On July 13, 2022, the Securities and Exchange Commission (SEC) proposed rule changes that would make it harder for reporting companies to exclude shareholder proposals from their proxy statement by narrowing certain existing legal bases for excluding proposals. Specifically, the SEC is proposing amending Exchange Act Rule 14a-8, which addresses when a company must (i) include a shareholder’s proposal in its proxy statement and (ii) identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders. The shareholder proposal rule includes 13 substantive bases for a company to exclude a shareholder’s proposal.
Proposed Amendments Would Modify Three Bases
1. Substantial Implementation
Under the existing substantial implementation exclusion, a company may exclude a shareholder proposal if “the company has already substantially implemented the proposal.” The SEC’s proposed amendments would narrow this exclusion to provide that a shareholder proposal may only be excluded if “the company has already implemented the essential elements of the proposal.” If adopted, this amendment would require companies to consider whether all of the essential elements of a proposal have been implemented, rather than just, for example, whether a proposal’s underlying concerns have been addressed. The SEC believes that this amendment would “provide a more objective and specific framework” for interpreting the substantial implementation standard.
The duplication exclusion permits a company to exclude a shareholder proposal if the proposal “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.” Historically, the SEC has applied this standard by considering whether the proposals share the same “principal thrust” or “principal focus,” but the SEC’s proposed amendments would clarify that a proposal only “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.”
Currently, a company may exclude a shareholder proposal if the proposal 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 most recent vote occurred within the preceding three calendar years and the most recent vote was: (i) less than 5% of the votes cast if previously voted on once; (ii) less than 15% of the votes cast if previously voted on twice; or (iii) less than 25% of the votes cast if previously voted on three or more times. Under the proposed amendments, the current “substantially the same subject matter” test would be discarded, and the resubmission exclusion would be revised to align with the duplication exclusion, such that a shareholder proposal would constitute a resubmission if it “substantially duplicates” another proposal. As with the proposed update to the duplication exclusion, a shareholder proposal would substantially duplicate another proposal if it “addresses the same subject matter and seeks the same objective by the same means.”
SEC Continues to Promote Shareholder Access to Proxies
In its press release announcing the proposed amendments, the SEC suggested that these amendments would “promote more consistency and predictability in application.” Further, in the proposed amendments, the SEC posits that the changes:
“Would facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues … and would enhance the ability of shareholders to express diverse objectives and various ways to achieve those objectives through the shareholder proposal process.”
Stepping back, the proposed amendments are consistent with a broader trend by the SEC to promote shareholder access to proxies. Apple, for example, has recently been on the wrong side of the SEC’s initiative, with the SEC denying Apple’s attempts to exclude a shareholder proposal asking the company to report on its efforts to keep forced labor out of its supply chain and another shareholder proposal asking for information about the company’s use of non-disclosure agreements and other concealment clauses. The SEC stresses in its proposed amendments that “[s]hareholder proposals provide an important mechanism for investors to express their views, provide feedback to companies, exercise oversight of management and raise important issues for the consideration of their fellow shareholders in the company’s proxy statement.” The practical effect of these changes, however, may be longer proxy statements with more shareholder proposals, which may or may not be beneficial to the company and its shareholders. For example, Apple included six shareholder proposals in its most recent proxy statement, only one of which was narrowly approved, and this number could increase in the future if the proposed amendments are ultimately adopted.
The public comment period will remain open for 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.
KJK’s Corporate & Securities practice group will continue to monitor the status of these proposed rule changes. For further questions or concerns, please contact Christopher Hubbert (CJH@kjk.com; 216.736.7215).