special meetings held prior to January 1, 2023, provided that they continue to hold at least $2,000 of the company’s securities to the date the proposal is submitted.

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Note:

[1] Rule 14a-8(i)(11) allows exclusion if a proposal substantially duplicates another proposal previously submitted by a proponent that will be included in the company’s proxy materials for the same meeting.