The US Securities and Exchange Commission on July 13 proposed amendments to the shareholder proposal rule, which governs the process for including or excluding a shareholder proposal in a company’s proxy statement.
Under Rule 14a-8 (the Rule), companies generally must include shareholder proposals in their proxy statements unless a proposal is eligible for exclusion on a procedural or substantive basis, as outlined in the Rule.[1] A company that wishes to omit a shareholder proposal from its proxy statement must submit its “reasons” to do so to the staff of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance (the Staff). Such no-action requests seek assurance that the Staff will not recommend enforcement action against the company if it fails to include the subject proposal in its proxy statement by presenting one or more arguments pursuant to the procedural or substantive bases in the Rule, as applicable, for the Staff’s consideration. If the Staff grants the request, then the company will typically exclude the proposal from its proxy materials.[2]
The amendments proposed on July 13, 2022 (Proposed Rule) would revise three of the current substantive bases for exclusion. In moving forward with the Proposed Rule, the SEC stated its belief that the revisions would “promote more consistency and predictability in application.”[3]
The Proposed Rule would revise the following bases for exclusion:
The Proposed Rule represents the first time the SEC has addressed Rule 14a-8 since it adopted amendments to the procedural requirements and resubmission thresholds in September 2020. The key components of the Proposed Rule are discussed below.
Current Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal that “the company has already substantially implemented.” As discussed above, the Staff reviews company no-action requests for exclusion of shareholder proposals. According to the data cited in the Proposing Release, for the last three proxy seasons, the Staff has concurred with companies’ positions between 30 to 50% of the time under this basis for exclusion.
Since its original adoption in 1983, the staff has generally applied a framework of analyzing whether a company has substantially implemented the subject proposal based on whether its policies, practices, and procedures compare favorably or whether the company has adequately addressed the proposal’s underlying concerns and essential objectives.[4]
Under the Proposed Rule, determining whether a proposal could be excluded under the “substantial implementation basis” would continue to require substantive analysis, but through what appears to be a stricter lens —a determination of which elements of the proposal are the “essential elements” and an analysis of whether those elements have been addressed.
In determining the essential elements of a proposal, the Staff has stated that it “anticipate[s] that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis.”[5] A company would only be eligible to exclude a proposal if it could show that all the essential elements of the proposal had been implemented. This shift would likely result in fewer omissions of shareholder proposals under this basis, and the Proposing Release includes multiple examples that show how a proposal that would have been previously excluded would not be excludable under the Proposed Rule.
Current Rule 14a-8(i)(11) 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.” According to the data cited in the Proposing Release, for the last three proxy seasons, the Staff has concurred with companies’ positions between 25 and 44% of the time under this basis for exclusion.
Under the Proposed Rule, a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means,” which differs from the prior staff interpretation that focused on whether the proposals in question shared the same principal thrust or principal focus and allowed for the exclusion of the later-received proposal.[6]
With this revision, even if the substance of the proposal is the same but the method of implementation is different, the Staff would require a company to include both proposals, which correspondingly will result in fewer omissions under this basis. As the Proposing Release discusses, prior applications of this basis would have allowed the exclusion of a proposal that sought a report from management on political contributions as being substantially duplicative of another asking political contributions to be published in newspapers; however, under the Proposed Rule, both would be included in the company’s proxy. Finally, the Proposing Release sets forth the SEC’s belief that the revisions may also reduce the “first mover advantage” by allowing the inclusion of proposals with similar subject matters but different objectives, therefore encouraging more careful analysis and consideration of multiple viewpoints on similar matters regardless of the order of receipt.
Current Rule 14a-8(i)(12) provides that a shareholder proposal may be excluded from a company’s proxy materials if it “addresses substantially the same subject matter as a proposal, or proposals, previously 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 received support below specified vote thresholds on the most recent vote. In recent years, very few companies have submitted under this exclusion, and the Staff has fluctuated from agreeing with all submissions in a particular year to rejecting all in another year.
Under the Proposed Rules, a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” Similar to the proposed amendments to the substantial duplication exclusion, in order to be excludable under the resubmission exclusion, a proposal must not only address the same subject matter as a prior proposal but also seek the same objective by the same means, which will also likely result in fewer omissions of proposals as being substantially duplicative.
If adopted substantially as proposed, the Proposed Rule would continue to shift the way shareholder proponents draft their proposals and companies determine whether a proposal is eligible for exclusion. The most likely immediate impact of the Proposed Rule, if adopted, would be an increase in the inclusion of shareholder proposals that would have otherwise been excluded under the prior Staff interpretation of the applicable bases.
Recent actions by the SEC’s Division of Corporation Finance have signaled its position on the importance of the expanded ability for shareholder proponents to include proposals in a company’s proxy, such as the Division’s rescission of three recent staff legal bulletins on shareholder proposals in 2021. The Proposed Rules would continue this trend and codify the policy shifts companies have seen in recent years.
As the shareholder proposal space evolves and the SEC continues to signal a shift toward inclusion of proposals by shareholder-proponents, companies and shareholders may find it difficult to apply past Staff no-action positions to predict whether a proposal should be included in a company’s proxy statement.
The comment period for this Proposed Rule will close 30 days after publication in the Federal Register or September 12, 2022, whichever is later.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Bryan S. Keighery
Hong Kong
June Chan
Yile (Eli) Gao
William Ho
Louise Liu
Edwin Luk
Billy Wong
New York
Thomas P. Giblin, Jr.
Thurston J. Hamlette
Howard A. Kenny
Kimberly M. Reisler
Philadelphia
Justin W. Chairman
James W. McKenzie
Joanne R. Soslow
Pittsburgh
Celia A. Soehner
Princeton
David C. Schwartz
Shanghai
Matthew H. Lewis
Silicon Valley
Albert Lung
Singapore
Bernard Lui
Joo Khin Ng
Vanessa Ng
Washington, DC
Leland S. Benton
Erin E. Martin
[1] The procedural bases relate to eligibility and procedural requirements for shareholder proposals. There are 13 substantive bases, which essentially cover matters or areas that have been deemed inappropriate for shareholder consideration through the shareholder proposal process, such as proposal that relates to “ordinary business,” (Rule 14a-8(i)(7)), a proposal that is “materially false or misleading,” (Rule 14a-8(i)(3)) or one that relates to a “personal grievance” (Rule 14a-8(i)(4)).
[2] Note that the SEC staff’s no-action position is not legally binding and the matter ultimately may be resolved by a federal district court. For example, a company could elect to notify the SEC of its intention to exclude a particular proposal without seeking no-action relief and instead seek a judicial determination—however, such an occurrence is incredibly rare.
[3] SEC Press Release, SEC Proposes Amendments to the Shareholder Proposal Rule (July 13, 2022).
[4] Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, 34-95267 (July 13, 2022).
[5] Id.
[6] Id.