SEC Adopts Amendments to Shareholder Proposal Rules

Key Takeaways

• The amendments impose more stringent requirements for shareholders seeking to put proposals on company ballots for an annual or special meeting to be held on or after January 1, 2022.
• The minimum share ownership and holding-period requirements have been increased from $2,000 (or 1%) worth of the company’s outstanding securities for at least 1 year to any of $25,000 for at least 1 year, $15,000 for at least 2 years, or $2,000 for at least 3 years.
• Shareholders may not aggregate their holdings together to satisfy the amended ownership thresholds.
• Shareholder proponents who present their proposals through a designated representative must produce supporting documentation concerning the representative’s authority to speak on their behalf.
• Shareholders submitting a proposal must also provide companies with their availability for a discussion regarding their proposal.
• The “one-proposal” rule now prohibits any person from submitting multiple proposals, even if submitting them in multiple capacities or on behalf of multiple shareholders. 
• The level of shareholder support a proposal must get to be eligible for resubmission at a future meeting has been changed from 3% to 5% (for first resubmissions), 6% to 15% (for second resubmissions) and 10% to 25% (for further resubmissions).
• The amendments are controversial and may test whether ESG issues will motivate institutional investors to fill the void left by the exclusion of smaller retail holders.

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On September 23, 2020, the United States Securities & Exchange Commission announced the adoption of amendments to its shareholder proposal rule, Rule 14a-8, aimed at modernizing the requirements for submitting (and resubmitting) shareholder proposals. 

The Changes 

The amendments were adopted substantially as originally proposed by the SEC in November 2019 (as detailed in our prior OnPoint on the subject), except that the so-called “Momentum Requirement,” which would have allowed registrants to exclude any shareholder proposal dealing with the same subject matter as another previously submitted proposal that failed to win significant support multiple times in recent years, and the requirement that co‑filers designate a lead filer with authority to withdraw the proposal on their behalf, have not been adopted.

As revised, Rule 14a-8(b) will raise the current share-ownership and holding-period requirements, which previously provided that in order to have a shareholder proposal included in a registrant’s proxy statement, the proponent must have owned at least $2,000 worth of, or 1% of, the registrant’s securities for at least one year, in favor of a tiered system: the proponent must now have owned $25,000 worth for at least one year, $15,000 worth for at least two years, or $2,000 worth for at least three years. The 1% of outstanding securities alternative method of meeting the requirement has been removed, and groups of shareholders can no longer aggregate their holdings for purposes of meeting the share ownership and holding period requirements.

The amendments also add two new procedural requirements: First, if a proponent decides to present their proposal at an annual or special meeting through a designated representative, the proponent must “provide documentation to make clear that the representative is authorized to act on the [proponent’s] behalf and to provide a meaningful degree of assurance as to the [proponent’s] identity, role and interest in” the proposal at hand. Second, proponents must now state that they are able to meet with the registrant (either in person or via teleconference) between 10 and 30 days after submitting their proposal in order to discuss the proposal with the registrant, and must provide multiple specific business days and times within that window when they would be available for such discussion.

In addition, Rule 14a-8(c) has been modified so as to apply the one proposal rule to “each person” rather than “each shareholder,” such that a proponent will no longer be able to submit one proposal in their own name while also serving as a designated representative on behalf of another shareholder proponent; similarly, designated representatives will no longer be able to submit more than one proposal at the same meeting, even if the proposals are on behalf of different shareholders.

Finally, amended Rule 14a-8(i)(12) increases the amount of support a shareholder proposal needs to obtain in order for a proposal dealing with “substantially the same subject matter” to be eligible for resubmission at a subsequent meeting in the following three years. Previously, the rules required resubmitted proposals to have garnered 3% support (if previously voted upon once in the past five years), 6% (if previously voted upon twice in the past five years), and 10% (if previously voted upon three or more times in the past five years). The amendments increase these thresholds to 5%, 15%, and 25%, respectively. (The three-year cooling-off period and five-year lookback period remain unchanged.)

The final amendments will be effective for proposals submitted for any annual or special meeting to be held on or after January 1, 2022, though the increased holding requirements are subject to a grace period and allow shareholders to rely on the old requirements for meetings to be held prior to January 1, 2023.

The Controversy 

The amendments generated controversy and garnered a significant amount of comments—more than 14,000 comment letters were submitted from a mix of U.S. senators, state treasurers, C-suite corporate executives, law professors, veteran shareholder proponents, institutional investors, and other stakeholders. At a time when many investors and other stakeholders have sought to increase attention to climate change, inequality and other environmental, social and governance issues that these shareholder proposals often seek to address, the amendments are likely to make these shareholder proposals more difficult if not impossible for smaller shareholders to make. On the other hand, many in the corporate community have long complained that the proposal process permits special interest proposals by shareholders with very small economic stakes at risk.

The SEC vote on the amendments fell on partisan lines, with the two Republican Commissioners in support of the amendments, the two Democrat Commissioners opposed, and SEC Chair Jay Clayton casting the deciding vote.

The Commission majority emphasized the need for a recalibration of the rules given that Rule 14a-8 had not been substantively amended in decades, particularly given that shareholder proposals “draw on company resources and … command the time and attention of the company and other shareholders” and that, as SEC Chair Jay Clayton noted, “five individuals accounted for 78% of all the proposals submitted by individual shareholders.” Additionally, Chair Clayton observed that without the amendments “…90 percent or more of fellow shareholders could oppose a proposal year in and year out and yet still be required to consider it again, year in and year out.” Commissioner Hester Peirce suggested the SEC should go further and eliminate Rule 14a-8 altogether. In her view, the proper role of the securities laws is to provide “investors the information they need to understand the long-term financial value of companies,” not to provide a mechanism for investors to interact with corporations. The SEC also stressed that the increased resubmission thresholds primarily served to weed out non‑meritorious proposals—according to data from the 2011‑2018 period, approximately 95% of shareholder proposals that ultimately received majority support would still have cleared the new thresholds.

The dissenting Commissioners and many of the commenters opposing the changes nevertheless disagreed, focusing on the fact that the new rules make it more difficult for shareholders, particularly less wealthy shareholders (for whom the $25,000 ownership threshold will likely prove daunting), to exercise their rights, with Commissioner Allison Herren Lee arguing that the amendments “put a thumb on the scale for management in the balance of power between companies and their owners.”

Likely Effect

It seems likely that the amendments will reduce, and were intended to reduce, the number of proposals made by the few individuals who own de minimis amounts of shares and who nevertheless submit many proposals to many companies each year (a group which has been, as Chair Clayton noted, responsible for a majority of all proposals submitted by individual proponents in recent years). However, many institutional investors will easily qualify to make proposals under the amendments, including the many prominent asset managers that have noted the importance of ESG issues to their investment criteria. It remains to be seen whether these institutional investors will increasingly make use of Rule 14a-8 to address these issues or continue to rely more frequently on other means to influence the direction of management. If these institutional investors do take up the mantle, companies may face fewer proposals but the proposals may be more likely to have impact.