SEC Updates Rule 14a-8 Shareholder Proposal Rules

The U.S. Securities and Exchange Commission on September 23 adopted final rules amending the shareholder proposal rules in Rule 14a‑8 of the Securities Exchange Act of 1934.

The final rules:

• Require that a shareholder submitting a proposal must have held $2,000 of company stock for at least three years (or higher amounts for shorter periods of time)
• Revise the one‑proposal rule from applying to “each shareholder” to now applying to “each person” and
• Increase the levels of support required for a proposal to be eligible for resubmission at future shareholder meetings

The final rules will apply to proposals submitted for an annual or special meeting to be held on or after January 1, 2022.

Ownership Thresholds

Previously, Rule 14a‑8(b) required that in order to submit a proposal at a shareholder meeting, a shareholder must hold at least $2,000 or 1% of a company’s securities for at least one year. The final rules eliminate the 1% test and replace the dollar requirement with three alternative ownership thresholds that may be met by a shareholder who wishes to submit a proposal, with the effect of tripling the holding period or increasing the holding amount for shorter periods:

• $2,000 of the company’s securities for at least three years
• $15,000 of the company’s securities for at least two years
• $25,000 of the company’s securities for at least one year

The final rules provide for a transition period with respect to the ownership thresholds that will allow shareholders to rely on an ownership threshold of $2,000 of the company’s securities held for at least one year to submit a proposal for an annual or special meeting to be held prior to January 1, 2023, provided that they:

• Hold $2,000 of the company’s securities as of the date 60 days following publication of the final rule in the federal register
• Continue to hold at least $2,000 of a company’s securities through the date that they submit a proposal
• Provide the company with a written statement that the shareholder intends to continue to hold that amount through the date of the shareholders’ meeting

As a result of this transition period, the impact to the upcoming proxy season is unlikely to be meaningful.

Under the final rules, shareholders are prohibited from aggregating their holdings for purposes of meeting the ownership thresholds. Shareholders may continue to co‑sponsor or co‑file proposals as a group, but each shareholder member of such group would have to meet one of the ownership thresholds. The final rules do not require co‑sponsoring holders to name a lead filer, but the SEC noted that it continues to believe that, as a best practice, co‑filers should clearly state in their initial submittal letter to the company that they are co‑filing the proposal with other proponents and identify the lead filer, specifying whether such lead filer is authorized to negotiate with the company and withdraw the proposal on behalf of the other co‑filers.

The final rules also require that, if a shareholder wishes to use a representative for the purpose of submitting a shareholder proposal, that shareholder must provide documentation evidencing the representative’s authority to submit the proposal and otherwise act on the shareholder’s behalf, as well as a meaningful degree of assurance of that shareholder’s identity, role and interest in the proposal.

The final rules further require that proposing shareholders must state their availability to meet with the company to discuss their proposal 10‑30 days after submission of the proposal, providing contact information and date/time slots available. The SEC expressed its belief that the ability to engage directly with the shareholder‑proponent may encourage greater dialogue between the shareholder and the company, and may lead to more efficient and less costly resolution of these matters than would be involved with a shareholder proposal to be presented to the annual or special meeting. However, companies are not required to meet with proposing shareholders. The SEC observed that because companies and their shareholders bear the burdens associated with including a shareholder proposal in their proxy materials, or seeking no‑action relief to exclude such proposals, companies are incentivized to pursue less costly forms of engagement that may be facilitated by meeting with the proponent.

One‑Proposal Rule

Previously, Rule 14a‑8(c) contained a rule limiting “each shareholder” to submitting only one proposal. The final rules revise this limitation to now apply to “each person,” thus precluding a shareholder from submitting a proposal in its own name and simultaneously serving as a representative on the submission of another proposal.

Resubmissions

Under the previous Rule 14a‑8(i)(12), a shareholder proposal would be excludable from a company’s proxy materials if it addressed substantially the same subject matter as a proposal, or proposals, 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 less than specified thresholds. The final rules modify those thresholds such that a substantially similar proposal may be excluded if the most recent supporting vote was:

• Less than 5% of the votes cast if previously voted on once
• Less than 15% of the votes cast on its last submission to shareholders if previously voted on twice
• Less than 25% of the votes cast on its last submission to shareholders if previously voted on three or more times

These thresholds replace the previous 3%, 6% and 10% thresholds.

While the proposed amendments to Rule 14a‑8 included a “momentum” provision that would have allowed companies to exclude certain proposals dealing with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that had declining shareholder support, the final rules did not include this momentum provision.