SHARE

August 09, 2022

SEC Proposes Revisions to Shareholder Proposal Rules

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all Law.com OnPractice content.
Register Now

Key Takeaways

  • Require companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain requirements.

Summary

The Securities and Exchange Commission (SEC) last month proposed revisions to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (Exchange Act), which require companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain requirements.

The Upshot

  • If the amendments are adopted, it will become even more difficult for companies to exclude shareholder proposals.
  • The proposed amendments generally appear aimed at promoting clarity for the use of the exclusions and narrowing the scope of the exclusions.

The Bottom Line

With the increase in the number of shareholder proposals in the past two or three years, especially relating to Environmental, Social, and Governance (ESG) matters, companies will find it increasingly difficult to exclude proposals under Rule 14a-8.

The Securities and Exchange Commission (SEC) last month proposed revisions to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (Exchange Act), which require companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain requirements. The proposed amendments, if adopted, would revise three of the substantive bases for exclusion of shareholder proposals under Rule 14a-8: (a) the "substantial implementation" exclusion in Rule 14a-8(i)(10); (b) the "duplication" exclusion in Rule 14a-8(i)(11); and (c) the "resubmission" exclusion in Rule 14a-8(i)(12). The proposed amendments generally appear aimed at promoting clarity for the use of the exclusions and narrowing the scope of the exclusions.

Substantial Implementation. The substantial implementation exclusion in Rule 14a-8(i)(10) allows companies to exclude a shareholder proposal that has been "substantially implemented." The amended rule would permit a company to exclude a proposal if the company has already implemented the "essential elements of the proposal." The SEC's rationale for this change is to provide a clearer standard for exclusion, and to provide more predictability in determining the exclusion of proposals. A company would only be allowed to exclude a proposal under this rule if all of its essential elements have been implemented, representing a narrowing of the existing substantial implementation standard.

Duplication. The duplication exclusion in Rule 14a-8(i)(11) permits companies to exclude a shareholder proposal that "substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting." The amended rule specifies that a proposal is substantially duplicative if it "addresses the same subject matter and seeks the same objective by the same means." The SEC notes that the proposed change would allow shareholders to more accurately consider proposals received by the company that address the same subject matter as an earlier proposal, but which seek different objectives of addressing the same matter. The change in standard would make excluding proposals increasingly difficult for companies because a proposal must now seek the same "objective" to be excludable, a more stringent standard.

Resubmission. The resubmission exclusion in Rule 14a-8(i)(12) provides companies the power to exclude a shareholder proposal that "addresses substantially the same subject matter as a proposal, or proposals, previously included in the company's proxy materials within the preceding five calendar years," if the issue was voted on at least once in the last three years and received support below specified thresholds, last amended in 2020. The amended rule would change "substantially the same subject matter" to "substantially duplicates," in order to harmonize the amendment with the proposed changes to Rule 14a-8(i)(11). Additionally, a proposal would "substantially duplicate" another proposal if it "addresses the same subject matter and seeks the same objective by the same means." The SEC believes its proposed changes would allow shareholders greater flexibility to adjust their proposals to build support, and allow other shareholders to offer additional proposals addressing the same issue.

The key takeaway from the proposal: the proposed amendments would make it more difficult for companies to exclude shareholder proposals. This is probably most applicable to the "substantial implementation" exclusion, which has frequently been utilized by companies to exclude proposals. With the increase in the number of shareholder proposals in the past two or three years, especially around proposals relating to Environmental, Social, and Governance (ESG) matters, companies will find it increasingly difficult to exclude proposals under Rule 14a-8.

The proposed rules are subject to a comment period of 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

From startup financing to public offerings, Ballard Spahr's Securities and Capital Markets Group advises private and public companies through all stages of development and capital-raising activities. We also help clients comply with public reporting, proxy, and disclosure obligations. Please contact us for more information.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Ballard Spahr

New York Restricts Automated Decision Making in Employment

By Timothy Dickens Ballard Spahr August 29 , 2022

Businesses operating in New York City should be aware of a local law addressing the use of automated employment screening and decision-making tools coming into effect on January 1, 2023.

Status Update: Federal Contractor Vaccine Mandate Injunction Narrowed

By Lila A. Sevener Ballard Spahr August 29 , 2022

On August 26, 2022, the United States Court of Appeals for the Eleventh Circuit narrowed the nationwide injunction of Executive Order 14042, which requires federal contractors and employees who work on or in connection with a covered federal contract, or share a workplace with another employee who works on or in connection with such contracts, to be fully vaccinated against COVID-19.

Unions Cannot Force OSHA to Issue Permanent COVID Standard

By Shannon D. Farmer Ballard Spahr August 26 , 2022

On August 26, 2022, the U.S. Court of Appeals for the District of Columbia Circuit turned back efforts by a group of unions seeking to force the Occupational Safety and Health Administration (OSHA) to quickly issue a permanent rule establishing protections for healthcare workers from COVID-19.

More From Corporate Governance

CSRD Update: Corporate Sustainability Reporting Directive (CSRD) adopted

By Dr. Philipp Grenzebach McDermott Will & Emery November 30 , 2022

In November 2022, the Corporate Sustainability Reporting Directive (CSRD) was adopted by the EU Parliament (Parliament) and approved by the European Council (EC).

FINRA Targeting Crypto Asset Retail Communications

By William B. Mack Greenberg Traurig November 22 , 2022

The Financial Industry Regulatory Authority (FINRA) in November 2022 released a targeted exam letter pertaining to communications for crypto products and services.

Takeaways From SEC v. LBRY, Inc. On What Constitutes A "Security"

By Chih-Hsun (Tim) Lin Ingram Yuzek Gainen Carroll & Bertolotti November 21 , 2022

It has been a long and heated debate as to whether NFTs and certain cryptocurrencies can be deemed as securities under applicable laws and precedents.

Featured Stories
Closeclose
Search
Menu

Working...