On Sept. 23, 2020, the U.S. Securities and Exchange Commission (SEC) announced the adoption of final rules amending Exchange Act Rule 14a-8 to make the following revisions to requirements for a shareholder to have a proposal included in a company’s proxy statement:
- Changing the value of shares owned and the length of time held by a shareholder submitting a proposal
- Requiring shareholder-proponents to identify specific dates and times they can meet and engage with the company about the proposal
- Limiting a person to one proposal per shareholders meeting
- Raising the threshold levels of shareholder support a proposal must receive to be eligible for resubmission at the company’s future shareholders’ meetings
Effective Date. The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting held on or after Jan. 1, 2022. However, the final rules also provide for a transition period with respect to the ownership thresholds, allowing shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting held prior to Jan. 1, 2023.
Purpose of Amendments. The SEC noted that the purpose of these amendments is to modernize and enhance the efficiency and integrity of the process, specifically by ensuring that a proponent has shown a “meaningful economic stake or investment interest” before a company must use its resources to include the proposal in its proxy statement materials.
Ownership Thresholds. Currently, to be eligible to submit a proposal under Rule 14a-8(b), a shareholder proponent must have continuously held at least $2,000 or 1 percent of a company’s securities entitled to vote on the proposal, for at least one year as of the date the proposal is submitted.
The final amendments to Rule 14a-8(b) state that a shareholder will be eligible to submit a proposal if the shareholder shows continuous ownership of:
- $2,000 of the company’s securities entitled to vote, for at least three years;
- $15,000 of the company’s securities entitled to vote, for at least two years; or
- $25,000 of the company’s securities entitled to vote, for at least one year.
The amended rule also eliminates the percentage test. The SEC noted that it believes “shareholders would be unlikely to rely on such a threshold in light of the new thresholds and that the amendment will avoid administrative complexities that could result from a percentage-based test.”
Furthermore, the amendments prohibit shareholders from aggregating their securities with other shareholders for the purposes of meeting the minimum ownership thresholds. Instead, each shareholder must satisfy one of the three ownership thresholds to be eligible to submit or co-file a proposal.
Shareholder Representative Limitations. The amendments require that shareholders that use a representative to submit a proposal provide documentation that specifically identifies the shareholder submitting the proposal and the designated representative. A statement from the shareholder that authorizes the designated representative to submit the proposal and otherwise act on the shareholder’s behalf is also required. The shareholder must also identify the specific topic of the proposal and include the shareholder’s statement supporting the proposal. The amendments are intended to help improve the integrity of the proposal process and provide additional assurance to the company as to the identity of the shareholder and the shareholder’s interest in a proposal that is submitted.
Availability Requirement. The amendments add a shareholder engagement component and require each proponent to submit a written statement that he or she is available to meet with the company via teleconference or in person within 10 to 30 calendar days following submission of the proposal. Shareholders also need to include contact information as well as specific business days and times when they are available to discuss the proposal. The times should be during the regular business hours of the company’s principal executive offices.
One-Proposal Limit. The amendments modify Rule 14a-8(c) to state that each person, rather than each shareholder, is allowed to submit only one proposal, either in the shareholder’s own name or through a representative, for a particular meeting.
Resubmission Thresholds. The amended rule increases the level of shareholder support a proposal must receive for the proposal to be included again in the same company’s proxy statement for a future meeting. The changes are as follows:
| Number of Times a Proposal Addressing Substantially the Same Subject Matter Was Included in Company Proxy Materials Within Past Five Calendar Years if Most Recent Vote Occurred in Past Three Years | Level of Shareholder Support in Most Recent Vote on the Proposal Current Rule | Level of Shareholder Support in Most Recent Vote on the Proposal Amended Rule |
|---|---|---|
| Once | 3% | 5% |
| Twice | 6% | 15% |
| Three or More Times | 10% | 25% |
For example, a proposal would need to garner support from at least 5 percent of the voting shareholders in its first submission to be eligible for resubmission in the subsequent three years. Proposals submitted two and three times in the prior five years would need to achieve 15 percent and 25 percent support, respectively, to be eligible for resubmission in the subsequent three years. The SEC noted that the new threshold percentages are intended to help distinguish between proposals that may realistically obtain broader or majority support in the near future and proposals that will not gain broader support.
No Momentum Requirement. The SEC decided not to adopt the momentum requirement discussed in the proposing release. That proposed rule would have allowed companies to exclude proposals previously voted on by shareholders under certain circumstances where support declined by 10 percent or more compared to the immediately preceding shareholder vote on the same subject matter.
No Amendments to SEC and Staff Role in the Rule 14a-8 Process. In proposing changes to Rule 14a-8, the SEC requested public comment on SEC’s current Rule 14a-8 processes. The proposing release sought comments on, for example, whether the SEC staff should continue to review proposals companies wish to exclude. While the final rule release discussed and responded to the comments received, the SEC did not adopt any changes in these areas at this time, but noted that it would consider the comments in connection with any future rulemaking or modifications to the no-action process.
Next Steps
Since the $2,000/1 percent shareholder ownership threshold remains in effect for an annual or special meeting held before Jan. 1, 2023, companies should continue to use that threshold to determine whether a shareholder proponent meets the ownership criteria until the company’s 2023 annual meeting.
Companies should research the shareholder support level for shareholder proposals voted on in the last three years and the number of times a substantially similar proposal was included in the proxy statement over the past five years to determine if the new resubmission thresholds would allow exclusion of any substantially similar proposal that might be received for the proxy statement for annual meetings held after Jan. 1, 2022.
Companies should closely review shareholder proposals submitted for annual meetings held after Jan. 1, 2022, for compliance with the new rules. For example, the company should evaluate the shareholder proposal for compliance with the new rules prohibiting aggregation of share ownership and permitting the single submission of a proposal by a person rather than a shareholder to ensure that the company objects to including proposals that do not satisfy these requirements.
Companies should also update any website disclosures to shareholders about how to submit shareholder proposals and refresh any internal checklists or memos about the shareholder proposal process to reflect the amended rules.
For additional guidance on the information in this alert, please contact any of the authors, any member of McGuireWoods’ securities and compliance team, or your primary McGuireWoods contact.
McGuireWoods’ securities and compliance team assists private and public companies in capital raising efforts through private and public offerings, and also assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.