Senate Banking Committee chair seeks to overturn 14a-8 reforms

Senator Sherrod Brown, D-Ohio, has launched an effort to overturn SEC reforms that change the shareholder proposal process and have sparked widespread concern among investors.

Brown last week introduced a joint resolution stating that ‘Congress disapproves the rule submitted by the [SEC] relating to ‘Procedural requirements and resubmission thresholds under Exchange Act Rule 14a–8’… and such rule shall have no force or effect.’ The measure was referred to the Senate Banking Committee, which Brown chairs.

The commission last September voted 3-2 in favor of amendments to Rule 14a-8 that will raise the thresholds shareholders must meet to get a measure on a proxy statement either for a first time or to keep it on the ballot if it fails to secure majority backing.

The amendments are highly contentious in the governance world. Broadly speaking, supporters argue that the changes are an overdue modernization that will limit certain shareholders’ ability to impose costs on their fellow shareholders by pushing unpopular proposals onto the proxy statement. Critics complain that the reforms will clamp down on shareholder democracy and thwart important ESG-related measures that can take years to garner majority support.

Cydney Posner of law firm Cooley notes in a blog post on Brown’s move that reversing a final regulation that has been published in the Federal Register usually requires going through the notice-and-comment process set out by the Administrative Procedure Act. But the Congressional Review Act creates a path for both houses of Congress to overturn a recently adopted rule by passing a joint resolution that is signed by the president. 

Although the Democratic Party holds the majority in the House of Representatives the 50-50 split in the Senate gives it technical though slim control. The fate of the joint resolution therefore remains uncertain.

CHANGES AND DEBATE
Assuming they go into effect, the changes will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. At that point they will replace the previous ownership threshold, which requires holding at least $2,000 or 1 percent of a company’s shares for at least one year, with three alternative thresholds requiring a shareholder to demonstrate continuous ownership of at least $2,000 of the company’s stock for at least three years, $15,000 of the company’s stock for at least two years, or $25,000 of the company’s securities for at least one year.

Until now, a company has been able to 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 amendment will raise those thresholds to 5 percent, 15 percent and 25 percent, respectively.

The reaction to the vote in September highlighted the divisions over the amendments. Commission member Allison Herren Lee – who is now acting chair – said in her dissent: ‘The final rules represent the capstone in a series of policies that will dial back shareholder oversight of management at the companies they own.’

She added that opposition to the changes has come from individual investors, asset managers, pension funds and labor unions, state and local governments, universities, religious institutions, investor organizations, US senators, academics, state securities regulators and the SEC’s own investor advisory committee.

Fellow commission member Caroline Crenshaw said in her own dissent: ‘To be clear, I am not suggesting that every individual investor’s idea is a good one. What I am suggesting is that there are benefits, and not just costs, to giving corporate boards the opportunity to engage with shareholders.

‘Shareholder proposals provide a proven, effective pathway for sending good ideas to management, while allowing bad ideas to fall away. After today, fewer of those ideas will surface and those conversations will not occur. This is because we have shut them down.’

‘It’s important for corporate secretaries to understand that investors overwhelmingly opposed the rule,’ Jonas Kron, chief advocacy officer at Trillium Asset Management, told Corporate Secretary in September. ‘Despite the effort of a bare majority of the SEC to tip the scales against investors, their shareholders will be undeterred. In fact, it may reinvigorate them and encourage them to seek additional channels to express their opinions.’

Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, said in a statement at the time: ‘The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes.

‘The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors – when there is 50 years of evidence to the contrary.’

There is also support for the changes. Then-SEC chair Jay Clayton said in welcoming the September vote: ‘These amendments ensure there is an appropriate alignment of interests between shareholder-proponents and their fellow shareholders and illustrate again why retrospective review and, as appropriate, modernization of our rules is necessary.

‘There have been many significant changes in communication methods and technology, as well as the methods investors, particularly retail investors, use to access our markets in the 20 years and 75 years since the initial and resubmission thresholds were last revised.’

Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, said at the time: ‘The Eisenhower-era rules on shareholder proposals no longer reflected the needs of 21st century investors and businesses. They allowed special interest activists to push narrow agendas unrelated to the success of public companies and investor return.

‘The US Chamber commends the SEC on today’s shareholder proposal rule, which will improve communications between investors and businesses and ultimately promote a modern and effective regulatory structure.’