On September 23, 2020, the Commissioners of the U.S. Securities and Exchange Commission voted 3-2 to “modernize” the shareholder proposal rule, the process by which shareholders can seek to have proposals included in a Company’s annual proxy statement.
The new amendments greatly increase the ownership requirements for bringing a shareholder proposal. Currently, any shareholder holding $2,000 of stock for a year may submit a shareholder proposal. The amended rule increases that amount to $25,000. This amended threshold then decreases the longer the shareholder holds the stock, falling to $15,000 after 2 years, and $2,000 after 3 years of ownership. The amendment also raises the percentage of votes that proposals must receive to be resubmitted and prevents shareholder from banding together to meet the minimum thresholds. Finally, the amended rule adds filing requirements and disclosure obligations for shareholders electing to use a representative for the purpose of submitting a shareholder proposal.
Proponents of the amended rule argue that the change will save corporations thousands of dollars in costs incurred in analyzing and contesting shareholder proposals. Outgoing SEC Chair, Jay Clayton commented: “It’s all about having a credible demonstration that the proponent’s interests are aligned with all of the others’ interests from an investment or ownership standpoint. Our approach to this has been content-neutral.”
Critics, however, view the amended rule as designed to stifle shareholder democracy and to curtail the growing trends of shareholder proposals focused on environmental, social and governance (ESG) issues. Democratic Commissioners Allison Herren Lee and Caroline Crenshaw voted against the rule, saying it will make the vast majority of small investors ineligible to submit proposals. “The final rules represent the capstone in a series of policies that will dial back shareholder oversight of management at the companies they own,” Ms. Lee said.
During the comment period, most letters submitted were from shareholders opposed to the change. For example, Los Angeles City Employees’ Retirement System voiced its strong opposition to the suggested changes, commenting: “Both of the proposed amendments effectively weaken shareholders’ ability to promote ethical governance practices at publicly traded companies and stifle the process of value creation for shareholders. The SEC must maintain a system that provides fair access to all shareholders to voice their opinions and to act on proxy recommendations in an independent and timely manner.”
The impact of the change for large institutional investors may be slight. However, smaller funds and retail investors could lose their voice. The Wall Street Journal reported that a “preliminary analysis of outside data by SEC economists found the new rule would preclude shareholder proposals from between half and three-fourths of individual-investor accounts in S&P 500 companies that previously qualified.”
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. In addition, the final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.