On September 23, 2020, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, amended certain procedural requirements of Exchange Act Rule 14a-8, which governs the process for shareholder proposals to be included in a company’s proxy statement. The amendments (1) replace the current ownership criteria that a shareholder must satisfy to include a proposal in a company’s proxy statement, (2) require specified documentation for a representative to submit a proposal on behalf of a shareholder, (3) increase the level of shareholder support required to resubmit proposals at future shareholder meetings and (4) eliminate the ability of a single person to submit multiple proposals at the same meeting both as a shareholder and as a representative of a shareholder. The amendments were adopted substantially as proposed by the SEC on November 5, 2019, and discussed in our alert dated November 13, 2019.

The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to proposals submitted for shareholder meetings to be held on or after January 1, 2022. Therefore, these changes will not be applicable to proposals for the upcoming 2021 proxy season.

Background

The amendments to Rule 14a-8 reflect the SEC’s ongoing efforts to improve and modernize the proxy process as well as its consideration of the interests of all shareholders. The initial and resubmission thresholds were last revised 20 years and 75 years ago, respectively. According to the press release announcing the amendments, in 2018 alone, almost 5,700 proxy materials were filed with the SEC and the staff received more than 250 no-action requests in connection with shareholder proposals. The amendments seek to preserve the ability of shareholder-proponents to include their proposals in companies’ proxy materials without compromising the efficient use of company and shareholder resources.

The amendments have sparked much debate among investors, corporate governance watchdogs and the SEC commissioners. Many welcome the amendments as a much-needed rebalancing of the interests of shareholder proponents and target companies, while others believe the amended rules will keep smaller investors from having a voice in management oversight and will undermine environmental, social and governance (ESG) initiatives of investors.

Summary of Final Amendments

Initial Submission Criteria

Rule 14a-8(b) currently requires that a shareholder-proponent hold at least $2,000 or 1% of a company’s securities continuously for at least one year to be eligible to submit a proposal for inclusion in the company’s proxy statement. The new rule replaces this threshold with three alternative tests.

To be eligible to submit a proposal under amended Rule 14a-8(b), a shareholder must demonstrate continuous ownership of at least:

• $2,000 of the company’s securities for at least three years;
• $15,000 of the company’s securities for at least two years; or
• $25,000 of the company’s securities for at least one year.

A shareholder-proponent may not aggregate its holdings with those of other shareholders to satisfy the new ownership thresholds.

The new rules provide for a transition period so that shareholders currently eligible at the existing $2,000 threshold will remain eligible if they meet certain conditions. Specifically, shareholders who satisfy the $2,000/one-year ownership threshold as of the effective date of the new rules (60 days after publication in the Federal Register) will be eligible to submit proposals for annual or special meetings to be held prior to January 1, 2023, so long as they continuously hold at least $2,000 of the company’s securities from the effective date through the date the shareholder submits a proposal to the company.

The amendments will also require a shareholder-proponent to provide the company with a written statement that the proponent is available to meet with the company, either in person or via teleconference, no less than 10 days nor more than 30 days after submission of the shareholder’s proposal. In addition, a shareholder-proponent must provide contact information and specific dates and times during the regular business hours of the company’s principal executive offices that the proponent is available to discuss the proposal with the company.

Shareholder Representatives

The amendments also address the role of representatives in submitting shareholder proposals. Any shareholder electing to use a representative to submit a proposal on its behalf for inclusion in the company’s proxy statement must provide documentation, signed and dated by the shareholder, 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-proponent and the designated representative;
• Includes the shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf;
• Identifies the specific proposal to be submitted; and
• Includes the shareholder’s statement supporting the proposal.

However, where a shareholder-proponent is an entity, this documentation will not be required so long as the representative’s authority to act for the shareholder is apparent and self-evident such that a reasonable person would understand that the agent has authority to act on behalf of the entity. For example, submission of documentation would not be required when a corporation’s CEO submits a proposal on behalf of the corporation.

Eligibility for Resubmission

Under Rule 14a-8(i)(12), a shareholder proposal may be excluded from a company’s proxy materials if (1) it addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five years, (2) the most recent vote occurred within the preceding three years and (3) the proposal received less than 3%, 6% or 10% of the votes cast if voted on once, twice, or three or more times, respectively. The SEC expressed concern that the existing thresholds may force companies and their shareholders to spend resources on matters that had previously been voted on and rejected without sufficient indication that the rejected proposals could gain traction among the majority of shareholders in the near future.

The new rule increases the levels of shareholder support a proposal must receive to be eligible for resubmission at a future meeting. Under amended Rule 14a-8(i)(12), a proposal addressing substantially the same subject matter as a proposal or proposals previously included in the company’s proxy materials within the preceding five years may be excluded if the most recent vote occurred within the preceding three years and was:

• Less than 5% of the votes cast if previously voted on once;
• Less than 15% of the votes cast if previously voted on twice; or
• Less than 25% of the votes cast if previously voted on three or more times.

It is notable that the SEC did not adopt the proposed “momentum requirement,” which would have allowed companies to exclude certain resubmitted shareholder proposals that would not otherwise be excludable under the 25% threshold but for which support had been declining.

One-Proposal Limit

The one-proposal rule in Rule 14a-8(c) currently states that each shareholder may submit no more than one proposal to a company for a particular meeting. However, a single shareholder could technically submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. The new rules address this loophole by applying the one-proposal limit to each “person” rather than to each shareholder, so a person is not able to submit one proposal as a shareholder and a different proposal for the same meeting in his or her capacity as a representative of another shareholder.

However, the amendment will not prohibit a single representative from representing multiple co-filers in connection with the submission of a single shareholder proposal. In addition, the adopting release indicates that shareholders may still seek assistance and advice from lawyers, investment advisers or others in drafting their proposals. The ability to provide such assistance to more than one shareholder is not affected – the limitation in the amended rule applies only to the submission of proposals as a shareholder-proponent or a representative of a proponent.