By: Margaret D. Farrell, Kaitlin M. Humble, James R. Burke
On July 13, 2022, the Securities and Exchange Commission (the “SEC”) proposed amendments to Rule 14a-8 (collectively, the “Proposed Amendments”) that would modify three of the thirteen substantive bases for excluding shareholder proposals from consideration at a public company’s annual or special meetings: (i) the substantial implementation exclusion, (ii) the duplication exclusion, and (iii) the resubmission exclusion. The full text of the Proposed Amendments can be viewed here. Each exclusion is presented in further detail below, but the overall impact of the changes as proposed would be a significant loosening of certain restrictions on shareholder proposals.
Background
Issued under the Securities Exchange Act of 1934, Rule 14a-8 facilitates shareholder rights by requiring public companies to include shareholder proposals for consideration in their annual or special meeting proxy statements if the shareholder proposals satisfy certain procedural and substantive requirements. If these requirements are satisfied, a company must include the shareholder proposal in its proxy materials unless the company can rely on one of the thirteen bases for exclusion under Rule 14a-8. If a company excludes a shareholder proposal, it must provide an explanation to the SEC, usually in the form of a no-action request.
According to the SEC, the Proposed Amendments are intended to improve the shareholder proposal process by ensuring that investors “receive full and accurate information about all security holder proposals that are to, or should, be submitted to them for their action…and have the opportunity to vote” on such proposals. The SEC believes that the Proposed Amendments would enhance the ability of shareholders to express diverse objectives, and the manners in which to achieve those objectives, while also setting forth a clear framework for the application of certain exclusions, providing greater certainty and transparency to both shareholders and companies during the shareholder proposal evaluation process.
Substantial Implementation Exclusion
| Current Rule |
Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal that the company has already “substantially implemented.” In applying this exclusion, the SEC has traditionally focused on “whether the company’s policies, practices and procedures compare favorably with the guidelines of the proposal” and whether the company has addressed the proposal’s underlying concerns and/or essential objectives. |
| Proposed Amendments |
The Proposed Amendments would require that the analysis focus on the specific “essential elements” of a shareholder proposal to assess whether actions taken by the company to implement the proposal are sufficiently responsive, such that the substance of the essential elements of the proposal have been substantially implemented. The analysis would be factual and case-by-case, and would be driven by the degree of specificity of the shareholder proposal and its stated primary objectives. To exclude a shareholder proposal on this basis, the company must have already implemented all of the essential elements of the proposal. |
| Example |
A proposal calls for a company to issue a report about a particular topic. The company’s existing reports or disclosures about that topic may not implement the essential elements of the proposal, especially if the plain language of the proposal explains how the company’s existing reports or disclosures are insufficient. Additionally, where a proposal requests a report from the company’s board of directors (such as disclosure regarding the board’s assessment of a topic, or the board’s process in approaching a topic), the SEC may determine that the company has not implemented an essential element of the proposal if the report comes from management rather than the board, if the proposal demonstrates a clear emphasis on reporting directly from the board. |
Duplication Exclusion
| Current Rule |
Rule 14a-8(i)(11) allows a company to exclude a shareholder proposal that “substantially duplicates” a shareholder proposal that the company has already received, and will be included in its proxy materials for the same meeting. Historically, the SEC has considered a proposal to be duplicative of another proposal if the two proposals have the same principal thrust or focus. |
| Proposed Amendments |
The Proposed Amendments would change the standard such that two proposals are “substantially duplicate” only when they address “the same subject matter and seek the same objective by the same means.” (emphasis added.) In other words, the Proposed Amendment would enable the consideration by a company’s shareholders of later-received proposals that may be similar to and/or address the same subject matter as an earlier-received proposal, but which seek different objectives or offer different means of addressing the same matter. |
| Example |
Two proposals are presented: (1) a proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation; and (2) a proposal requesting a report to shareholders on the company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities. In considering the application of the duplication exclusion to these proposals, the SEC previously had concurred that the proposals were substantially duplicative when analyzing the principal thrust or focus of the proposals. Under the Proposed Amendments, however, these proposals would not be deemed substantially duplicative because, although they both address the subject matter of the company’s political and lobbying expenditures, they seek different objectives by different means. |
Resubmission Exclusion
| Current Rule |
Rule 14a-8(i)(12) allows a company to exclude a shareholder proposal that addresses “substantially the same subject matter” as a proposal previously included in the company’s proxy within the preceding five calendar years, provided that the matter was voted on and received support below required approval thresholds. |
| Proposed Amendments |
The Proposed Amendments would modify the standard for the resubmission exclusion from “substantially the same subject matter” to “substantially duplicates,” using the same analysis outlined in the duplication exclusion section (i.e., same subject matter and same objective by the same means). |
| Example |
Two proposals are at issue: (1) a proposal requesting that the board adopt a policy prohibiting the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a “government service golden parachute”); and (2) a proposal requesting that the board prepare a report to shareholders regarding the vesting of such government service golden parachutes that identifies eligible senior executives and the estimated dollar value of each senior executive’s government service golden parachute. The SEC previously had viewed the above proposals as addressing the same subject matter for purposes of the resubmission exclusion; however, under the Proposed Amendments, although these proposals concern the same subject matter (namely, government service golden parachutes for senior executives), exclusion would not be warranted because they do not seek the same objectives by the same means. |
Shareholder activists will almost certainly support any Rule 14a-8 amendments that will help to get more proposals onto more ballots, while corporate boards and management will likely push back on these Proposed Amendments, questioning whether the changes actually add any clarity and transparency or simply erode carefully constructed parameters meant to encourage effective management without investor interference. Comments on the Proposed Amendments will likely include a mix of the above viewpoints and are due 30 days after publication in the Federal Register or September 12, 2022, whichever is later.
For additional information related to Proposed Amendments, please contact one of the authors listed above, or any member of our Securities Law Practice Group.
