SEC Proposes Changes to Shareholder Proposal Rules | Skadden, Arps, Slate, Meagher & Flom LLP
On July 13, 2022, the U.S. Securities and Exchange Commission (SEC), by a 3-2 vote, proposed changes to the proxy rules that would reduce certain grounds under which companies can exclude shareholder proposals of their proxy statements. Specifically, the Proposed Amendments would change the standards for exclusion under “substantial implementation”, “duplication” and “resubmission” bases for exclusion under Rule 14a-8. Although presented as an effort to provide more certainty and transparency to shareholder sponsors and corporations, the amendments (if enacted as proposed) would likely increase the number of shareholder proposals received by corporations and make less likely that proposals can be excluded.
Comments on the proposal are due no later than 60 days after the publication of the proposal statement on the SEC website or 30 days after the publication of the proposal statement in the Federal Register, which means that comments will be due at earlier on September 12, 2022. Since the Amendments are proposed rather than final rules, companies that currently receive shareholder proposals should continue to review those proposals under the existing rules.
Pursuant to Rule 14a-8, a corporation must include a shareholder proposal in the corporation’s proxy materials unless the proposal falls under one of the thirteen material bases for exclusion or the promoter or proposal does not meet the eligibility or procedural requirements of the rule. When a company intends to exclude a shareholder proposal from its proxy materials, the company typically requests a no-action waiver from the staff of the SEC’s Corporate Finance Division (the staff).
As described in our June 2022 Insights article, the staff took a number of positions during the 2022 proxy season that overturned the long-standing precedent of the no-action letter. The proposed amendments would codify some of these positions and reduce three of the substantive bases available to businesses to exclude proposals.
Substantial implementation: Currently, Rule 14a-8(i)(10) permits a corporation to exclude a shareholder proposal that “the corporation has already substantially implemented.” To determine whether a proposal has been substantially implemented, staff assess whether a company’s particular policies, practices and procedures “compare favorably” with the proposal guidelines. Staff also review whether the company has addressed the underlying concerns of the proposal and whether the essential objectives of the proposal have been achieved. Historically, a proposal could be excluded on the basis of substantial implementation even if a company had not implemented all of the requested elements of the proposal.
In contrast, prior to 1983, the exclusion was only available when a company had “fully implemented” the proposal. In a number of instances during the 2022 proxy season, staff appeared to apply a test closer to “full implementation” than “substantial implementation.”
The proposed amendment would provide that a company may exclude a proposal as substantially implemented”[i]f the company has already implemented the essential elements of the proposal. In particular, the proposal release notes that the proposed amendment would allow a shareholder proposal to be excluded as substantially implemented only if the company has implemented everything of its essential elements.
In addition, the proposal statement states that “the degree of specificity of the proposal and of one of its stated primary objectives” will guide the determination of which elements of a proposal are “essential elements” (with the caveat that, as the proponent identifies more elements, each becomes less essential).
Illustrating the difference in approach from the current rule, the proposal release notes that staff have historically found that proposals to enact proxy access provisions allowing an unlimited number of shareholders collectively holding 3 % of the company’s outstanding common stock for three years to appoint up to 25% of the company’s directors was found to be substantially implemented when the company adopted a proxy access rule allowing a shareholder or group of up to 20 shareholders holding three 3% of its ordinary shares continuously for three years to appoint up to 20% of the board. Under the proposed amendment (as well as no-action letters in the 2022 proxy season), the inclusion of a proxy access aggregation limit would preclude a conclusion of substantial implementation. Another illustration provided in the proposal release indicates that, in certain circumstances, a proposal to obtain a report from the board of directors of a company may not be substantially implemented if the report comes from the management of the company. .
Reproduction: Currently, Rule 14a-8(i)(11) provides that a corporation may exclude a shareholder proposal if the proposal “substantially duplicates another proposal previously submitted to the corporation by another proponent that will be included in the corporate proxy documents for the same meeting.” As the SEC explained when it passed the exclusion in 1976, “[t]The purpose of the provision is to eliminate the possibility for shareholders to have to consider two or more substantially identical proposals submitted to an issuer by sponsors acting independently of each other.
In assessing whether Proposals are materially redundant under Rule 14a-8(i)(11), Staff have historically considered whether Proposals share the same “primary direction” or “primary objective”. Propositions that differ in terms or scope may nevertheless be considered substantially redundant if the main thrust or direction is the same.
The proposed change would clarify that a proposal “substantially duplicates” another proposal previously submitted for the same shareholders’ meeting if it “addresses the same subject and pursues the same objective by the same means”.
As described in the proposal release, the amendment “would facilitate the consideration at the same shareholder meeting of multiple shareholder proposals that present different means of solving a particular problem.”
At the same time, the proposal release acknowledges that the proposed change could confuse shareholders and create implementation issues for companies if shareholders approve multiple similar, but non-redundant proposals.
Resubmission: Currently, Rule 14a-8(i)(12) provides that a corporation may exclude a shareholder proposal from the corporation’s proxy materials if the proposal “addresses substantially the same subject matter as a previously included proposal or proposals in the company’s proxy documents”. in the previous five calendar years” if the issue was voted on at least once in the last three years and received support below certain specified thresholds in the most recent vote. These quantitative thresholds were amended in 2020 and came into effect for the 2022 proxy season (and would remain unchanged under the proposed amendments).
Under the current resubmission basis for exclusion, a proposal may be considered to address “substantially the same subject matter” as a previous proposal when it shares the same “substantive concerns”. In conducting this analysis, staff do not focus on “specific language or actions proposed to address these concerns”.
The proposed amendment would provide that a proposal is considered a new submission if it “substantially duplicates” another proposal that has already been submitted for previous shareholder meetings of the same company, meaning that it ” deals with the same subject and pursues the same objective by the same means.”
When the eligibility and resubmission thresholds under Rule 14a-8 were changed in 2020, the shareholder developer community expressed serious concerns. When these rules went into effect for the 2022 proxy season, the changes actually had minimal impact and, in fact, the number of shareholder proposals reached levels not seen since 2016. In contrast, the proposed changes current ones, if adopted, create a clear roadmap allowing proponents to submit multiple proposals on the same topic in a single year and to submit proposals on topics that a company has already acted on or that has not been successful to gain meaningful shareholder support, in each case with no likely recourse for the companies to exclude such proposals. Due to the likely increase in the number of shareholder proposals submitted to companies and requiring a vote at annual meetings, adoption of the rules as proposed could have the unintended consequence of reducing meaningful engagement between companies and shareholders, to the detriment of all parties. .