Last week, the Securities and Exchange Commission (SEC) voted 3-2 to take the following actions:
- Propose new amendments to Rule 14a-8, the shareholder proposal rule.
- Adopt new amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis.
With respect to the 14a-8 amendments, the SEC is proposing to amend three of the substantive exclusions on which companies rely to omit shareholder proposals from their proxy materials, which will arguably make it harder for companies to omit shareholder proposals under the relevant provisions.
Concerning the amendments to the rule governing proxy voting advice, the SEC is rescinding certain rules that were adopted by the SEC in 2020, including a rule that effectively would have required ISS and Glass Lewis to adopt and publicly disclose written policies and procedures designed to ensure that companies subject to such proxy voting advice had access to such advice at or before the time when such advice is disseminated to the proxy advisory firm’s clients, as well as a mechanism by which the clients of proxy advisory firms are provided with a means of becoming aware of any written responses by companies to the proxy voting advice.
A summary of each of these actions follows.
Proposed Amendments to the Shareholder Proposal Rule (14a-8)
The proposed amendments to Rule 14a-8 would revise the following bases for exclusion:
- Substantial Implementation (14a-8(i)(10)).
- The proposed amendments would specify that a proposal may be excluded under this provision if the company has already implemented the “essential elements” of the proposal. Currently, Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal that “the company has already substantially implemented.”
- The SEC proposing release includes the following examples of how this change will impact the application of the rules:
“For example, the staff historically has concurred in the exclusion, under Rule 14a-8(i)(10), of proposals seeking the adoption of a proxy access provision that allows an unlimited number of shareholders who collectively have owned 3 percent of the company’s outstanding common stock for 3 years to nominate up to 25 percent of the company’s directors, where the company had adopted a proxy access bylaw allowing a shareholder or group of up to 20 shareholders owning 3 percent of its common stock continuously for 3 years to nominate up to 20 percent of the board. Under the proposed amendment, because the ability of an unlimited number of shareholders to aggregate their shareholdings to form a nominating group generally would be an essential element of the proposal, exclusion would not be appropriate.
“As another example, where a proposal calls for a company to issue a report about a particular topic, a company’s existing reports or disclosures about that topic may not implement the essential elements of the proposal, especially if the plain language of the proposal explains how the company’s existing reports or disclosures are insufficient. Additionally, where a proposal requests a report from the company’s board of directors (such as disclosure regarding the board’s assessment of a topic, or the board’s process in approaching a topic), the staff may determine that the company has not implemented an essential element of the proposal if the report comes from management rather than the board, if the proposal demonstrates a clear emphasis on reporting directly from the board.”
- Duplication (14a-8(i)(11)).
- The proposed amendments would specify that a proposal “substantially duplicates” another proposal previously submitted for the same shareholder meeting if it “addresses the same subject matter and seeks the same objective by the same means.” Currently, in evaluating whether proposals are substantially duplicative, the staff focuses on whether the proposals have the same “principal thrust” or “principal focus,” and whether or not the terms or scope are the same.
- The SEC proposing release includes the following example of how this change will impact the application of the rules:“For example, consider the following two proposals: (1) a proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation; and (2) a proposal requesting a report to shareholders on the company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities. In considering the application of the duplication exclusion to these proposals, the staff previously had concurred that the proposals were substantially duplicative when analyzing the principal thrust or focus of the proposals. Under the proposed amendment, however, these proposals would not be deemed substantially duplicative because, although they both address the subject matter of the company’s political and lobbying expenditures, they seek different objectives by different means.”
- Resubmission (14a-8(i)(12)).
- Rule 14a-8(i)(12) provides that a shareholder proposal may be excluded if it “addresses 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 matter was voted on at least once in the last three years and did not achieve specified levels of support on the most recent vote. (emphasis added)
- The proposed amendments would revise the standard of what constitutes a resubmission under Rule 14a-8(i)(12) from a proposal that “addresses substantially the same subject matter” as a prior proposal to a proposal that “substantially duplicates” a prior proposal—the same standard that applies under current Rule 14a-8(i)(11), the duplication exclusion. The proposed amendments also would provide that, for purposes of Rule 14a-8(i)(12), a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.
- The SEC proposing release includes the following example of how this change will impact the application of the rules:
“To take an example, the staff previously had viewed the following proposals as addressing the same subject matter for purposes of the resubmission exclusion: (1) a proposal requesting that the board adopt a policy prohibiting the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a “government service golden parachute”); and (2) a proposal requesting that the board prepare a report to shareholders regarding the vesting of such government service golden parachutes that identifies eligible senior executives and the estimated dollar value of each senior executive’s government service golden parachute.65 Under the proposed amendment to Rule 14a-8(i)(12), although these proposals concern the same subject matter (namely, government service golden parachutes for senior executives), exclusion would not be warranted because they do not seek the same objectives by the same means.”
For additional information, a link to the proposed rule is here.
Comments on the proposal should be received on or before 30 days after publication in the Federal Register or September 12, 2022, whichever is later.
Adopting Amendments to Proxy Rules Governing Proxy Voting Advice (i.e., ISS and Glass Lewis)
The final amendments rescind certain rules applicable to proxy voting advice businesses (i.e., ISS and Glass Lewis) that the Commission adopted in 2020. First, the final amendments rescind conditions to the availability of two exemptions from the proxy rules’ information and filing requirements on which proxy voting advice businesses often rely.
Those conditions generally required proxy advisory firms to adopt and publicly disclose written policies and procedures reasonably designed to ensure that:
- Registrants subject to proxy voting advice have such advice made available to them at or before the time such advice is disseminated to the proxy advisory firm’s clients.
- The proxy advisory firm provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants that are the subject of such advice in a timely manner before the security holder meeting.
Second, the final amendments also delete the 2020 changes to the proxy rules’ liability provision in Rule 14a-9. Specifically, the SEC is rescinding Note (e) to Rule 14a-9, which provides that the failure to disclose material information regarding proxy voting advice, such as the proxy voting advice business’s methodology, sources of information, or conflicts of interest, could be considered misleading for purposes of Rule 14a-9’s prohibition of misleading statements in connection with a proxy solicitation.
Finally, the SEC is rescinding guidance that the SEC issued in 2020 to investment advisers regarding their proxy voting obligations because such guidance was tied to the rules that are being rescinded.
For additional information, a link to the final rule is here.
The amendments and the rescission of the guidance are effective 60 days after publication in the Federal Register.
If you have any questions regarding any of the topics covered in this blog post, please feel free to email the author directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
About the Bass, Berry & Sims Corporate & Securities Practice
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; special purpose acquisition companies (SPACs) and de-SPAC transactions; executive compensation issues; corporate governance; ESG matters; and shareholder activism. We serve as primary corporate and securities counsel to numerous public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years. Click here to learn more about the Corporate & Securities Practice at Bass, Berry & Sims.