By Soyoung Ho
The SEC has scheduled a public meeting for September 16, 2020, to consider finalizing a rule that would make it more difficult for shareholders to put forth proposed resolutions—such as disclosure of political spending—for vote during public company annual meetings.
This follows a separate but related rule the SEC adopted in July to increase oversight of proxy advisory firms who recommend how institutional investors should vote during annual meetings. (See Divided SEC Issues Rule Increasing Regulation of Proxy Advisers in the July 23, 2020, edition of Accounting & Compliance Alert.)
Some investor advocates oppose the changes, and thousands of individuals also sent in form comment letters to voice their opposition. But the rulemakings address long-running business complaints, and the SEC issued the proposals for the two rules at the same time in November 2019.
The one governing shareholder submissions is in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8. (See Divided SEC Proposes to Make it More Difficult for Shareholders to Bring Proposals for Vote at Company Annual Meetings in the November 6, 2019, edition of ACA.)
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, companies 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.
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 and stay public.
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.
It is unclear whether the SEC will adopt the thresholds as proposed, but Dave Brown, a partner with Alston & Bird LLP, thinks the commission will likely make small changes to them.
“I think there will be some minor tweaks similar to the proxy advisers,” Brown said. “The minor tweaks give them the opportunity to show that the SEC listened to the comments while also pushing the key reforms through.”
In the proxy adviser rules, the SEC in July largely adopted the rules as proposed. One small change has to do with the timing of when proxy advisers are required to provide voting recommendations to companies.
The final rule says it should be prior to or at the time when the advice is disseminated to asset managers. The SEC had proposed to require proxy advisers to give companies an opportunity to review and provide feedback before the recommendation is issued.
Investor advocates want current 14a-8 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.
Release No. 34-87458 would 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.
This article originally appeared in the August 18, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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