[This post revises and updates my earlier post on this topic primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted, three to two, to propose new amendments to Rule 14a-8, the shareholder proposal rule. Under Rule 14a-8, a shareholder proposal must be included in a company's proxy materials "unless the proposal fails to satisfy any of several specified substantive requirements or the proposal or shareholder-proponent does not satisfy certain eligibility or procedural requirements." The SEC last amended Rule 14a-8 in 2020 to, among other things, raise the eligibility criteria and resubmission thresholds. The SEC is now proposing to amend three of the substantive exclusions on which companies rely to omit shareholder proposals from their proxy materials: Rule 14a-8(i)(10), the "substantial implementation" exclusion, would be amended to specify that a proposal may be excluded as substantially implemented if "the company has already implemented the essential elements of the proposal." Rule 14a-8(i)(11), the "substantial duplication" exclusion, would be amended to provide that a shareholder proposal substantially duplicates another proposal previously submitted by another proponent for a vote at the same meeting if it "addresses the same subject matter and seeks the same objective by the same means." Rule 14a-8(i)(12), the resubmission exclusion, would be amended to provide that a shareholder proposal would constitute a "resubmission"—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it "substantially duplicates" a prior proposal by "address[ing] the same subject matter and seek[ing] the same objective by the same means." The SEC indicates that almost half of the no-action requests the staff received under Rule 14a-8 in 2021 were based on these three exclusions. In his statement, SEC Chair Gary Gensler indicated that the proposed amendments would "improve the shareholder proposal process" by providing "greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements." In the proposing release, the SEC contends that the amendments "are intended to improve the shareholder proposal process based on modern developments and the staff's observations" and "would facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company's shareholders, on important issues." Notably, however, the two dissenting commissioners seemed to view the proposed changes—even though they stop well short of revamping the 2020 eligibility criteria and resubmission thresholds—as an effort to undo or circumvent the balance achieved by the 2020 amendments without actually modifying those aspects of the rules. For example, new Commissioner Mark Uyeda said that the proposed amendments could "effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless."
The proposal will be open for comment for 60 days following publication of the proposing release on the SEC's website or 30 days following publication in the Federal Register, whichever period is longer. Here are the fact sheet, press release and proposing release.
In October 2020, at a highly contentious meeting, the SEC adopted controversial amendments to the requirements for submission of shareholder proposals in Rule 14a-8. According to the adopting release, those amendments were intended to "modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders." The 2020 amendments generally raised the eligibility criteria for submission of shareholder proposals, as well as the resubmission thresholds; provided that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibited aggregation of holdings for purposes of satisfying the ownership thresholds; facilitated engagement with the proponent; and updated other procedural requirements. Notably, the submission threshold had not been amended since 1998, and the resubmission threshold since 1954. The amendments applied to any proposals submitted for an annual or special meeting held on or after January 1, 2022, so the 2022 proxy season was the first season during which the amendments applied.
The 2020 amendments had been contentious from the get-go among the commissioners and were also widely debated in the public sphere, drawing a proliferation of comments. One reason was that shareholder proposals had begun to assume an increasingly significant role as investors intensified their focus on environmental issues, such as climate change, and social issues, such as racial injustice and inequity. The pandemic also highlighted workforce health and safety issues. Shareholder proposals are viewed by their proponents and others as instrumental in driving companies to address many of these issues and their potential impact on sustainability and long-term shareholder value.
To the commissioners opposing the 2020 amendments, the changes restricted yet another mechanism for shareholder oversight of management, particularly affecting smaller holders and proposals related to ESG issues—just as they were increasing in favor—with little cost savings for most companies. For example, Commissioner Allison Lee, who dissented, viewed the 2020 rulemaking as the "capstone in a series of policies that will dial back shareholder oversight of management at the companies they own." Although the changes purported to be looking after the interests of shareholders, she remarked, the weight of comment letters on the proposals made clear that shareholders "strongly oppose" these changes.
To those commissioners voting in support, in light of significant changes in communications and the mode of retail investing over time, the amendments reflected an appropriate and necessary rebalancing of the costs and interests of shareholder proponents as against the subject companies and the other shareholders (who must share in the costs). In addition, various corporate groups had long pushed the SEC to raise the bar on shareholder proposals. In 2014, the Chamber of Commerce, along with other corporate groups, submitted a rulemaking petition requesting the SEC to increase the resubmission thresholds, citing a "growing crescendo of respected voices...attesting to the unacceptable negative consequences for investors of the overwhelmingly verbose and often senseless assault on the ability of shareholders and portfolio managers to focus on how to manage their securities investments wisely, as well as the diversion of serious management focus away from the best interests of shareholders." (See this PubCo post.)
According to the SEC, the new proposal is designed to "improve the shareholder proposal process and promote consistency by revising three of the substantive bases for excluding a shareholder proposal under the rule":
Rule 14a-8(i)(10)—Substantial Implementation. As noted above, Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal that "the company has already substantially implemented." The purpose of the exclusion is to "avoid the possibility of shareholders having to consider matters which have already been favorably acted upon by the management." Of the 110 no-action requests based on this exclusion received in 2021, the staff agreed with the company on 36.
Prior to 1983, the rule permitted exclusion "only when a proposal had been fully effected—that is, when a company had taken all of the actions requested by the proposal." However, in 1983, the rule was reinterpreted more broadly, and then amended in 1998, to provide for "substantial implementation." Because of the many potential interpretations of "substantial implementation," concerns have been raised (including by the SEC) that the current rule may not be consistently and predictably applied. In addition, the SEC is concerned that "the language of the current rule is insufficiently focused on the specific actions requested by a proposal—i.e., its elements—and, thus, it may not serve the original purpose of the exclusion to avoid the consideration of proposals on which a company already has 'favorably acted.'" The SEC also reports that some proponents have protested about "the difficulty of 'threading the needle' when seeking to draft a proposal that does not 'micro-manage' the company under Rule 14a-8(i)(7) but still provides sufficient specificity and direction to avoid exclusion as 'substantially implemented' under Rule 14a-8(i)(10) when a company had not implemented its essential elements."
The proposed amendment is intended to provide a "clearer framework" by revising the rule to allow exclusion "[i]f the company has already implemented the essential elements of the proposal." [Emphasis added.] The SEC believes that "an analysis that focuses on the specific elements of a proposal would provide a reliable indication of whether the actions taken to implement a proposal are sufficiently responsive to the proposal such that it has been substantially implemented." But what are "essential elements"? The SEC acknowledges that proposed amendment would still require a substantive analysis, both to determine the elements and whether they have been implemented. The SEC observes that "the degree of specificity of the proposal and of its stated primary objectives would guide the analysis" of whether an element is essential, noting that the "primary objectives, elements, or features" are sometimes identified by the proponent: "the more objectives, elements, or features a proponent identifies, the less essential the staff would view each of them."
To exclude the proposal, the company need not have implemented every element, but must have implemented all of the essential elements. However, "a proposal need not be rendered entirely moot, or be fully implemented in exactly the way a proponent desires, in order to be excluded. A company may be permitted to exclude a proposal it has not implemented precisely as requested if the differences between the proposal and the company's actions are not essential to the proposal."
Examples provided by the SEC demonstrate how the amendment would narrow the exclusion. For example, under the proposal, the staff would no longer permit exclusion of a proxy access proposal (3% of shares/held for 3 years/to nominate 25% of board) allowing an unlimited number of shareholders to aggregate their shares to form a nominating group where the company had adopted a proxy access bylaw (3%/3 years/ 20%) but limited the nominating group to 20 shareholders: "because the ability of an unlimited number of shareholders to aggregate their shareholdings to form a nominating group generally would be an essential element of the proposal, exclusion would not be appropriate." Similarly, the staff may not consider the essential elements of a proposal requesting a report on a topic to be implemented by existing reports or disclosures about that topic, "especially if the plain language of the proposal explains how the company's existing reports or disclosures are insufficient." Also, the staff may view a management report to not substantially implement a request for a board report, "if the proposal demonstrates a clear emphasis on reporting directly from the board."
The SEC believes that "the proposed amendment would facilitate shareholder suffrage, provide a more objective and specific framework for the substantial implementation exclusion, assist the staff in more efficiently reviewing and responding to no-action requests, and benefit shareholders and companies by promoting more consistent and predictable determinations."
Rule 14a-8(i)(11)—Duplication. Rule 14a-8(i)(11) provides that a shareholder proposal may be excluded if it "substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting." The purpose of the exclusion is "to eliminate the possibility of shareholders having to consider two or more substantially identical proposals submitted to an issuer by proponents acting independently of each other." The SEC has not substantively amended this rule since its adoption in 1976. During the 2021 proxy seasons, the staff received 12 no-action requests citing this exclusion as the basis and concurred in the exclusion of three.
Currently, in evaluating whether proposals are substantially duplicative, the staff focuses on whether the proposals have the same "principal thrust" or "principal focus," whether or not the terms or scope are the same. But this analysis requires "fact-intensive, case-by-case judgments" and may not be consistently or predictably applied. The SEC also believes that the current rule may "unduly constrain shareholder suffrage" because it "enables a shareholder who is first to submit a proposal for a company's meeting to preempt the consideration of later-received proposals, even though a later proposal (if it had been voted on) may have received more shareholder support."
As proposed, the exclusion would be revised to provide that a shareholder proposal would be considered to "substantially duplicate" another proposal if it "addresses the same subject matter and seeks the same objective by the same means." The SEC provides the following example to illustrate differences in application of the proposed new and current standards:
"For example, consider the following two proposals: (1) a proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation; and (2) a proposal requesting a report to shareholders on the company's process for identifying and prioritizing legislative and regulatory public policy advocacy activities. In considering the application of the duplication exclusion to these proposals, the staff previously had concurred that the proposals were substantially duplicative when analyzing the principal thrust or focus of the proposals. Under the proposed amendment, however, these proposals would not be deemed substantially duplicative because, although they both address the subject matter of the company's political and lobbying expenditures, they seek different objectives by different means."
The SEC believes the proposed amendment "would provide a clearer standard for exclusion that would assist the staff in more efficiently reviewing and responding to no-action requests and would benefit shareholder-proponents and companies by promoting more predictable and consistent determinations regarding the exclusion of proposals." The SEC also believes that proposed amendment would reduce incentives for proponents to submit a proposal quickly to preempt other proposals and "facilitate the consideration at the same shareholder meeting of multiple shareholder proposals that present different means to address a particular issue." However, the SEC acknowledges the potential for shareholder confusion resulting from multiple similar proposals in the same proxy statement, as well as company implementation challenges in the event of conflicting or inconsistent results arising out of the approval of multiple similar, but different proposals—and requests comment on the possible implications.
Rule 14a-8(i)(12)—Resubmissions. Rule 14a-8(i)(12) provides that a shareholder proposal may be excluded if it "addresses substantially the same subject matter as a proposal, or proposals, previously included in the company's proxy materials within the preceding five calendar years" if the matter was voted on at least once in the last three years and did not achieve specified levels of support on the most recent vote. The purpose of the rule is to "to relieve the management of the necessity of including proposals which have been previously submitted to security holders without evoking any substantial security holder interest therein." During the 2021 proxy season, the staff received two no-action requests citing this rule as a basis for exclusion and agreed with one. Probably because of the 2020 increases in the resubmission thresholds, the staff had received 11 requests for 2022.
Initially, the rule required "substantially the same proposal" for a proposal to be excluded as a resubmission, which was interpreted to mean "virtually identical." But that approach was criticized as easy to circumvent "by simply recasting the form of the proposal, expanding its coverage, or by otherwise changing its language," perhaps even making minor changes. In 1983, the SEC amended the rule to permit exclusion of proposals dealing with "substantially the same subject matter" as proposals previously submitted. As discussed above, in 2020, the SEC raised the resubmission thresholds. (See this PubCo post.) The release states that the SEC is "continu[ing] to assess the impact of these amendments." (So stay tuned on that.) The SEC observes that, in comments on the 2020 resubmission proposal, some commenters suggested that, if the 2020 amendments raised the resubmission thresholds, the SEC "should consider whether to 'narrow the definition of Resubmissions.'"
In applying the "substantially the same subject matter" standard, the staff currently looks at "whether the proposals share the same 'substantive concerns' rather than the 'specific language or actions proposed to deal with those concerns.'" This analysis, the SEC believes, can necessitate "fact-intensive, case-by-case judgments" that may result in over-inclusion or under-inclusion. In addition, proposals that call for different actions regarding the same topic "may receive significantly different shareholder votes, which could suggest that shareholders view such proposals as raising different issues." The SEC is also concerned that standard "unduly constrains shareholder suffrage because of its potential 'umbrella' effect—i.e., that it could be used to exclude proposals that have only a vague relation, or are not sufficiently similar, to earlier proposals that failed to receive the necessary shareholder support."
The proposal would align the test for resubmission with the test for "substantial duplication" in Rule 14a-8(i)(11): "to be excludable under the resubmission exclusion, a proposal must not only address the same subject matter as a prior proposal but also must seek the same objective by the same means," (i.e., the specific actions proposed to deal with a proposal's "substantive concerns").
Here's the SEC's example illustrating the effect of the change: under the current rule, the staff had
"viewed the following proposals as addressing the same subject matter for purposes of the resubmission exclusion: (1) a proposal requesting that the board adopt a policy prohibiting the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a 'government service golden parachute'); and (2) a proposal requesting that the board prepare a report to shareholders regarding the vesting of such government service golden parachutes that identifies eligible senior executives and the estimated dollar value of each senior executive's government service golden parachute. Under the proposed amendment to Rule 14a-8(i)(12), although these proposals concern the same subject matter (namely, government service golden parachutes for senior executives), exclusion would not be warranted because they do not seek the same objectives by the same means."
As proposed to be amended, the rule would allow shareholder proposals to be excluded even if they are not identical—i.e., the SEC does not intend to revert to "the pre-1983 standard of 'substantially the same proposal.'" The SEC believes that the proposed amendment would enable "proponents to make adjustments to their proposals to build broader support and also allow other proponents to put forth their own proposals offering different ways to address the same issue," which the SEC considers to be more consistent with the purpose of the exclusion, and "strike a more appropriate balance between effecting the purpose of the exclusion and preserving the ability of shareholders to engage with a company and other shareholders through the shareholder proposal process." Although the SEC recognizes that the standard would still demand "a degree of fact-intensive judgment, we believe it would provide a clearer standard for exclusion, assist the staff in more efficiently reviewing and responding to no-action requests, and benefit shareholders and companies by promoting more consistent and predictable determinations regarding the exclusion of proposals."
Although, in the release, the SEC did not propose to amend Rule 14a-8(i)(7), the ordinary business exclusion, it did expressly reaffirm the SEC's 1998 standards for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7). Rule 14a-8(i)(7) permits a company to omit a proposal that "deals with a matter relating to the company's ordinary business operations." The 1998 release described the policy underlying the ordinary business exclusion as resting "on two central considerations. The first relates to the subject matter of the proposal. . . . [P]roposals relating to [ordinary business] matters but focusing on sufficiently significant social policy issues . . . generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote. . . . The second consideration relates to the degree to which the proposal seeks to 'micro-manage' the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment." At the same time, the SEC "also clarified that specific methods, time-frames, or detail do not necessarily amount to micromanagement and are not dispositive of excludability." Subsequently, during Jay Clayton's tenure as SEC Chair, Corp Fin had issued three new SLBs reexamining the exclusions under Rules 14a-8(i)(5), the "economic relevance" exception, and 14a-8(i)(7), the "ordinary business" exception. For example, under SLB 14K, the staff took "a company-specific approach in evaluating the significance of social policy, rather than recognizing particular issues or categories of issues as universally 'significant.'" In 2021, Corp Fin adopted SLB 14L, which rescinded those three prior SLBs, reversing some of the interpretations of "significant social policy," "micromanagement" and "economic relevance" imposed under those rescinded SLBs, returning to the perspective that prevailed in 1998, all of which made exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. (See this PubCo post.) Interestingly, at the open meeting, Commissioner Hester Peirce sought an answer from staff as to the purpose and meaning of the reaffirmation in the release of the 1998 standards. Did it have anything to do with bestowing the SEC's imprimatur on the positions taken in SLB 14L? The response was that the guidance stated in the 1998 release was the SEC's latest statement on the issues and that the reaffirmation in the proposing release was considered appropriate, but not necessary, for purposes of clarity.
These proposed new amendments do not directly disturb any of the changes to Rule 14a-8 adopted in 2020 (discussed above). However, the two dissenting commissioners seemed to consider the new proposal to represent an effort by the SEC to put its thumb on the scale in favor of shareholder proponents, and, in effect, circumvent or compensate for some of the 2020 changes. In her statement, Peirce noted that, only two years ago, the SEC had adopted the last amendments to Rule 14a-8 recalibrating the balance between allowing shareholder proposals to be included in a company's proxy materials against "the reality that consideration of such proposals consumes company and shareholder resources." She could not support a proposal that would "upset that careful calibration by narrowing companies' ability to exclude proposals that they have substantially implemented, are duplicative of other proposals, or are resubmissions of prior failed proposals." Instead, she advocated that the SEC wait for data about how the 2020 rules operated in practice.
In addition, she contended that the proposed new terms would simply create new ambiguities for the staff "to interpret and market participants to debate. Any new ambiguity is likely to be resolved in favor of favored shareholder-proponents, and any new clarity is likely to narrow the three exclusion categories." For example, the new test for assessing whether a company can exclude a proposal based on substantial implementation is whether the company has already implemented the essential elements of the proposal. But what are "essential elements"? In her view, "the release suggests that staff will defer to shareholder-proponents' assessment of which elements are essential; the Proposing Release explains that '[i]n determining the essential elements of a proposal, we anticipate that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis.'" Similarly, with regard to the duplication exclusion, she suggests that the proposal would effectively "defang" the exclusion: "Unless proposals are seeking exactly the same things, it seems that neither will be excludable as duplicative. The likely result—one the Proposing Release acknowledges—is multiple potentially overlapping or even conflicting proposals on the same topic on the same proxy. Shareholder proponents, come one, come all!" The proposal regarding resubmissions, in her view, takes the exclusion back, in effect, to its original form prior to the 1983 amendments, which allowed proponents to easily "evade exclusion of their proposals by recasting the form of the proposal, expanding its coverage, or changing its language such that it was not identical to a prior proposal." Under the new proposal, "the resubmission basis will not exclude any proposal unless it is nearly identical to a prior proposal." Will any proposal ever be deemed a "resubmission"? If not, then what was the purpose of the 2020 changes to the resubmission thresholds? She also questioned the brief duration of the comment period. Peirce concludes with a prediction that "if this proposal is adopted, company proxy statements are likely to look like our rulemaking agenda—packed with items, many of which overlap with one another and rehash recently completed matters."
In his statement, Uyeda also advocated waiting to evaluate data from the 2022 proxy season. His information indicated that the number of proposals increased by 8% over 2021, but at the same time, the success rate for exclusion of proposals declined dramatically to 38% in 2022, down from 71% in 2021. To Uyeda, the proposed changes "would further discourage issuers from attempting to seek exclusions of shareholder proposals because they have been substantially implemented or are duplicative of other proposals. They could also effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless." For example, "if a shareholder proposal merely tweaks an essential element, such as the subject matter, objective, or means, the duplication and resubmission exclusions would no longer apply." The relative ease of submitting a proposal, he contends, would give leverage to special interests, and the lack of transparency around engagement "means that the investing public may never know how companies altered their actions in response to a shareholder proposal, whether threatened or actual." Nor is it clear that the proposal would add value for investors. But, he contends, the proposal would create an uneven playing field for public domestic companies relative to foreign companies and private companies. In his view, the proposal, together with the staff guidance in SLB 14L, "sends a message to public companies about shareholder proposals: don't bother trying to exclude them. It will become one more reason for not becoming a public company to begin with."
In contrast, Lee stressed the importance of the shareholder proposal process to various improvements in corporate governance over time, as well as the role of shareholder proponents as bellwethers of significant issues. As a result, she said, "it is imperative that the substantive bases for excluding shareholder proposals from the ballot are not overbroad and create as balanced, predictable, and efficient a framework as possible." The proposed amendments, in her view, "would clarify the framework governing the inclusion or exclusion of shareholder proposals from the proxy ballot, and help ensure proponents have a fair opportunity to put appropriate proposals before their fellow shareholders." By focusing on "essential elements," the proposed revision regarding substantial implementation would establish a "more objective and specific standard to enhance certainty for shareholders and companies alike." The proposed changes to the duplication and resubmission exclusions "would align and narrow these bases for exclusion to circumstances where proposals address the same subject matter and seek the same objective by the same means, thereby facilitating the ability of shareholders to put forth various differing approaches to achieving their objectives. Just as management endeavors to be innovative and creative in driving value and seeking solutions, shareholders too can add value by generating ideas for different approaches to an issue."
Crenshaw observed that shareholder proponents "have used the shareholder proposals submitted in proxy materials to limit mechanisms that insulated boards and management. Through proposals, corporate governance hygiene in the form of board declassification and term limits have become commonplace." However, over a period of many years, Crenshaw noted, "observers have expressed concern about variation and potential unpredictability in the application of some exclusions." The proposal "seeks to clarify that framework, and in so doing, 'facilitate[s] shareholder suffrage and communication between shareholders and the companies they own on important issues.' This modernization, in combination with the release language, seeks to provide transparency and predictability in how the principles under certain 14a-8 exclusions are applied and, in turn, help ensure that all proposals that ought to be put to a shareholder vote will be."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.