SEC Proposes Changes to Shareholder Proposal Rules and Rules Governing Proxy Advisors
At an open meeting on November 5th, SEC Commissioners voted 3-2 to propose potentially significant changes to the shareholder proposals process under Rule 14a-8 with respect to the bases upon which issuers can seek to omit shareholder proposal from their proxy materials.
The proposed amendments to the shareholder proposal process under Rule 14a-8 would:
- Institute a “tiered approach” for demonstrating sufficient ownership of securities to submit a proposal;
- Require specified documentation for proposals submitted by a shareholder representative;
- Obligate shareholder proponents to engage with the company with respect to the shareholder’s proposal;
- Restrict a person to the submission of only one proposal for the same shareholders’ meeting;
- Raise the shareholder support thresholds for resubmitting a proposal; and
- Allow companies to exclude proposals under certain conditions where shareholder support for the issue has declined.
In addition, the SEC separately adopted proposed rules directed towards proxy advisors such as ISS and Glass Lewis, which the SEC refers to as proxy voting advice businesses. The proposed rules:
- Provide for enhanced disclosure of conflicts of interests by proxy voting advice businesses;
- Require that registrants be given the opportunity to review and comment on proxy voting recommendations in certain circumstances;
- Permit registrants to include a hyperlink in the proxy voting recommendation setting forth the registrant’s position on the proxy voting advice;
- Clarify the application of the SEC’s antifraud rules to proxy voting recommendations and provide examples of what may be misleading information; and
- Codify previous SEC interpretations to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote.
Significant Updates to Shareholder Proposals Process
The proposed amendments to the shareholder proposal process would reflect the first substantial modifications to the process in decades.
The first proposed amendment is to Rule 14a-8(b), which provides the eligibility requirements a shareholder-proponent must satisfy to have a proposal included in a company’s proxy statement. Under the current rule, to be eligible to submit a proposal, a shareholder proponent must have continuously held at least $2,000 in market value or one percent of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the date the proposal is submitted.
The ownership threshold and holding period in Rule 14a-8(b) are intended to ensure that a shareholder has some meaningful “economic stake or investment interest” in a company before engaging company resources via the proposal submission process. Based on concerns that the prior thresholds no longer present a meaningful investment, the SEC has proposed a tiered approach that would provide three options for demonstrating an ownership stake through a combination of amount of securities owned and length of time held.
As proposed, the amended thresholds would allow a shareholder to submit a Rule 14a-8 proposal for inclusion in a company’s proxy materials if the shareholder satisfies one of three continuous ownership requirements: as follows:
- $2,000 of a company’s securities entitled to vote on the proposal for at least 3 years;
- $15,000 of a company’s securities entitled to vote on the proposal for at least 2 years; or
- $25,000 of a company’s securities entitled to vote on the proposal for at least 1 year.
The proposed rule would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds.
Additional Documentation Required for Shareholder Representatives
Proposals are often submitted by individuals or entities that may not qualify to submit proposals at a particular company in their own name, but serve as a representative for an individual that maintains the requisite share ownership requirements. The representative typically submits the proposal to the company on the shareholder’s behalf along with necessary documentation and acts as the shareholder’s representative following the initial submission.
To address concerns over whether a proponent actually fully supports the proposal being submitted on their behalf, the Commission proposed to amend the eligibility requirements of Rule 14a-8 to require shareholders that use a representative to submit a proposal for inclusion in a company’s proxy statement to provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf.
Under the proposed amendment, the required documentation would be required to specifically including the following information:
- The company to which the proposal is directed;
- The annual or special meeting for which the proposal is submitted;
- The shareholder-proponent and the designated representative;
- The shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf;
- The specific proposal to be submitted;
- The shareholder’s statement supporting the proposal; and
- The dated signature of the shareholder.
Mandatory Shareholder Engagement
In an effort to facilitate discussion and possible resolutions between shareholder proponents and the companies at which they have submitted proposals, the SEC has proposed to require shareholder proponents to state when they would be able to meet with the company in person or via teleconference to engage with the company with respect to the proposal.
Specifically, the proposed amendment would revise Rule 14a-8(b) to require a statement from each shareholder proponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. Shareholders would also be required to include contact information and provide available business days and specific times for discussing the proposal with the company.
One Proposal Per Company, Per Person
The Commission proposed amendments to Rule 14a-8(c), which provides that each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.
The SEC has proposed to extend the one proposal limitation to each person, rather than each shareholder, directly or indirectly, for the same shareholders’ meeting. The expansion of the limitation to each person on a direct or indirect basis has the effect of curtailing multiple submissions by shareholder representatives. For example, under the proposed rule, a shareholder proponent may not submit one proposal in its own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Similarly, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders.
Increased Resubmission Thresholds
The Commission proposed specific changes to Rule 14a-8(i)(12), which allows companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years” if the matter was voted on at least once in the last three years and did not receive at least: (i) 3 percent of the vote if previously voted on once; (ii) 6 percent of the vote if previously voted on twice; or (iii) 10 percent of the vote if previously voted on three or more times.
The proposing release highlights that the initial amendments to the resubmission basis for exclusion in 1983 were intended to address commenter’s desire for “an appropriate response to counter the abuse of the security holder proposal process by certain proponents who make minor changes in proposals each year so that they can keep raising the same issue despite the fact that other shareholders have indicated by their votes that they are not interested in that issue.”
The proposed amendments reflect the SEC’s concern “the current resubmission thresholds may allow proposals that have not received widespread support from a company’s shareholders to be resubmitted—in some cases, year after year—with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support” and address this concern by raising the current resubmission thresholds of 3, 6, and 10 percent to 5, 15, and 25 percent, respectively.
Exclusion of Proposals with Declining Support
In connection with the proposed modification to the resubmission thresholds, the SEC also proposed to add a new provision to Rule 14a-8(i)(12) that would allow companies to exclude proposals where shareholder support for the matter has declined. In particular, companies would be permitted to exclude proposals that have been submitted three or more times in the preceding five years if:
- the proposals received more than 25 percent, but less than 50 percent, of the vote, and
- support for the proposal declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote.
Regulation of Proxy Advice and Proxy Voting Advice Businesses
The SEC also proposed amendments to its rules governing proxy solicitations to help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions, in a manner that does not impose undue costs or delays that could adversely affect the timely provision of proxy voting advice.
Disclosures of Conflicts of Interest
The SEC is proposing to require that persons who provide proxy voting advice include certain disclosures, which are intended to be more illuminating than what is currently required by the existing rules and are specifically tailored to proxy voting advice businesses and the nature of their conflicts. The proposed disclosures include:
- Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates) in the matter or parties concerning which it is providing the advice;
- Any material transaction or relationship between the proxy voting advice business (or its affiliates) and (i) the registrant (or any of the registrant’s affiliates), (ii) another soliciting person (or its affiliates), or (iii) a shareholder proponent (or its affiliates), in connection with the matter covered by the proxy voting advice;
- Any other information regarding the interest, transaction, or relationship of the proxy voting advice business (or its affiliate) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship; and
- Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.
Registrants’ Review of Proxy Voting Advice and Response
Review of Proxy Voting Advice by Registrants
The proposed amendments would require one standardized opportunity for timely review and feedback by registrants of proxy voting advice before a proxy voting advice business disseminates its voting advice to clients, regardless of whether the advice on the matter is adverse to the registrant’s own recommendation.
As proposed, if the registrant files its definitive proxy statement less than 45 but at least 25 calendar days before the date of its shareholder meeting, the proxy voting advice business would be required to provide the registrant no fewer than three business days to review the proxy voting advice and provide feedback as a condition of the exemptions. However, if the registrant files its definitive proxy statement 45 calendar days or more before its shareholder meeting, the proxy voting advice business would be required to provide the registrant at least five business days to review the proxy voting advice and provide feedback. In the event a registrant files its definitive proxy statement less than 25 calendar days before the meeting, the proxy voting advice business would have no obligation under the proposed amendment to provide the proxy voting advice to the registrant as a condition of the exemption.
In addition to the review and feedback period, a proxy voting advice business would be required to provide registrants with a final notice of voting advice. This notice, which must contain a copy of the proxy voting advice that the proxy voting advice business will deliver to its clients, must be provided by the proxy voting advice business no later than two business days prior to delivery of the proxy voting advice to its clients. This final notice would allow the registrant to determine whether or not to provide a statement in response to the advice and request that a hyperlink to its response be included in the voting advice delivered to clients of the proxy voting advice business.
Response to Proxy Voting Advice by Registrants
In addition to the proposed review and feedback period and final notice requirements, registrants would also have the option under the proposed amendments to request that proxy voting advice businesses include in their proxy voting advice (and on any electronic medium used to distribute the advice) a hyperlink or other analogous electronic medium directing the recipient of the advice to a written statement prepared by the registrant that sets forth its views on the advice. To prevent undue delays in the distribution of the proxy voting advice to clients, registrants would be required to provide the hyperlink (or other analogous electronic medium) to the proxy voting advice business no later than the expiration of the two-day final notice period referred to above.
Changes to Antifraud Rules
The SEC believes subjecting proxy voting advice businesses to the same antifraud standard as registrants and other persons engaged in soliciting activities is appropriate in the public interest and for the protection of investors. The SEC is proposing to amend the list of examples in its rules regarding misleading information to highlight the types of information that a proxy voting advice business may, depending upon the particular facts and circumstances, need to disclose to avoid a potential violation of the rule. Thus, the amended rule would list failure to disclose information such as the proxy voting advice business’s methodology, sources of information and conflicts of interest as an example of what may be misleading within the meaning of the rule.
The SEC is aware of concerns that may arise when proxy voting advice businesses make negative voting recommendations based on their evaluation that a registrant’s conduct or disclosure is inadequate, notwithstanding that the conduct or disclosure meets applicable SEC requirements. Without additional context or clarification, clients may mistakenly infer that the negative voting recommendation is based on a registrant’s failure to comply with the applicable SEC requirements when, in fact, the negative recommendation is based on the determination that the registrant did not satisfy the criteria used by the proxy voting advice business. To address these concerns, the proposed amendments would add as an example that the failure to disclose the use of standards or requirements that materially differ from relevant standards or requirements of the SEC may be misleading, depending upon particular facts and circumstances.
Codification of the SEC’s Interpretation of “Solicitation”
The SEC is proposing to codify previous interpretations to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice separately from other forms of investment advice and sells such advice for a fee. The SEC believes the furnishing of proxy voting advice by a person who has decided to offer such advice separately from other forms of investment advice to shareholders for a fee with the expectation that its advice will be part of the shareholders’ voting decision-making process, is conducting the type of activity that raises the investor protection concerns about inadequate or materially misleading disclosures that Section 14(a) of the Exchange Act and the SEC’s proxy rules are intended to address.