SEC Proposes Revisions to Shareholder Proposal Rules

The Securities and Exchange Commission (SEC) last month proposed revisions to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (Exchange Act), which require companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain requirements. The proposed amendments, if adopted, would revise three of the substantive bases for exclusion of shareholder proposals under Rule 14a-8: (a) the “substantial implementation” exclusion in Rule 14a-8(i)(10); (b) the “duplication” exclusion in Rule 14a-8(i)(11); and (c) the “resubmission” exclusion in Rule 14a-8(i)(12). The proposed amendments generally appear aimed at promoting clarity for the use of the exclusions and narrowing the scope of the exclusions.

Substantial Implementation. The substantial implementation exclusion in Rule 14a-8(i)(10) allows companies to exclude a shareholder proposal that has been “substantially implemented.” The amended rule would permit a company to exclude a proposal if the company has already implemented the “essential elements of the proposal.” The SEC’s rationale for this change is to provide a clearer standard for exclusion, and to provide more predictability in determining the exclusion of proposals. A company would only be allowed to exclude a proposal under this rule if all of its essential elements have been implemented, representing a narrowing of the existing substantial implementation standard.

Duplication. The duplication exclusion in Rule 14a-8(i)(11) permits companies to exclude a shareholder proposal that “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.” The amended rule specifies that a proposal is substantially duplicative if it “addresses the same subject matter and seeks the same objective by the same means.” The SEC notes that the proposed change would allow shareholders to more accurately consider proposals received by the company that address the same subject matter as an earlier proposal, but which seek different objectives of addressing the same matter. The change in standard would make excluding proposals increasingly difficult for companies because a proposal must now seek the same “objective” to be excludable, a more stringent standard.

Resubmission. The resubmission exclusion in Rule 14a-8(i)(12) provides companies the power to exclude a shareholder proposal that “addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years,” if the issue was voted on at least once in the last three years and received support below specified thresholds, last amended in 2020. The amended rule would change “substantially the same subject matter” to “substantially duplicates,” in order to harmonize the amendment with the proposed changes to Rule 14a-8(i)(11). Additionally, a proposal would “substantially duplicate” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” The SEC believes its proposed changes would allow shareholders greater flexibility to adjust their proposals to build support, and allow other shareholders to offer additional proposals addressing the same issue.

The key takeaway from the proposal: the proposed amendments would make it more difficult for companies to exclude shareholder proposals. This is probably most applicable to the “substantial implementation” exclusion, which has frequently been utilized by companies to exclude proposals. With the increase in the number of shareholder proposals in the past two or three years, especially around proposals relating to Environmental, Social, and Governance (ESG) matters, companies will find it increasingly difficult to exclude proposals under Rule 14a-8.

The proposed rules are subject to a comment period of 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

From startup financing to public offerings, Ballard Spahr’s Securities and Capital Markets Group advises private and public companies through all stages of development and capital-raising activities. We also help clients comply with public reporting, proxy, and disclosure obligations. Please contact us for more information.

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