SEC finalizes Rule 14a-8 reforms

In a split-decision, the SEC yesterday approved changes to the shareholder proposal process that have sparked thousands of comment letters and widespread concern among investors.

The commission voted 3-2 in favor of amendments to Rule 14a-8 that will ramp up 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 final version of the rule does, however, drop part of the plan involving multi-year support for proposals.

The changes replace the current 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 is now raising those thresholds to 5 percent, 15 percent and 25 percent, respectively.

The changes have proved to be highly contentious within the governance community. 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 say the reforms will clamp down on shareholder democracy and thwart important ESG-related measures that can take years to garner majority support.

The reaction to the vote indicates the depth of opposition to the reforms. ‘It’s important for corporate secretaries to understand that investors overwhelmingly opposed the rule,’ Jonas Kron, chief advocacy officer at Trillium Asset Management, tells Corporate Secretary. ‘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, says in a statement: ‘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.’

‘The amendments weaken the voice of investors and jeopardize faith in the fairness of US public capital markets by making the filing process more complicated, constricting and costly,’ says Amy Borrus, executive director of the Council of Institutional Investors (CII). ‘The result will be fewer shareholder proposals – and that is precisely the goal of the business lobby that pressed the SEC to make these changes. Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on [ESG] matters.’

Rev Kirsten Snow Spalding, senior director of the Ceres Investor Network on Climate Risk and Sustainability, says: ‘The SEC vote to revise the rule governing shareholder proposals would restrict the rights of small and medium shareholders. The vast majority of 13,000 comments the SEC received on this rule expressed strong opposition. Even large asset managers opposed it. Yet the SEC went ahead and issued the rules with only minor changes.’

Commission member Allison Herren Lee in her dissent says: ‘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 adds 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.

‘Today’s amendments do not serve shareholders or the capital markets more broadly,’ Lee told the SEC meeting yesterday. ‘They will have pronounced effects in two important respects. First, in connection with [ESG] issues at a time when such issues – climate change, worker safety, racial injustice – have never been more important to long-term value. Second, in connection with smaller shareholders, Main Street investors, who will be dramatically disadvantaged by the changes we adopt today.’

Caroline Crenshaw, who joined the commission last month, says in her 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.’

She adds: ‘[R]egardless of its stated purpose, the implication of today’s rulemaking is that the wealthy are more likely to possess ideas worthy of corporate consideration. That is one way to reduce the burden on corporations, but I believe that that is a bad result.’ 

MOMENTUM REQUIREMENT DROPPED
The final version of the rule changes did offer some comfort to investors, however. In addition to raising resubmission thresholds to 5 percent, 15 percent and 25 percent, the original version included adding a provision to allow companies to exclude proposals dealing with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that would not otherwise be excludable under the 25 percent threshold if: a) the most recently voted on proposal received less than a majority of the votes cast; and b) support declined by 10 percent or more compared with the immediately preceding shareholder vote on the matter. This was referred to as the ‘momentum requirement.’

SEC officials write in the final rule that, after considering the comments, they decided to exclude this change: ‘We agree with commenters that the momentum requirement, as proposed, could at least in theory lead to anomalous results’ and that it ‘could render the resubmission basis for exclusion unnecessarily complex.’ 

‘[W]e opposed the momentum requirement because it was a complicated and ill-designed attempt to block certain proposals,’ CII general counsel Jeff Mahoney tells Corporate Secretary. ‘It is not surprising it was dropped from the final rule because the SEC staff had a very difficult time explaining how it worked and why it was needed.’  

A CII analysis issued earlier this year found that the 5/15/25 thresholds, in combination with the 10 percent momentum requirement, would have more than doubled the number of shareholder proposals excluded during the period from 2011 up to the third quarter of 2019.

COMMISSION SUPPORT
SEC chair Jay Clayton says in a statement welcoming the 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.’

SEC commissioner Elad Roisman, who supports the changes, says in a statement: ‘The only constant in our markets is the fact that they will change. It is our job as regulators to make sure our rules keep pace. The amendments to Rule 14a-8 that the commission adopted today aim to ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals to be included in a company proxy’s statement, paid for by all shareholders.’

Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, says in a statement: ‘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.’