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October 23, 2020

SEC Amends Requirements For Shareholder Proposals

The U.S. Securities and Exchange Commission has amended its rules governing the procedural requirements for submission and resubmission of shareholder proposals to be included in a company’s proxy statement under Rule 14a-8. Although several of the amendments appear to make significant changes in the shareholder proposal process, the practical impact is uncertain and may be modest. As amended, Rule 14a-8 will:

  • require shareholders who intend to submit a proposal to satisfy a new tiered ownership test that significantly increases shareholder ownership requirements if the shares have been held for less than three years; 
  • significantly increase the required levels of support received by proposals dealing with substantially the same subject matter during the preceding five years; 
  • eliminate the current ability of a single representative to submit multiple proposals on behalf of different shareholders at a single shareholders’ meeting; and
  • require shareholders to provide information about their ability to meet with the company, and if a representative will present the proposal on behalf of the shareholder, require the shareholder to provide the company with written documentation relating to the shareholder and the authorization of the representative. 
The amended rule will apply to proposals submitted for an annual or special meeting to be held on or after January 1, 2022. As a result, the amended rule will not apply to annual or special meetings held during 2021. The effective date of the amendments, which will be 60 days after publication in the Federal Register, will be relevant only for transitional relief for certain shareholders with respect to the new tiered ownership requirements.
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Tiered Ownership Requirements

Rule 14a-8 permits a shareholder to have a company include the shareholder’s proposal in the company’s proxy statement for an annual or special meeting of shareholders, subject to various conditions. One of those conditions is ownership of at least a minimum dollar amount of the company’s stock. The amended rule will significantly increase the minimum ownership threshold for shareholders who wish to submit a proposal. The current ownership threshold and the ownership threshold under the amended rule are shown in the table below.

 Current  As Amended
Shareholder must have owned at least $2,000 of company stock continuously for at least one year.

Shareholder must satisfy one of three thresholds for continuous ownership of company stock entitled to vote on the proposal:

  • $2,000 for at least three years;
  • $15,000 for at least two years; or
  • $25,000 for at least one year.
Alternatively, a shareholder must hold at least 1% of the company’s stock that is entitled to vote on the proposal. The amendments eliminate the 1% alternative ownership threshold.
Shareholders are permitted to aggregate their holdings with holdings of another shareholder or group of shareholders to satisfy this requirement. Shareholders are not permitted to aggregate their holdings with holdings of another shareholder or group of shareholders to satisfy this requirement.
 
Transition Period for Ownership Requirement. The amended rules provide a transition period for the new tiered ownership requirement. A shareholder that satisfies the current $2,000/one year ownership requirement on the effective date of the amended rule (but does not satisfy the amended ownership requirement) will remain eligible to submit proposals at annual and special meetings held prior to January 1, 2023 if the shareholder continuously holds at least $2,000 of company stock from the effective date through the date of submission. A shareholder relying on this transitional provision must provide the company with a written statement that the shareholder intends to continue to hold at least $2,000 of company securities through the date of the shareholder meeting at which the proposal will be considered and satisfy certain other conditions. This temporary provision will expire on January 1, 2023. 

Shareholder Approval Resubmission Thresholds

Rule 14a-8 currently permits a company to exclude a proposal if the proposal addresses substantially the same subject matter as a proposal included in the company’s proxy statement within the preceding five years that failed to satisfy minimum shareholder approval thresholds at one or more previous meetings. The amendments will increase the thresholds for shareholder approval that a proposal must have received in order to avoid exclusion of the proposal by the company, as shown in the table below.

  Current   As Amended

A proposal dealing with substantially the same subject matter as a proposal or proposals included in the company’s proxy materials within the preceding five years may be excluded under the current rule if the most recent shareholder vote occurred within the preceding three years and received less than:

  • 3% of votes cast if previously voted on once;
  • 6% of votes cast if voted on twice; and
  • 10% of votes cast if voted on three or more times

A proposal dealing with substantially the same subject matter as a previous proposal or proposals included in the company’s proxy materials within the preceding five years may be excluded under the amended rule if the most recent shareholder vote occurred within the preceding three years and received less than:

  • 5% of the votes cast if previously voted on once;
  • 15% of the votes cast if voted on twice; and
  • 25% of the votes cast if voted on three or more times.

The final amendments do not include the “momentum” requirement included in the proposed amendments that would have provided an additional basis to exclude shareholder proposals. Under the proposed amendment, a company could have excluded resubmitted proposals that dealt with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years if (1) the proposal most recently voted on received less than a majority of the votes cast, and (2) support declined by 10 percent or more compared to the immediately preceding shareholder vote on the matter.

Entities and all persons under their control, including employees, will be treated as a “person” for purposes of the amendment. As such, if an investment adviser at Advisory Firm A submits a proposal on behalf of a shareholder-proponent to Company Y, neither that investment adviser nor any other adviser at Advisory Firm A would be permitted to submit a proposal on behalf of a different shareholder-proponent at Company Y for the same meeting. 

Single Proposal Per Shareholder Limit

Rule 14a-8 imposes limits on the ability of shareholders to submit more than one proposal to a company for a particular meeting, but the current limit applies only to shareholders, which allows persons who represent shareholders to submit multiple proposals on behalf of different shareholders. The amended rule applies the single proposal per meeting limit to “persons,” rather than shareholders, which eliminates the ability to avoid the current limitation by use of shareholder representatives. The current and amended provisions limiting the number of proposals that can be made is shown in the table below. 

  Current  As Amended
A shareholder may submit no more than one proposal to a company for a particular meeting, but a single representative may submit multiple proposals on behalf of different shareholders for the same meeting. A person may submit no more than one proposal to a company for a particular meeting.
 
The amended limitation applies only to persons who submit one or more proposals as a proponent or as a representative of a proponent. It will not apply to persons who provide legal, investment or other types of assistance or advice, and is not intended to limit the ability of a representative to appear at the meeting and present proposals on behalf of multiple shareholders who have complied with this limitation at the same meeting.

The adopting release states that entities and all persons under their control, including employees, will be treated as a “person” for purposes of the amended rule. This means that, for example, if an investment adviser at Advisory Firm A submits a proposal on behalf of a shareholder-proponent to Company Y, neither that investment adviser nor any other adviser at Advisory Firm A would be permitted to submit a proposal on behalf of a different shareholder-proponent at Company Y for the same meeting.

Statement Regarding Availability to Meet with the Company

The amended rule requires that a proponent must provide the company with a written statement that the shareholder is able to meet with the company in person or via teleconference. The shareholder must:

  • be able to meet with the company on not less than 10 calendar days or more than 30 calendar days after the shareholder submits the proposal;
  • include the shareholder’s contact information as well as business days and specific times that the shareholder is available to discuss the proposal with the company; and
  • identify times that are within the regular business hours of the company’s principal executive offices, and if the company did not disclose its business hours in its proxy statement for the prior year’s annual meeting, the shareholder must identify times that are between 9 a.m. and 5:30 p.m. in the time zone of the company’s principal executive offices.

This information must be provided with respect to the shareholder, rather than a representative of the shareholder, although a representative may participate in any such meeting.

The adopting release notes that SEC proxy rules do not require companies to disclose their business hours, but also notes that companies may choose to do so to facilitate shareholder engagement with respect to shareholder proposals. If a company chooses to disclose its business hours, the adopting release suggests that it appear with the deadline for submitting proposals.

Co-Filer Requirements for Availability to Meet with the Company. If a shareholder intends to file a proposal with other shareholders, all co-filers must either: 

  • agree to the same dates and times of availability, or
  • identify a single lead filer who will provide dates and times of the lead filer’s availability to engage on behalf of all co-filers; and
  • if a shareholder intends to use a representative to submit a its proposal on its behalf, the requirements under “Proposals Submitted by a Representative,” below, must be satisfied.

Proposals Submitted by a Representative

The amended rule codifies and expands SEC staff guidance issued in Staff Legal Bulletin No. 14I (November 1, 2017), which addressed the use of representatives to submit shareholder proposals (sometimes referred to as “proposal by proxy”). The use of representatives could make it difficult to determine whether a shareholder proposal satisfied the requirements of Rule 14a-8. The amended rule requires that a shareholder that intends to use a representative to submit a proposal for inclusion in a company’s proxy statement must provide the company with written 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 as the proponent and identifies the person acting on its behalf as its representative;
  • includes the shareholder’s statement authorizing the designated representative to submit the proposal and otherwise act on its behalf;
  • identifies the specific topic of the proposal to be submitted;
  • includes the shareholder’s statement supporting the proposal; and
  • has been dated and signed by the shareholder.

The documentation requirement does not apply to shareholders that are entities if the representative’s authority to act on behalf of the shareholder is “apparent and self-evident,” which means that a reasonable person would understand that the agent has authority to submit the proposal and otherwise act on the shareholder’s behalf. The adopting release provides several examples to illustrate the intended scope of the amended rule. For example, this requirement would not apply in the following situations:

  • a corporation’s CEO submits a proposal on behalf of the corporation;
  • an elected or appointed official who is the custodian of state or local trust funds submits a proposal on behalf of one or more of those funds;
  • a partnership’s general partner submits a proposal on behalf of the partnership; or
  • an adviser to an investment company submits a proposal on behalf of the investment company.

On the other hand, compliance would be required where the agency relationship between the shareholder and the representative is not apparent and self-evident. The adopting release provides as an example an investment adviser that seeks to submit a proposal on behalf of a client that is a shareholder. In this case, the private relationship governed by a private contractual arrangement between a third-party investment adviser, and the adviser’s client would not be apparent or self-evident for purposes of the amended rule.

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