On July 13, 2022, the SEC proposed amendments to Rule 14a-8 governing the process for including shareholder proposals in a company’s proxy statement. The proposed amendment would narrow three of the provisions that a company can rely upon to exclude a shareholder proposal from its proxy statement including: (i) substantial implementation – i.e., the elements of the proposal have already been substantially implemented; (ii) duplication – the proposal substantially duplicates another proposal already submitted for the same meeting; and (iii) resubmission – the proposal substantially duplicates another proposal previously submitted for the same company’s prior shareholder meetings.
Background – Rule 14a-8
The regulation of corporate law rests primarily within the power and authority of the states. However, for public companies, the federal government imposes various corporate law mandates including those related to matters of corporate governance. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies. Federal proxy regulations give effect to existing state law rights to receive notice of meetings and for shareholders to submit proposals to be voted on by fellow shareholders.
All companies with securities registered under the Exchange Act are subject to the Exchange Act proxy regulations found in Section 14 and its underlying rules. Section 14 of the Exchange Act and its rules govern the timing and content of information provided to shareholders in connection with annual and special meetings with a goal of providing shareholders meaningful information to make informed decisions, and a valuable method to allow them to participate in the shareholder voting process without the necessity of being physically present.
Rule 14a-8 allows shareholders to submit proposals and, subject to certain exclusion substantive and procedural requirements, require a company to include such proposals in the proxy solicitation materials even if contrary to the position of the board of directors. Rule 14a-8 has been the source of considerable contention and after years of debate, was amended on September 23, 2020 (see HERE). The amendment increased the ownership threshold requirements for shareholders to submit and re-submit proposals to be included in a company’s proxy statement.
The September 2020 amendments were long overdue. The rules had not been amended in decades and during that time, shareholder activism shifted. A 2017 U.S. Department of the Treasury Report stated that “[A]ccording to one study, six individual investors were responsible for 33% of all shareholder proposals in 2016, while institutional investors with a stated social, religious, or policy orientation were responsible for 38%. During the period between 2007 and 2016, 31% of all shareholder proposals were a resubmission of a prior proposal.” A study completed in 2018 found that 5 individuals accounted for 78% of all the proposals submitted by individual shareholders.
The 2020 amendment altered the current ownership requirements for the submission of shareholder proposals to: (i) incorporate a tiered approach that provides for three options involving a combination of amount of securities owned and length of time held; (ii) specify documentation that must be provided when submitting a proposal; (iii) require shareholder proponents to specify dates and times they can meet with company management either in person or on the phone to discuss the submission; and (iv) provide that a person may only submit one proposal, either directly or indirectly, for the same shareholders meeting. The amendment also raised the current thresholds for the resubmission of proposals from 3, 6 and 10 percent to 5, 15 and 25 percent.
The Rule 14a-8 amendment debate raged on even after the September 2020 amendments and as with many other capital markets regulations recently, was divided largely along party lines. On November 3, 2021, the SEC Division of Corporation Finance (“Corp Fin”) issued Staff Legal Bulletin 14L (“SLB 14L”) rescinding prior Bulletins 14I, 14J and 14K and effectively destroying four years of interpretative guidance related to the exclusion of ESG related shareholder proposals from proxy statements. SLB 14L had the effect of minimizing some of the amendments implemented in the September 2020 rule change.
State laws in general allow a shareholder to attend a meeting in person and at such meeting, to make a proposal to be voted upon by the shareholders at large. In adopting Rule 14a-8, the SEC provides a process and parameters for which these proposals can be made in advance and included in the proxy process. By giving shareholders an opportunity to have their proposals included in the company proxy, it enables the shareholder to present the proposal to all shareholders, with little or no cost to themselves. It has been challenging for regulators to find a balance between protecting shareholder rights by allowing them to utilize company resources and preventing an abuse of the process to the detriment of the company and other shareholders.
Other than based on procedural deficiencies, if a company desires to exclude a particular shareholder proposal, it must have substantive grounds for doing so. Under Rule 14a-8, to qualify to submit a proposal, a shareholder must:
- Shareholders that met the eligibility requirement to submit a proposal as of September 23, 2020 continue to be eligible under the old criteria for meetings held prior to January 1, 2023 – the old criteria being that the shareholder continuously hold a minimum of $2,000 in market value or 1% of the company’s securities entitled to vote on the subject proposal, for at least one year prior to the date the proposal, is submitted and through the date of the annual meeting;
- After September 23, 2020, satisfy one of three eligibility levels: (a) continuous ownership of at least $2,000 of the company’s securities for at least three years; (b) continuous ownership of at least $15,000 of the company’s securities for at least two years; or (c) continuous ownership of at least $25,000 of the company’s securities for at least one year;
- If the securities are not held of record by the shareholder, such as if they are in street name in a brokerage account, the shareholder must prove its ownership by either providing a written statement from the record owner (i.e., brokerage firm or bank) or by submitting a copy of filed Schedules 13D or 13G or Forms 3, 4 or 5 establishing such ownership for the required period of time;
- If the shareholder does not hold the requisite number of securities through the date of the meeting, the company can exclude any proposal made by that shareholder for the following two years;
- Provide a written statement to the company that the submitting shareholder intends to continue to hold the securities through the date of the meeting;
- Clearly state the proposal and course of action that the shareholder desires the company to follow;
- Submit no more than one proposal for a particular annual meeting;
- Submit the proposal prior to the deadline, which is 120 calendar days before the anniversary of the date on which the company’s proxy materials for the prior year’s annual meeting were delivered to shareholders, or if no prior annual meeting or if the proposal relates to a special meeting, then within a reasonable time before the company begins to print and send its proxy materials;
- Attend the annual meeting or arrange for a qualified representative to attend the meeting on their behalf – provided, however, that attendance may be in the same fashion as allowed for other shareholders such as in person or by electronic media;
- If a shareholder decides to use a representative to submit their proposal, they must provide documentation that the representative is authorized to act on their behalf and clear evidence of the shareholder’s identity, role and interest in the proposal including a signed statement by the shareholder;
- If the shareholder or their qualified representative fail to attend the meeting without good cause, the company can exclude any proposal made by that shareholder for the following two years;
- Shareholders may not aggregate ownership with other shareholders to meet the threshold for submittal. Shareholders may co-file or co-sponsor proposals, but each one must meet the eligibility threshold;
- The proposal, including any accompanying supporting statement, cannot exceed 500 words. If the proposal is included in the company’s proxy materials, the statement submitted in support thereof will also be included; and
- Require that each shareholder that submits a proposal state that they are able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the proposal (regardless of prior communications on the subject), and provide contact information (of the shareholder, not its representative) as well as business days and specific times (i.e., more than one date and time) that the shareholder is available to discuss the proposal with the company.
Under the rules, a shareholder may only submit one proposal. The one-proposal rule applies per person such that a shareholder would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative is not permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
A proposal that does not meet the substantive and procedural requirements may be excluded by the company. To exclude the proposal on procedural grounds, the company must notify the shareholder of the deficiency within 14 days of receipt of the proposal and allow the shareholder to cure the problem. The shareholder has 14 days from receipt of the deficiency notice to cure and resubmit the proposal. If the deficiency could not be cured, such as because it was submitted after the 120-day deadline, no notice or opportunity to cure must be provided.
Upon receipt of a shareholder proposal, a company has many options. The company can elect to include the proposal in the proxy materials. In such case, the company may make a recommendation to vote for or against the proposal, or not take a position at all and simply include the proposal as submitted by the shareholder. If the company intends to recommend a vote against the proposal (i.e., Statement of Opposition), it must follow specified rules as to the form and content of the recommendation. A copy of the Statement of Opposition must be provided to the shareholder no later than 30 days prior to filing a definitive proxy statement with the SEC. If included in the proxy materials, the company must place the proposal on the proxy card with check-the-box choices for approval, disapproval or abstention. For more on proxy cards including the November 17, 2021 rule adopting the use of universal proxy cards, see HERE.
As noted above, the company may seek to exclude the proposal based on procedural deficiencies, in which case it will need to notify the shareholder and provide a right to cure. The company may also seek to exclude the proposal based on substantive grounds, in which case it must file its reasons with the SEC which is usually done through a no-action letter seeking confirmation of its decision and provide a copy of the letter to the shareholder.
Substantive grounds for exclusion include:
- The proposal is not a proper subject for shareholder vote in accordance with state corporate law;
- The proposal would bind the company to take a certain action as opposed to recommending that the board of directors or company take a certain action;
- The proposal would cause the company to violate any state, federal or foreign law, including other proxy rules;
- The proposal would cause the company to publish materially false or misleading statements in its proxy materials;
- The proposal relates to a personal claim or grievance against the company or others or is designed to benefit that particular shareholder to the exclusion of the rest of the shareholders;
- The proposal relates to immaterial operations or actions by the company in that it relates to less than 5% of the company’s total assets, earnings, sales or other quantitative metrics;
- The proposal requests actions or changes in ordinary business operations, including the termination, hiring or promotion of employees – provided, however, that proposals may relate to succession planning for a CEO;
- The proposal requests that the company take action that it is not legally capable of or does not have the legal authority to perform;
- The proposal seeks to disqualify a director nominee or specifically include a director for nomination;
- The proposal seeks to remove an existing director whose term is not completed;
- The proposal questions the competence, business judgment or character of one or more director nominees;
- The company has already substantially implemented the requested action;
- The proposal is substantially similar to another shareholder proposal that will already be included in the proxy materials;
- The proposal is substantially similar to a proposal that was included in the company proxy materials within the last five years and received fewer than a specified number of votes;
- The proposal seeks to require the payment of a dividend; or
- The proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.
The rules also set forth resubmission thresholds. Under certain circumstances, Rule 14a-8(i)(12) allows companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years.” In addition, under Rule 14a-8, in order to be eligible to resubmit a proposal, a proposal must achieve 5%, 15% and 25% shareholder approval on matters voted on once, twice or three or times in the last five years.
The proposed amendment would narrow three of the provisions that a company can rely upon to exclude a shareholder proposal from its proxy statement including: (i) substantial implementation – i.e., the elements of the proposal have already been substantially implemented; (ii) duplication – the proposal substantially duplicates another proposal already submitted for the same meeting; and (iii) resubmission – the proposal substantially duplicates another proposal previously submitted for the same company in the preceding five calendar years. The stated purpose of the amendment is to “enhance the ability of shareholders to express diverse objectives and various ways to achieve those objectives through the shareholder proposal process.”
Rule 14a-8(i)(10), the substantial implementation exclusion, allows a company to exclude a shareholder proposal that “the company has already substantially implemented.” In order to rely on this exclusion, a company must submit the request for exclusion to the SEC using the no-action letter process. Because of the fact-intensive nature of the rule, over the years the SEC has applied various, but similar, interpretive frameworks to determine whether a shareholder proposal has been substantially implemented by a company resulting in variation and a level of unpredictability in the outcome of the analysis.
The proposed amendment would specify that a proposal may be excluded if “the company has already implemented the essential elements of the proposal.” The analysis would remain a factual case-by-case determination; however, under the new rule, the analysis would focus on the elements of the proposal. In determining the essential elements of a proposal, the SEC anticipates that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis. The proposed amendment would permit a shareholder proposal to be excluded as substantially implemented only if the company has implemented all of its essential elements. This marks a significant change from the existing rule which allows for a more holistic approach.
The rule release provides several examples, notably where a shareholder proposal requests a specific report from the board of directors. It will be much more difficult to exclude such proposal based on other reports if they do not hit on the exact topic, or if the report was issued by management instead of the board itself. I see this example as a clear message to the small group of activist shareholders that the SEC will support board accountability on matters involving ESG.
Rule 14a-8(i)(11), the duplication exclusion, provides that a shareholder proposal may be excluded if it “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.” Historically the SEC analyzed an exclusion request by considering whether the proposals share the same principal thrust or principal focus. The analysis could result in differing views and results very similar to the substantial implementation exclusion.
Moreover, under the current rule, the exclusion can only used for the second (or third, etc.) proposal, even if such later proposal may be better written or otherwise receive greater shareholder support, leading to shareholder competition and a focus on speed of issuance.
The proposed amendment would specify that a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” The example given by the SEC is where one proposal requests that a company publicly publish its direct or indirect political contributions and another proposal requests a shareholder report on the company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities. Historically the SEC would find these duplicative because they both address the subject matter of the company’s political and lobbying expenditures. Under the new rules, however, they would not be duplicative because they have different objectives by different means – presumably because one is more narrow than the other and because one wants a public report and the other just a shareholder report – though under Regulation FD, the shareholder report would need to be made public as well.
Since the SEC will analyze duplication on a narrower basis, it believes that the speed issue will likewise be resolved. That is, the SEC believes the new rule would “facilitate the consideration at the same shareholder meeting of multiple shareholder proposals that present different means to address a particular issue.” I see this as resulting in the inclusion of multiple shareholder proposals dealing with the same or similar issue in the same proxy materials, which in turn will lead to shareholder confusion and inconsistent or conflicting results. The SEC notes this possible negative outcome but is proceeding with the rule proposal nonetheless.
Rule 14a-8(i)(12) allows companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years.” Under Rule 14a-8, in order to be eligible to resubmit a proposal, a proposal must achieve 5%, 15% and 25% shareholder approval on matters voted on once, twice or three or times in the last five years.
The proposed amendments would provide that a proposal deals with substantially the same subject matter if it “addresses the same subject matter and seeks the same objective by the same means.” The differing analysis for resubmissions would be the same as that for the substantial implementation and duplication exclusions discussed above.
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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