On September 23, 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to the shareholder proposal rule, Rule 14a-8 under the Securities Exchange Act of 1934, as amended. Rule 14a-8 governs the process for a shareholder to have its proposal included in a company’s proxy statement for consideration by the company’s shareholders.

The amendments relate to, among other things, the principal requirements for: (1) initial inclusion in the company’s proxy statement, including the requirements as to the amount and length of share ownership by a proposing shareholder, and (2) subsequent resubmission of the same proposal at future shareholder meetings if the proposal is not approved.

We believe that companies will welcome the amendments both in light of the significant costs typically imposed on companies in connection with shareholder proposals, as well as because the amendments facilitate, but do not require, engagement with shareholder-proponents. However, it remains to be seen how the amendments will affect the volume of shareholder proposals or whether engagement with shareholder-proponents will increase beyond their current levels.

Background

Rule 14a-8 provides a process whereby a shareholder may include a proposal alongside management’s proposals in a company’s proxy materials. In recent years, shareholders have submitted proposals seeking company action and/or disclosure on a variety of environmental, social and governance issues, including climate change and board diversity. The rule sets forth procedural and substantive requirements that a shareholder-proponent must meet, including shareholder eligibility requirements, proposal requirements and specific deadlines for the shareholder proposal process.

Highlights of the Amendments

The amendments change Rule 14a-8(b) by:

• replacing the current ownership threshold (requiring a shareholder to hold at least $2,000 or 1% of a company’s securities continuously for at least one year) with a tiered approach consisting of three alternative thresholds requiring a shareholder to have continuous ownership of at least:
  
  
  • $2,000 of the company’s voting securities for at least three years;
    
    
  • $15,000 of the company’s voting securities for at least two years; or
    
    
  • $25,000 of the company’s voting securities for at least one year;
    
    
• prohibiting multiple shareholders from aggregating holdings for purposes of satisfying the amended ownership thresholds;
  
  
• requiring that a shareholder who elects to use a representative to submit a proposal for inclusion in a company’s proxy statement must provide the company with (1) documentation to make clear that the representative is authorized to act on the shareholder’s behalf and (2) a meaningful degree of assurance as to the shareholder’s identity, role and interest in the proposal; and
  
  
• requiring that each shareholder-proponent must state that the shareholder is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal, and must provide contact information, as well as specific business days and times that the shareholder is available to discuss the proposal with the company.

In addition, the amendments change Rule 14a-8(c) by applying the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal for a shareholder meeting. As a result, a shareholder-proponent will be prohibited from submitting one proposal in the shareholder’s own name and simultaneously acting as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same company’s meeting. In addition, a representative will be prohibited from submitting more than one proposal to be considered at the same meeting, even if each proposal were to be submitted on behalf of different shareholders.

Further, the amendments modify Rule 14a-8(i)(12) by increasing the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings for matters previously voted on once, twice or three or more times in the last five years from 3%, 6% and 10%, respectively, to 5%, 15% and 25%, respectively. To illustrate, a proposal must receive the support of at least 5% of the voting shareholders in its first submission to be eligible for resubmission in the next three years. Proposals submitted two or three times in the last five years must achieve the support of at least 15% and 25%, respectively, of the voting shareholders to be eligible for resubmission in the next three years.

SEC Commentary

In its press release announcing the changes, the SEC noted that the amendments are intended to ensure that the ability to have a proposal included alongside management’s in a company’s proxy materials “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.” In addition, the SEC expects the amendments to “facilitate engagement among shareholder-proponents, companies and other shareholders” while “preserving the ability of smaller shareholders to access the proxy statements of the companies in which they have demonstrated a continuing interest.” The amendments are part of the SEC’s broader effort to improve the proxy process and the ability of shareholders to exercise their voting rights.

Next Steps

The amendments will become effective 60 days after publication in the Federal Register and will apply to proposals submitted for annual or special meetings to be held on or after January 1, 2022. The final rules include a transition period for the ownership thresholds that will allow shareholders who meet certain conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for annual or special meetings to be held prior to January 1, 2023.

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