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Sep 30, 2020

SEC Adopts Amendments to Modernize Shareholder Proposal Rule 14a-8

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SEC ADOPTS AMENDMENTS TO MODERNIZE SHAREHOLDER PROPOSAL RULE 14A-8

On September 23, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to modernize certain requirements for the submission of shareholder proposals under Exchange Act Rule 14a-8.[1] The amendments most notably revise the initial submission and resubmission thresholds that shareholders must satisfy to submit shareholder proposals and apply the one-proposal rule to “each person,” rather than to “each shareholder,” meaning that an individual may submit only one shareholder proposal to a company for a particular shareholders’ meeting, whether the shareholder proposal is submitted by a person as a shareholder or as a representative of a shareholder.

These amendments are designed to strengthen the requirement that shareholder-proponents demonstrate a meaningful economic stake or investment interest in the company for which they are seeking to present a matter before shareholders. The updates introduced by these amendments are a welcome modernization of the shareholder proposal rule, which has not been amended with respect to initial submission eligibility thresholds since 1998, nor amended with respect to resubmission thresholds since 1954. The amendments were adopted substantially as proposed by the SEC on November 5, 2019.[2]

Initial Submission Threshold (Rule 14a-8(b))

Rule 14a-8(b) currently requires a shareholder-proponent to demonstrate that he or she has continuously held for at least one year either $2,000 in market value or 1% of the company’s securities entitled to be voted on the proposal at the meeting in order to submit a proposal. Under Rule 14a-8(b), as amended, this threshold is replaced with three, tiered thresholds, requiring a shareholder to demonstrate minimum continuous ownership with one of the following thresholds:

  • $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.

To satisfy the new, tiered thresholds, shareholder-proponents are no longer permitted to aggregate holdings to be eligible to submit or co-file a proposal. While aggregation is no longer permitted under the amendment, shareholders continue to be permitted to co-file proposals as a group, provided that each shareholder-proponent is independently eligible to submit a proposal. Further, shareholders that use a representative to submit a proposal must provide documentation that, among other things, includes a statement from that shareholder authorizing the representative to act on the shareholder’s behalf and a shareholder’s statement supporting the proposal. The purpose of this requirement is to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in the proposal.

Under the amendment’s transition provision, shareholders who are currently eligible to submit a proposal under the existing eligibility criteria will remain eligible without any additional investment for proposals submitted for an annual or special meeting to be held prior to January 1, 2023, so long as they provide the company with a written statement that they intend to continue to hold at least $2,000 of such securities through the date of the shareholders’ meeting for which the proposal is submitted, as is already required. The transition provision is not applicable to the prohibition on aggregation of holdings.

Additionally, in an effort to facilitate efficient dialogue between shareholders and companies in the shareholder-proposal process, under the amended rule, a shareholder-proponent is required to provide her contact information and state her availability to meet with the company (in person or via teleconference) during the period commencing on the tenth calendar day and ending on the 30th calendar day, after submission of the shareholder proposal, including providing specific business days and times of availability during such period.

Resubmission Threshold (Rule 14a-8(i)(12))

Rule 14a-8(i)(12) currently permits a company to exclude from its proxy materials a shareholder proposal dealing with substantially the same subject matter as another proposal or proposals that had been submitted once, twice or three or more times in the preceding five calendar years and received less than 3%, 6% and 10% of shareholder votes, respectively. Such proposal would be excludable for any meeting held within three calendar years after the last meeting for which the proposal was included.

Under Rule 14a-8(i)(12), as amended, the thresholds are increased to 5%, 15% and 25%, respectively. Thus, for example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission to be eligible for resubmission in the following three years, and proposals submitted two and three times in the prior five calendar years would need to achieve 15% and 25% support, respectively, in their most recent vote to be eligible for resubmission in the following three years after such most recent vote. These updates are intended to reduce the costs to the company related to repeated consideration of proposals that have not been widely supported by shareholders, while continuing to maintain shareholders’ ability to submit proposals and engage with companies.

One-Proposal Limit (Rule 14a-8(c))

Rule 14a-8(c) currently allows “each shareholder” to submit no more than one proposal to a company for a particular shareholders’ meeting, but someone serving as a representative for more than one shareholder can submit multiple proposals to the same company on behalf of different shareholders. In order to more effectively apply the one-proposal limit, Rule 14a-8(c), as amended, revises the rule to apply the one-proposal limit to “each person” rather than “each shareholder,” and the amendment further states that a person cannot rely on the securities holdings of another person for purposes of meeting the eligibility requirements and thereby submitting multiple proposals for a particular shareholders’ meeting. As a result, the new rule prevents representatives from having the ability to submit multiple proposals to the same company for the same shareholders’ meeting, and it also prevents a shareholder-proponent from submitting one proposal in his or her own name and simultaneously serving as a representative to submit a different proposal on another shareholder’s behalf.

Effectiveness

The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022, subject to the transition provision related to initial submissions described above. We expect the amendments to be effective for the 2021 proxy season.

Our Take

These amendments are a welcome modernization of the shareholder proposal rule. We expect the amendments to decrease the number of shareholder proposals received by companies. Although the increased ownership thresholds will not likely result in a meaningful reduction in the overall number of proposals, the restrictions to aggregation of ownership for purposes of qualifying for the new thresholds may result in a reduction of some recurring proponent proposals. The new resubmission thresholds should reduce how often companies receive the same proposal in successive years that repeatedly receive little shareholder support, which will be a welcome development for companies. Additionally, companies that have historically received multiple proposals in the same proxy season from the same individual serving as a representative of different shareholders (and we know who these individuals are) should see a reduction of proposals from the “usual” shareholder proponents with the new one-proposal limit to “each person.” Requiring shareholder-proponents to provide contact information and their availability to meet with the company appears like it could result in more engagement and, ultimately, more withdrawals of shareholder proposals, but, in our experience, the proponents who are open to figuring out a mutually beneficial path that includes a withdrawal of the proposal have been always ready to engage with companies. It is not likely that those proponents who typically have been motivated by getting a proposal in the proxy and in front of shareholders are going to be open to a compromise that results in a withdrawal of the proposal.

Footnotes

[1] See Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-89964 (Sept. 23, 2020).
[2] See Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-87458 (Nov. 5, 2019). The Momentum Requirement as proposed would have allowed companies to exclude shareholder proposals related to substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years not otherwise excludable under the 25 percent threshold if (i) the most recently voted-on proposal received less than a majority of the votes cast and (ii) support declined by 10 percent or more compared to the immediately preceding shareholder vote on the matter.

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