SEC’s September 2020 Rule Toughens Resubmission of Shareholder Proposals

SEC’s September 2020 Rule Toughens Resubmission of Shareholder Proposals

August 3, 2021
SEC’s September 2020 Rule Toughens Resubmission of
Shareholder Proposals
At a publicly traded company’s annual or special meeting,
funds and faith-based investment groups in proposing a
its shareholders typically vote to appoint board members
panoply of often controversial environmental, social, and
and adopt or reject various shareholder- and management-
governance (collectively, ESG) proposals. Among them are
sponsored business proposals, including executive
resolutions that have included disclosing political spending,
compensation and corporate mergers. Most generally
climate-change-related disclosures, employee and board
require board adoption to be implemented. Some sources
diversity, and disclosures on worker and human rights
report that there were 858 shareholder proposals in 2020.
policies. The 2021 proxy season reportedly set new records
with at least 467 shareholder resolutions on ESG issues.
In 2020, the SEC adopted controversial rules that would
toughen the criteria for resubmitting similar unadopted
History of the Resubmission Thresholds
proposals at subsequent meetings. The rules have sparked
In 1948, the SEC amended Rule 14a-8 by prohibiting a
opposition, including from some Members of Congress.
shareholder proposal from being included in a proxy
statement for shareholder vote if a similar proposal received
Background
less than 3% of the votes cast at the previous annual
State-based business incorporation laws (such as those in
meeting. The agency argued that amendment’s goal was “to
the dominant business incorporation state of Delaware) give
relieve the management of the necessity of including
the states substantial authority over companies that are
proposals which have been previously submitted to security
incorporated within a given state. Under these laws,
holders without evoking any substantial security holder
shareholders of publicly traded companies generally have
interest therein.”
the right to vote their shares to elect directors, approve or
reject a company’s generally binding management
In 1954, arguing that the ability to resubmit proposals that
proposals, and submit and vote on the generally non-
received 3% or more of the vote “resulted in the repetition
binding shareholder proposals.
year after year of proposals which have evoked very modest
stockholder interest,” the agency amended Rule 14a-8 by
Within the parameters of the state business incorporation
allowing two other resubmission thresholds. The
laws, the Securities and Exchange Commission (SEC)
amendment allowed firms to also exclude substantially the
oversees the types of information shareholder proposals
same subject matter as another proposal or proposals that
contain and how that information is disseminated under
have been previously included in the company’s proxy
Rule 14a-8. After a shareholder submits a proposal, the
materials within the preceding five calendar years if the
proposal faces three potential outcomes: (1) the corporation
matter was voted on at least once in the last three years and
may allow it to appear on the ballot for a shareholder vote,
did not receive at least:
(2) the proponent may withdraw the proposal after
negotiation with the company, or (3) the company may omit
 3% of the vote if previously voted on once,
the proposal from the ballot after receiving a no-action
letter from the SEC. While the majority of shareholder
 6% of the vote if previously voted on twice, or
proposals are non-binding, proposals with the best chance
of adoption by a firm’s board of directors generally garner a
 10% of the vote if previously voted on three or
majority of votes.
more times.
Public companies are largely owned by institutional
In 1997, the SEC proposed increasing the resubmission
investors such as mutual funds and pension funds.
thresholds from 3%, 6%, and 10% to 6%, 15%, and 30%,
However, small investors, including individuals and faith-
respectively. It argued that the prevailing thresholds needed
based groups (sometimes referred to as “gadflies”), have
to be more stringent, as “a proposal that has not achieved
historically played disproportionately large roles as
these levels of support has been fairly tested and stands no
submitters of shareholder proposals. According to one
significant chance of obtaining the level of voting support
analysis (Nili and Kastiel, 2019), a small group of five
required for approval.” Later, citing investor concerns, the
individuals accounted for close to 40% of all shareholder
SEC opted not to adopt the proposal.
proposals submitted to S&P 1500 firms in 2018.
Rule 14a-8 Rulemaking, Support, and Opposition
Until recently, activist individual investors’ proposals
In September 2020, the SEC commissioners voted 3-2 to
tended toward corporate governance proposals involving
amend Rule 14a-8. Principally, the reform will tighten the
corporate board structures and shareholder rights. In recent
eligibility criteria needed for investors in publicly traded
years, such activist small shareholders have joined pension
companies to resubmit proposals. (A corollary reform will
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SEC’s September 2020 Rule Toughens Resubmission of Shareholder Proposals
impose more rigorous eligibility standards for shareholders
reflected the chairman’s interest in revisiting and possibly
who want to submit a proposal. See CRS In Focus IF11883,
attempting to reverse certain rulemakings finalized in the
The SEC’s September 2020 Reform on Investor Eligibility
past two years under then-Chair Jay Clayton. The
to Advance Shareholder Proposals, by Gary Shorter.) The
September 2020 Rule 14a-8 reform is part of that agenda.
reform applies to proposals submitted to annual or special
meetings on or after January 1, 2022.
Key Arguments in Support of the Reform
 When adopted in 1954—an era of snail mail and
Under the reform, a shareholder’s proposal will be
excludable from a company’s proxy materials if it
limited options for shareholder communications
with firms and other shareholders—the 3%, 6%,
addressed substantially the same subject matter as a
and 10% thresholds may have been reasonable.
proposal or proposals previously included in the company’s
Today, with expanded communication options
proxy materials within the preceding five calendar years if
(including video conferences, one-on-one
the matter was voted on at least once in the last three years
meetings, shareholder surveys, and e-forums),
and did not receive at least:
many argue that seems to be much less the case.
 5% of the votes cast if previously voted on once;
 Under the 3%, 6%, and 10% thresholds, 90% or

more of voting shareholders could oppose a

15% of the votes cast if previously voted on twice;
proposal year after year, but it could still be
or
reconsidered.
 25% of the votes cast if previously voted on three
 A U.S. Chamber of Commerce research unit, the
or more times.
Center for Capital Markets Competitiveness,
examined 2,449 shareholder proposals between
Proponents of the revision say it will reduce the number of
2001 and 2018 on environmental, social, political,
frivolous proposals and their corporate (and thus ultimately
and human rights matters. It found that (1) 5%
shareholder) costs. It is largely supported by business
attracted a majority of votes, while 32% had failed
interests, including the National Association of
to gain a majority of votes after three or four
Manufacturers, the U.S. Chamber of Commerce (a national
submissions (“zombie” proposals); and (2) if the
business trade group), and the Business Roundtable (an
SEC had adopted its proposed 1997 resubmission
association of public company chief executive officers).
protocol (of 6%, 15%, and 30%), which was fairly
similar to that it adopted in 2020, 27% of the
Opponents noted that proposals often require repeated
zombie proposals would have been eligible for a
submissions in order to gain sufficient momentum, which
fourth submission.
the reform will curtail. Among the reform’s critics were the
SEC’s Office of the Investor Advocate and Investor
Key Arguments Against the Reform
Advisory Committee (IAC); the Consumer Federation of
America; the Council of Institutional Investors, a large
 The historical decline in proposals excluded from
investor trade group; and the Interfaith Center on Corporate
voting is likely due to an increase in overall
Responsibility, a faith-based investor coalition.
shareholder support and greater awareness by
proponents of how their proposals could ultimately
Opponents have undertaken several initiatives to vacate or
benefit from modifications or from being
undo the changes to Rule 14a-8. S.J.Res. 16 (Senator
temporarily withdrawn, not because the
Sherrod Brown) and H.J.Res. 36 (Representative Michael
resubmission thresholds were too low.
F. Q. San Nicolas) are joint resolutions under the
Congressional Review Act (CRA; P.L. 104-121) that
 According to Ceres, a sustainability advocate,
provide for congressional disapproval of the SEC adopted
between 2010 and 2020, shareholders merely
shareholder proposals. If the resolutions had been passed by
resubmitted ESG proposals 35 times at 26 firms.
both chambers and signed by the President, the rule changes
would have been vacated, and the SEC would have been
 Research in 2020 conducted by the Council of
prohibited from issuing a rule that was “substantially the
Institutional Investors found that for proposals
same.” However, the timeline for Congress to use the
submitted between 2011 and 2019, the new
CRA’s expedited procedures has expired.
thresholds would have more than doubled the
number of excluded governance proposals,
On June 15, 2021, a group of investors led by the Interfaith
including proposals for independent board chairs
Center on Corporate Responsibility filed a lawsuit against
and disclosures on political spending.
the SEC in the U.S. District Court in Washington, DC,
asking the court to vacate the shareholder reforms. In

addition, under President Biden the composition of SEC
commissioners has changed, and when the SEC released the
Gary Shorter, Specialist in Financial Economics
Spring 2021 Unified Agenda of Regulatory and
IF11888
Deregulatory Action, the agenda included newly appointed
SEC Chair Gary Gensler’s “Reg Flex Agenda.” The agenda

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SEC’s September 2020 Rule Toughens Resubmission of Shareholder Proposals

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