Yesterday, the Securities and Exchange Commission (SEC) adopted amendments to the shareholder proposal rule – Rule 14a-8 under the Securities Exchange Act of 1934. The long-awaited changes largely track the SEC's November 5, 2019 rule proposals. Most importantly, the amendments update the submission and resubmission thresholds for shareholder proposals and limit the ability of individual persons – whether a shareholder proponent or representative – to submit more than one proposal to an individual company for an annual meeting of shareholders. As the Commission noted in announcing the rule changes, Rule 14a-8 has not been substantively changed since 1998 in the case of the initial submission eligibility thresholds and 1954 in the case of the resubmission shareholder support thresholds, so the rule changes represent a significant development and welcome modernization of the shareholder proposal system.
Submission Thresholds: Prior to the amendments, the ownership threshold to qualify to submit a proposal under Rule 14a-8 required holding at least $2,000 or 1% of a company's securities for at least one year. Consistent with the proposal, the rule changes amend Rule 14a-8(b) to replace the current ownership threshold with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:
- $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.
Under the final rule's transition provision, however, these rule changes will not impact shareholders that meet the currently required threshold and continue to hold their shares through the date the shareholder submits a shareholder proposal to the company. Such shareholders will be able to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023. With regard to satisfying the shareholding requirements, shareholder proponents will no longer be able to aggregate holdings for purposes of satisfying the ownership thresholds and this no-aggregation standard is not subject to the transition provision.
In addition to the changes in ownership thresholds, the amendments will now require a shareholder proponent to state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company. This change will help to address problems that many companies have experienced in attempting to engage with some shareholder proponents who have been unwilling to do so, which could result in more successful resolution of issues raised by shareholder proposals.
Resubmission Thresholds: Further, and consistent with the proposal, the SEC amended Rule 14a-8(i)(12) to replace the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company's future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. This means that a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years and proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years. The SEC did not adopt the proposed "momentum" provision that would have permitted exclusion of a proposal 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% threshold if (i) the most recently voted on proposal received less than a majority of the votes cast and (ii) support declined by 10% or more compared to the immediately preceding shareholder vote on the matter. Even without the "momentum" provision, these revisions to the resubmission thresholds should help reduce the time and expense devoted to including shareholder proposals that are of little interest to a company's shareholders.
Representatives: The SEC's amendments also make important updates to the rule with regard to the role of representatives in the process. Under amended Rule 14a-8(b), shareholders that use a representative for the purpose of submitting a shareholder proposal will be required to provide documentation to make clear that the representative is authorized to act on the shareholder's behalf and to provide meaningful assurance as to the shareholder's identity, role and interest in the proposal. Even more significant, the SEC amended Rule 14a-8(c), which provides that a shareholder may only submit one shareholder proposal to a company each year, to provide that the one-proposal limit applies to "each person" rather than "each shareholder" who submits a proposal. As a result, a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on behalf of another shareholder for consideration at the same meeting. Similarly, a person will not be permitted to submit more than one proposal to be considered at the same meeting on behalf of different shareholders. This aspect of the amended rule is likely to have the most immediate and noticeable impact on the number of shareholder proposals received by companies in light of the significant number of proposals currently submitted by certain retail shareholders who utilize the representative approach to enable a single individual to submit multiple proposals to individual companies each proxy season.
The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022, subject to the special transition period described above.
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