Getting Serious on Shareholder Proposals at Annual Meetings

On September 23, 2020 the SEC adopted amendments to Exchange Act Rule 14a-8.  This was to counter what the SEC considered a too simple way for entities (often individuals with limited funds but a lot of time on their hands) to get “shareholder proposals” placed on companies’ annual meeting ballots – in many cases year-after-year.  Effective January 1, 2022 such proponents must show a more sizable and long-term investment in the company to have such proposals included in the proxy statement and on the proxy card, and also achieve higher approval percentages in subsequent years to keep them there.

Specifically, whereas before a shareholder simply had to own $2,000 of the company’s stock or 1% of the value of votable securities for a one-year period to have his/her proposal voted on, now he/she will have to own $2,000 for three years, $15,000 for two years or $25,000 for one year.  And, just as important, it will no longer be possible for shareholders to pool their holdings and “co-file” a proposal, i.e., the proponent will have to satisfy the ownership criteria as one independent entity/person.  Regarding permissibility to resubmit these proposals in subsequent years if they fail to pass, whereas before it only took 3%, 6% and 10% approval levels in years one, two and three respectively, now it will require 5%, 15% and 25% respectively.

This was a big win for corporations wanting to see a reduction in what they consider frivolous shareholder proposals.  Not surprisingly, though, various shareholder rights groups are challenging these rule amendments as “anti-investor advocacy,” and hope they can get them rescinded under the SEC’s new Biden-era leadership.  Most shareholder proposals these days are ESG-related, but many still call for Chair and CEO roles separation, anti-staggered boards and the like.

Our take, having seen many annual meetings up close and personal as Inspector of Elections over the past 15 years, is the new rules are valid.  They do not take away the right of advocates to submit shareholder proposals.  They simply ensure that proponents are serious investors with the interests of the company and other shareholders squarely in mind, and that, if such proposals are not passing to a reasonable degree over a reasonable period of time, they die an appropriate death.