SEC Proposes Further Limitations on Proxy Statement Exclusion of Shareholder Proposals

On July 13, 2022, the U.S. Securities and Exchange Commission (the “SEC”) proposed amendments to Rule 14a-8, which specifies the conditions under which companies can exclude shareholder proposals from the company’s proxy materials for shareholder meetings even if the shareholder has satisfied the procedural conditions of Rule 14a-8. The proposed amendments are the latest in a series of regulatory actions taken by the SEC that limit the ability of companies to exclude shareholder proposals from proxy statements. At the same meeting, the SEC adopted final amendments to its rules governing proxy voting advice and rescinded a related interpretive position on the voting responsibilities of investment advisers, which are described in a separate Goodwin alert.

If the SEC adopts the Rule 14a-8 shareholder proposal amendments, these amendments would be the third change in the SEC’s regulatory framework for proxy solicitations since Gary Gensler became chair of the SEC in April 2021. The adoption of the Rule 14a-8 amendments and the proxy voting advice amendments, combined with publication in November 2021 of Staff Legal Bulletin No. 14L, which reversed several earlier interpretive positions on exclusion of shareholder proposals, is likely to make it easier for shareholders to use Rule 14a-8 to compel companies to include shareholder proposals in proxy statements. This is especially likely for proposals involving environmental, social and governance (“ESG”) matters such as climate change, human capital management and corporate board diversity.

The SEC has not taken action with respect to the Rule 14a-8 amendments adopted in September 2020 that modified ownership requirements, resubmission thresholds and other procedural matters affecting the shareholder proposal process under Rule 14a-8.

Applicability and Public Comment Period

The proposed 14a-8 amendments would apply to all domestic operating companies if adopted as proposed. Foreign private issuers are not subject to SEC proxy rules and would not be required to comply with the proposed amendments. The proposed Rule 14a-8 shareholder proposal amendments are subject to public comment for a period that will end on the later of (1) 60 days following publication of the proposed amendments on the SEC’s website on July 13, 2022 or (2) 30 days following publication of the proposed amendments in the Federal Register.

The Proposed Rule 14a-8 Shareholder Proposal Amendments

The SEC has stated that the proposed amendments to Rule 14a-8 are intended to “improve the shareholder proposal process” and to facilitate communication between companies and shareholders on “important issues.”  The SEC also intends that the proposed amendments will promote greater consistency in the application of Rule 14a-8 to shareholder proposals when the staff of the SEC’s Division of Corporation Finance (the “staff”) reviews requests for no-action relief by companies seeking to exclude shareholder proposals from their proxy statements.

The proposed amendments would revise three of the current bases for exclusion of shareholder proposals from a company’s proxy statement: substantial implementation, duplication, and resubmission. If adopted as proposed, these amendments would narrow the scope of these exclusions, resulting in a potentially significant increase in the number of shareholder proposals included in companies’ proxy statements under Rule 14a-8.

Another potential result might be that fewer companies would seek no-action relief from the staff before excluding a shareholder proposal from the company’s proxy materials. Currently, most companies that wish to exclude a shareholder proposal seek confirmation from the staff that the staff would not recommend enforcement action under SEC proxy rules if the company excludes a shareholder proposal, but SEC rules do not require companies to obtain no-action relief before excluding a shareholder proposal. It is possible that companies might exclude at least some shareholder proposals without seeking no-action relief from the staff.

It is also possible that the proposed amendments would alter the balance of power between shareholders and companies to an extent that would reduce the willingness of shareholders to accept negotiated resolutions that they do not consider favorable. The overall shareholder proposal process under Rule 14a-8, from submission of a proposal to determination whether the proposal will be included or excluded, includes various deadlines and conditions that require significant amounts of time on the part of the shareholder, the company and the SEC staff. This has contributed to a growing number of shareholder proposals being withdrawn by the shareholder if negotiations are satisfactory to the shareholder — for example, an agreement by the company to adopt a policy or implement a process sought by the shareholder. The proposed amendments may result in fewer negotiated resolutions that involve withdrawal of shareholder proposals.

Substantial Implementation

Rule 14a-8(i)(10) currently allows companies to exclude a shareholder proposal that the company has already “substantially implemented.” The proposed amendments would permit companies to exclude a proposal as substantially implemented if “the company has already implemented the essential elements of the proposal.” The proposed amendments do not define “essential elements,” but refer to elements as the specific actions requested by a proposal.

The discussion in the proposing release states that the SEC intends to make application of the substantial implementation exclusion less subjective, but the discussion also suggests that the result may be that this exclusion would become significantly narrower, resulting in the exclusion of fewer shareholder proposals on this basis. Examples in the proposing release suggest that shareholders will find it significantly easier to avoid exclusion based on substantial implementation by making relatively insignificant or non-substantive changes in a proposal.

Duplication

Rule 14a-8(i)(11) currently allows 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 proposed amendments would amend Rule 14a-8(i)(11) to provide that a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.”  The duplication exclusion was intended to permit companies to exclude shareholder proposals that overlapped or duplicated another shareholder proposal that would be considered at the same meeting, in contrast to the substantial implementation exclusion, which was intended to permit companies to exclude shareholder proposals that were similar in substance to action previously taken by the company.

The proposed amendment is likely to prevent companies from excluding a shareholder proposal unless the proposal is a near-copy of another proposal already submitted for consideration at a particular meeting. This change may not only result in exclusion of fewer shareholder proposals but may also result in proxy statements including multiple shareholder proposals with subject matters, objectives and implementation means that are similar but not the same. This amendment may therefore result in proxy statements that include an array of shareholder proposals that are difficult to distinguish when shareholders vote and potentially wasteful, if implemented.

Resubmission

Rule 14a-8(i)(12) currently allows companies 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 matter was voted on at least once in the last three years and did not receive the required level of shareholder support. The proposed amendments would amend Rule 14a-8(i)(12) to provide that a proposal constitutes a resubmission if it “substantially duplicates” a prior proposal. 

Like the amendments to the duplication exclusion, the proposed amendments would provide that a proposal “substantially duplicates” another proposal only if it “addresses the same subject matter and seeks the same objective by the same means.”  This is likely to have the same effect as the amendments to the duplication exclusion, making it more difficult for companies to rely on the resubmission exclusion to exclude shareholder proposals that are similar but not identical to proposals that were submitted to shareholders for approval in prior years.

SEC Statement Regarding the Ordinary Business Exclusion

The proposing release includes the following statement about Rule 14a-8(i)(7), the ordinary business exclusion:

In addition, while we do not propose to amend Rule 14a-8(i)(7), the ordinary business exclusion, at this time, we reaffirm the standards the [SEC] articulated in 1998 for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7).

The proposing release cites the SEC’s 1998 adopting release “Amendments to Rules on Shareholder Proposals,” which reversed the staff’s position announced in the 1992 Cracker Barrel no-action letter concerning the approach of the Division of Corporation Finance to employment-related shareholder proposals that raise social policy issues, and set the standard for Rule 14a-8(i)(7), including the rule’s micromanagement prong.

The proposing release states that in the 1998 adopting release “[t]he [SEC] also clarified that specific methods, time-frames, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.” The proposing release does not indicate why the SEC chose to reaffirm its 1998 statements about the ordinary business exclusion at this time. In addition, no reason for this reaffirmation was given by SEC staff members in response to questions from Commissioner Peirce during the open meeting at which the SEC voted to propose the Rule 14a-8 amendments. 

However, the proposing release acknowledges that “[s]ome shareholders . . . have expressed concerns about the difficulty of ‘threading the needle’ when seeking to draft a proposal that does not ‘micro-manage’ the company under Rule 14a-8(i)(7), but still provides sufficient specificity and direction to avoid exclusion as ‘substantially implemented’ under Rule 14a-8(i)(10) when a company had not implemented its essential elements.”

If the proposed amendment to the ordinary business exclusion is adopted, shareholders will likely find it easier to thread the needle in drafting proposals that avoid exclusion under both the ordinary business exclusion, Rule 14a-8(i)(7), and the substantial implementation exclusion, Rule 14a-8(i)(10).