SEC Proposes Amendments To Shareholder Proposal Rule – Shareholders

On July 13, 2022, the SEC proposed
amendments to Rule 14a‑8, the shareholder proposal
rule, to modify three of the bases for excluding shareholder
proposals from a company’s proxy materials. SEC Chair Gary
Gensler stated, “I believe these proposed amendments would
provide a clearer framework for the application of this rule, which
market participants have sought. They also would help shareholders
exercise their rights to submit proposals for consideration by
their fellow shareholders.”

PROPOSED MODIFICATIONS TO EXCLUSIONS

The substantial implementation, duplication, and resubmission
exclusions account for a significant percentage of the no-action
requests that the SEC receives under Rule 14a‑8. The SEC
believes that the proposed amendments would provide a more
objective and specific framework for these exclusions, assist the
SEC staff in more efficiently reviewing and responding to no-action
requests, and benefit shareholders and companies by promoting more
consistent and predictable determinations. By providing greater
certainty and transparency, the SEC believes that the proposed
amendments would aid shareholders in drafting their proposals and
companies in determining whether a proposal may be excluded.

Substantial Implementation

Rule 14a-8(i)(10) allows companies to exclude a shareholder
proposal that the company has already substantially implemented.
The proposed amendment would specify that a proposal may be
excluded as substantially implemented if the company has already
implemented the “essential elements” of the
proposal.

The SEC believes that an analysis that focuses on the specific
elements of a proposal would provide a reliable indication of
whether the actions taken to implement a proposal are sufficiently
responsive to the proposal such that it has been substantially
implemented. In determining the essential elements of a proposal,
the SEC anticipates that the degree of specificity of the proposal
and of its stated primary objectives would guide the analysis. The
SEC expects that the more objectives, elements, or features a
proponent identifies, the less essential the SEC staff would view
each of them to be. The proposed amendment would permit a
shareholder proposal to be excluded as substantially implemented
only if the company has implemented all of its essential elements.
A company would be permitted to exclude a proposal that it has not
implemented precisely as requested if the differences between the
proposal and the company’s actions are not essential to the
proposal.

Duplication

Rule 14a-8(i)(11) 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 shareholder meeting. The proposed amendment would specify
that a proposal “substantially duplicates” another
proposal if it addresses the same subject matter and seeks the same
objective by the same means.

The SEC believes that the proposed amendment would promote more
consistent outcomes when comparing a given proposal against other
proposals submitted for the same shareholder meeting for purposes
of the duplication exclusion. The proposed amendment would reduce
incentives for proponents to submit a proposal quickly in order to
gain the perceived advantage of being the first to submit a
proposal, reduce incentives for proponents to attempt to preempt
other proposals that those proponents do not agree with, and
facilitate the consideration at the same shareholder meeting of
multiple proposals that present different means to address a
particular issue. The new standard would enable shareholders to
consider later-received proposals that may be similar to and/or
address the same subject matter as an earlier-submitted proposal
but seek different objectives or present different means of
addressing the same matter.

Resubmission

Rule 14a-8(i)(12) 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 at least (i) 5% of the votes
cast if voted on once, (ii) 15% of the votes if voted on
twice, or (iii) 25% of the votes if voted on three or more
times. The proposed amendment would provide that a resubmission is
a shareholder proposal that “substantially duplicates”
a proposal previously included in the company’s proxy
materials, replacing the current “substantially the same
subject matter” test. The “substantially
duplicates” standard for this exclusion would be the same as
the standard in Rule 14a‑8(i)(11) described above. This
would align the resubmission exclusion with the duplication
exclusion, given the similar objectives of these two
exclusions.

The SEC believes that the proposed amendment would allow
proponents to make adjustments to their proposals in subsequent
years to build broader shareholder support and allow other
shareholders to present different approaches to addressing the same
issue. As with the proposed amendment to the duplication exclusion,
the SEC believes that the proposed amendment would promote more
consistent outcomes when comparing a given proposal against
proposals considered at prior shareholder meetings for purposes of
the resubmission exclusion.

REAFFIRMATION OF ORDINARY BUSINESS EXCLUSION

Rule 14a-8(i)(7) allows companies to exclude proposals that
relate to the company’s ordinary business operations.
Although the SEC did not propose to amend the ordinary business
exclusion, the proposing release reaffirms the standards the SEC
articulated in 1998 for determining whether a proposal relates to
ordinary business for purposes of the exclusion. In the 1998
adopting release, the SEC stated that the policy underlying the
ordinary business exclusion rests on two central considerations:
(i) the subject matter of the proposal; and (ii) the
degree to which the proposal seeks to “micro-manage”
the company. The SEC believes that proposals relating to ordinary
business matters but focusing on sufficiently significant social
policy issues generally would not be excludable, because such
proposals transcend day-to-day business matters and raise policy
issues so significant that they would be appropriate for a
shareholder vote. The SEC further believes that a proposal would be
considered to seek to micro-manage the company if it probes too
deeply into matters of a complex nature upon which shareholders, as
a group, would not be in a position to make an informed judgment.
The SEC noted that specific methods, time frames, or details do not
necessarily amount to micro-management and are not dispositive of
excludability.

Comments on the proposed amendments are due 30 days after
publication in the Federal Register or September 12, 2022,
whichever is later, and can be submitted either electronically or
on paper. All submissions should refer to File
Number S7‑20‑22.

Sangil Min, a law clerk in Winston’s London office,
assited with this briefing. 

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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