A divided U.S. Securities and Exchange Commission (SEC) voted today to adopt amendments to its shareholder proposal rules, which govern the process for a shareholder to have proposals included in a company’s proxy statement for consideration by all the company’s shareholders.
Under the amended rules, a shareholder may submit an initial proposal after having held $2,000 of company stock for at least three years, or higher amounts for shorter periods of time. Specifically, to put forward a proposal before this three-year period, an individual or entity must hold $15,000 of the company’s securities for at least two years, or $25,000 of the company’s securities for at least one year.
Critics of the rule amendments say the new framework will make it significantly harder for smaller shareholders to put forward proposals. Notably, the rule amendments provide for a transition period so shareholders who are currently eligible at the $2,000 threshold will remain eligible to submit a proposal for inclusion in the company’s proxy statement “so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting).”
“Today’s amendments reflect many years of the staff’s engagement with investors and market participants, as well as their extensive experience with shareholder proposals,” SEC Chairman Jay Clayton said after the vote. “These amendments ensure there is an appropriate alignment of interests between shareholder-proponents and their fellow shareholders and illustrate again why retrospective review and, as appropriate, modernization of our rules is necessary.”
Clayton said that, in updating the initial submission criteria, the amendments help ensure a shareholder’s ability to have a proposal included in a company’s proxy materials—and thus to draw on company resources and to command the time and attention of the company and other shareholders—appropriately takes into consideration the interests of not only the shareholder who submits a proposal, but also the other shareholders who bear the costs associated with reviewing, considering and voting on such proposals in the company’s proxy statement.
An SEC fact sheet published after the vote details other key aspects of the rule amendments. For example, the new rules prohibit the aggregation of holdings for purposes of satisfying the amended ownership thresholds. They also require that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation “to make clear that the representative is authorized to act on the shareholder’s behalf and to provide a meaningful degree of assurance as to the shareholder’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement.”
Another rule change applies the “one-proposal rule” to “each person,” rather than “each shareholder” who submits a proposal. This means that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, the representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative submitted each proposal on behalf of different shareholders.
The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.
PLANADVISER received a sizable batch of negative comments about the rule changes immediately after the vote, including from within the SEC itself. Commissioner Allison Herren Lee noted that the new rules “will not serve markets well. … This will restrict shareholder rights.” She said the new rules will mostly impact small investors, suggesting that “retail investors will be greatly disenfranchised.”
“Under the new rules, the rights of smaller investors is valued at zero,” Herren Lee said.
Commissioner Caroline Crenshaw said shareholder resolutions are “a proven and effective pathway to suggesting changes to management.”
“Today, we have shut this down,” she lamented. “Shareholder resolutions drive positive financial performance. … The implication is that the wealthy are more likely to possess ideas that will impact a corporation.”
“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andrew Behar, CEO of the consumer advocacy group As You Sow. “Companies have gained deep insight into potential material risks to their businesses courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will force shareholders to escalate to litigation and other means.”
“The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility (ICCR). “The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary.”
Positive comments did come in from some parties, including the Institute for Pension Fund Integrity (IPFI), which said it “commends the SEC for taking action to build greater constructive engagement between shareholders and the companies that they have invested in, ensuring better functioning capital markets that prioritize long-term financial stability while at the same time reducing misuse of the shareholder proposal process.
“Under these updated regulations, we believe that there is less likelihood of special interests sidetracking the agenda of public companies with little regard to broader shareholder interests and investment returns,” reads a statement sent by the IPFI. “By facilitating better communications between shareholders and companies, investors will be able to make more informed decisions and the influence of outside proxy advisory firms, which have not been shown to act in the best fiduciary interest of their clients, will be curbed.”