Changes to shareholder proposal eligibility rules: What companies can expect from the new rules

Going into the 2022 annual meeting season, shareholder proposal eligibility criteria under Rule 14a-8 is going to change.[1] On September 23, 2020, the SEC released final rules amending Rule 14a-8 – the culmination of a multi-year process to modernize the rule, which governed unchanged for more than two decades. The SEC initially proposed amendments in November 2019 and the recently released final rules are substantially similar to the 2019 proposal. A recap of the key points is below. 

Ownership requirements

Under the current rule, to submit a proposal a shareholder must have held at least $2,000 or 1% of the company’s stock for at least a year. The SEC in both the proposing release and the final rule release emphasized that a shareholder making a proposal must have a “meaningful economic stake or investment interest”[2] in the company, and the new rules will determine satisfaction of that test through a new sliding scale taking into account the length of ownership and correlating it inversely to the required equity stake: 

Acting as a group or on behalf of a shareholder

The new rules will affect eligibility requirements when shareholders act together or on behalf of other shareholders. 

Aggregation:  The final rules continue to permit multiple shareholders to co-file proposals, so long as each shareholder independently satisfies one of the thresholds contained in the new eligibility test. There is no requirement that all co-filers meet the same eligibility threshold.  Shareholders will not be permitted to aggregate their holdings to collectively meet a threshold. The rules also do not require a lead filer be designated for a co-filed proposal, although the SEC notes that designating a lead filer is a “best practice.”[3]

One person requirement:  Rule 14a-8 has long provided that a shareholder may submit only one proposal at a given company.  The amendments clarify that the one-proposal rule will apply to “persons” rather than “shareholders,” officially closing the door on the ability to submit one proposal and act as a representative for another, or act as a representative for more than one proposal (even if on behalf of different shareholders). The final rules further clarify that entities count as a “person” for the purpose of the rule, which includes employees. This will not, however, prohibit entities from working on multiple proposals to be submitted to a single company, so long as the entity is not listed as a representative on more than one proposal.

Information requirements 

Proponents will be required under the new rules to provide additional information when submitting proposals, including their availability between 10 and 30 calendar days after submitting the proposal. The availability windows must be within a company’s business hours (or assumed default business hours provided for in the final release).

In addition, shareholder proponents that use representatives will be required to submit documentation to the company that provides “a meaningful degree of assurance as to the shareholder proponent’s identity, role and interest”[4] in the proposal.

Resubmission thresholds

The SEC evaluated the correlation between proposals that receive low votes and the likelihood of eventual majority support in future years, with the goal of revising the resubmission thresholds for shareholder proposals in a way that would decrease the cost and burden on companies from putting proposals receiving low levels of support to a vote at successive meetings. After reviewing historical support for proposals and applying the proposed revised thresholds on a retroactive basis to determine at what threshold a rejected proposal was more likely later to obtain a majority vote, the SEC increased the minimum support threshold for proposals to be eligible for resubmission in subsequent years as set forth below. There will be a three-year cooling off period for proposals that fail to meet a resubmission threshold. 

Timeline for application

Amended Rule 14a-8 will apply to all proposals submitted for annual meetings occurring in the 2022 calendar year. However, there is a phase-in period that will permit shareholders that have continuously held $2,000 of a company’s securities for at least one year as of the effective date of the new rule to be eligible to submit proposals until proposals are due for annual meetings in 2023.

What companies can expect

The status quo, or an increase in attention?

The 14a-8 amendments may appear on their face to mark a dramatic change, and they may result in a reduction in the overall number of shareholder proposals, at least in the short term. However, some companies – particularly those with a relatively stable shareholder base – may not notice a difference in the number of proposals received, or perhaps even face a slight increase as proponents opt to focus their energy on the companies in which they have long-term holdings and wait to submit shareholder proposals for new investments until they meet the lengthiest, lowest-dollar threshold.  

Some institutional investors are simply unlikely to be affected by the $25,000 minimum requirement for a one-year holding period. There are plenty of investors with significant investing power that typically results in initial investments exceeding that (highest) threshold, and some have become more prominent and frequent proponents in recent years. The ability of some of these shareholder proponents to use the shareholder proposal process to drive shareholder engagement and coordinate proposals among dozens of companies resulting in relatively rapid changes in the governance landscape is likely to at least remain the same.

Lastly, companies may face some additional pressure to engage with proponents as a result of the new requirement for proponents to include windows of availability 10 to 30 days after submission of the proposal for potential engagement. While companies are not required to engage proponents during this period, the SEC hinted that engagement may obviate the need for a no-action request, a process it seems to be increasingly reluctant to engage in (see below). It is possible that the SEC begins to ask companies if they have engaged as part of its no-action request deliberation process. And importantly, companies should not expect that lack of engagement will remain a secret and they will need to consider market perceptions about decisions to engage or not. 

Increased coordination among proponents

The final rule release emphasizes that none of the amendments to Rule 14a-8 are designed to curtail engagement or coordination among potential proponents. With the new limits more likely to affect the ability of less well-capitalized proponents to invest in new companies and then make proposals on a short-term basis, proponents will be further incentivized to engage and coordinate among shareholders. It is already common for single-focus coalitions to be co-signed by many proponents, and that level of coordination can only be expected to increase. And as the one-person per proposal per company requirement begins, we expect to see new repeat players across companies emerge.  

Increased focus on other forms of communication                                           

Engagement and communication among companies and their stakeholders is at an all-time high, as are the forms of engagement and communication available to shareholders (perhaps with the exception as of the date of this post of in-person communications). The SEC in the final rule release acknowledges the availability of “alternative channels” of engagement and the frequent higher degree of productivity from one-on-one engagement with management than engagement through the shareholder proposal process. Companies are also likely to feel pressure to increase engagement through other formats if it does become more difficult for shareholders to submit proposals. Companies that do not meet stakeholder expectations should assume that stakeholders will be vocal about those unmet expectations. 

Companies should also expect an increase in the volume of inbound communications from shareholders.  These too are likely to come in various forms. For instance, the recent popularity of shareholders submitting voluntary notices of exempt solicitation is likely to increase as shareholders must wait longer to submit shareholder proposals at certain companies.

Potential implications for newly public companies

The revised thresholds are likely to serve as a partial insulating mechanism for newly public companies, who will not be subject to receipt of a shareholder proposal from a shareholder holding $14,999.99 or less for three years. While a number of newly public companies are controlled companies in their early years, they nonetheless remain subject to shareholder proposals and their related reputational impact, even if the proposals would not receive majority support due to the company’s ownership structure. Shareholders that wish to make early proposals at newly public companies will have to commit to slightly larger investments, which of course at smaller companies in particular could come with potentially more limited liquidity. 

Staring into a crystal ball on the shareholder proposal process

While the SEC has now ushered in a new era of Rule 14a-8, it was the result of a multi-year process that received significant criticism and commentary from those on both sides of the debate about the perceived sufficiency of the degree of change. At the same time that the SEC was reviewing the 14a-8 rules, it also made significant changes to the no-action letter process, including the adoption of informal answers to requests for no-action relief, and an articulated view about the ability of the SEC staff to decline to state a view. 

In the process of soliciting comments on the proposed rules relating to 14a-8, the SEC also requested comments on the 14a-8 process in general and the SEC staff’s role. In response to concerns about consistency and transparency, the SEC reiterated in the final rule release that prior SEC positions in answers to requests for no-action relief should not be considered precedential. The SEC also noted that while it declined to make changes in this round of rulemaking, comments received on this topic would be considered in connection with future rulemaking and, importantly, future informal modifications to the no-action process, like the guidance it published in the fall of 2019. 

It remains to be seen how the SEC will continue to approach its role in adjudicating the relationships between companies and their shareholders. 

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[1] The new rules go into effect 60 days after publication in the Federal Register, which has not yet occurred.

[2] SEC Release No. 34-89964; File No. S7-23-19

[3] SEC Release No. 34-89964; File No. S7-23-19

[4] SEC Release No. 34-89964; File No. S7-23-19