On September 23, the Securities and Exchange Commission voted to adopt amendments to the rules governing the process for the submission of shareholder proposals to be included in a registrant’s proxy statement. Rule 14a-8 of the Securities Exchange Act of 1934 (Exchange Act) requires registrants holding a shareholder meeting that is subject to the Exchange Act proxy rules to include in their proxy statement proposals submitted by shareholders, so long as the applicable procedural and substantive requirements are met.
The amended rules, originally proposed on November 5, 2019, as discussed in the November 8, 2019 edition of Corporate & Financial Weekly Digest, update the ownership thresholds required for a shareholder to be eligible to submit a proposal, revise the “one-proposal” rule and increase the level of support that a proposal must receive to be eligible for resubmission at future shareholder meetings.
In enacting the amended rules, the SEC noted a balancing of the interests of the shareholder proponents in having access to the company’s proxy materials and the associated resources with the costs associated with reviewing, considering and voting on shareholder proposals, which are largely borne by the registrant and its other shareholders.
Eligibility and Ownership Thresholds
Under legacy Rule 14a-8(b), in order to submit a proposal for inclusion in a registrant’s proxy statement properly, the shareholder proponent must have continuously held at least $2,000 or 1 percent of the registrant’s securities entitled to vote on the proposal for at least one year as of the date the proposal was submitted.
Under amended Rule 14a-8(b), to be eligible to submit a shareholder proposal for inclusion in the registrant’s proxy statement, a proponent must demonstrate continuous ownership of the registrant’s securities entitled to vote on the proposal, of at least:
- $2,000 for at least three years;
- $15,000 for at least two years; or
- $25,000 for at least one year.
The amended rules provide that a shareholder proponent is not permitted to aggregate its holdings with those of other shareholders in order to satisfy the ownership threshold. Each shareholder proponent must satisfy at least one of the three ownership thresholds set forth above.
The amended rules also require a shareholder proponent to provide the registrant with a written statement that it is available to meet with the registrant, either in person or via teleconference, at specified times and dates no less than 10-calendar days, nor more than 30-calendar days, after submission of the proposal. A shareholder proponent must include contact information and identify specific business days and times (which must include more than one date and time) when the shareholder is available to discuss the proposal with the registrant. The time specified must be during the regular business hours at the registrant’s principal executive offices. If no such regular business hours are disclosed in the registrant’s proxy statement, the shareholder should identify times between 9:00 a.m. and 5:30 p.m. on business days in the time zone of the registrant’s principal executive offices.
The amended rules further require that any shareholder using a representative to submit a proposal for inclusion in a registrant’s proxy statement must provide documentation that, among other things, identifies the shareholder submitting the proposal and the shareholder’s representative, includes the shareholder’s statement authorizing the representative to submit the proposal on its behalf, identifies the topics of the proposal to be submitted, includes a statement supporting the proposal from the shareholder and is signed by the shareholder.
These rules are designed to ensure that when a representative, who may not qualify to submit a proposal in its own name, speaks and acts for a shareholder, there is a meaningful degree of assurance as to the shareholder’s identity, role and interest in the proposal being submitted.
The “one-proposal” rule under legacy Rule 14a-8(c) provides that a shareholder may not submit more than one proposal to a registrant for inclusion in a proxy statement for any particular shareholder meeting. The amended rules expand the limitation to apply to each “person,” rather than each shareholder. As a result, a proponent may not submit one proposal in its own name and also serve as a representative to submit a second proposal. Also, a person desiring to serve as a representative for multiple shareholders cannot submit more than one proposal for any one meeting in such capacity.
Under legacy Rule 14a-8(i)(12), a registrant may exclude a shareholder proposal from its proxy statement if the proposal addresses substantially the same subject matter as another proposal that has been previously included in the registrant’s proxy statement within the preceding five years and voted on within the preceding three years and support for that proposal in the most recent vote thereon was less than 3 percent of the votes cast if voted on once within the preceding five years, less than 6 percent of the votes cast if voted on twice within the preceding five years and less than 10 percent of the votes cast if voted on three or more times within the preceding five years.
Under amended Rule 14a-8(i)(12), a shareholder proposal may be excluded from a registrant’s proxy statement where it addresses substantially the same subject matter as a proposal previously included in the registrant’s proxy statement within the preceding five years if the most recent vote occurred within the preceding three years and support for the proposal in the most recent vote thereon was:
- less than 5 percent of the votes cast if previously voted on once;
- less than 15 percent of the votes cast if previously voted on twice; or
- less than 25 percent of the votes cast if previously voted on three or more times.
The SEC also proposed a related provision, referred to as the “Momentum Requirement,” which was not adopted. The Momentum Requirement, if adopted, would have allowed a registrant to exclude a shareholder proposal that had been previously voted on three or more times in the last five years, even if it satisfied the 25 percent support threshold the last time the matter was voted on, if the proposal received support of less than 50 percent of the votes cast and support for the proposal declined 10 percent or more compared to the prior vote. The SEC ultimately opted not to adopt the Momentum Requirement, in part, out of a concern that it could lead to anomalous results and was unnecessarily complex.
The amended rule will apply to any shareholder proposal submitted for a shareholder meeting to be held on or after January 1, 2022. However, any shareholder that has continuously held at least $2,000 of a registrant’s securities entitled to vote on a proposal for at least one year as of the effective date of the amended rules (60 days after publication of the rules in the Federal Register), and continues to hold at least $2,000 of such securities through the date of submission of a shareholder proposal, will not be required to satisfy the heightened ownership requirements for any shareholder meeting held prior to January 1, 2023.
The SEC’s implementing release and the rules are available here.