The SEC’s September 2020 Reform on Investor Eligibility to Advance Shareholder Proposals

The SEC’s September 2020 Reform on Investor Eligibility to Advance Shareholder Proposals

July 21, 2021
The SEC’s September 2020 Reform on Investor Eligibility to
Advance Shareholder Proposals
At a publicly traded company’s annual or special meeting,
On June 15, 2021, a group of investors, led by the Interfaith
its shareholders typically vote to appoint board members
Center on Corporate Responsibility, filed suit against the
and adopt or reject various shareholder- and management-
SEC in the U.S. District Court in Washington, DC, asking
sponsored business proposals, which generally require
the court to vacate the shareholder reforms.
board adoption to be implemented. There were reportedly
858 shareholder proposals in 2020. The SEC recently
In addition, with President Biden the composition of SEC
adopted changes to the rules governing shareholder
commissioners has changed, and when the SEC released the
proposals; opponents of the changes have undertaken a
Spring 2021 Unified Agenda of Regulatory and
number of initiatives seeking to undo them.
Deregulatory Action, it included newly appointed SEC
Chair Gary Gensler’s “Reg Flex Agenda.” The agenda
Rule 14a-8 Rulemaking and Opposition
reflected the chairman’s interest in revisiting and possibly
In September 2020, the Securities and Exchange
attempting to reverse certain rulemakings finalized in the
Commission (SEC) commissioners voted 3-2 to amend
past two years under then-Chair Jay Clayton. The
Rule 14a-8. Principally, the reform would tighten the
September 2020 Rule 14a-8 reform is part of that agenda.
eligibility criteria needed for small investors in publicly
traded companies to submit proposals. (A corollary reform
Background
not covered here is to require higher earlier supporting vote
State-based business incorporation laws (such as those in
percentages for shareholders to be able to resubmit similar
the dominant business incorporation state of Delaware) give
proposals at future meetings, the first such change since
states substantial authority over companies that are
1954.)
incorporated within a given state. Under these laws
shareholders of publicly traded companies generally have
The rationale for the reform is that it is a needed
the right to vote their shares to elect directors, approve or
modernization of proposal protocols that would reduce the
reject a company’s generally binding management
number of frivolous proposals and their corporate costs and
proposals, and submit and vote on the generally non-
help to ensure that the interests of shareholders who submit
binding shareholder proposals.
and resubmit proposals are better aligned with those of
other shareholders. It is largely supported by business
Within the parameters of the state business incorporation
interests, including the National Association of
laws, under Rule 14a-8, the SEC oversees the types of
Manufacturers, the U.S. Chamber of Commerce (a national
information shareholder proposals contain and how that
business trade group), and the Business Roundtable (an
information is disseminated. After a shareholder submits a
association of public company chief executive officers).
proposal, the proposal faces three potential outcomes: (1)
the corporation may allow it to appear on the ballot for a
Opponents criticized the changes for curtailing shareholders
shareholder vote. (2) the proponent may withdraw the
opportunities to submit potentially corporate-enhancing
proposal after negotiation with the company, or (3) the
proposals. Among the reform’s critics were the SEC’s
company may omit the proposal from the ballot after
Office of the Investor Advocate, the Consumer Federation
receiving a no-action letter from the SEC. While the
of America, the Council of Institutional Investors (a large
majority of shareholder proposals are non-binding,
investor trade group), and the Interfaith Center on
proposals with the best chance of adoption by a firm’s
Corporate Responsibility (a faith-based investor coalition).
board of directors generally garner a majority of votes.
Opponents have undertaken s everal initiatives to vacate or
Public companies are largely owned by institutional
undo the changes to Rule 14a-8. S.J.Res. 16 (Senator
investors such as mutual funds and pension funds.
Sherrod Brown) and H.J.Res. 36 (Congressman Michael F.
However, small investors, including individuals and faith-
Q. San Nicolas) are joint resolutions under the
based groups (sometimes referred to as “gadflies”), have
Congressional Review Act (P.L. 104-121) that provide for
historically played disproportionately large roles as
congressional disapproval of the SEC adopted shareholder
submitters of shareholder proposals. According to one
proposals. If the resolution had been passed by both
analysis (Nili and Kastiel, 2019) a small group of five
chambers and signed by the President, the rule changes
individuals accounted for close to 40% of all shareholder
would have been vacated and the SEC would have been
proposals submitted to S&P 1500 companies in 2018.
prohibited from issuing a rule that was “substantially the
same.” However, the timeline for Congress to use the
Until recently, activist individual investors’ proposals
Congressional Review Act’s expedited procedures has
tended toward corporate governance proposals involving
expired.
corporate board structures and shareholder rights. In recent
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The SEC’s September 2020 Reform on Investor Eligibility to Advance Shareholder Proposals
years, such activist small shareholders have joined pension
 According to some observers, investor gadflies have
funds and faith-based investment groups in proposing a
taken advantage of the prevailing $2,000-for-one-year
panoply of often controversial environmental, social, and
ownership threshold to submit proposals to a broad
governance (collectively, ESG) proposals. Among them are
spectrum of companies aimed at furthering their own
resolutions that have included disclosing political spending,
parochial agendas rather than seeking to create overall
climate-change-related disclosures, employee and board
shareholder value (for example, the Business
diversity, and disclosures on their worker and human rights
Roundtable, 2016).
policies. The 2021 proxy season set new records with at
least 467 shareholder resolutions on such ESG issues.
 In 2019, then-SEC Commissioner Robert Jackson’s
office conducted research that, among other things,
Key Changes: Ownership Thresholds
concluded that proposals brought by the 10 most
Prior to the 2020 amendments , a shareholder had to have
frequent individual submitters each year eroded long-
owned at least $2,000 (adopted in 1998) or 1% (adopted in
run corporate value for ordinary buy-and-hold investors.
1983) of a company’s voting stock for a period of at least
one year to be entitled to have a shareholder proposal
 While the reform requires investors in the smallest
included in a company’s proxy statement (a document with
holding’s tier to wait for at least three years to be
information that the SEC requires companies to provide to
eligible to submit proposals, such investors will still be
shareholders so they can make informed voting decisions
able to communicate their interests to a firm through
on matters before them at the annual meeting).
other means, including video conference calls, one-on-
one meetings, shareholder surveys, and e-forums.
The 2020 reform tightened the current requirements by
amending Rule 14a-8(b) by narrowing when small investors
Key Criticisms of Narrowing Eligibility
are eligible to submit shareholder proposals. Under the
 Some observers assert that the higher-ranging corporate
measure, eligibility is allowed when a shareholder
cost estimates of shareholder proposals cited by the SEC
demonstrates continuous ownership of voting shares of at
raise some methodological questions, and the agency
least:
admittedly made little effort to quantify the offsetting
 $2,000 of the company’s securities for at least three
value of the potential benefits of shareholder proposals
that were not adopted (for example, Coates and Roper,
years;
2020).
 $15,000 of the company’s securities for at least two
 According to some research, proposals advanced by
years; or
investor gadflies have generally not reflected their
 $25,000 of the company’s securities for at least
parochial self-interests. Instead, these studies suggest
one
they have largely involved “bread and butter” corporate
year.
governance issues, including majority voting, board
declassification, the removal of corporate takeover
Relatedly, the adopted amendments also prohibit the
defenses, and proxy access (for example, Nili and
aggregation of multiple shareholder holdings to meet the
Kastiel, 2019).
new ownership thresholds.
 According to some observers, the number of overall
The new share ownership thresholds must be observed at
shareholder proposals has been trending downward in
corporate shareholder meetings that take place on or after
recent years, with most firms rarely receiving a single
January 1, 2023.
shareholder proposal in any given year (for example, the
Ownership Threshold Debate
Sullivan and Cromwell Law Firm, 2020).
Both critics and proponents of the shareholder ownership
 The reform will contribute to greater inequality among
threshold reform indicate that gadfly investors would be
investors with different levels of wealth by narrowing
particularly impacted by it. Both groups have marshalled
the opportunities for less wealthy, smaller investors to
arguments in support of their positions.
advance proposals (for example, SEC Commissioners
Key Arguments Supporting Narrowing Eligibility
Allison Herren Lee and Caroline Crenshaw, 2020).
 The $2,000 ownership threshold was adopted in 1998.
 The reform will negatively impact the advancement and
Given ensuing inflation and substantial stock
ultimately the adoption of ESG-related proposals, whose
appreciation, holding that amount for merely a year may
numbers have been growing in recent years (for
no longer reflect meaningful shareholder interest in a
example, Herren Lee, 2020.)
company that would justify the corporate costs of
dealing with such an investor’s shareholder proposal.
Gary Shorter, Specialist in Financial Economics
SEC commentary on the final rule cited certain
estimates of direct and indirect corporate costs of
IF11883
incorporating shareholder proposals into proxy
statements ranging between $50,000 and $150,000 per
proposal, costs ultimately borne by shareholders.
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The SEC’s September 2020 Reform on Investor Eligibility to Advance Shareholder Proposals

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