SEC Adopts Amendments to Modernize Shareholder Proposal Rules
The Situation: In November 2019, the U.S. Securities and Exchange Commission ("SEC") proposed certain amendments to Rule 14a-8 of the Securities Exchange Act of 1934, the rule that permits a qualifying shareholder to include a non-binding proposal in a company's proxy statement.
The Result: On September 23, 2020, the SEC adopted a final rule amending Rule 14a-8 by: (i) imposing heightened eligibility requirements for submitting (or resubmitting) a shareholder proposal; (ii) restricting a person to only one proposal per meeting; and (iii) generally updating procedural requirements.
Looking Ahead: The amendments are expected to ease some of the burdens imposed on public companies by reducing the time and money spent responding to shareholder proposals from low-stakes investors with niche agendas, but companies should monitor how active investors adapt their strategies or exploit the new rules to continue to pressure boards and management to adopt their specific agendas.
Eligibility for Initial Submissions of Shareholder Proposals
Under current Rule 14a-8(b), a shareholder needs to hold at least $2,000 or 1% of a company's securities for at least one year to be eligible to include a non-binding shareholder proposal in such company's proxy statement. The amendments replace this threshold with a tiered approach based on a combination of position size and holding period:
- $2,000, if the shareholder held such minimum position for at least three years;
- $15,000, if the shareholder held such minimum position for at least two but less than three years; or
- $25,000, if the shareholder held such minimum position for at least one year but less than two years.
The amendments to Rule 14a-8(b) also:
- Prohibit aggregation of holdings for purposes of satisfying the new ownership thresholds;
- Require shareholders presenting a proposal through a designated representative to provide documentation clearly indicating that the representative is authorized to act on the shareholder's behalf and to provide a meaningful degree of assurance as to the shareholder's identity, role, and interest in the proposal that is being submitted (except if the representative's authority is apparent and self-evident under a reasonable person standard); and
- Require that shareholders state that they are able to meet with the company (either in person or via teleconference) between 10 and 30 calendar days after submitting their proposal, and provide contact information as well as specific business days and times that they are available to discuss the proposal with the company.
Under current Rule 14a-8(c), each "shareholder" is limited to one proposal for a particular shareholder meeting. The amendments apply the one-proposal rule to "each person" so that a proponent may only submit one proposal, regardless of whether it is in his or her capacity as a shareholder or as a representative on behalf of a another shareholder.
Shareholder Support Requirements for Resubmissions of Shareholder Proposals
Under current Rule 14a-8(i)(12), a company could exclude a shareholder proposal addressing substantially the same subject matter as a proposal previously included in the company's proxy statement within the past five years. This is possible if the most recent vote occurred within the past three years and the most recent vote received less than 3%, 6%, and 10% of the vote for matters previously voted on once, twice, or three or more times, respectively, during such period. The amendments increase these resubmission thresholds to 5%, 15%, and 25%, respectively (the three-year cooling-off period and five-year lookback period remain unchanged).
When calculating the voting results, votes for and against a proposal should be included but not abstentions or broker non-votes. Additionally, voting results should not be rounded up for purposes of determining whether the relevant threshold has been met.
The amendment will become effective 60 days after publication in the Federal Register and, subject to the transition period described below, will apply to any 14a-8 proposal submitted for a shareholder meeting occurring on or after January 1, 2022. Shareholders that meet the current 14a-8 conditions will be permitted, on a transitional basis, to continue to submit 14a-8 proposals for meetings held prior to January 1, 2023, even if they do not meet the amended requirements.
Four Key Takeaways
- The ownership and holding requirements have been increased from (x) at least $2,000 or 1% of a company's securities for at least one year to (y) at least $2,000 (if held for at least three years), at least $15,000 (if held for at least two years) and at least $25,000 (if held for at least one year).
- The one-proposal rule now applies to each person rather than to each shareholder—a person may only submit one proposal, directly or indirectly, to a company for the same shareholder meeting.
- The shareholder support thresholds for resubmitting shareholder proposals of substantially the same subject matter have been significantly increased from 3/6/10% to 5/15/25% for matters voted on once, twice, or three or more times, respectively, in the past five years.
- Shareholders are prohibited from aggregating their holdings to satisfy the increased ownership threshold.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.