On November 5, 2019, the Securities and Exchange Commission voted to propose certain amendments to its proxy rules. One of the proposed changes seeks to “modernize the criteria for use of the shareholder-proposal process through the company’s proxy statement.” Another proposed change relates to proxy advisory services such as ISS and Glass, Lewis & Co. and is “intended to help ensure that proxy voting advice used by investors and others who vote on investors’ behalf is accurate, transparent, and materially complete.” These proposed changes are summarized below.
Exchange Act Rule 14a-8 Requirements and Resubmission Thresholds
The proposed amendments eliminate the current percentage threshold which is, a person must hold 1% or $2,000 worth of a company’s securities for a minimum of one year to submit a shareholder proposal. The new rule would instead have a shareholder satisfy at least one of three alternative minimum dollar amount thresholds, each with their own minimum holding period. The new thresholds and corresponding minimum holding periods put forth are:
• A minimum investment of $2,000 of an issuer’s securities for at least three years
• A minimum of $15,000 for at least two years
• A minimum of $25,000 for at least one year
Additionally, stockholders would be required to make themselves available, either in person or by teleconference, to the company between 10 and 30 calendar days after submission of a shareholder proposal. Specific dates and times would need to be provided to the company, as well as contact information in order to discuss the proposal.
If a stockholder wishes to use a representative to submit a proposal, documentation would be needed to state that the representative has authorization to act on the proponent’s behalf.
The one-proposal limit has been in place for decades. The proposed amendment would clarify language to say that that each “person” may submit only one proposal rather than each “shareholder.”
Under the new policy shareholder proposal resubmission thresholds would be increased considerably. The new proposed rule change increases these thresholds to 5%, 15% and 25%; compared to the current policy, which states that a shareholder proposal is eligible for resubmission if, within the previous 5 years, it received support from 3% or more of the shares voted on the proposal in its first submission. This threshold jumps to 6% on the second attempt and 10% on the third attempt.
The proposed new provision would also allow for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal (i) received less than 50 percent of the votes cast and (ii) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.
Proposed rule amendments for proxy voting advice
Federal proxy rules state that a person or entity engaging in a “solicitation” must comply with filing and informational requirements in order to ensure that investors have complete and accurate information. The SEC considers the furnishing of proxy voting advice to be a “solicitation” that is subject to filing requirements under the proxy rules. To avoid having to comply with these requirements, proxy advisory services like ISS and Glass Lewis rely on exemptions under Rule 14a-2(b) of the Exchange Act. The SEC has proposed adding certain conditions to this practice to improve accuracy and transparency.
The SEC proposes to amend this rule to “specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.” It will also alter language to amend the rule to “voting advice provided in response to an unprompted request would not constitute a solicitation.”
Rule 14a-2(b)(1) and 14a-2(b)(3)
In order to rely on the exemptions under these rules, a proxy advisor needs to meet the following conditions:
• Provide enhanced disclosure around conflicts of interest (specific language)
• Give issuers an opportunity to review and provide feedback on proxy voting advice before it is released
• Give issuers the option to request that the proxy advisor include a hyperlink of the voting advice in addition to the writtenadvice, to be used instead or in addition to the filing of added definitive proxy materials
In order for the issuer to take advantage of the proposed review/feedback opportunity, they must file definitive proxy materials at least 25 calendar days prior to the meeting date. This review period is dependent upon how far in advance of the meeting date the definitive materials are filed. If materials are filed less than 45 but at least 25 calendar days prior to the meeting, the review window would be a minimum of three business days. If materials are filed 45 calendar days before the meeting, the review window would be a minimum of five business days.
The current rule prohibits false or misleading statements in proxy material, including:
• Predictions of future market values
• Material which directly or indirectly makes attacks on personal character or directly or indirectly makes changes concerning improper, illegal or immoral conduct or associations without factual foundation;
• Failure to identify a proxy statement, form of proxy and other soliciting material as to clearly distinguish it from the soliciting material of any other person or persons soliciting for the same meeting or subject matter and;
• Claims made prior to a meeting regarding the results of a solicitation
The SEC is proposing to amend the list to add potential disclosure requirements for proxy advisory firms including the firm’s methodology, sources of information and conflicts of interest. The proposed amendments also seek to clarify different criteria used by the proxy advisory firms and the SEC. For example, advisory firm against recommendations due to disclosure that may be considered inadequate by advisory firms’ standards but sufficient to meet the Commission’s criteria.
The changes being proposed are issuer friendly. The vote to propose the changes was 3-2, with the two opposing votes believing that the proposals stack the odds against shareholders and favor the playing field towards corporations. The proposed rules for shareholder proposals will potentially make it harder for shareholder proponents to submit a proposal because some proponents are now no longer eligible under these new guidelines; whether they are not long-term holders or don’t hold enough stock to qualify under the proposed thresholds. In addition, the proposed resubmission guidelines will make it more difficult for proposals to be resubmitted.
The proposed changes to the proxy advisor rules pertaining to additional disclosure by the advisors should allow more transparency for issuers. In addition, issuers would be able to review the advisory service recommendation report and would be able to have a link to the company’s thoughts about the advisory firm’s conclusions within the advisor’s reports. The SEC’s proposed changes are subject to a 60-day comment period. To view the proposed amendments and submit comments, go directly to the SEC website, below.