On September 23, 2020, the Securities and Exchange Commission (“SEC”) announced that it had adopted amendments to Rule 14a-8 under the Securities Exchange Act of 1934 (the “Amendments”). Rule 14a-8 governs the eligibility, on substantive and procedural grounds, for a shareholder to have a proposal included in the proxy statement of a public company. The Amendments revise certain of the procedural requirements pertaining to a shareholder’s initial proposal as well as resubmitted proposals. The Amendments do not change the substantive bases for inclusion or exclusion of shareholder proposals.
Until last week, Rule 14a-8 had not been revised significantly for 20 years. In adopting the Amendments, the SEC observed that they are intended to “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders” and are part of the SEC’s attempt to improve the proxy solicitation process and shareholders’ ability to exercise their voting rights. The SEC also noted that the Amendments are intended to assure that a shareholder’s ability to have a proposal included in a company’s proxy materials “is appropriately calibrated and takes into consideration the interests of not only the shareholder who submits a proposal but also the company and other shareholders who bear the costs associated with the inclusion of such proposals in the company’s proxy statement.”
The Amendments will become effective 60 days after publication in the Federal Register and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. Accordingly, the Amendments will not apply to shareholder proposals delivered to companies this fall in connection with annual meetings to be held next spring, but will first apply to proposals delivered timely in 2021 for consideration relative to annual meetings in 2022.
In addition, a transition rule will grandfather a shareholder that has continuously held at least $2,000 of the company’s stock for one year as of the effective date of the Amendments, and continuously maintains ownership of at least $2,000 of such stock from the effective date of the Amendments through the date the shareholder submits a proposal to such company, to qualify to submit an initial proposal for a meeting to be held before January 1, 2023. Speaking at the American Bar Association Federal Regulation of Securities Committee meeting the day the Amendments were adopted and at the annual Ray Garrett Institute hosted by Northwestern University the next day, the Director of the SEC Division of Corporation Finance, Bill Hinman, remarked that grandfathering would apply for three full years relative to resubmissions. Accordingly, companies would be wise to obtain lists of their shareholders as of the effective date of the Amendments in order to be in an optimal position to police grandfathering claims that might be made later by proponents.
The following chart summarizes existing requirements of, and the Amendments to, Rule 14a-8:
|Ownership||A shareholder must have owned at least $2,000 in market value of a company’s stock in order to qualify to submit a shareholder proposal for inclusion in the company’s proxy statement.||
Increases the ownership thresholds required in order to qualify to submit a shareholder proposal for inclusion in the company’s proxy statement. The Amendments will require a shareholder to own:
Importantly, the Amendments disallow aggregation of holdings of multiple shareholders for purposes of satisfying the ownership requirements.
|Engagement||Encouraged, but not required.||Requires a proposing shareholder to provide the company with a written statement that it is able to meet with the company in person or via teleconference not less than 10 calendar days nor more than 30 calendar days after submission of the proposal, and provide contact information as well as the specific business days and times that it is available to discuss the proposal with the company.|
|One Proposal per Shareholder||A proposing shareholder is allowed to submit only one proposal to a company for a particular shareholder meeting.||The existing rules were clarified (and prior loopholes were closed) by requiring additional information for proposals submitted by representatives of shareholders (including identification of the represented shareholder) and by prohibiting a shareholder from submitting multiple proposals under different names or through different representatives.|
Permits a company to exclude from its proxy materials a resubmitted shareholder proposal that addresses substantially the same subject matter as a proposal included in the company’s proxy materials within the preceding five calendar years, if the most recent vote occurred within the preceding three calendar years and was supported by less than:
Increases the prior vote thresholds for resubmission of a shareholder proposal that addresses substantially the same subject matter as a proposal included in the company’s proxy materials within the preceding five calendar years to permit exclusion by the company if the most recent vote occurred within the preceding three calendar years and was supported by less than:
Because the Amendments are generally quantitative rather than qualitative, they are basically clear on their face. Certain of the Amendments, however, have engendered some controversy or otherwise require placement in context or some explanation.
In line with the SEC’s attempts to balance shareholder participation in the proxy process with the costs borne by public companies of that participation, the Amendments modify the ownership thresholds by creating a tiered approach. Under that approach, the amount of stock that must be owned by a proponent is higher than at present if held for less than three years. The Amendments do not include a test based on percentage owned of a company’s stock. In this connection, the SEC reasoned that the revised thresholds represent “a meaningful economic stake or investment interest such that a separate percentage-based threshold is unnecessary.” Speaking to the concern that the higher thresholds might disenfranchise some shareholders, SEC Chairman Jay Clayton opined on CNBC Squawk Box the morning after the Amendments were adopted that he is confident that retail investors will respond by adjusting their behavior and that institutional investors will not be affected at all.
The Amendments introduce a prohibition of shareholders aggregating their holdings with one another to satisfy the ownership threshold for a Rule 14a-8 proposal. Under the Amendments, each shareholder must satisfy one of the three ownership thresholds in order to be eligible. In public remarks after adoption of the Amendments, Director Hinman explained that the SEC adopted this particular Amendment because it believes that aggregation undercuts the “meaningful interest” criterion, meaning the required thresholds of stock ownership.
The Amendments further the SEC’s desire to increase shareholder engagement with management by requiring a shareholder proponent to provide the company with a written statement that the proponent is able to meet with the company in person or via teleconference at specified dates and times that are not less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal. The 10-calendar-day minimum is meant to give management enough time to consider the proposal before engaging with the proponent. In order to facilitate engagement, shareholder-proponents must also provide contact information and identify the specific business days and times (i.e., more than one date and time) that the proponent is available to discuss the proposal. As Director Hinman explained, this requirement “underscores the importance of engagement.” Earlier and more likely engagement holds out the promise of discussion and agreement to possible compromise solutions obviating the need for inclusion of the proposal in the registrant’s proxy materials or solicitation of a no-action letter permitting exclusion.
The Amendments add a new eligibility requirement to Rule 14a-8, which requires shareholders that use a representative to submit a proposal for inclusion in a company’s proxy statement to provide documentation that:
According to the SEC, the new requirement is meant to, among other things, ensure shareholders have a genuine interest in the proposal and to confirm that representatives are acting only as authorized. Director Hinman commented that these documentation requirements are procedural eligibility requirements of amended Rule 14a-8 and that, therefore, companies will be within their rights in excluding proposals for failure to provide the required documentation.
The Amendments modify Rule 14a-8(c) to close prior loopholes with the result that each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. Under the Amendments, a person may not 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. Also, a shareholder-proponent will not be permitted to submit one proposal in the shareholder’s own name and simultaneously serve as representative relative to a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be allowed to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders. The SEC highlighted that the reason that it initially adopted the one-proposal restriction in 1976 is the same reason for these Amendments – prevention of abuse of shareholders’ rights to submit proposals.
The Amendments increase the vote thresholds such that a shareholder proposal will be excludable from a company’s proxy materials if it addressed 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 most recent vote occurred within the preceding three calendar years and the most recent support by shareholders was: less than 5% of the votes cast if previously voted on once; less than 15% of the votes cast if previously voted on twice; or less than 25% of the votes cast if previously voted on three or more times.
After the SEC voted to adopt the Amendments, Chairman Clayton remarked that these “resubmission” standards were the part of Rule 14a-8 most in need of updating, as they had not been changed for 50 years.
These Amendments to Rule 14a-8 are the most recent result in a series of ongoing initiatives by the SEC under Chairman Clayton and Corporation Finance Director Hinman to modernize SEC mandates and practices relative to public companies and capital raising by private companies by examining the existing regulations and updating them incrementally.
Other examples include:
Both Chairman Clayton and Director Hinman practiced law for nearly 40 years before assuming their present roles at the SEC. Their laudable efforts to modernize the rules reflect their immense private sector experience. Director Hinman says that the effort throughout the series of revisions is to be “more efficient, less costly, less cumbersome,” while assuring the appropriate degree of investor protection.