SEC Modernizes Shareholder Proposal Rule

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SUMMARY

The Securities and Exchange Commission announced that it adopted amendments to modernize Rule 14a-8—the shareholder proposal rule, which governs the process for a shareholder to have its proposal included in a public company’s proxy statement.

THE UPSHOT

  • Last year, the Commission proposed amendments to Rule 14a-8. After taking into consideration the public comments and feedback received, the Commission adopted all but one of the proposed amendments in substantially the form proposed.
  • The final amendments affect five areas: ownership thresholds, proposals submitted on behalf of shareholders, shareholder engagement, one proposal limit, and resubmission thresholds.
  • The final 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 Commission noted that the amendments were an attempt to modernize the shareholder proposal rule in light of “significant changes in communication methods and technology.” The Commission had not amended the principal requirements for initial inclusion in the proxy statement since 1998, nor had it amended the principal requirements for subsequent resubmission if the proposal is not approved since 1954.

THE BOTTOM LINE

These amendments are intended to ensure that the ability to have a proposal included alongside management’s proposal in a company’s proxy materials is appropriately calibrated and takes into consideration the interests of not only the shareholder who submits a proposal but also the company and other shareholders who bear the costs associated with the inclusion of such proposals in the company’s proxy statement. It is unclear how these amendments will affect the volume of shareholder proposals, but the Commission believes they will not only modernize but also enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders.

FULL ALERT

On September 23, 2020, the Securities and Exchange Commission (the Commission) announced that it adopted amendments to modernize Rule 14a-8—the shareholder proposal rule, which governs the process for a shareholder to have its proposal included in a public company’s proxy statement. Rule 14a-8 generally requires companies that are subject to the federal proxy rules to include shareholder proposals in the companies’ proxy statements to shareholders, subject to certain procedural and substantive requirements. 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 procedural or substantive requirements, or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements.

On November 5, 2019, the Commission proposed amendments to Rule 14a-8 seeking to:

  • amend the criteria that a shareholder must satisfy to be eligible to have a proposal included in a company’s proxy statement;
  • modify the rule limiting the number of proposals that may be submitted for a particular company’s shareholders’ meeting; and
  • revise the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholders’ meetings.

After taking into consideration the public comments and feedback received, the Commission adopted all but one of the proposed amendments in substantially the form proposed. The final 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 amendments to Rule 14a-8 are summarized below.

1. Ownership Thresholds

Rule 14a-8(b) originally required a shareholder that wishes to have a proposal included in a company’s proxy materials to have continuously held at least $2,000 in market value, or 1 percent, of a company’s securities entitled to vote on the proposal for at least one year as of the date the shareholder submits the proposal.

Under amended Rule 14a-8(b), a shareholder will be eligible to submit a Rule 14a-8 proposal if the shareholder demonstrates continuous ownership of 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.

New Rule 14a-8(b) also provides for a transition period so that shareholders who are currently eligible at the $2,000 threshold will remain eligible through January 1, 2023, to submit a proposal for inclusion in the company’s proxy statement 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).

2. Proposals Submitted on Behalf of Shareholders

The second amendment to Rule 14a-8 adds a new eligibility requirement that requires shareholders who use a representative for submission of a proposal for inclusion in a company’s proxy statement to provide certain documentation to help safeguard the integrity of the shareholder proposal process and the eligibility restrictions of the rule.

Now, shareholders who use a representative to submit a proposal for inclusion in a company’s proxy statement must provide documentation that: (i) identifies the company to which the proposal is directed; (ii) identifies the annual or special meeting for which the proposal is submitted; (iii) identifies the shareholder submitting the proposal and the shareholder’s designated representative; (iv) includes the shareholder’s statement authorizing the designated representative to submit the proposal and otherwise act on the shareholder’s behalf; (v) identifies the specific topic of the proposal to be submitted; (vi) includes the shareholder’s statement supporting the proposal; and (vii) is signed and dated by the shareholder. If the shareholder-proponent is an entity, and thus can act only through an agent, compliance with this amendment will 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.

3. Shareholder Engagement

The third amendment to Rule 14a-8 adds a shareholder engagement component to the current eligibility criteria. Under the adopted amendment, shareholder-proponents will be required to provide the company with a written statement that they are able to meet with the company in person or via teleconference at specified dates and times that are no less than 10 calendar days nor more than 30 calendar days after submission of the proposal1.Shareholder-proponents will also be required to provide their contact information and identify specific business days and times (i.e., more than one date and time), between 9:00 a.m. and 5:30 p.m. on business days in the time zone of the company’s principal executive office, that they are available to discuss the proposal.

4. One Proposal Limit

Rule 14a-8(c) previously limited the single shareholder proposal rule to “each shareholder.” Under the adopted amendment, the scope of Rule 14a-8(c) now limits the one-proposal rule to “each person” who submits a proposal. Going forward, entities and all persons under their control, including employees, will be treated as a “person”. This new rule prevents a person from submitting more than one proposal at the same meeting, even if such person submitted the proposals on behalf of different shareholders, or submitted one proposal in its own name and another proposal as a representative on behalf of another shareholder. This amendment does not prohibit a person from representing multiple co-filers in connection with the submission of a single shareholder proposal.

5. Resubmission Thresholds

Prior Rule 14a-8(i)(12) allowed a proposal to be resubmitted at a future shareholder meeting if the proposal received met certain threshold levels of shareholder support during the prior five years (3 percent, if previously voted on once, 6 percent, if previously voted on twice, and 10 percent, if previously voted on three or more times). The new rule increases these thresholds to 5 percent, 15 percent, and 25 percent, respectively. Thus, a proposal will now need to achieve support of at least 5 percent, as opposed to 3 percent, of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years.

On the other hand, the Commission rejected the “Momentum Requirement,” which was a proposal to amend Rule 14a-8(i)(12) to allow companies to exclude a proposal that would not otherwise be removable under the new 25 percent threshold if the proposal received less than a majority of the votes cast and support declined by more than 10 percent or more from the last shareholder vote.

Final Thoughts

The Commission noted that the amendments were an attempt to modernize the shareholder proposal rule in light of “significant changes in communication methods and technology.” The Commission had not amended the principal requirements for initial inclusion in the proxy statement since 1998 and for subsequent resubmission if the proposal is not approved since 1954. The full Final Rule can be found here.


 

[1] The contact information and availability will have to be the shareholder’s, and not that of the shareholder’s representative (if the shareholder uses a representative). The amendment, however, does not preclude a representative from participating in any discussions between the company and the shareholder.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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