Background: Rule 14a-8 provides the mechanism by which shareholders may submit proposals to companies for inclusion in the annual proxy statement to be voted upon by shareholders. On September 23, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to certain procedural requirements for submission of shareholder proposals and the provision relating to resubmitted shareholder proposals under Rule 14a-8 of the Securities Exchange Act of 1934, as amended. The amendments seek to modernize the system for the first time in over 35 years.
Below is a description of the amended rules, with some key takeaways. A before-and-after comparison is attached as Annex I.
1. Ownership Requirements – Rule 14a-8(b)(1)(i)
The SEC adopted a three-tiered ownership threshold requirement for shareholders to submit a proposal, taking into account both the amount of securities owned and the shareholder’s tenure as a security holder. Under the amended rule, a shareholder is eligible to submit a proposal if the shareholder has continuously held at least:
- $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
- $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
- $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
Consistent with prior ownership requirements, shareholders may not combine their securities with other shareholders in order to meet the applicable ownership thresholds.
The SEC eliminated the alternative 1% ownership threshold, which historically had not been utilized.
Note: Investors that are currently eligible to submit proposals under the current $2,000 threshold/one-year minimum holding period, but do not currently satisfy the new requirements, will continue to be eligible to submit proposals through the expiration of the transition period that extends for all annual or special meetings held prior to January 1, 2023, provided they continue to hold at least $2,000 of a company’s securities.
2. New Requirement to Facilitate Engagement – Rule 14a-8(b)(1)(iii)
As amended, Rule 14a 8(b) now requires, as a condition to eligibility, a written statement from each shareholder-proponent that he or she is able to meet with the company in person or via teleconference at specified dates and times, no less than 10 calendar days nor more than 30 calendar days, after submission of the shareholder proposal. The shareholder is required to include contact information and at least two calendar windows during the company’s regular business hours when he or she is available to discuss the proposal with the company. If a company is unavailable during the proposed dates or times, such engagement may take place at a different date and/or time, provided it is acceptable to both the shareholder-proponent and the company.
Example: If a shareholder submits a proposal on October 1, they would be required to identify dates and times of availability between October 11 and October 31.
Note: Under the new rule, companies are not required to engage with a shareholder-proponent or to state that they have attempted to engage with the shareholder-proponent prior to submitting a no-action request to exclude the proposal.
3. Shareholders Attestations for Proposals Submitted By Representatives – Staff Legal Bulletin 14I (“SLB 14I”) and new 14a-8(b)(iv)
Previously governed by SLB 14I, the amended Rule 14a-8 adds a provision requiring shareholders that appoint a representative to submit a proposal for inclusion in a company’s proxy statement on their behalf to provide written documentation that:
- Identifies the shareholder and the person or entity selected as the representative;
- Identifies the company to which the proposal is directed;
- Identifies the annual or special meeting for which the proposal is submitted;
- Identifies the specific topic of the proposal to be submitted;
- Is signed and dated by the shareholder;
- Includes the shareholder’s statement authorizing the designated representative to submit the proposal and otherwise act on the shareholder’s behalf; and
- Includes the shareholder’s statement supporting the proposal.
Note: The SEC modified the SLB 14I requirement (iv) to specify the topic of the proposal being submitted, and added requirements (vi) and (vii).
4. One-Proposal Limit – Rule 14a-8(c)
As previously in effect, Rule 14a-8(c) provided that each shareholder could submit no more than one proposal to a company for a particular shareholders’ meeting.
Relying on that wording, it has become common for activists to submit proposals on behalf of one or more eligible shareholders (sometimes referred to as “proposal by proxy”). By submitting proposals in a representative capacity, proponents were able to effectively evade Rule 14a-8(c)’s one-proposal limit and submit multiple proposals to a company for a particular shareholders’ meeting.
With the recent amendments, the SEC has undertaken to close that loophole by revising Rule 14a-8(c) to provide that each person may submit no more than one proposal, directly or indirectly, for each shareholders’ meeting. By applying the one-proposal rule to “persons” rather than “shareholders” and adding “directly or indirectly,” the SEC has made it clear that companies may exclude multiple proposals by a single person, even if the person submitting such proposals is acting in a representative capacity for multiple separate shareholders, each of whom is the proponent of record for only one of the proposals.
Note: Rule 14a-8 does not address whether or not a particular shareholder has the right to submit a proposal through a representative, as that is a matter of state law and the company’s charter and by-laws.
5. Resubmission Threshold of Shareholder Proposals – Rule 14a-8(i)(12)
As amended, Rule 14a-8(i)(12) allows companies to exclude shareholder proposals that deal with substantially the same subject matter as another proposal or proposals that have been included in the company’s proxy materials within the preceding five calendar years, if the matter was voted on at least once in the last three years and did not receive at least:
- 5% of the vote if previously voted on once;
- 15% of the vote if previously voted on twice; or
- 25% of the vote if previously voted on three or more times.
Note: The SEC did not adopt the proposed amendment to add a “momentum requirement” to Rule 14a-8(i)(12), which would have allowed companies to exclude proposals that had been submitted three or more times in the preceding five years and would not otherwise have been excludable under the 25% threshold if (i) the most recently voted on proposal received less than 50% of the votes cast and (ii) support declined by 10 percent or more compared to the immediately preceding shareholder vote on the matter.