Debate continues over 14a-8 reform plans

The SEC’s plans to reform the process by which shareholder proposals reach a vote – or companies exclude them from the proxy statement – continue to divide the governance community.

Although the official deadline for feedback on plans to reform Rule 14a-8 was in February, commenters have been filing letters with the agency as recently as July 21. A panel discussion during Corporate Secretary and IR Magazine’s virtual ESG Integration Forum last week also highlighted the differences in views that often exist between investors and issuers over the proposal.

Part of the SEC’s plan would update the ‘one proposal’ rule to make clear that a single person is not allowed to submit multiple proposals at the same AGM on behalf of different shareholders. Speaking on the panel, Patrick Foley, securities counsel with General Motors (GM), told the audience the company supports giving shareholders ‘meaningful opportunities’ to include proposals in its proxy statement but that there should be ‘reasonable and common-sense’ limits.

Foley said GM believes the one proposal rule has been abused, noting that in the most recent proxy season the company received four proposals from the same person – one in the shareholder’s personal capacity and three as the representative of other shareholders.

This activity imposes costs on the company and other shareholders, he argued. Those costs include the time management and the board’s governance committee spend considering each proposal GM receives and time spent at the AGM presenting proposals, he said. ‘A single shareholder that holds a limited number of shares can hijack that meeting and take over a huge amount of time’ that could otherwise be devoted to Q&As and presentations by the company, Foley added.

Fellow panelist Andrew Behar, CEO of As You Sow, held a different view. As a starting point, he explained that – for his organization – engagement rather than filing a proposal is always the intention and that in roughly 75 percent of cases a company likes its ideas and takes them on board. ‘It’s unusual [that] we have to escalate to a shareholder resolution,’ he said. But multiple proposals may be necessary if a company has separate issues across, say, the three pillars of ESG, he added.

According to Behar, the process can help a company avoid costs in that As You Sow can provide it with detailed analysis in support of its idea for free – rather than having to hire an outside consultant – that can help the issuer avoid risks. ‘It’s about bringing new ideas to the table,’ he said. ‘It’s about helping companies deal with a risk they might not see.’ The planned rule change would stifle such ideas, Behar argued.

RESUBMISSION THRESHOLDS

Among other things, the SEC’s plan would make it more difficult for shareholders to bring unsuccessful resolutions in successive years. At present, a company can exclude a 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 would raise those thresholds to 5 percent, 15 percent and 25 percent (5/15/25 thresholds), respectively.

‘This is intended to crush new ideas,’ Behar said. He referred to a proposal As You Sow had brought that he said secured 3.2 percent support in the first year and 6 percent support in the second year before the company in the third year agreed to adopt the provision, leading to it creating a new business line and millions of dollars. He also noted that governance measures such as say on pay and proxy access took years before gaining broad support.

Foley said GM supports the new thresholds: ‘We think if a proposal is overwhelmingly rejected by our shareholders then there’s no good reason to put it back to a vote again immediately.’ He noted that GM adopted proxy access as the ‘market moved’ on this issue, adding that such changes can happen outside of the 14a-8 process.

Shearman & Sterling associate Arielle Katzman, also on the panel, said she expected the threshold changes to have a particularly marked effect on environmental and social proposals because they often attract lower levels of support and are prone to being resubmitted. Once an issue has been brought to a company’s attention by a shareholder then engagement has begun, Katzman said, adding that the SEC’s changes would not stop shareholders advancing good concepts via means other than proposals.

A paper from the Council of Institutional Investors released this spring estimates that the 5/15/25 thresholds, in combination with the 10 percent minimum requirement included in the SEC plan, would have more than doubled the number of proposals excluded during the period from 2011 up to the third quarter of 2019.