On September 23, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to its shareholder proposal rule, Rule 14a-8 under the Securities Exchange Act of 1934, which governs the process for a shareholder to have his or her proposal included in a company’s proxy materials for consideration by the company’s shareholders. With the adoption of these final rules, the SEC is revising the submission threshold for the first time since 1998 and the resubmission threshold (i.e., the level of support from other shareholders required to submit the same or a similar proposal for a future meeting) for the first time since 1954.
Rule 14a-8 requires companies that are subject to the federal proxy rules to include in their proxy materials shareholder proposals that satisfy the rule’s procedural and substantive requirements. One procedural requirement—Rule 14a-8(b)—establishes, among other requirements, a share ownership threshold that a shareholder must satisfy to have his or her proposal considered for inclusion in a company’s proxy materials, while Rule 14a-8(c) provides that each shareholder may submit no more than one proposal to a company for a particular shareholder meeting.
Another requirement—Rule 14a-8(i)(12)—permits companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years” if the matter was voted on by shareholders at least once in the last three years and did not receive a specified percentage of votes for approval.
On November 5, 2019, the SEC proposed rule amendments relating to the procedural submission requirements and resubmission thresholds under Rule 14a-8. The comment period for these proposed amendments ended on February 3, 2020.
The Final Rules
The SEC’s Commissioners voted 3-2 to adopt the final amendments on September 23, 2020.
The Adopting Release notes generally that all of the requirements related to Rule 14a-8, including the process by which a company may seek to exclude a shareholder proposal from its proxy materials if the proposal or its proponent fails to meet certain procedural or substantive requirements, “are generally designed to ensure that the ability under Rule 14a-8 for a shareholder to have a proposal included alongside management’s in the company’s proxy materials—and thus to draw on resources and to command the time and attention of the company and other shareholders—is not inappropriately used,” and that over the years the SEC “has amended the shareholder-proposal rule as necessary to protect against such use and protect the integrity of the process.”
SEC Chairman Jay Clayton stated that the final amendments “reflect many years of the staff’s engagement with investors and market participants as well as their extensive experience with shareholder proposals,” and “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,” noting that 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.”
Consistent with the Proposing Release, the final amendments to Rule 14a-8(b):
The Adopting Release states that, in establishing the amended ownership thresholds, the SEC “considered the costs to the company and its shareholders associated with management’s consideration of a proposal and/or its inclusion in the company’s proxy statement, as well as the direct costs to other shareholders.” With regard to eliminating the one percent of a company’s securities threshold, the Adopting Release indicates that “shareholders would be unlikely to rely on such a threshold in light of the new thresholds and that the amendment will avoid administrative complexities that could result from a percentage-based test.”
Shareholders will continue to be permitted to co-file proposals as a group if each shareholder-proponent in the group meets all of the eligibility requirements. The SEC did not adopt a requirement that co-filers identify a lead filer or specify whether the lead filer is authorized to negotiate a withdrawal on behalf of co-filers, as requested by several commenters, stating that such a rule “does not appear necessary at this time as co-filers already tend to designate a lead filer.”
Consistent with the Proposing Release, the final amendments to Rule 14a-8(c):
- Apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a proponent will not be permitted to 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; and
- Provide that 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.
Under the final rule, entities and all persons under their control, including employees, will be treated as a “person” for purposes of such rule. The final rule does not, however, prohibit a single representative from representing multiple co-filers in connection with the submission of one shareholder proposal.
Consistent with the Proposing Release, the final amendments to Rule 14a-8(i)(12):
- Modernize the current resubmission thresholds of three percent, six percent, and 10 percent for matters voted on once, twice, or three or more times in the last five years, respectively, with thresholds of five percent, 15 percent, and 25 percent, respectively.
The Adopting Release states that the SEC believes that the amended resubmission thresholds will “reduce the costs associated with management’s and shareholders’ repeated consideration of these proposals and their recurrent inclusion in the proxy statement while maintaining shareholders’ ability to submit proposals and engage with companies on matters of interest to shareholders.”
The final rules do not include the so-called “Momentum Requirement,” which was included in the Proposing Release. The Momentum Requirement would have allowed for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal received less than 50 percent of the votes cast and experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote. The SEC noted in the Adopting Release that such a provision could lead to “anomalous results.”
The final amendments will apply to proposals submitted for an annual or special meeting to be held on or after January 1, 2022. The final amendments include a transition period with respect to the ownership thresholds that will allow shareholders who meet the $2,000/one-year ownership threshold as of the effective date of the amendments to submit proposals for an annual or special meeting to be held prior to January 1, 2023, provided they continuously hold at least $2,000 of a company’s securities from the effective date through the date of submission. The final amendments will go effective 60 days after publication of the Adopting Release in the Federal Register.
 Release No. 34-89964, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Sept. 23, 2020), available at https://www.sec.gov/rules/final/2020/34-89964.pdf (the “Adopting Release”).
 Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Nov. 5, 2019), available at https://www.sec.gov/rules/proposed/2019/34-87458.pdf (the “Proposing Release”).
 SEC Adopts Amendments to Modernize Shareholder Proposal Rule (Sept. 23, 2020), available at https://www.sec.gov/news/press-release/2020-220.