On July 13, 2022, the Securities and Exchange Commission ("SEC") proposed amendments to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under Rule 14a-8, reporting companies with securities registered under Section 12 of the Exchange Act must include shareholder proposals made under such rule in their proxy materials unless they can demonstrate either a procedural or a substantive basis for exclusion. The SEC's proposal would amend three of the 13 substantive bases for exclusion: (i) the substantial implementation exclusion, (ii) the duplication exclusion and (iii) the resubmission exclusion. The SEC believes the proposal will facilitate the exercise of shareholders' rights by providing a clearer framework for application of the rule.
1. Substantial Implementation Exclusion
Current Rule 14a-8(i)(10) provides for exclusion of a shareholder proposal from a company's proxy materials where the company already has "substantially implemented" the proposal. During the most recent proxy period, the SEC staff received 110 no-action requests based on this exclusion and granted 36 such requests.1 Due to the relatively subjective nature of the rule, the SEC historically has applied various interpretive frameworks to determine whether a proposal has been substantially implemented. As a result, some observers have noted that the current rule is difficult to apply with any consistency.
The proposed amendments therefore propose a new test and would specify that a proposal may be excluded under this provision if the company already has implemented the "essential elements" of the proposal. The SEC acknowledged that the proposed rule still would require a fact-intensive analysis. However, it did articulate a few parameters for the proposed "essential elements" test. First, it outlined the structure of the analysis: companies wishing to exclude proposals on this basis must first determine which elements are "essential" and then analyze whether each such element has been addressed. Second, it stated that the determination of which elements are "essential" would be guided by the degree of the proposal's specificity and by its stated primary objectives.
The SEC also provided some illuminating examples of how the test would be applied. For instance, it stated that the staff no longer would concur in the exclusion of proposals "seeking the adoption of a proxy access provision that allows an unlimited number of shareholders who collectively have owned 3 percent of the company's outstanding common stock for 3 years to nominate up to 25 percent of the company's directors, where the company had adopted a proxy access bylaw allowing a shareholder or group of up to 20 shareholders owning 3 percent of its common stock continuously for 3 years to nominate up to 20 percent of the board." It reasoned that "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."2
In another example, the SEC explained that the staff may determine not to exclude as "substantially implemented" a shareholder proposal seeking a report from the board if the same report was issued by management, since having the report come from the board may be an essential element of the proposal.
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