SEC Adopts Amendments to Modernize Shareholder Proposal Rules
On September 23, 2020, the SEC voted to adopt amendments to modernize its shareholder proposal rules under Rule 14a-8 of the Securities Exchange Act of 1934, which governs the process for a shareholder to have a proposal included in a company’s proxy statement.
The amendments revised the following in connection with shareholder proposals: (1) replaced the current ownership requirements with a tiered approach combining the number of shares owned and the length of ownership, among other changes; (2) altered the “one proposal rule” to prevent multiple proposals for a company by a shareholder representative; and (3) modified the level of shareholder support a proposal must receive to be eligible for resubmission at future shareholder meetings. The amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.
Amended Rule 14a-8(b): Ownership Threshold Shareholders Must Meet to Submit Initial Proposal
The amendment to Rule 14a-8(b) replaces the current ownership threshold, which requires shareholders to hold at least $2,000 in market value or 1% of a company’s securities continuously for at least one year. Under the amended rules, a shareholder must satisfy one of three alternative thresholds (the 1% alternative was eliminated) that require a shareholder to demonstrate continuous ownership of at least:
- $2,000 of the company’s securities for at least three years;
- $15,000 of the company’s securities for at least two years; or
- $25,000 of the company’s securities for at least one year.
The rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.
The amended rules also prohibit shareholders from aggregating their holdings with other shareholders for the purpose of meeting the ownership thresholds.
Furthermore, the amendments impact proposals submitted on behalf of shareholders by a representative. These amendments require a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal to provide documentation clarifying 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 any proposal that is submitted for inclusion in a company’s proxy statement.
In addition, the amendments include a shareholder engagement requirement, whereby a shareholder who makes a proposal must provide the company with contact information, as well as a written statement that the shareholder is able to meet with the company in person or by teleconference at specified dates and times that are no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal. The purpose of this amendment is to facilitate dialogue between shareholders and companies during the shareholder proposal process, thereby promoting the efficient and cost effective resolution of such proposals.
Amended Rule 14a-8(c): One Proposal Limit
Under the current Rule 14-8(c), a shareholder may submit only one proposal at any particular meeting, while a shareholder representative could submit multiple proposals at the same meeting on behalf of multiple individual shareholders. The SEC’s amendments will apply the one proposal limit to each “person” rather than each “shareholder”; as a result a shareholder representative will 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 will 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.
Amended Rule 14a-8(i)(12): Shareholder Proposal Resubmission Criteria
The SEC’s amendments to Rule 14a-8(i)(12) will increase the level of shareholder support that a proposal must receive to be eligible for resubmission if it has not been successful in the previous five years. The SEC’s amendment revises the level of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings from 3% to 5%, 6% to 15% and 10% to 25% for matters previously voted on once, twice or three or more times in the last five years, respectively. For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.
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If you would like further information regarding the above referenced SEC amendments to modernize shareholder proposal rules, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or any of the lawyers listed above.