On September 23, 2020, the Securities and Exchange Commission (SEC) adopted amendments to certain of the procedural requirements for the submission of shareholder proposals under Rule 14a-8 of the Securities Exchange Act (Exchange Act). These amendments revise multiple aspects of the shareholder proposal submission process. The amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. A redline reflecting the difference between the current and amended Rule 14a-8 appears as Annex A.

Background

Under Rule 14a-8 of the Exchange Act, shareholders are able to submit proposals for inclusion in a company’s proxy materials. This rule provides shareholders with a right to use company resources to submit their proposal to all shareholders for approval. This right does have limitations; Rule 14a-8 includes both procedural and substantive requirements. Should these requirements not be met, the company has a basis for excluding the proposal from its proxy materials.

Ownership Thresholds

Prior to these amendments, Rule 14a-8(b) stated that a shareholder must have continuously held $2,000 in market value, or 1%, of the company’s securities for at least one year by the date the shareholder submits a proposal. The SEC stated that the intent of the ownership threshold and holding period included in Rule 14a-8(b) is “to strike an appropriate balance such that a shareholder has some meaningful ‘economic stake or investment interest’ in a company before the shareholder may draw upon company resources to require the inclusion of a proposal in the company’s proxy statement.” The SEC noted that for some (especially smaller) shareholders, however, the amount of stock owned is not the only way to demonstrate an interest in a company; the SEC recognized that length of time of ownership can also be a “meaningful indicator” of such interest.

The amendments do away with the 1% threshold altogether, as the SEC determined this was a seldom-used provision. The amendments also introduce tiered ownership requirements, which still take into consideration both the amount of the company’s securities a shareholder owns and the length of time of such ownership, in lieu of the prior blanket ownership requirement. The amendments also add a new requirement that shareholders submitting a proposal jointly cannot aggregate their holdings to satisfy these ownership eligibility requirements. Under the amendments, to submit a proposal, the shareholder (or in the case of a joint proposal, each shareholder) must have continuously held ownership of:

• $2,000 of the company’s securities for at least three years;

• $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.

However, note that to provide a transition period for shareholders, the amendments include a provision that “grandfathers in” a shareholder who has continuously held at least $2,000 of a company’s securities for at least one year as of the effective date of the amendments, and who continuously maintains at least $2,000 of such securities, to be eligible to submit a proposal to such company without satisfying the amended share ownership thresholds for an annual or special meeting to be held prior to January 1, 2023.

Resubmission of Proposals

Prior to the amendments, shareholders were permitted to submit the same proposal to a company for inclusion in its proxy statement multiple times, subject to certain limitations. The SEC noted that Rule 14a-8(i)(12) seeks “to relieve the management of the necessity of including proposals which have been previously submitted to security holders without evoking any substantial security holder interest therein.” The amendments, for the first time in almost 70 years, change the resubmission thresholds included in Rule 14a-8(i)(12). The amendments allow a company to exclude a proposal (i) covering substantially the same subject matter as a proposal previously included in the company’s proxy statement in the past five years, (ii) if the most recent vote on such proposal was within the preceding three years and (iii) such most recent vote garnered:

• less than 5% of the votes cast if previously voted on once (increased from 3%);

• less than 15% of the votes cast if voted on twice (increased from 6%); and

• less than 25% of the votes cast if voted on three or more times (increased from 10%).^[1]

Additional Procedural and Informational Requirements

The amendments add certain new procedural requirements for the submission of shareholder proposals. First, the amendments provide for additional informational requirements for shareholders who are submitting a proposal through a representative. According to the SEC, the goal of this change to Rule 14a-8(b) is to ensure the shareholder has a genuine and meaningful interest in the proposal, rather than only the shareholder’s representative having an interest. If a proposal is presented through a representative, the amendments require the shareholder to provide certain documentation:

• identifying the company to which the proposal is directed;

• identifying the annual or special meeting for which the proposal is submitted;

• identifying the shareholder as the proponent, and identifying the person who will act on the proponent’s behalf as the proponent’s representative;

• including a statement authorizing the representative to submit the proposal and/or otherwise act on the proponent’s behalf;

• identifying the specific topic of the proposal to be submitted; and

• including the shareholder’s statement supporting the proposal.^[2]

The amendments also expand Rule 14a-8(b) to require that a shareholder provide a written statement that the shareholder is able to meet with the company, in person or by teleconference, whether submitted by the shareholder or through a representative. As provided in the proposed rule release, the shareholder will need to provide the company in such written statement with (i) contact information and (ii) business days and specific times that the shareholder is available to discuss the proposal with the company during a window that begins 10 days, and continue until 30 days, after submission of the shareholder proposal. The amendments clarified that the specified times should be during the regular business hours of the company, and should be agreed upon by co-filing shareholders, if applicable. The SEC stated that the goal of this additional procedural requirement is to encourage the trend of proactive company engagement with shareholders, which has increased in recent years and in many cases has led to shareholders withdrawing their proposals.

Finally, the amendments revise Rule 14a-8(c) to clarify that a person cannot submit more than one proposal at a shareholder meeting (previously, the rule used the term “shareholder”). This change will prevent a person from simultaneously submitting their own proposal as a shareholder of the company and also submitting a different proposal for the same meeting as a representative of another shareholder, or from submitting multiple proposals for the same meeting as a representative if doing so for multiple shareholders. The SEC stated in the final rule release that the submission of multiple proposals by one person “constitutes an unreasonable exercise of the right to submit proposals at the expense of other shareholders and also may tend to obscure other material matters in the proxy statement of issuers, thereby reducing the effectiveness of such documents.”

Conclusion

The SEC’s changes to Rule 14a-8 modernize several aspects of the shareholder proposal procedure. These amendments may change attitudes of both issuers and shareholders regarding submission of shareholder proposals. Specifically, the SEC hopes the amendments encourage issuers to attempt direct discussions with shareholders more frequently to resolve a shareholder’s concerns without needing to take the proposal to the shareholders for a vote. Ideally, these changes will not significantly impact a shareholder’s ability to bring a proposal that they view as beneficial to the company, but will reduce costs for companies in the long run when they no longer have to respond to repeat proposals that do not have notable shareholder support.

ANNEX A

Redline of Final Amendment to Rule 14a-8 of the Exchange Act

Rule 14a-8. Shareholder Proposals.

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(b) Question 2: Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible?

(1) In order tTo be eligible to submit a proposal, you must satisfy the following requirements:

(i) you must have continuously held:

(A) at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one three years; or

(B) at least $15,000 in market value of the company’s securities entitled to vote on the proposal for at least two years; or

(C) at least $25,000 in market value of the company’s securities entitled to vote on the proposal for at least one year; or

(D) The amounts specified in paragraph (b)(3) of this section. This paragraph (b)(1)(i)(D) will expire on the same date that paragraph (b)(3) expires; and

(ii) You must provide the company with a written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the shareholders’ meeting for which the proposal is submitted; andby the date you submit the proposal. You must continue to hold those securities through the date of the meeting.

(iii) You must provide the company with a written statement that you are able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. You must include your contact information as well as business days and specific times that you are available to discuss the proposal with the company. You must identify times that are within the regular business hours of the company’s principal executive offices. If these hours are not disclosed in the company’s proxy statement for the prior year’s annual meeting, you must identify times that are between 9 a.m. and 5:30 p.m. in the time zone of the company’s principal executive offices. If you elect to co-file a proposal, all co-filers must either:

(A) Agree to the same dates and times of availability, or

(B) Identify a single lead filer who will provide dates and times of the lead filer’s availability to engage on behalf of all co-filers; and

(iv) If you use a representative to submit a shareholder proposal on your behalf, you must provide the company with written documentation that:

(A) Identifies the company to which the proposal is directed;

(B) Identifies the annual or special meeting for which the proposal is submitted;

(C) Identifies you as the proponent and identifies the person acting on your behalf as your representative;

(D) Includes your statement authorizing the designated representative to submit the proposal and otherwise act on your behalf;

(E) Identifies the specific topic of the proposal to be submitted;

(F) Includes your statement supporting the proposal; and

(G) Is signed and dated by you.

(v) The requirements of paragraph (b)(1)(iv) of this section shall not apply to shareholders that are entities so long as the representative’s authority to act on the shareholder’s behalf is apparent and self-evident such that a reasonable person would understand that the agent has authority to submit the proposal and otherwise act on the shareholder’s behalf.

(vi) For purposes of paragraph (b)(1)(i) of this section, you may not aggregate your holdings with those of another shareholder or group of shareholders to meet the requisite amount of securities necessary to be eligible to submit a proposal.

(2) One of the following methods must be used to demonstrate your eligibility to submit a proposal:

(i) If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the meeting of shareholders.

(ii) However, iIf, like many shareholders, you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own. In this case, at the time you submit your proposal, you must prove your eligibility to the company in one of two ways:

(iA) The first way is to submit to the company a written statement from the "record" holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held at least $2,000, $15,000, or $25,000 in market value of the company’s the securities entitled to vote on the proposal for at least three years, two years, or one year, respectively. You must also include your own written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the meeting of shareholders’ meeting for which the proposal is submitted; or

(iiB) The second way to prove ownership applies only if you were required to file, and have filed, a Schedule 13D, Schedule 13G, Form 3, Form 4 and/or Form 5, or amendments to those documents or updated forms, demonstrating that you meet at least one of the share ownership requirements under paragraph (b)(1)(i)(A) through (C) of this sectionreflecting your ownership of the shares as of or before the date on which the one-year eligibility period begins. If you have filed one or more of these documents with the SEC, you may demonstrate your eligibility by submitting to the company:

(A1) A copy of the schedule(s) and/or form(s), and any subsequent amendments reporting a change in your ownership level;

(B2) Your written statement that you continuously held at least $2,000, $15,000, or $25,000 in market value of the company’s securities entitled to vote on the proposal for at least three years, two years, or one year, respectivelythe required number of shares for the one-year period as of the date of the statement; and

(C) Your written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, ownership of the shares through the date of the company's annual or special meeting.

(3) If you continuously held at least $2,000 of a company’s securities entitled to vote on the proposal for at least one year as of [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], and you have continuously maintained a minimum investment of at least $2,000 of such securities from [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER] through the date the proposal is submitted to the company, you will be eligible to submit a proposal to such company for an annual or special meeting to be held prior to January 1, 2023. If you rely on this provision, you must provide the company with your written statement that you intend to continue to hold at least $2,000 of such securities through the date of the shareholders’ meeting for which the proposal is submitted. You must also follow the procedures set forth in paragraph (b)(2) of this section to demonstrate that: (i) You continuously held at least $2,000 of the company’s securities entitled to vote on the proposal for at least one year as of [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER]; and (ii) You have continuously maintained a minimum investment of at least $2,000 of such securities from [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER] through the date the proposal is submitted to the company. (iii) This paragraph (b)(3) will expire on January 1, 2023.

(c) Question 3: How many proposals may I submit?

Each shareholder person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders' meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders’ meeting.

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(i) Question 9: If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal?

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(12) Resubmissions: If the proposal deals withaddresses substantially the same subject matter as another a proposal, or proposals, that has or have been previously included in the company's proxy materials within the preceding five calendar years, if the most recent vote occurred within the preceding three calendar years and the most recent vote wasa company may exclude it from its proxy materials for any meeting held within 3 calendar years of the last time it was included if the proposal received:

(i) Less than 53% of the votes cast if proposed previously voted on once within the preceding 5 calendar years;

(ii) Less than 156% of the votes cast on its last submission to shareholders if proposed previously voted on twice previously within the preceding 5 calendar years; or

(iii) Less than 2510% of the votes cast on its last submission to shareholders if proposed previously voted on three or more times or more previously within the preceding 5 calendar years; and.

[1] Note that the proposed amendments, originally released November 5, 2019, also included a new “momentum” rule that would have allowed companies to exclude proposals that dealt with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that would not otherwise be excludable under the 25% threshold if (i) the most recently voted-on proposal received less than a majority of the votes cast and (ii) support declined by 10% or more compared to the immediately preceding shareholder vote on the matter. However, after hearing from commenters, the SEC determined not to adopt this “momentum” rule in the final amendments.

[2] These requirements would not apply to shareholders that are entities so long as the representative’s authority to act on the shareholder’s behalf is apparent and self-evident such that a reasonable person would understand that the representative has authority to submit the proposal and otherwise act on the shareholder’s behalf.