On September 23, the Securities and Exchange Commission adopted amendments to the "shareholder proposal rule" set forth in Rule 14a-8 of the Securities Exchange Act of 1934, which governs the process for a shareholder to have its proposal included in a company's proxy statement to be voted on at an upcoming shareholder meeting. These amendments are part of an ongoing effort by the SEC to modernize its rules affecting public companies.
Rule 14a-8 requires companies that are subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. By giving shareholders the ability to have a proposal included in a company's proxy statement, Rule 14a-8 enables eligible shareholders to present their proposals to all other shareholders and to solicit their proxies, at little or no expense to the proposing shareholder. Among other things, the amendments to the shareholder proposal rule raise the threshold for (i) the amount and length of ownership needed by the proposing shareholder to include a proposal in a company's proxy statement and (ii) the amount of support needed from other shareholders in order to be able to resubmit a prior proposal that was not approved. The SEC stated that the amendments are "intended to help ensure that the ability to have a proposal included alongside management's in a company's proxy materials-and thus to draw on company and shareholder resources and to command the time and attention of the company and other shareholders-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."1
The amendments to Rule 14a-8 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 Jan. 1, 2022. However, the final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the prior ownership threshold for proposals submitted for an annual or special meeting to be held prior to Jan. 1, 2023.
The following are highlights from the SEC's amendments to the shareholder proposal rule.
1. Rule 14a-8(b)
Rule 14a-8(b) of the Exchange Act is amended by:
- Replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company's securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least (i) $2,000 of the company's securities for at least three years, (ii) $15,000 of the company's securities for at least two years or (iii) $25,000 of the company's securities for at least one year.
- Prohibiting the aggregation of holdings by multiple shareholders for purposes of satisfying the amended ownership thresholds.
- Requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder's behalf and to provide a meaningful degree of assurance to the company as to the shareholder's identity, role and interest in a proposal that is submitted for inclusion in a company's proxy statement.
- Requiring that each shareholder state that he or she is able to meet with the company between 10 and 30 days after submission of its proposal to discuss the proposal with the company.
2. Rule 14-8(c)
Rule 14-8(c) of the Exchange Act is amended such that a shareholder will no longer be permitted to submit a proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder's behalf for consideration at the same shareholder meeting. Likewise, a representative will not be permitted 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.
3. Rule 14a-8(i)(12)
Rule 14a-8(i)(12) of the Exchange Act is amended by revising 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% to 5%, 15% and 25%, respectively. Under the amended rule, a shareholder proposal can be excluded from a company's proxy statement if it addresses substantially the same subject matter as a proposal included in the company's proxy statement within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote received (i) less than 5% of the votes cast if previously voted on once, (ii) less than 15% of the votes cast if previously voted on twice or (iii) less than 25% of the votes cast if previously voted on three or more times.
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