SEC Revisits Shareholder Proposal Rule

SEC Revisits Shareholder Proposal Rule

Blog Keeping Current: Disclosure and Governance Developments

The Securities and Exchange Commission recently revisited two proxy-related matters by (a) adopting amendments to the proxy rules governing proxy voting advice and (b) proposing amendments to the shareholder proposal rule in Rule 14a-8.  Both of these areas were the subject of recent rulemaking during former Chair Clayton’s tenure. 

Focusing on the proposed modifications to the shareholder proposal rule, the SEC proposed amendments to three substantive bases for exclusion:

  1. Rule 14a-8(i)(10) (Substantial Implementation) – Under Rule 14a-8(i)(10), a company may exclude a shareholder proposal that “the company has already substantially implemented.”  The SEC has proposed specifying a standard for exclusion that looks to whether “the company has already implemented the essential elements of the proposal.”  To conduct this substantive analysis, the proposing release notes that the ability to define the “essential elements” will, in part, rely on the specificity of the proposal and of its stated primary objectives as presented by the proponent.  The proposing release offers two illustrations to contextualize the contemplated analysis.  In the context of a proxy access shareholder proposal that specifies the adoption of a bylaw allowing 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, the company would not have substantially implemented the shareholder proposal if it adopted a proxy access bylaw containing all of these provisions but added a 20-shareholder cap on the ability to aggregate ownership, as such provision would be an “essential element” of the shareholder proposal.  In a second example involving a report about a particular topic, the proposing release notes that a company’s existing reports or disclosures about such topic may not implement the essential elements “if the plain language of the proposal explains how the company’s existing reports are disclosures are insufficient” or where a report comes from management but is requested to come from the board.
  2. Rule 14a-8(i)(11) (Duplication) – Under Rule 14a-8(i)(11), a company may exclude a shareholder proposal that “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.”  The SEC has proposed defining “substantially duplicates” for these purposes to mean that the other shareholder proposal “addresses the same subject matter and seeks the same objective by the same means.”  In describing this proposed change, the SEC expressed concern that the current rule “may unduly constrain shareholder suffrage by limiting shareholder-proponents’ ability to engage with the companies whose securities they own and with other shareholders by presenting for consideration competing approaches to addressing important issues.”  To illustrate, the proposing release gives the following example: “(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.”  Under the current rule, and consistent with no-action letter precedent, the second proposal would be excludable as the proposals share the same “principal thrust” and “principal focus.”  However, under the proposed rule amendment, that would not be the case, as the shareholder proposals “seek different objectives by different means,” despite both addressing the same subject matter of the company’s political and lobbying expenditures.
  3. Rule 14a-8(i)(12) (Resubmissions) – Rule 14a-8(i)(12) allows companies to exclude a shareholder proposal that “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.” In 2020, the relevant resubmission thresholds in this rule were amended (see our prior post).  Here, the SEC has proposed replacing “substantially the same subject matter” with “substantially duplicates,” which would align the test in this rule with the proposed standard to be used in the duplication rule discussed above.  Notably, the proposing release does not change the resubmission thresholds, but points out that the SEC “continue[s] to assess the impact of these amendments,” leaving open the possibility that the SEC might revisit this again.

In addition, while the proposing release does not contemplate modifications to the ordinary business exclusion under Rule 14a-8(i)(7), the SEC noted in the proposing release that it “reaffirms” the standards noted in the SEC’s 1998 release regarding when a shareholder proposal may be excluded under Rule 14a-8(i)(7):

In the 1998 Adopting Release, supra note 10, the Commission stated: “The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. . . . [P]roposals relating to [ordinary business] matters but focusing on sufficiently significant social policy issues . . . generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote. . . . The second consideration relates to the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” The Commission also clarified that specific methods, time-frames, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.

Exchange Act Release No. 95267 at n.14 (July 13, 2022).

Comments on these proposed rules are due 30 days after publication in the Federal Register or September 12, 2022, whichever is later.

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