Proxy Voting Advice
Proxy voting advice is a “solicitation” under the proxy rules.
The proposed amendments regarding proxy voting advice follow years of engagement with the public by the SEC and its staff on the role and influence of proxy advisory firms, such as ISS and Glass Lewis, referred to in the proposing release as “proxy voting advice businesses,” and their voting recommendations, referred to as “proxy voting advice.” As described in our prior alert, in August 2019 the SEC issued guidance that provided ways for the recipients of proxy voting advice, such as institutional investors and fund managers, to monitor proxy voting advice businesses. That guidance provided that, among other things, proxy voting advice provided by proxy voting advice businesses constitutes a “solicitation” subject to the proxy rules.
The proposed amendments would codify the recent SEC guidance by amending the definition of “solicitation” in Exchange Act Rule 14a-1(l) to include proxy voting advice and provide that any firm that markets and sells proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. The proposed amendment would also codify the SEC’s view that voting advice provided in response to an unprompted request (such as a financial advisor responding to a client’s inquiry) would not constitute a solicitation.
We do note that, in October 2019, ISS filed a lawsuit against the SEC challenging the SEC’s recent guidance by claiming, among other things, that the SEC’s regulation of proxy voting advice as proxy solicitation is contrary to law and exceeds the SEC’s statutory authority under the Exchange Act. This claim would also apply to the proposed amendments and, as a result, ISS’s lawsuit may impact when and whether the SEC moves forward with final rulemaking in these areas, and the content of any new rules that are adopted.
Exemptions from proxy rules conditioned on new disclosure and procedural requirements.
Proxy voting advice businesses rely upon the exemptions in Exchange Act Rule 14a-2(b)(1) and Rule 14a-2(b)(3) to provide advice without complying with the filing and information requirements of the proxy rules. The proposed amendments would condition the availability of these existing exemptions on compliance with the following three new disclosure and procedural requirements.
1. Disclosure of conflicts of interest. Proxy voting advice businesses would have to include “prominent” disclosures about their material conflicts of interest in their written reports containing proxy voting advice, regarding the following:
- Any material interests, direct or indirect, of the proxy voting advice business in the matter or parties concerning which it is providing the advice.
- Any material transaction or relationship between the proxy voting advice business and (i) the company, (ii) another soliciting person or (iii) a shareholder proponent, in connection with the matter covered by the proxy voting advice.
- Any other information regarding the interest, transaction, or relationship of the proxy voting advice business that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship.
- Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.
Notably, the proposing release specifies that these disclosures should be detailed and that boilerplate language stating that such conflicts may or may not exist (which is the current practice of many proxy voting advice businesses) would be insufficient for satisfying this condition to the exemptions.
2. Companies provided with a review and feedback period. Under the proposed amendments, companies, and any person conducting a non-exempt solicitation (i.e. a competing solicitation), must be given an opportunity to review and provide feedback on proxy voting advice before it is issued (with the length of the review period dependent on the number of days between the filing of the definitive proxy statement and the date of the shareholder meeting). If the definitive proxy statement is filed between 25 and 44 calendar days before the date of the shareholder meeting, the proxy voting advice business would be required to provide the company or other soliciting person no fewer than three business days to review the proxy voting advice and provide feedback as a condition of the exemptions. If the definitive proxy statement is filed 45 calendar days or more before the shareholder meeting, the proxy voting advice business would be required to provide the company or other soliciting person at least five business days to review the proxy voting advice and provide feedback. While the proposed amendments provide an opportunity for companies and other soliciting persons to review proxy voting advice and suggest revisions before the distribution of the advice, it does not require proxy voting advice businesses to accept any such suggested revisions.
In addition to the review and feedback period, in order to rely on the exemptions to the proxy rules, a proxy voting advice business would be required to provide companies and other soliciting persons with a final notice of its voting advice no earlier than the end of the applicable review and feedback period and no later than two business days prior to delivery of the proxy voting advice to its clients. Such final notice would include a copy of the voting advice and any revisions to such advice made after the review and feedback period.
The proposed amendments would allow proxy voting advice businesses to require that companies and other soliciting persons enter into a confidentiality agreement regarding the materials exchanged during the review and feedback period, which would cease to apply once the voting advice is provided to clients. If companies and other soliciting persons do not enter into the confidentiality agreement, the proxy voting advice businesses are excused with complying with the review and feedback rules. The proposed amendments would allow a proxy voting advice business to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional, so long as the proxy voting advice business made a good faith and reasonable effort to comply.
3. Hyperlink to Company’s view regarding proxy voting advice. Under the proposed amendments, upon request by a company or other soliciting person prior to the expiration of the two business day final notice period, the proxy voting advice must include an active hyperlink that leads to the company’s or other soliciting person’s statement regarding the proxy voting advice. The proposing release notes that the company’s or other soliciting person’s statement would constitute a “solicitation” under the proxy rules and be subject to the anti-fraud prohibitions of proxy rules, as well as the filing requirements that would necessitate that it be filed as supplemental proxy materials.
Significantly, if a definitive proxy statement is filed less than 25 calendar days before the shareholders meeting, then a proxy voting advice business would be under no obligation to comply with the above requirements regarding the review and feedback period or inclusion of a hyperlink.
If adopted, the proposed amendments would change existing practices for interactions between proxy voting advice business and companies, where currently only S&P 500 companies have limited opportunities to briefly review proxy voting advice materials in advance of distribution to investors. Many investors submit their votes within a couple of days following the issuance of proxy voting advice reports, and the proposed amendments would seemingly provide companies more of an opportunity to correct errors or present counterarguments in advance of those votes being cast. While the inclusion of a hyperlink may become an effective tool for ensuring that a company’s view can be considered concurrently with the proxy voting advice, practically there are many investors with limited resources that likely will continue to vote according to the recommendation of proxy voting advice businesses without taking into consideration the company’s view.
Anti-fraud provisions of the proxy rules apply to proxy voting advice.
Solicitations that are exempt from the proxy rules’ information and filing requirement, such as proxy voting advice, remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. In addition, such solicitation must not omit to state any material fact necessary in order to make the statements therein not false or misleading. The proposed amendments would modify Rule 14a-9 to include examples of when the failure to disclose certain information in the proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. The amended rule would list failure to disclose information such as the proxy voting advice business’s methodology, sources of information, conflicts of interest and use of standards that materially differ from relevant standards or requirements that the SEC sets or approves, as examples of what may be misleading within the meaning of the rule.
Transition period for implementation of proposed amendments.
If adopted, the proposed amendments described above would become effective following a one-year transition period after the publication of a final rule in the Federal Register to give proxy voting advice businesses sufficient time to develop processes and systems to comply with the proposed new requirements.
Modernization of Shareholder Proposal Rules
The SEC proposed amendments to Exchange Act Rule 14a-8, the shareholder proposal rule, which requires companies subject to the proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The rule permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several specified substantive or procedural requirements, or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements. The proposed amendments would revise the eligibility requirements under Rule 14a-8(b), the one-proposal limit under Rule 14a-8(c) and the resubmission thresholds under Rule 14a-8(i)(12).
Tiered ownership requirements.
The proposed amendments to Exchange Act Rule 14a-8(b) would update the current requirement that a shareholder-proponent hold at least $2,000 or 1% of a company’s securities for at least one year to be eligible to submit a proposal. In addition to eliminating the 1%threshold (which historically has not been utilized), the proposal would amend the rule with the following three alternative thresholds, any one of which a shareholder could satisfy to be eligible to submit a proposal:
- continuous ownership of at least $2,000 of the company’s securities for at least three years;
- continuous ownership of at least $15,000 of the company’s securities for at least two years; or
- continuous ownership of at least $25,000 of the company’s securities for at least one year.
The proposed amendments would no longer allow two or more shareholders to aggregate their securities to meet the applicable minimum ownership thresholds to submit a Rule 14a-8 proposal. Shareholders, however, would continue to be permitted to co-file or co-sponsor shareholder proposal as a group if each shareholder-proponent in the group meets an eligibility requirement.
Documentation required for proposals submitted by representatives.
The proposed amendments require that a shareholder-proponent who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder-proponent’s behalf and to provide a meaningful degree of assurance as to the shareholder-proponent’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement.
Information regarding shareholder availability for engagement with company.
The proposed amendments require that each shareholder-proponent state that he or she 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 shareholder proposal, and provide contact information as well as business days and specific times that the shareholder-proponent is available to discuss the proposal with the company. The SEC believes that this proposed eligibility requirement would encourage shareholders to engage with companies, and could facilitate useful dialogue between the parties by enabling the company to reach out directly to a shareholder-proponent to understand his or her concerns, potentially leading to a more mutually satisfactory and less burdensome resolution of the matter.
One-proposal limit modification.
Currently, Rule 14a-8(c) provides that “each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.” The proposed amendment to Rule 14a-8(c) would apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders. The proposing release notes that lawyers, investment advisers or others may provide assistance and advice to more than one shareholder; however, to the extent that the provider of such services submits a proposal, either as a proponent or as a representative, it would be subject to the one-proposal limit and would not be permitted to submit more than one proposal in total.
Modernization of resubmission thresholds.
The proposed amendments to Rule 14a-8(i)(12) would modernize the current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively. The SEC noted its concern that the current resubmission thresholds (which have not changed since 1954) may allow proposals that have not received widespread support from a company’s shareholders to be resubmitted — in some cases, year after year — with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support. In light of these concerns, the SEC proposes to increase the resubmission thresholds to allow companies to exclude resubmitted proposals that have not received broad support and appear less likely to be on a sustainable path toward achieving majority shareholder support.
New “momentum” rule to exclude resubmitted proposals with declining support.
The proposed amendments to Rule 14a-8(i)(12) would also add a new “momentum” requirement that would allow companies to exclude shareholder proposals concerning substantially the same subject matter as proposals previously voted on three or more times in the last five calendar years that would not otherwise be excludeable under the 25% threshold if:
- the most recently voted on proposal received less than 50% of the votes cast; and
- support declined by 10% or more compared to the immediately preceding shareholder vote on the matter.
The proposing release provides the following example regarding the momentum rule. A proposal would be excludable where proposals dealing with substantially the same subject matter had previously been voted on three times in the preceding five calendar years and received 26% of the votes cast on the third submission compared to 30% on the second submission. In this case, the percentage of votes cast on the third submission (26%) declined by more than 10% compared to the percentage of votes cast on the second submission (30%) and, thus, proposals dealing with substantially the same subject matter would be excludable during the relevant lookback period.
Daniel P. AdamsPartner
Paul J. DelligattiPartnerDC Business Law Leader
Andrew H. GoodmanPartner
John T. HaggertyPartnerCo-Chair, Public M&A / Corporate Governance
John O. NewellCounsel