Overview

The SEC yesterday adopted amendments to modernize Exchange Act Rule 14a-8 — shareholder proposal rule, which governs the process for shareholders to make proposals that will be included in a company’s proxy statement for consideration at a meeting of shareholders.  The amendments revise two of the rule’s cornerstone provisions — (1) the ownership threshold for initial inclusion in a company’s proxy statement (not substantively revised since 1998); and (2) the support thresholds for subsequent resubmission of a proposal if it is not approved (not substantively revised since 1954).     

SEC Chairman Jay Clayton said, “Today’s amendments reflect many years of the staff’s engagement with investors and market participants as well as their extensive experience with shareholder proposals.  These amendments ensure there is an appropriate alignment of interests between shareholder-proponents and their fellow shareholders and illustrate again why retrospective review and, as appropriate, modernization of our rules is necessary.  There have been many significant changes in communication methods and technology, as well as the methods investors, particularly retail investors, use to access our markets in the 20 years and 75 years since the initial and resubmission thresholds were last revised."

Current Rule 14a-8 allows any shareholder to submit an initial proposal after having held $2,000 worth or 1% of a company’s securities for at least one year.  The amendments replace that threshold with three alternative thresholds that combine higher amounts and shorter holding periods.  The rules also provide for a transition period so that shareholders who currently are eligible at the $2,000 threshold will remain eligible to submit proposals for meetings prior to January 1, 2023 so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting).  The amended criteria are designed to ensure that a shareholder’s ability to have a proposal included in a company’s proxy materials — and thus to draw on company resources and to command the time and attention of the company and other shareholders — appropriately takes into consideration the interests of not only the shareholder who submits a proposal, but also the other shareholders who bear the costs associated with reviewing, considering and voting on such proposals in the company’s proxy statement. 

In resetting the support threshold for resubmission thresholds, the SEC staff reviewed shareholder proposals between 2011 and 2018 that ultimately received a majority of the votes cast on a second or subsequent submission. Of those proposals, 98% received over 5% support in the first submission. Of the proposals that obtained majority support on the third or subsequent submissions, approximately 95% received support of over 15% on the second submission, and 100% received over 25% support in their third or subsequent submission.

Highlights

The final amendments, among other things:

• amend Rule 14a-8(b) to:
  • replace the current ownership threshold ($2,000 or 1% of a company’s securities for at least one year), with the following three alternative thresholds that will require 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.
  • prohibit aggregation of holdings for purposes of satisfying the new ownership thresholds;
  • require shareholders who elect to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and
  • require that shareholders state that they are able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of their proposal, and provide contact information as well as specific business days and times that they are available to discuss the proposal with the company.
• amend Rule 14a-8(c) to:
  • apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, so that a shareholder-proponent may not 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.  Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
• amend Rule 14a-8(i)(12) to:
  • replace the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future meetings from the exiting thresholds of 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively.  Under the new thresholds, a proposal must achieve 5% or more support in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years now must achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.

What’s Next?

The amendments will be effective 60 days after publication in the Federal Register, and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.  The final rule can be found here: https://www.sec.gov/rules/final/2020/34-89964.pdf.