Yesterday, the Securities and Exchange Commission (Commission ) voted 3-2 (Commissioners Jackson and Lee dissenting) to propose amendments to rules under the Exchange Act in connection with the ongoing review of the proxy process. The proposed amendments would impose additional requirements on proxy advisory firms that provide recommendations on votes and would raise the eligibility and resubmission thresholds for shareholder proposals:
Amendments to exemptions from the proxy rules
Among others, the proposed amendments would condition the availability of certain existing exemptions from the information and filing requirements of the federal proxy rules for proxy advisory firms on compliance with certain additional disclosure, including disclosure of material conflicts of interest in voting advice (not just to their clients). The proposed amendments also would provide registrants opportunities to review and provide feedback on reports before a proxy advisory firm disseminates its votes to institutional investor clients, regardless of whether the advice is adverse to the voting recommendation of the registrant. The Chairman asserted at the open meeting that the proposal is intended to incentivize the registrant to file its definitive proxy statement earlier, thereby allowing more time for the proxy advisory firm and its clients to formulate and consider voting recommendations, because registrants who file earlier (45 days or more in advance of shareholder meeting) have more time to review the proxy voting advice than those who file later (25-45 days in advance). In addition, the proxy advisory firm would be required to provide a final notice of voting advice no later than two business days prior to delivery of the advice to clients. The registrant thereafter would be permitted to include a hyperlink to its views on the voting advice in the report delivered to clients. This proposal also would add examples of when the failure to disclose certain information in proxy voting advice could be considered misleading under the proxy rules.
Procedural requirements and resubmission thresholds
These amendments would update the shareholder proposal rule, which requires issuers subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The amendments would revise the current eligibility requirements, the one-proposal limit and the resubmission thresholds.
To initially submit a shareholder proposal, a shareholder would need to hold at least $2000 or 1% of an issuer’s securities for at least three years, rather than the current one year holding period. Those with larger ownership stake could satisfy the eligibility standard in less time. In addition, shareholder proponents would be required to be available to meet with the company to discuss the proposal.
The proposed amendments would apply the one-proposal rule such that a shareholder proponent would not be permitted to submit a proposal in her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting (and similarly, a representative could only submit one proposal at a given meeting, even if the representative submits each proposal on behalf of different shareholders). Commissioner Roisman alleged at the open meeting that this process had been “misused” in the past by proponents wishing to submit multiple proposals at the same shareholder meeting.
The proposed amendments would raise the current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the past five years to 5%, 15% and 25% respectively. In addition, the proposal would allow an issuer to exclude a proposal that previously has been voted on three or more times in the past five years, even if the proposal received 25% in its most recent resubmission if the proposal: (1) received less than 50% of the votes cast and (2) experienced a decline in shareholder support of 10% or more. Commissioner Lee’s dissenting statement asserted that the amendments would “suppress” the exercise of shareholding rights with regard to ESG issues, including in particular climate-related proposals which made up more than half of shareholder proposals in recent years.
All of the proposals are subject to a 60-day public comment period. We will be following up in the near future with more detailed analysis of the proposals.