On November 5, 2019, the Securities and Exchange Commission (SEC) proposed amendments to Securities Exchange Act Rule 14a-8, which requires a public company to include shareholder proposals in the company's own proxy statement, subject to certain conditions. Rule 14a-8 permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several substantive requirements or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements. The proposing release indicates that the purpose of these requirements is to ensure that a shareholder does not "excessively or inappropriately" use Rule 14a-8, since shareholder proposals "draw upon company resources to command the time and attention of other shareholders." As described in more detail below, the proposed amendments would amend the eligibility and procedural requirements of Rule 14a-8.
Current Rule—Rule 14a-8(b) establishes eligibility requirements a shareholder-proponent must satisfy to include a proposal in a company's proxy statement. Under the current rule, a shareholder-proponent must have continuously held at least $2,000 in market value or 1 percent of the company's securities entitled to be voted on the proposal at the meeting for a least one year by the date the proposal is submitted.
Proposed Amendment—The proposed amendment would increase the ownership requirements to submit a shareholder proposal under the rule, including both the amount of securities owned and the length of time held. As proposed, a shareholder would be eligible to submit a Rule 14a-8 proposal for inclusion in a company's proxy materials if the shareholder has continuously held at least the following amounts of the company's securities entitled to vote on the proposal for indicated lengths of time:
- $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.
The proposed amendment would no longer allow shareholders to aggregate their securities with other shareholders to meet the ownership thresholds. Shareholders, however, could continue to co-file or co-sponsor proposals as a group if each shareholder-proponent in the group meets one of the eligibility requirements. Note that while the proposed amendment maintains the current $2,000 threshold under Rule 14a-8(b), it would require such investors to hold the securities for at least three years (rather than one year) to be eligible to submit a proposal. Also, the proposed amendment would eliminate the current 1 percent ownership threshold because it has not been utilized historically.
Requirements for Proposals Submitted Through Representatives
Current Rule—Rule 14a-8 does not address a shareholder's ability to submit a proposal for inclusion in a company's proxy materials through a representative, which is sometimes referred to as "proposal by proxy." Instead, this practice has been governed by state agency law. The proposing release notes that the practice of using a representative in the shareholder-proposal process raises questions, including whether the shareholder has a genuine and meaningful interest in the proposal and whether the eligibility requirements of Rule 14a-8(b) have been satisfied. Previously, in the Division of Corporation Finance Staff Legal Bulletin No. 14I (SLB No. 14I), the Division of Corporation Finance staff (not the SEC itself) reiterated its view that a shareholder's ability to submit proposals through a representative is consistent with Rule 14a-8.
Proposed Amendment—The proposal would amend the eligibility requirements of Rule 14a-8 so that shareholders using a representative in the shareholder-proposal process must provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder's behalf, expanding upon the view of the Division of Corporation Finance staff in SLB No. 14I. Specifically, the proposed amendment would require documentation that:
- Identifies the company to which the proposal is directed.
- Identifies the annual or special meeting for which the proposal is submitted.
- Identifies the shareholder-proponent and the designated representative.
- Includes the shareholder's statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder's behalf.
- Identifies the specific proposal to be submitted.
- Includes the shareholder's statement supporting the proposal.
- Is signed and dated by the shareholder.
Also, as discussed below, the proposed amendments to the "one-proposal" requirement may affect some uses of representatives in the shareholder-proposal process.
Shareholder Engagement Requirement
Current Rule—Rule 14a-8 does not currently require shareholders to make themselves available to companies to discuss a shareholder proposal. The proposal indicates "a statement of availability would encourage greater dialogue between shareholders and companies in the shareholder-proposal process, and may lead to more efficient and less costly resolution of these matters."
Proposed Amendment—The proposal would amend the eligibility criteria in Rule 14a-8(b) to require a statement from each shareholder-proponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after the submission of the shareholder proposal. The shareholder would be required to include contact information as well as business days and specific times that he or she is available to discuss the proposal with the company.
Current Rule—Rule 14a-8(c) provides that each shareholder may submit no more than one proposal to a company for a particular shareholders' meeting. The current rule does not explicitly limit multiple proposals by a person in its capacity as a shareholder and a representative of other shareholders.
Proposed Amendment—The proposed amendment to Rule 14a-8(c) would make the one-proposal limit applicable to "each person" rather than "each shareholder" who submits a proposal so that "each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders' meeting." Under the proposal, a person would not be able to rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders' meeting. In addition, a shareholder-proponent would not be able to submit one proposal in its own name and simultaneously serve as a representative to submit a different proposal on another shareholder's behalf for consideration at the same meeting. Similarly, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders.
Current Rule—Rule 14a-8(i)(12) allows companies to exclude a shareholder proposal that deals with substantially the same subject matter as another proposal that has been included in the company's proxy materials within the preceding five calendar years, if the proposal did not meet certain shareholder approval thresholds. A company may exclude such a proposal for three years following the last time it was included in the company's proxy statement if the matter did not receive at least the following levels of shareholder approval on its last submission to shareholders:
- 3 percent of the vote if voted on once in the preceding five years.
- 6 percent of the vote if voted on twice in the preceding five years or
- 10 percent of the vote if voted on three or more times in the preceding five years.
The proposal indicates the SEC is concerned that the current resubmission thresholds may allow proposals that have not received widespread support from a company's shareholders to be resubmitted with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support.
Proposed Amendment—The proposed amendment would allow a company to exclude a shareholder proposal from a company's proxy materials if it addresses substantially the same subject matters as a proposal that was included in a company's proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and level of shareholder approval for that vote was:
- Less than 5 percent of the votes cast if voted on once in the preceding five years.
- Less than 15 percent of the votes cast if voted on twice in the preceding five years or
- Less than 25 percent of the votes cast if voted on three times or more in the preceding five years.
In addition to raising the resubmission thresholds, the proposed amendment would allow companies to exclude proposals dealing with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that would not otherwise be excludable under the 25 percent threshold if, at the most recent shareholder vote:
- The proposal received less than a majority of the votes cast.
- Support declined by 10 percent or more compared to the immediately preceding shareholder vote on the matter.
The proposal indicates it is intended to relieve management and shareholders from having to repeatedly consider, and bear the costs related to matters for which shareholder interest has declined.
The proposed amendments will be subject to a 60-day public comment period following publication in the Federal Register.
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