By Soyoung Ho
Despite strong opposition from investor groups, a divided SEC on November 5, 2019, decided to propose a couple of business management-friendly rules when it comes to annual shareholder votes.
The SEC’s two Democratic commissioners, Robert Jackson and Allison Lee, voted against the proposals. Among other things, they said the market regulator has not shown evidence to back up the proposed changes. But both proposals respond to long-running business complaints, and one would make it harder for investors to bring shareholder proposals for vote during a public company’s annual meeting. The other proposal would subject proxy advisory firms to greater oversight. (See Split SEC Decides to Propose Greater Oversight of Proxy Advisory Firms in the November 6, 2019, edition of Accounting & Compliance Alert.)
Business groups, especially the U.S. Chamber of Commerce and the Business Roundtable, have been criticizing Rule 14a-8 of the Securities Exchange Act of 1934, which lets investors put forth proposals if they own at least $2,000, or 1 percent, of a public company’s voting shares for at least one year. The groups believe that as currently set, the rule allows a handful of activist investors to easily put forward “idiosyncratic” proposals that relate to environmental, social, and governance (ESG) matters at the expense of the rest of the shareholders. The business organizations think ESG issues have nothing to do with a company’s financial performance. But it is an extra expense that companies have to address resolutions, for example, on disclosure of the amount spent on political activities or greenhouse gas emissions.
Moreover, businesses believe that the rule should be tightened so that a small group of shareholders will be restricted from submitting losing proposals repeatedly. Currently, Rule 14a-8(i)(12) allows a company to exclude a proposal from its proxy statement for a vote at the annual meeting if it failed to receive the support of 3 percent of shareholders if voted on once in the last five years, 6 percent if voted on twice in the last five years, and 10 percent if voted on three or more times in the last five years.
For example, had the thresholds been 6 percent, 15 percent, and 30 percent, only 27 percent of the resubmitted proposals from 2001 to 2018 would have been eligible for a fourth year on company ballots, the U.S. Chamber wrote in a December 2018 letter to the SEC.
The SEC under Chairman Jay Clayton’s leadership has been sympathetic to business complaints and has made it a priority to make commission rules less burdensome so more companies will be encouraged to go public.
“Today’s proposed amendments follow from the staff’s extensive experience with shareholder proposals and recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs [exchange traded funds], rather than directly by Main Street investors, ” Clayton said. “The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.”
Investor advocates want current rules left intact because, among other things, they believe ESG matters are increasingly material today. They also believe small retail investors will be disenfranchised if the thresholds were raised. Most of all, they believe the current process helps to hold corporations accountable.
In particular, the SEC would update the conditions that a shareholder must meet for a proposal to be included in a company’s proxy statement. The proposed amendments change the eligibility requirements under Rule 14a-8(b), the one-proposal limit under Rule 14a-8(c), and the resubmission thresholds under Rule 14a-8(i)(12), according to Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8. Comments are due 60 days after publication in the Federal Register , which normally occurs a few weeks after a rulemaking document is posted on the SEC’s website.
The SEC proposes to eliminate the current 1 percent threshold, but a shareholder with at least $2,000 of a company’s securities must hold them for at least three years. If a shareholder holds more than $15,000, then the waiting period is two years, with $25,000 it is one year.
The proposal would raise the current resubmission thresholds of 3 percent, 6 percent, and 10 percent to 5 percent, 15 percent and 25 percent, respectively. It would also allow companies to exclude a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal received less than 50 percent of the votes cast and experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.
The “one proposal” rule would clarify that one person may not submit multiple proposals at the same meeting.
The proposed rule would also require a shareholder who uses a representative to provide documentation to make clear that the representative is authorized to act on the shareholder. It would also require that each shareholder state that he or she is able to meet with the company within a certain time frame.
The influential Council of Institutional Investors (CII) rebuked the SEC for undercutting critical shareholder rights.
“CEOs do not like public challenges to how and how much they are paid, or to be second-guessed by shareholders on a range of environmental, social and governance matters,” CII Executive Director Kenneth Bertsch said. “That is what is driving the concerted effort by lobbyists for CEOs to prod the SEC to shackle proxy advisory firms and limit shareholder proposals. The rules are an unnecessary interference in the free market, and would impede investors’ voice on critical matters at U.S. public companies.”
Blaine Townsend, who oversees the Sustainable, Responsible and Impact Investing (SRII) group at Bailard, Inc., a wealth and asset management firm in Foster City, California, also said the proposed changes are unnecessary.
“For 50 years, the existing rules provided an elegant and effective platform for small and large investors alike to elevate social and environmental issues that were and are as important to the bottom line as they are to society in general,” Townsend said. “The current rules cost very little and their impact has been overwhelmingly positive: They existed during a half-century that saw America become the preeminent economic power in the world, while also becoming a leader in transparency and corporate governance. Better governance and transparency has made American companies more attractive to global investors because of the perceived lower risk. Right-sizing regulation for the times is a reasonable thing to do, but a complete overhaul of rule 14a-8 is an unnecessary overreach.”
The U.S. Chamber welcomed the SEC’s action, calling it long overdue.
“The current structure allows special interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals,” U.S. Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman said. “These new SEC reforms will help improve communication between investors and businesses. Ultimately, these changes will allow the will of the majority to prevail.”
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