SEC proposal highlights differences on shareholder proposals

Nov 08, 2019
Commission plans to change eligibility thresholds under Rule 14a-8

The SEC on Tuesday voted to propose amendments to Rule 14a-8, which governs the process for determining which shareholder proposals wind up in a company’s proxy statement, in a move highlighting the differing views companies and investors have on the process.

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.

Among other things, the proposed amendments would change the existing resubmission thresholds of 3 percent, 6 percent and 10 percent for matters voted on once, twice or three or more times in the last five years, respectively, to thresholds of 5 percent, 15 percent and 25 percent, respectively.

The proposals would also add a new provision allowing companies to exclude a proposal 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 proposal has sparked opposition. ‘To understand the effects of that rule on the balance of power between insiders and investors, we should examine the kinds of proposals that will be taken off the ballot and their effect on company value,’ says SEC member Robert Jackson in a dissenting statement on the proposal.

He adds: ‘Today’s release does not even attempt to do that. Instead, the proposal simply assumes that high levels of support indicate a good proposal, and that lower levels of support suggest that a proposal is bad. That has not been the SEC’s historical approach to shareholder proposals – and for good reason.’

Investor interest in a subject takes time to coalesce and the SEC has traditionally understood that short-term voting results are not the only factor in determining a proposal’s merits, Jackson says, adding: ‘The assumption that vote totals reflect the merits of proposals risks depriving investors and the commission of information that has long produced crucial transparency on corporate governance matters.’

Fellow SEC member Allison Herren Lee, who also voted against the proposal, says in a separate statement that it would suppress the exercise of shareholders’ rights, particularly those of the smallest retail investors, by raising the eligibility and resubmission thresholds.

The dividing lines outside the commission are also apparent. The US Chamber of Commerce in a statement commends the SEC on the ‘long overdue’ proposal.

‘The Eisenhower-era rules on shareholder proposals are no longer sufficient in the 21st century. The current structure allows special interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals,’ says Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness. ‘These new SEC reforms will help improve communication between investors and businesses.’

The Council of Institutional Investors (CII) was not pleased, however. It criticized the SEC, saying the proposed increases in ownership and resubmission thresholds would curb the ability of retail investors to submit shareholder proposals and would impede future new social and environmental proposals, which generally take time to gain traction.

‘CEOs do not like public challenges to how and how much they are paid, or to be second-guessed by shareholders on a range of [ESG] matters,’ says CII executive director Ken Bertsch in a statement. ‘That is what is driving the concerted effort by lobbyists for CEOs to prod the SEC to shackle proxy advisory firms and limit shareholder proposals. The rules are an unnecessary interference in the free market and would impede investors’ voice on critical matters at US public companies.’

An SEC announcement of the proposal states that it is ‘part of [the commission’s] ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights.’

‘Today’s proposed amendments follow from the staff’s extensive experience with shareholder proposals and recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors,’ says SEC chair Jay Clayton in a statement.

‘The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.’

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