The rule enables eligible shareholder-proponents easily to present their proposals to all other shareholders at little expense to themselves.
On September 23, 2020, the Securities and Exchange Commission adopted the amendments to its shareholder proposal rule, which governs the process for a shareholder to have a proposal included in the company’s proxy statement for consideration by all shareholders. Typical shareholder proposals include recommendations that a company or its board of directors take specified actions. The amendments are designed to promote engagement between the company and the proponent, raise eligibility thresholds for shorter-term investors and further restrict repeat proposals garnering minimal support.
The amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022 (although some shareholders may take advantage of a transition period, as explained below).
Rule 14a-8 under the Securities Exchange Act of 1934 generally requires reporting companies to include shareholder proposals satisfying specified requirements in their proxy statements to shareholders. The rule enables eligible shareholder-proponents easily to present their proposals to all other shareholders at little expense to themselves. Because the inclusion of shareholder proposals alongside management’s proposals in the company’s proxy materials commands resources, time and attention of the company and other shareholders, Rule 14a-8 includes safeguards intended to curtail improper uses of the rule. Specifically, if a proposal fails to meet certain procedural and substantive requirements or a shareholder does not satisfy specified eligibility or procedural requirements, Rule 14a‑8 permits the company to exclude the proposal from its proxy statement. The amendments modernize these safeguards and enhance the efficiency and integrity of the shareholder proposal process.
1. Ownership thresholds. Under the current rule, a shareholder desiring to have a proposal included in a company’s proxy materials must have continuously held at least $2,000 in market value or 1 percent of the company’s securities entitled to vote on the proposal for at least one year as of the submission date of the proposal. The amendments eliminate the rarely used 1 percent test and replace the current $2,000/one-year threshold with three alternatives for shareholders to demonstrate a sufficient ownership stake in a company to avail themselves of the company’s proxy machinery:
- At least $2,000 of the company’s securities for at least three years;
- At least $15,000 of the company’s securities for at least two years; or
- At least $25,000 of the company’s securities for at least one year.
2. Transition period. While the amendments will apply to proposals submitted for meetings on or after January 1, 2022, there is a special transition period for these new ownership thresholds. A shareholder that (i) has held $2,000 of a company’s securities for one year as of the effective date of the amendments (which is 60 days after publication of the amendments on the Federal Register) and (ii) continuously maintains such ownership until the proposal is submitted can still rely on the existing $2,000/one-year threshold for proposals submitted for meetings to be held before January 1, 2023.
3. Aggregation. The amendments prohibit multiple shareholders seeking to co-sponsor a proposal from aggregating their holdings for purposes of satisfying the new ownership thresholds. Instead, each shareholder must satisfy one of the three ownership thresholds above to be eligible to co-file a proposal.
Shareholders sometimes wish to use a representative to submit their proposals. In practice, when a representative acts on behalf of a shareholder, it can be unclear whether the shareholder has a genuine and meaningful interest in the proposal or whether the proposal is primarily of interest to the representative. In some cases, it may appear more like the representative is using the shareholder to advance its agenda. To address this concern, the amendments now add a new requirement that a shareholder electing to use a representative must provide information and documentation to ensure that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal.
Promoting Shareholder Engagement
The amendments also add a shareholder engagement component to current eligibility requirements, requiring a statement from each shareholder that it is able to meet with the company, either in person or via teleconference, within a 10-to-30-day period after submission of the proposal. The purpose of this component is to facilitate dialogue between shareholders and companies and to encourage resolution outside of the shareholder voting process.
The current rule allows “each shareholder” to submit only one proposal for a particular shareholders’ meeting. Technically, a shareholder may submit one proposal in the shareholder’s name and another proposal as a representative on another shareholder’s behalf for consideration at the same meeting. The amendments now apply the one-proposal rule to “each person” rather than “each shareholder” to prevent the use of a representative to circumvent the one-proposal limit. Likewise, a representative can no longer submit multiple proposals for the same meeting on behalf of different shareholders, curbing a practice long viewed by companies as abusive.
Under the current rule, a company may exclude a shareholder proposal from the company’s proxy materials if (i) the proposal addresses substantially the same subject matter as a proposal (or proposals) previously included in the company’s proxy materials in the last five years, (ii) the most recent vote occurred within the last three years and (iii) the most recent vote was:
- Less than 3 percent of the votes cast if previously voted on once;
- Less than 6 percent of the votes cast if previously voted on twice; or
- Less than 10 percent of the votes cast if previously voted on three or more times.
The amendments raise these thresholds to 5 percent, 15 percent and 25 percent, respectively. The new thresholds are believed to better distinguish between proposals that are more likely to obtain sufficient support upon resubmission from those that are not.
The amendments likely will allow companies to exclude more proposals, thus achieving cost savings, the magnitude of which remains to be seen. While shareholders may change their investment behaviors and offset the cost-saving effects of new ownership thresholds (for example, a shareholder who meets the current $2,000/one-year threshold simply can wait two more years to meet the new thresholds), the changes in resubmission thresholds would be more likely to reduce nuisance shareholder proposals that gain little support. Other than economic effects, the amendments may encourage more direct communication between shareholders (or their representatives) and companies, fostering potential beneficial shareholder engagement.
For More Information
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