By: Shagun Parekh

Summary

This article addresses the recent announcement by the Securities and Exchange Commission (SEC) to modify Exchange Act Rule 14a-8 which is also known as the “shareholder proposal rule.” This is a part of the commission’s ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights.

History and Impact

Rule 14a-8 allows shareholders to have their proposals included in the company’s proxy statement and to be considered and voted on by shareholders with little cost to the shareholder proponent.  This is a significant benefit for the shareholder proponent; without this accommodation, that shareholder would need to conduct a separate proxy solicitation in compliance with the federal proxy rules that would be costly for the proponent.  The rule was intended to facilitate meaningful engagement between companies and proposing shareholders, for the benefit of all shareholders.

What really changes?

Per the SEC, these proposed amendments will work to facilitate constructive engagement of long-term shareholders in a manner that will benefit all shareholders and public capital markets. These proposed shareholder amendments aim to update the requirements, like ownership eligibility, which the shareholder will be required to satisfy to be able to require a company to include a proposal in its proxy statement. Some noteworthy changes are mentioned below:

Minimum Ownership: With the proposed changes, the Commission has maintained the long-standing $2,000 minimum ownership threshold. However, it is now required that, in order to take advantage of that ownership threshold, a proponent must have held the shares for at least three years in order to demonstrate long-term investment in the company.

One Proposal Rule: With the proposed changes, the “one proposal” rule is also set to change since now the amended version seeks to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting on behalf of different shareholders.

Failed Proposal Rule: With the proposed changes, shareholders seeking to resubmit failed proposals will have new thresholds where to resubmit a proposal within the first five years of failing, there will be a requirement of 5% of shareholders voting in its favor. Initially, this number was capped at 3%. The road only gets tougher as the second submission would require a 15% support and a third a whooping 25%. Additionally, there is also a “time out” cap – where if after 3 attempts, your proposal cannot gather a 75% support then the proposal will take a “time out.”

Stay Updated

We will continue to monitor the changes as the public comment period will remain open for 60 days following publication of the proposed rule release in the Federal Register. For more information and/or to subscribe to our newsletter, please email us at info@chugh.com or schedule a consultation with our team. We also encourage you to share our alerts with your contacts who might benefit.