Rule 14a-8 reforms would halt many resubmissions, CII argues

A new paper from the Council of Institutional Investors (CII) argues that parts of the SEC’s proposed changes to Rule 14a-8 would have more than doubled the number of shareholder proposals excluded from proxy statements over the past several years, had they been in effect.

At present, a company can exclude a shareholder proposal if one substantially on the same topic received 3 percent, 6 percent and 10 percent of the vote for matters voted on once, twice or three or more times, respectively, in the last five years. The SEC’s proposal would raise those thresholds to 5 percent, 15 percent and 25 percent (5/15/25 thresholds), respectively.

Among other things, the proposals would add a new ‘momentum requirement’ allowing companies to exclude a proposal on substantially the same topic that has been previously voted on three or more times in the last five years – notwithstanding having received at least 25 percent of the votes cast on its most recent submission – if the proposal received less than 50 percent of the votes cast and saw a decline in shareholder support of 10 percent or more compared with the preceding vote.

The proposals have sparked fierce and widespread debate in the governance community. CII is a vocal critic, arguing that the changes would limit shareholder rights. The SEC also received more than 13,000 form letters raising concerns about corporate accountability. On the other hand, the US Chamber of Commerce in a statement last year commended the commission on a ‘long-overdue’ proposal.

Ernie Barkett, a CII research analyst, looked at data on shareholder proposals from 2011 up to the third quarter of 2019 to estimate the effect of the SEC’s plan on first, second and third-time shareholder proposals had the proposed changes been in place.

The report estimates that the 5/15/25 thresholds, in combination with the 10 percent momentum requirement, would have more than doubled the number of proposals excluded during that period. ‘[T]he research shows that a number of issues widely seen as important would have been no-go areas for shareholder proposals for a period of time had the SEC amendments been in force earlier,’ Barkett writes.

Barkett acknowledges that CII’s methodology is ‘somewhat rough’ due in part to a reliance on the interpretation of ‘substantially the same subject matter.’ He also acknowledges that issuers can influence votes at the margin, ‘and likely would have taken extra steps to push votes down that were marginally more than 15 percent in the second year, or 25 percent in the third or subsequent year.’

That said, the report finds that, in combination, the proposed thresholds would have increased the number of excluded proposals over the period studied from 221 to at least 514. Among 2,422 first-time proposals, 269 received less than 5 percent support, including 101 that attracted support of less than 3 percent of shares and would be excludable under the existing rules, according to CII.

Even so, 168 first-year proposals received support of more than 3 percent but less than 5 percent of votes cast, and therefore would be ‘newly excludable’ under the SEC amendments, Barkett writes. ‘In fact, only 79 of these 168 proposals were resubmitted, suggesting that many proponents do not continue to pursue subjects on which they do not immediately gain some traction with investors,’ he adds.

The first-year threshold increase may have less of an impact than the steeper second and third-year changes, although many proposals that are voted on twice or more ‘receive very substantial support that is above the SEC’s contemplated increased thresholds,’ according to the report.

Among 740 second-time proposals, 36 met the existing 6 percent resubmission threshold to qualify for a third vote but did not reach 15 percent support and would therefore be ‘newly excludable’ under the changes, the report states. ‘Of these 36 newly excludable proposals, the fact is that under the old rules, only 14 were submitted for a third time; most were not resubmitted, again raising questions on the need for the amended thresholds if market participants already react to a signal sent by a relatively low vote,’ Barkett writes.

Of 157 third-time proposals that met the existing 10 percent resubmission threshold to qualify for a fourth vote, 86 received between 10 percent and 25 percent support, making them newly excludable, with 49 (57 percent) of them submitted for a fourth time, according to the study.

CII finds that the proposed momentum requirement, on its own, would have enabled companies to exclude 22 additional shareholder proposals during the period studied, or 7 percent of all shareholder proposals submitted four or five times within a five-year period. Unlike the higher thresholds, the momentum requirement would have affected governance proposals ‘considerably more’ than environmental or social proposals, the group says.

‘We think it is not an accident that shareholder proposals that would be impacted most are those on subjects particularly sensitive to senior management and their lobbyists: proposals for independent board chairs and for better reporting to shareholders on lobbying activities and political contributions,’ Barkett writes.

CII did not include in the study another important aspect of the proposals. At present, a proponent must hold at least $2,000 or 1 percent of a company’s shares for at least one year to be eligible to submit a proposal. The proposal would drop the 1 percent threshold and create three alternative ownership/tenure thresholds:

• 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
• Continuous ownership of at least $25,000 of the company’s securities for at least one year.

CII argues in its report that the SEC has not done sufficient work in looking at the impact of this change. ‘Without serious SEC research to provide data on the ownership requirements or on likely impacts of the proposals to increase procedural requirements for proponents, we find it challenging to measure potential impacts of those elements of the SEC amendments with any degree of accuracy,’ Barkett writes.

The SEC did not respond immediately to a request for comment. The agency as a matter of policy has not traditionally commented on feedback regarding its proposals.