On September 23, 2020, a divided Securities and Exchange Commission voted 3-2 to adopt amendments modernizing its shareholder proposal rule (Rule 14a-8), which governs the process for a shareholder proposal to be included in a company’s proxy statement for consideration by all company shareholders. The rule raises shareholder thresholds and affects the ability of shareholders to submit new proposals or resubmit previously failed proposals.
Since 1998, Rule 14a-8 has required shareholders to own at least $2,000 in company stock for one year before submitting a proposal. Under the new rules, a tiered approach factors in both the amount of and length of ownership. Shareholders can submit proposals if they own $2,000 in a company’s stock for at least three years; $15,000 in stock for two years; or $25,000 in stock for one year. The SEC stated that this change preserves the ability of smaller shareholders to access the proxy statements of companies in which they have demonstrated a continuing interest.
The SEC’s rule change also raises the bar on investors resubmitting rejected proposals, a rule that had been unchanged since 1954. The prior rule required a proposal to gain at least 3% support to be resubmitted if it were voted on once in the last five years; 6% if voted on twice in the last five years; or 10% if voted on three times in the last five years. Those percentages will now be raised to 5%, 15% and 25%, respectively (see SEC’s Fact Sheet). The new rules also provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative, prohibit aggregation of holdings for purposes of satisfying the ownership thresholds, facilitate engagement with the proponent, and update other procedural requirements.
The SEC majority described the changes as an effort to modernize and enhance the efficiency and integrity of the shareholder proposal process, noting that shareholder proposals allow a few investors to pass the costs of a proposal to other shareholders and the company. The SEC estimated that these changes could save companies in aggregate across the Russell 3000 Index about $69.8 million annually.
"While we all have a right to get on our soapboxes, we have no right to force others to pay for them," said SEC Commissioner Elad Roisman, joined by Chairman Jay Clayton and Commissioner Hester Peirce in supporting the changes. Commissioner Peirce said that the new standards will “help to ensure that the shareholder-proponent’s interests are aligned with those of her fellow shareholders,” and that proponents of proposals are committed long-term investors of their companies. Only about three shareholders per million investors submit proposals, and this rule relieves companies and shareholders of the obligation to consider, and spend resources on, matters previously voted on and rejected by a substantial majority of shareholders.
Critics of this decision argued that the changes favor corporate executives at the expense of investors. Commissioners Caroline Crenshaw and Allison Herren Lee criticized the changes, concerned that they will squash shareholder voices on environmental, social and governance matters (ESG) such as climate risks and workplace diversity. Shareholder proposal advocates say proposals can be effective in reforming corporate governance, even if they take years to gain support.
Commissioner Lee argued that the cost savings were exaggerated, stating that only 13% of Russell 3000 companies received a shareholder proposal between 2004 and 2017 (averaging one proposal every 7.7 years). Commissioner Lee said that the new rules “collectively put a thumb on the scale for management in the balance of power between companies and their owners” and “dial back shareholder oversight of management at the companies they own.” Commissioner Crenshaw argued that small investors are at a disadvantage, noting that many cannot afford to invest $25,000 in a company, and the new rules prohibit shareholders from jointly submitting a proposal and combining their respective holdings to meet the thresholds. Small investors would now be required to wait three years before submitting ballot proposals on urgent topics such as COVID-19 or climate change.
Labor advocates and investor groups like the Council of Institutional Investors also criticized the changes, saying that they will discourage investors from speaking out on ESG matters. The Council of Institutional Investors’ press release states that the amendments will “muzzle the voice of small investors” and that the current proposal process is a cost-effective way for shareholders to communicate with companies. But business groups, including the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, support the new rules. The center’s executive vice president, Tom Quaadman, stated that “the Eisenhower-era rules on shareholder proposals no longer reflected the needs of 21st century investors and businesses,” and “tilt[ed] the scales in favor of a small subset of activists at the expense of investors as a whole.”
The new shareholder proposal rules will be effective 60 days after publication in the Federal Register and will apply to shareholder meetings starting on Jan. 1, 2022. There is a transition period that allows shareholders to continue relying on the $2,000-one-year ownership threshold under certain conditions until Jan. 1, 2023. You can find the Final Rule here.
Michael Best’s Securities & Capital Markets team has experts who advise public and private companies on compliance with the SEC regulations. Please do not hesitate to contact a member of the Securities & Capital Markets team for additional information on this change or other securities compliance issues.