On November 5, the Securities and Exchange Commission (SEC) in a 3-2 decision voted to propose amendments to rules governing shareholder proposals in companies’ proxy statements. These proposed amendments – which seek to revise Rule 14a-8’s eligibility requirements, one-proposal limit, and resubmission thresholds – follow on the heels of recent guidance issued by the Staff of the Division of Corporation Finance related to the no-action letter process for shareholder proposals.
The press release announcing the proposed changes noted that the changes are part of the SEC’s ongoing focus on improving proxy access and the ability of shareholders to exercise their rights to vote. SEC Chairman Jay Clayton commented in the release that the proposed changes are designed to “facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.” Not without controversy though, the rule revisions are receiving criticism from shareholder advocacy groups, while business-minded groups like the U.S. Chamber of Commerce have come out in support of the proposed changes.
Eligibility Requirements for Shareholders
The current eligibility requirements require that a shareholder proponent hold at least $2,000 or 1% of a company’s securities for at least a year to be eligible to submit a proposal. The proposed revisions, eliminate the 1% threshold and replace the $2,000 threshold with the following three alternatives:
- Continuous ownership of at least $2,000 of the company’s securities for at least three years.
- Continuous ownership of at least $15,000 of the company’s securities for at least two years.
- Continuous ownership of at least $25,000 of the company’s securities for at least one year.
In addition, the rules require a shareholder-proponent to state that the shareholder is able to meet with the company, either in person or by teleconference, no less than 10 calendar days nor more than 30 calendar days, after the submission of a proposal and provide contact information as well as business days and specific times that the shareholder is available to discuss the proposal with the company. Shareholder-proponents who elect to use a representative for the purpose of submitting their proposal would also be required to provide documentation with their proposal that makes clear that the representative is authorized to act on their behalf and provide a meaningful degree of assurance as to the shareholder-proponent’s identity, role and interest in the proposal.
Number of Proposals Submitted by Shareholders Would be Limited under Rule 14a-8
The proposed changes to the one proposal portion of Rule 14a-8 would apply that restriction to “each person” rather than “each shareholder” as is currently the case, who submits a proposal. As a result, a shareholder-proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a separate proposal on another shareholder’s behalf. Nor would a representative be permitted to submit more than one proposal to be considered at a meeting, even if the representative were to submit the proposal on behalf of different shareholders.
Resubmission Thresholds and Exclusion Ability Would Also Change
The revised rule also seeks to modernize the portion of Rule 14a-8 that addresses a shareholder’s ability to submit a proposal that doesn’t receive sufficient support at subsequent meetings. Currently, a shareholder may not resubmit a proposal at a subsequent meeting unless it received support of at least 3%, 6% or 10% for matters voted on once, twice or three or more times, respectively – thresholds that have been in place since 1954. Under the proposed rules, those resubmission thresholds would be raised to 5%, 15% and 25%, respectively.
Companies would also be able to exclude a proposal that has been voted on three or more times in the last five years even if it received support in excess of 25% of the votes cast on its most recent submission if the proposal received less than 50% of the votes cast and experienced a decline in shareholder support of 10% or more compared to the immediately preceding vote.
The rule changes are now subject to a 60-day comment period. To submit comments, use the SEC’s Internet submission form or send an email to firstname.lastname@example.org.
If you have questions about this or other issues related to Rule 14a-8, please contact any member of our Corporate & Securities Practice for more information.
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Public and private companies of all sizes across a variety of industries turn to Bass, Berry & Sims for counsel on a wide range of corporate matters, including mergers, acquisitions and dispositions; capital markets transactions; executive compensation issues; corporate governance; and shareholder activism. We serve as primary corporate and securities counsel to more than 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years.