The Securities and Exchange Commission (SEC) adopted amendments to Exchange Act Rule 14a-8, effective January 4, 2021 increasing the economic interest of the shareholder/proponent for eligibility to submit a shareholder proposal for inclusion in an issuer’s proxy statement for its shareholders’ meetings. A link to the adopting release as published in the Federal Register on November 4, 2020 is available here.
These are the first significant amendments to Rule 14a-8 in over 35 years. The amendments are intended to reduce costs largely borne by the issuer and its shareholders and require that a shareholder-proponent has a more “meaningful economic stake or investment interest” in an issuer before being permitted to require the inclusion of a proposal in the issuer’s proxy statement. Rule 14a-8 does not affect a shareholder’s rights under state corporate law and an issuer’s charter and bylaws.
Amended Ownership Requirements
The new rule changes the minimum ownership thresholds for shareholder proposals. Previously, Rule 14a-8(b) required a shareholder that wishes to have a proposal included in a company’s proxy materials to have continuously held at least $2,000 in market value, or 1 percent, of an issuer’s securities entitled to vote on the proposal for at least one year as of the date the shareholder submits the proposal.
Under the amended Rule, a shareholder wishing to submit a Rule 14a-8 proposal must demonstrate continuous ownership of an issuer’s securities entitled to vote on the proposal of at least; (a) $2,000 in value of the company’s securities for at least three years; (b) $15,000 in value for at least two years; or (c) $25,000 for at least one year.
The SEC’s rationale is that a shareholder who has a meaningful “economic stake or investment interest” in an issuer is more likely to put forth proposals reflecting an interest in the issuer and its shareholders than to use Rule 14a-8 to promote a personal interest or general cause. The SEC also indicated that the 1% threshold was no longer a sensible alternate ownership benchmark and eliminated it.
Despite the adoption of the amendments, a shareholder who currently is eligible to submit proposals under the current $2,000 threshold and one-year minimum holding period, but does not satisfy the new requirements, will continue to be eligible to submit proposals through the expiration of a transition period. This transition period extends for all shareholders’ meetings held prior to January 1, 2023, as long as the shareholder continues to hold at least $2,000 in value of a issuer’s securities.
However, the amended rule forbids aggregation of holdings by different shareholders for purposes of meeting the ownership requirements, as antithetical to the intent that each shareholder has a sufficient economic stake or investment interest in the issuer. Co-filed proposals remain allowed as long as each shareholder-proponent in the group meets the eligibility requirement.
The amended rules also prohibit a shareholder from submitting more than one proposal, directly or indirectly, to an issuer for a particular shareholders’ meeting. A shareholder-proponent will no longer 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.
In addition, the amended rule makes it easier for an issuer to exclude previously unsuccessful proposals. A shareholder proposal will be excludable if it addresses substantially the same subject matter as another proposal previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was: (a) less than 5 percent of the votes cast if previously voted on once; (b) less than 15 percent of the votes cast if previously voted on twice; or (c) less than 25 percent of the votes cast if previously voted on three or more times. These increased thresholds of 5, 15, and 25 percent replace the former thresholds of 3, 6, and 10 percent, respectively.
The amended rules also require a shareholder that uses a representative to submit a proposal for inclusion in a proxy statement to provide certain documentation to the issuer. The documentation must identify the issuer to which the proposal is directed; the shareholders’ meeting for which the proposal is submitted; the shareholder submitting the proposal and the shareholder’s designated representative; and the specific topic of the proposal to be submitted. The representative must also include the shareholder’s statement authorizing the designated representative to submit the proposal (and otherwise act on the shareholder’s behalf) and be signed and dated by the shareholder.
Finally, the amended rule require a shareholder-proponent to provide the issuer with a written statement that the shareholder is able to discuss the proposal with the issuer in person or via 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.