On September 23rd, the Commission adopted rules altering the shareholder proposals submission (and re-submission) framework under Rule 14a-8 of the Exchange Act for the first time in over twenty years.
Following another split-vote of the commissioners, the SEC approved the staff's recommended modifications to the current shareholder ownership threshold for initial submissions as well as the shareholder support levels required for resubmissions of proposals and adopted several other notable changes in-line with staff's proposing release.
Initial Submission Thresholds
With respect to initial submission requirements, the adopting release noted the Commission's view that the amount of stock owned by a shareholder is not the only way to demonstrate an interest in a company, particularly for smaller investors. The final rules reflect the Commission's conclusion that the length of time owning a company's securities may be a more meaningful indicator that a shareholder has a sufficient interest that warrants use of the company's proxy statement.
Accordingly, the share ownership thresholds for eligibility to submit an initial shareholder proposal have been revised to employ a sliding scale based on the amounts of securities owned as follows:
- Holders of at least $2,000 worth of company securities must have held those securities for an extended period of three years (instead of one year, as under the current formulation of the rule),
- Holders of at least $15,000 worth of company securities must have held those securities for at least two years, and
- Holders of at least $25,000 worth of company securities must have held those securities for at least one year.
The new thresholds are intended to require a more appropriate demonstrated “economic stake or investment interest” in a company before a shareholder may draw on company and shareholder resources to require the inclusion of a proposal in the company's proxy statement.
Consistent with the proposing release, aggregation of holdings for purposes of meeting the ownership requirements will no longer be permitted under the rules. Instead, each shareholder must satisfy one of the three ownership thresholds to be eligible to submit or co-file a proposal.
The Commission's rules also revised the resubmission thresholds under Rule 14a-8 to increase the required support necessary to resubmit a proposal. Under the amendments, a shareholder proposal would be excludable from a company's proxy materials if it addressed 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 most recent vote occurred within the preceding three calendar years and the most recent vote in favor of the proposal 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.
In the Proposing Release, the Commission expressed a concern that the prior resubmission thresholds of 3, 6, and 10 percent did not adequately distinguish between proposals that are more likely to obtain broader or majority support upon resubmission and those that are not. As such, the modifications are intended to avoid a result in which company and shareholder resources may end up being used to consider and vote on matters that are unlikely to be supported by shareholders.
Submissions by Representatives
The adopted rules require a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal to 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 as to the shareholder's identity, role and interest in a proposal that is submitted for inclusion in a company's proxy statement. In this regard, when a proposal is submitted on behalf of a shareholder proponent, such shareholder will be required to include certain documentation that:
- Identifies the company to which the proposal is directed;
- Identifies the annual or special meeting for which the proposal is submitted;
- Identifies the shareholder submitting the proposal and the shareholder's designated representative;
- Includes the shareholder's statement authorizing the designated representative to submit the proposal and otherwise act on the shareholder's behalf;
- Identifies the specific topic of the proposal to be submitted;
- Includes the shareholder's statement supporting the proposal; and
- Is signed and dated by the shareholder.
Required Engagement with Company
Under the amendments, shareholder proponents will be required to engage in discussions with companies in connection with their submission of shareholder proposal. Specifically, shareholder proponents will be required to provide the company with a written statement that they are able to meet with the company in person or via teleconference at specified dates and times that are no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal. Here, the Commission's stated goal is facilitating a “swifter resolution” to shareholder proposal issues, reducing “friction” between the respective parties and pre-empting the need to submit a no-action request to the SEC staff.
One proposal limit
The SEC's newest amendments revise Rule 14a-8(c) to apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal. In particular, the new rule will state that each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders' meeting and specify that “[a] person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders' meeting.”
In application, the amendments will prohibit a shareholder-proponent from submitting one proposal in its own name and simultaneously serving as a representative to submit a different proposal on another shareholder's behalf for consideration at the same meeting.
Effectiveness and Transition Guidance
The new thresholds become effective 60 days after publication in the Federal Register and will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. However, the final rules also provide transition accommodations for application of the new submission thresholds, such that a shareholder that has continuously held at least $2,000 of a company's securities entitled to vote on the proposal for at least one year as of the effective date of the amendments, and who continuously maintains such ownership through the date he or she submits a proposal, will be eligible to submit a proposal to such company, and need not satisfy the amended share ownership thresholds for an annual or special meeting to be held prior to January 1, 2023.
The SEC's final amendments can be viewed here.
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