The U.S. Securities and Exchange Commission (“SEC”) recently proposed amendments to Securities Exchange Act of 1934 Rules 14a-2(b) and 14a-8 that could significantly hamper investors’ abilities to advocate for corporate policies and hold corporate insiders accountable.
Under the SEC’s proposed amendments, the eligibility requirements that a shareholder must satisfy to have a proposal included in a company’s proxy statement are substantially more difficult to meet than those in the current rules. For example, while the proposed amendments would keep the minimum ownership value that is required to submit a proposal at $2,000, they would increase the minimum time a shareholder must have held those shares from one year to three. Further, the proposed amendments would also limit access to a work-around of these minimum-value requirements. Under the current rules, shareholders may own 1% of the company’s market value as an alternative route to meeting the ownership requirements; but the proposed amendments would require shareholders to have had continuous ownership of at least $15,000 for two years or $25,000 for one year.
While the SEC characterized the proposals as a way to “modernize” the thresholds and process by which shareholder proposals are included in proxy statements, there is a risk, beyond the changes above, that these rule changes could limit shareholders’ already tenuous influence over how companies address critical issues. For example, the proposed amendments eliminate the provision allowing shareholders to pool their shares together to meet the 1% threshold—a critical component of the current rules. As the CEO and President of impact investing advocate Ceres explained, “The SEC’s proposed changes to the shareholder proposal process are misguided and will take away an important resource for investors to manage all kinds of financial risk, from climate change to cybersecurity[] to human rights.”
Beyond that, the proposed amendments include a new provision that could create a significant chilling effect on potential challengers seeking to hold companies accountable: the proposed amendments would require proxy advisors to give companies the right to review and provide feedback on proxy voting advice before providing it to their clients. While there is little downside to staying quiet, there is potentially great risk to speaking up. If a proxy advisor is deciding how to advise shareholders regarding poor corporate performance, there are no risks to recommending that investors support management. However, one SEC commissioner worries that a recommendation against management exposes the advisory firm to a potential lawsuit from the company at issue claiming that the proxy voting advice is misleading because the company is threatened by the methodology used by the advisor.
One of the two dissenting commissioners, Robert Jackson, stated that “[t]he SEC is interfering in decades-long relationships between investors and their advisors in a way that will significantly skew voting recommendations toward executives. That will be especially true in cases, such as investor proposals to strengthen the link between CEO pay and performance, where proxy advisors have historically engaged in the careful, firm-specific analysis that such proposals require.”
Together, these proposals are in line with recent steps taken by the SEC to help out corporate America. The SEC claims that these amendments will reverse a 20-year decline in the number of companies being listed on U.S. exchanges by modernizing disclosures and cutting regulatory costs for firms.
But these changes come at the expense of investors’ ability to vote in reliance on independent voting recommendations and submit shareholder proposals. The Executive Director of the Council of Institutional Investors, Ken Bertsch, described the proposals as an attempt by the SEC to “shackle proxy advisory firms and limit shareholder proposals.” In his view, “The rules are an unnecessary interference in the free market, and would impede investors’ voice on critical matters at U.S. public companies.”
* * *
The proposed amendments are currently open for public comment until February 3, 2020. Comments may be submitted electronically at https://www.sec.gov/rules/proposed.shtml or via email to rule-comments@sec.gov. Submissions regarding the amendments to the proxy rules should reference File Number S7-22-19. Submissions regarding amendments to the shareholder proposals should reference S7-23-19.