Category Shareholder Proposals

SEC Proposed Additional Rules for Proxy Voting Advice and Shareholder Proposals

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On November 5, 2019, the SEC issued two new proposed rules. One impacts proxy voting advice and the other impacts shareholder proposals.

Proxy Voting Advice

The proposed rule amends Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations. The amendment would call for enhanced disclosure of material conflicts of interest and would codify the August 2019 guidance’s change in the definition of “solicitation” to include proxy voting advice.

Under the proposed amendments, proxy voting advice businesses (i.e., proxy advisory firms) relying on the Exchange Act Rule 14a-2(b) exemptions from the information and filing requirements of the proxy rules would be subject to the following conditions:

  • They must include disclosure of material conflicts of interest in their proxy voting advice
  • Public companies must be given an opportunity to review and provide feedback on proxy voting advice before it is issued; and
  • Public companies may request that proxy voting advice businesses include in their voting advice a hyperlink or similar method of directing the recipient of the advice to a written statement that sets forth the public company’s views on the proxy voting advice.

The proposed amendments would permit the proxy voting advice businesses to require public companies to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional.

The proposed rule will be subject to a 60-day public comment period.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-231

Shareholder Proposals

The other rule changes that the SEC proposed involved shareholder proposals. The proposed amendments would:

  • update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement.
  • Update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
  • Modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings

The changes to the ownership requirements represent a significant increase over the current standard. Currently, the ownership requirement is met if a shareholder hold at least $2,000 or 1 percent of a company’s securities for at least one year. The $2,000 amount is retained, provided the individual has held the shares for at least 3 years but increased to $15,000 if held for at least 2 years and increased again to $25,000 if held for at least 1 year (25 times the current ownership standard!).

Even the changes to the resubmission thresholds for proposals are being increased. The current resubmission thresholds of 3 percent, 6 percent, and 10 percent for matters voted on once, twice or three or more times in the last 5 years, respectively, would be changed to 5 percent, 15 percent, and 25 percent respectively, and an overriding provision would be added for proposals that have been previously voted on three or more times in the last five years could be excluded if (1) it received less than 50 percent of votes cast, and (2) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

These proposed changes are also subject to a 60-day public comment period. It will interesting to see what comments shareholders have on these proposals as they all seem to limit the current rights of shareholders with respect to the companies in which they hold securities.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-232

SEC Issues Guidance on Shareholder Proposals

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On October 23, 2018, the SEC issued Staff Legal Bulletin No. 14J (CF) [SLB 14J] regarding Rule 14a-8. Specifically, SLB 14J takes a look at the economic relevance and ordinary business exclusions for shareholder proposals. The SEC Staff last addressed these concepts in SLB 14I.

SLB 14J offers additional guidance on proposals that address senior executive and/or director compensation and ordinary business matters. The SLB states that in evaluating proposals that raise both ordinary business and senior executive and/or director compensation matters, the SEC staff examines whether the focus of the proposal is an ordinary business matter or aspects of senior executive and/or director compensation. Where the focus appears to the SEC staff to be on an ordinary business matter, the proposal might be excludable under Rule 14a-8(i)(7).

Furthermore, the SEC Staff indicated that it believes a proposal that addresses senior executive and/or director compensation may be excludable under Rule 14a-8(i)(7) if a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce and the company demonstrates that the executives’ or directors’ eligibility to receive the compensation does not implicate significant compensation matters.

The SEC also announced a bit of a change in how it will approach the exclusion of proposals addressing senior executive and/or director compensation on the basis of micromanagement. Historically, the SEC has not agreed with such exclusions. However, the SEC rethought its position and may support such exclusions in cases where the proposal seeks intricate details or seeks to impose specific timeframes or methods for implementing complex policies.

SLB 14J also details the form of analysis that would be most helpful to the SEC Staff as it considers the no-action request to exclude a shareholder proposal. The SLB lays out the factors that the SEC Staff believes the board may need to address depending on the facts and circumstances in determining whether the shareholder proposal involves a policy issue that is otherwise significantly related to the company’s business or is sufficiently significant in relation to the company’s business. The SLB indicates that a well-developed discussion will describe in sufficient detail the specific substantive factors the board considered in arriving at its conclusion that an issue is not otherwise significantly related to its business or is not sufficiently significant in relation to the company.

SEC Staff Legal Bulletin

Available at: https://www.sec.gov/corpfin/staff-legal-bulletin-14j-shareholder-proposals#