By Bill Flook
In an August 21, 2020, letter to SEC Chairman Jay Clayton, Sen. Sherrod Brown urged the market regulator to drop its plans to increase the difficulty for shareholders to both submit and resubmit proposals for a vote. Brown, an Ohio Democrat and the ranking member of the Senate Banking Committee, said the proposal “would substantially restrict shareholders’ ability to hold corporate executives accountable for how corporations are considering and addressing those issues.”
Brown’s letter represents the latest attempt by Democratic lawmakers to pressure the SEC not to finalize its November 2019 proposal 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.)
The SEC has scheduled a September 16 vote on the changes.
Today, Rule 14a-8 allows an investor to put forth a proposal if they have owned at least $2,000, or 1 percent, of a public company’s voting shares for at least one year.
Release No. 34-87458 would scrap that 1 percent threshold. In its place would be a new regime in which a shareholder with $2,000 of a company’s securities must hold them for three years to be eligible, falling to two years for a shareholder with $15,000 of a company’s securities, and one year for $25,000.
The proposal also squeezes the resubmission thresholds under Rule 14a-8(i)(12). Today, a company can 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. Release No. 34-87458 steps up that vote requirement to 5 percent, 15 percent, and 25 percent, respectively, among other changes.
Raising both the submission and resubmission thresholds has been a long-standing priority of the business lobby, which has complained that investors with only marginal stakes in public companies have swamped them with “idiosyncratic” proposals that waste management’s time and resources. Central to those criticisms are the rise of environmental, social, and governance (ESG) proposals that seek greater disclosures from companies on topics such as climate risk and political spending, which institutional investors are increasingly seeking but detractors cast as “idiosyncratic” and not material.
Brown, in his letter to Clayton, pointed to recent results from annual meetings that show “that shareholder engagement matters in advancing policies that consider economic justice and workforce policies.”
“These changes are plainly anti-shareholder and, as proposed, could silence the consideration of gender and racial pay equity, workplace diversity, and racial discrimination and social and economic justice that have increased in recent years and that will undoubtedly be proposed in the future,” Brown wrote. “Instead, the SEC should be encouraging shareholders to engage with companies and allow full consideration of issues relevant to long-term shareholder value.”
Brown also took aim at a less-noticed provision in the SEC proposal, the so-called “momentum requirement,” which allows companies to exclude repeat proposals where support declines by 10 percent or more compared to the preceding vote. Under that new requirement “companies would be able to exclude proposals despite substantial shareholder support,” Brown wrote.
Brown’s comments are part of a wider broadside against the proposal, which has emerged in recent months as a top target of Democrats in Congress.
The House in late July passed a fiscal 2021 budget bill that includes $1.92 billion for the SEC, a more than $100 million boost, but would forbid the commission from spending money to complete rules raising the submission and resubmission thresholds. The Chamber of Commerce and House Republicans both criticized that provision.
And a House Financial Services subcommittee in July discussed a bill, the Ensuring Shareholder Governance Act of 2020, that would prohibit the SEC from amending Rule 14a-8 in a way that restricts “a shareholder’s ability to have a shareholder proposal included in an issuer’s proxy statement,” beyond the current eligibility and procedural requirements.
This article originally appeared in the August 25, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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