SEC Amends Shareholder Proposal Rule 14a-8
On September 23, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to modernize Rule 14a-8, which governs the process for shareholder proposals to be included in a company’s proxy statement. These amendments update sections of the rule, specifically shareholder ownership eligibility criteria and resubmission thresholds, which were long overdue for modernization.1 While the amendments aim to advance shareholder engagement, in practice they may limit the amount of activist shareholder proposals included in public company proxy statements. It also appears that the amendments will have little impact, if any, on the number of shareholder proposals made by activist hedge funds. This is because activist funds oftentimes will not hold company stock long enough to be eligible to submit shareholder proposals under Rule 14a-8. Activist hedge funds also usually prefer to use their own proxy statement to broadcast their campaigns as opposed to a company’s proxy statement, which is where Rule 14a-8 shareholder proposals must appear.
Companies will have to wait a bit longer for the new rules to apply, however, as the new rules generally will not apply until 2022, with an additional transition period meaning the new ownership requirement generally will not apply until 2023.
New Rule 14a-8(b) Eligibility Requirements
- Provides for a three-tiered approach for satisfying ownership requirements.
Under the prior version of the Rule, a shareholder had to hold at least $2,000 or one percent of a company’s securities for at least one year to be eligible to submit a proposal. The new Rule 14a-8(b) eliminates the one percent threshold, replacing it instead with a three-tiered approach under which a shareholder may satisfy any one of three thresholds to be eligible to submit a proposal:
- continuous ownership of at least $2,000 of the company’s securities for at least three years;
- continuous ownership of at least $15,000 of the company’s securities for at least two years; or
- continuous ownership of at least $25,000 of the company’s securities for at least one year.
The new approach, a combination of the dollar value of securities owned and length of time such securities are held, is intended to ensure that a shareholder proponent demonstrates a meaningful ‘economic stake or investment interest’ in a company before they can use company resources to require the inclusion of a proposal in the company’s proxy statement.2 Additionally, the amendment prohibits the aggregation of holdings with other shareholders for purposes of satisfying the new ownership thresholds, requiring each shareholder proponent to satisfy these requirements individually.
- Requires certain documentation to be provided if shareholders use a representative.
Under the new rule, a shareholder who elects to use a representative to submit a shareholder proposal must provide documentation that, among other things, clarifies that the representative is authorized to act on the shareholder’s behalf and provides a greater degree of assurance as to the shareholder’s identity and interest in a proposal that is submitted for inclusion in a company’s proxy statement.
- Requires additional shareholder engagement.
The new rule also requires each shareholder proponent to state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 days, nor more than 30 days, after submission of the shareholder proposal. Additionally, shareholders must provide contact information as well as specific business days and times that they are available to discuss the proposal with the company. The SEC’s amendment is meant to facilitate dialogue between shareholders and companies in order to create a more effective and less costly process.
One Proposal Limit
- Applies the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal.
Under the new rule, a shareholder-proponent will not be permitted to submit one proposal in their 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.
- Revises Rule 14a-8(i)(12) levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings.
Amended Rule 14a-8(i)(12) replaces the previous resubmission thresholds of 3% for matters voted on once, 6% for matters voted on twice and 10% for matters voted on three or more times in the last five years. Now, a shareholder proposal will be excludable from a company’s proxy materials if it addresses substantially the same subject matter as a proposal previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote was:
- Less than 5% of the votes cast if previously voted on once;
- Less than 15% of the votes cast if previously voted on twice; or
- Less than 25% of the votes cast if previously voted on three or more times.
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.
Will the Amendments Impact Activist Hedge Funds?
In an academic sense, yes, because activist hedge funds will be subject to the same new ownership and procedural requirements as all other shareholders. In a practical sense, no, for a few reasons.
- Activist hedge funds oftentimes do not hold securities long enough to have been eligible under the old ownership duration requirements, let alone the longer durations contemplated by the amended rules.
- Rule 14a-8 proposals are normally best suited for shareholders wishing to use the company’s proxy to put Environmental, Social and Governance (“ESG”) issues front and center for other shareholders. Valid Rule 14a-8 proposals will appear in a company’s proxy statement and will be the subject of a shareholder vote, with companies having a great degree of control over the substance of the rest of the proxy, the timing for its filing and the solicitation of shareholders. Activist hedge funds running proxy fights or other shareholder activism campaigns, on the other hand, usually prefer to control the cadence, rhythm and volume of their campaign communications. They therefore typically use their own proxy statements, public relations firms and proxy solicitors to help support their campaigns, instead of relying on the Rule 14a-8 proposal mechanism.
The amendments generally will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders who meet specified conditions to rely on the existing $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023. You can find the SEC’s full release here.
1 SEC Release, SEC Adopts Amendments to Modernize Shareholder Proposal Rule, (Sept. 23, 2020) https://www.sec.gov/news/press-release/2020-220.
2 SEC Final Rule, 17 CFR Part 240, Release No. 34-89964; File No. S7-23-19.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.