[Federal Register Volume 84, Number 233 (Wednesday, December 4, 2019)]
[Proposed Rules]
[Pages 66458-66515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24476]
[[Page 66457]]
Vol. 84
Wednesday,
No. 233
December 4, 2019
Part II
Securities and Exchange Commission
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17 CFR Part 240
Procedural Requirements and Resubmission Thresholds Under Exchange Act
Rule 14a-8; Proposed Rule
Federal Register / Vol. 84 , No. 233 / Wednesday, December 4, 2019 /
Proposed Rules
[[Page 66458]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-87458; File No. S7-23-19]
RIN 3235-AM49
Procedural Requirements and Resubmission Thresholds Under
Exchange Act Rule 14a-8
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing to amend certain procedural requirements and
the provision relating to resubmitted proposals under the shareholder-
proposal rule. The proposed amendments to the procedural requirements
would replace the current ownership requirements with a tiered approach
that would provide three options for demonstrating an ownership stake
through a combination of amount of securities owned and length of time
held; require certain documentation to be provided when a proposal is
submitted on behalf of a shareholder-proponent; require shareholder-
proponents to state when they would be able to meet with the company in
person or via teleconference to engage with the company with respect to
the proposal; and provide that a person may submit no more than one
proposal, directly or indirectly, for the same shareholders' meeting.
The proposed amendments to the resubmission thresholds would raise the
current resubmission thresholds of 3, 6, and 10 percent to 5, 15, and
25 percent, respectively; and add a new provision that would allow
companies to exclude proposals under certain circumstances where
shareholder support for the matter has declined.
DATES: Comments should be received on or before February 3, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/concept.shtml); or
Send an email to [email protected]. Please include
File Number S7-23-19 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-23-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on our website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing
and printing in the Commission's Public Reference Room, 100 F Street
NE, Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Matt McNair, Senior Special Counsel in
the Office of Chief Counsel, at (202) 551-3500, Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR
240.14a-8 (``Rule 14a-8'') under the Securities Exchange Act of 1934
[15 U.S.C. 78a et seq.] (``Exchange Act'').
Table of Contents
I. Introduction
A. Background
B. Roundtable on the Proxy Process
II. Discussion of Proposed Amendments
A. Rule 14a-8(b)--Eligibility Requirements
1. Relevant History and Background of Rule 14a-8(b)
2. Public Views on Rule 14a-8(b)
3. Need for Proposed Amendments
4. Proposed Amendments
B. Proposals Submitted on Behalf of Shareholders
1. Background
2. Proposed Amendments
C. The Role of the Shareholder-Proposal Process in Shareholder
Engagement
1. Background
2. Proposed Amendment
D. One-Proposal Limit
1. Background
2. Proposed Amendment
E. Rule 14a-8(i)(12)--Resubmissions
1. Relevant History and Background of Rule 14a-8(i)(12)
2. Public Views on Rule 14a-8(i)(12)
3. Need for Proposed Amendments
4. Proposed Amendments
III. General Request for Comment
IV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Current Regulatory Framework
2. Affected Entities
3. Current Practices
C. Benefits and Costs and Effects on Efficiency, Competition,
and Capital Formation of Proposed Rule Amendments
1. General Economic Considerations Relevant to Shareholder
Proposals
2. General Economic Effects of the Proposed Amendments
3. Benefits and Costs of the Proposed Amendments
4. Effects of Proposed Amendments on Efficiency, Competition,
and Capital Formation
D. Reasonable Alternatives
1. Shareholder Ownership Thresholds
2. Shareholder Resubmission Thresholds
E. Request for Comment
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of the Proposed Amendments' Effects on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Duplicative, Overlapping or Conflicting Federal Rules
F. Significant Alternatives
G. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority
I. Introduction
A. Background
Under state corporate law, shareholders have the right to vote
their shares to elect directors and to approve or reject major
corporate transactions at shareholder meetings, and shareholders may
appoint proxies to vote on their behalf at such meetings.\1\ Because
most shareholders do not attend public company shareholder meetings in
person and, instead, vote their shares by the use of proxies that are
solicited before the shareholder meeting takes place, the proxy
solicitation process rather than the shareholder meeting
[[Page 66459]]
itself has become the ``forum for shareholder suffrage.'' \2\
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\1\ See Concept Release on the U.S. Proxy System, Release No.
34-62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)], at 42984
(``Proxy Plumbing Release'').
\2\ See Proposed Amendments to Rule 14a-8, Release No. 34-19135
(Oct. 14, 1982) [47 FR 47420 (Oct. 26, 1982)], at 47420-21 (``1982
Proposing Release''); Proxy Plumbing Release, supra note 1, at
42984; Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F.2d 416,
422 (D.C. Cir. 1992) (quoting 1982 Proposing Release).
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Issuers with a class of securities registered under Section 12 of
the Securities Exchange Act of 1934 (``Exchange Act'') and issuers that
are registered under the Investment Company Act of 1940 (``Investment
Company Act'') are generally required to comply with the federal proxy
rules in Regulation 14A when soliciting proxies from shareholders.\3\
These rules include the requirement that issuers publicly file and
provide shareholders with a proxy statement containing certain
information. Individual shareholders and other persons may also solicit
proxies in support of proposals that a shareholder wishes to present
for a vote at a shareholder meeting. Such solicitations must also
generally comply with the federal proxy rules.
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\3\ Foreign private issuers are exempt from the federal proxy
rules. See 17 CFR 240.3a12-3(b). In addition, debt securities
registered under Section 12(b) are exempt from the federal proxy
rules, with some exceptions. See 17 CFR 240.3a12-11(b).
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Rule 14a-8 requires companies that are subject to the federal proxy
rules to include shareholder proposals in their own proxy statements to
shareholders, subject to certain procedural and substantive
requirements.\4\ By giving shareholder-proponents the ability to have
their proposals included alongside management's in the company's proxy
statement, Rule 14a-8 enables shareholder-proponents to easily present
their proposals to all other shareholders, and to have proxies
solicited for their proposals, at little or no expense to themselves.
The rule, the concept of which was first adopted by the Commission in
1942, thus facilitates shareholders' traditional ability under state
law to present their own proposals for consideration at a company's
annual or special meeting, and it facilitates the ability of all
shareholders to consider and vote on such proposals.\5\
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\4\ Unless otherwise noted, references to ``shareholder
proposal,'' ``shareholder proposals,'' ``proposal,'' or
``proposals'' refer to submissions made in reliance on Rule 14a-8.
\5\ See, e.g., Securit[ies] and Exchange Commission Proxy Rules:
Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House
Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 17-
19 (1943) (Statement of the Honorable Ganson Purcell, Chairman,
Securities and Exchange Commission) (explaining the initial
Commission rules requiring the inclusion of shareholder proposals in
company proxy materials: ``We give [a stockholder] the right in the
rules to put his proposal before all of his fellow stockholders
along with all other proposals . . . so that they can see then what
they are and vote accordingly. . . . The rights that we are
endeavoring to assure to the stockholders are those rights that he
has traditionally had under State law, to appear at the meeting; to
make a proposal; to speak on that proposal at appropriate length;
and to have his proposal voted on.'').
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However, this mechanism for shareholders to require inclusion of
their proposals in companies' proxy materials is not without limits.
Rule 14a-8 permits a company to exclude a shareholder proposal from its
proxy statement if the proposal fails to meet any of several specified
substantive requirements, or if the shareholder-proponent does not
satisfy certain eligibility or procedural requirements. All of these
requirements are generally designed to ensure that the ability under
Rule 14a-8 for a shareholder to have a proposal included alongside
management's in the company's proxy materials--and thus to draw upon
company resources and to command the time and attention of other
shareholders--is not excessively or inappropriately used.\6\
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\6\ The Commission has expressed recurring concern over the
years that Rule 14a-8 is susceptible to misuse. In 1948, the
Commission adopted three new bases for exclusion to ``relieve the
management of harassment in cases where [shareholder] proposals are
submitted for the purpose of achieving personal ends rather than for
the common good of the issuer and its security holders.'' See Notice
of Proposal to Amend Proxy Rules, Release No. 34-4114 (July 6, 1948)
[13 FR 3973 (Jul. 14, 1948)], at 3974 (``1948 Proposing Release'').
In 1953, the Commission amended the shareholder-proposal rule to
allow companies to omit the name and address of the shareholder-
proponent to ``discourage the use of this rule by persons who are
motivated by a desire for publicity rather than the interests of the
company and its security holders.'' See Notice of Proposed
Amendments to Proxy Rules, Release No. 34-4950 (Oct. 9, 1953) [18 FR
6646 (Oct. 20, 1953)], at 6647. In amending the resubmission basis
for exclusion in 1983, the Commission noted that commenters ``felt
that it was an appropriate response to counter the abuse of the
security holder proposal process by certain proponents who make
minor changes in proposals each year so that they can keep raising
the same issue despite the fact that other shareholders have
indicated by their votes that they are not interested in that
issue.'' See Amendments to Rule 14a-8 Under the Securities Exchange
Act of 1934 Relating to Proposals by Security Holders, Release No.
34-20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)], at 38221
(``1983 Adopting Release''). In addressing the personal-grievance
basis for exclusion in 1982, the Commission noted that ``[t]here has
been an increase in the number of proposals used to harass issuers
into giving the proponent some particular benefit or to accomplish
objectives particular to the proponent.'' See 1982 Proposing
Release, supra note 2, at 47427.
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A proposal may be excluded if the rule's procedural requirements
are not satisfied. These rules set forth the level of share ownership
necessary to be eligible to submit a proposal, the number of proposals
that a shareholder may submit for a particular shareholders' meeting,
the proposal's permitted length and the deadline for submitting
proposals.
The substantive requirements permit a company to exclude a proposal
if the proposal would violate applicable law; would violate the proxy
rules; relates to a proponent's personal grievance or personal
interest; is not significantly related to the company's business; is
not capable of being implemented by the company; deals with matters
relating to the company's ordinary business operations; or has already
been substantially implemented, among other grounds. Proponents and
companies do not always agree on the application of these exclusions.
Accordingly, if a company intends to exclude a shareholder proposal
from its proxy materials on these grounds or any other ground, it is
required under Rule 14a-8(j) to ``file its reasons'' for doing so with
the Commission. These notifications are generally submitted in the form
of a no-action request seeking the staff's concurrence that they may
exclude a shareholder proposal under one or more of the procedural or
substantive bases under Rule 14a-8. The staff of the Divisions of
Corporation Finance and Investment Management, as a convenience to both
companies and shareholder-proponents, has for many years engaged in the
informal practice of expressing whether the staff would recommend
enforcement action to the Commission if a company excludes a proposal
from its proxy materials. This is done to provide guidance as to the
staff's views and to assist both companies and shareholder-proponents
in complying with the federal proxy rules.
We are proposing modifications to, and seeking public comment on,
two of the rule's procedural requirements and one of its substantive
requirements.
The first proposed amendment is to Rule 14a-8(b), which establishes
the eligibility requirements a shareholder-proponent must satisfy to
have a proposal included in a company's proxy statement. Under the
current rule, to be eligible to submit a proposal, a shareholder-
proponent must have continuously held at least $2,000 in market value
or 1 percent of the company's securities entitled to be voted on the
proposal at the meeting for at least one year by the date the proposal
is submitted.\7\ The $2,000 ownership threshold was last substantively
reviewed and updated by the Commission in 1998.\8\
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\7\ 17 CFR 240.14a-8(b)(1).
\8\ See Amendments To Rules On Shareholder Proposals, Release
No. 34-40018 (May 21, 1998) [63 FR 29106 (May 28, 1998)] (``1998
Adopting Release'').
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[[Page 66460]]
The second proposed amendment is to Rule 14a-8(c), which provides
that each shareholder may submit no more than one proposal to a company
for a particular shareholders' meeting.\9\
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\9\ 17 CFR 240.14a-8(c).
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The third proposed amendment is to Rule 14a-8(i)(12), which allows
companies to exclude a shareholder proposal that ``deals with
substantially the same subject matter as another proposal or proposals
that has or have been previously included in the company's proxy
materials within the preceding 5 calendar years'' if the matter was
voted on at least once in the last three years and did not receive at
least:
(i) 3 percent of the vote if previously voted on once;
(ii) 6 percent of the vote if previously voted on twice; or
(iii) 10 percent of the vote if previously voted on three or more
times.\10\
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\10\ 17 CFR 240.14a-8(i)(12).
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These resubmission thresholds have been in place since 1954 \11\
and, like the ownership thresholds in Rule 14a-8(b), were last
substantively reviewed by the Commission in 1998.\12\
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\11\ See Adoption of Amendments to Proxy Rules, Release No. 34-
4979 (Jan. 6, 1954) [19 FR 246 (Jan. 14, 1954)] (``1954 Adopting
Release'').
\12\ See 1998 Adopting Release, supra note 8. The Commission
sought public comment on the ownership and resubmission requirements
in 2007 in connection with a proposed rule on proxy access, but
these requirements have not been substantively revisited since 1998.
See Shareholder Proposals, Release No. 34-56160 (Jul. 27, 2007) [72
FR 43488 (Aug. 3, 2007)] (``2007 Proxy Access Proposing Release'').
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B. Roundtable on the Proxy Process
On November 15, 2018, the Commission's staff held a roundtable on
the proxy process (``Proxy Process Roundtable''), which included a
panel discussion on Rule 14a-8 and the shareholder-proposal process.
The shareholder-proposal panelists expressed their views on the
application of Rule 14a-8 and shared their experiences with shareholder
proposals and the related benefits and costs involved for companies and
shareholders. Among the topics addressed were ownership and
resubmission thresholds under Rule 14a-8(b) and Rule 14a-8(i)(12),
respectively, and the extent to which these thresholds are in need of
updating.
Panelists from the issuer community recommended revising the
ownership and/or resubmission thresholds,\13\ while the panelists who
have submitted shareholder proposals generally opposed revisions to
these rules.\14\ Among those favoring changes to these thresholds,
several cited the costs to companies and their shareholders as a
primary basis for raising ownership and/or resubmission thresholds.\15\
Among those who support the current thresholds, one panelist stated
that Rule 14a-8 already appropriately balances the costs and benefits
of the shareholder-proposal process,\16\ and another panelist suggested
that Rule 14a-8 is currently a cost-effective mechanism that
facilitates private ordering.\17\
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\13\ See Transcript of the Roundtable on the Proxy Process (Nov.
15, 2018) (``Roundtable Transcript''), available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf, comments
of Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell
LLP; Maria Ghazal, Senior Vice President, Business Roundtable; Tom
Quaadman, Executive Vice President, U.S. Chamber of Commerce Center
for Capital Markets Competitiveness; and Dannette Smith, Secretary
to the Board of Directors and Senior Deputy General Counsel,
UnitedHealth Group.
\14\ See Roundtable Transcript, supra note 13, comments of
Michael Garland, Assistant Comptroller, Corporate Governance and
Responsible Investment, Office of the Comptroller, New York City;
Jonas Kron, Senior Vice President and Director of Shareholder
Advocacy, Trillium Asset Management; Aeisha Mastagni, Portfolio
Manager, Corporate Governance Unit, California State Teachers'
Retirement System; James McRitchie, Publisher, CorpGov.net; and
Brandon Rees, Deputy Director of Corporations and Capital Markets,
American Federation of Labor and Congress of Industrial
Organizations.
\15\ See Roundtable Transcript, supra note 13, comments of Ning
Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP, at
127; Tom Quaadman, Executive Vice President, U.S. Chamber of
Commerce Center for Capital Markets Competitiveness, at 136; and
Dannette Smith, Secretary to the Board of Directors and Senior
Deputy General Counsel, UnitedHealth Group, at 148-49.
\16\ See Roundtable Transcript, supra note 13, comments of
Aeisha Mastagni, Portfolio Manager, Corporate Governance Unit,
California State Teachers' Retirement System, at 134.
\17\ See Roundtable Transcript, supra note 13, comments of Jonas
Kron, Senior Vice President and Director of Shareholder Advocacy,
Trillium Asset Management, at 124.
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In connection with the Proxy Process Roundtable, the staff invited
members of the public to provide their views on the proxy process via
written comments.\18\ We received many comment letters addressing Rule
14a-8. Some of these commenters recommended raising the ownership and/
or resubmission thresholds,\19\ while others were supportive of the
current thresholds.\20\ Several commenters expressed concern about the
costs associated with
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management's consideration of a proposal and/or its inclusion in the
proxy statement.\21\ Two commenters cited an estimate indicating an
average cost to companies of $87,000 per shareholder proposal,\22\
another commenter estimated its cost at more than $100,000 per
proposal,\23\ and another commenter cited a cost of approximately
$150,000 per proposal.\24\ Other commenters suggested the costs to
companies are low and noted that most companies receive few, if any,
shareholder proposals.\25\ Some commenters expressed concern that a
large number of proposals are submitted by a small number of
individuals who own nominal stakes in the companies to which they
submit proposals.\26\ One commenter disagreed with this concern because
proposals submitted by these individuals between 2004 and 2017 received
an average level of support of 40 percent and, in the commenter's
opinion, this level of support ``indicates these filers provide a
valuable service to fellow shareholders by promoting good corporate
governance.'' \27\
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\18\ Comment letters related to the Proxy Process Roundtable are
available at https://www.sec.gov/comments/4-725/4-725.htm.
\19\ See letters in response to the Proxy Process Roundtable
from Advent Capital Management, LLC dated July 29, 2019; American
Securities Association dated June 7, 2019; Braemar Hotels & Resorts
Inc. dated January 4, 2019; Business Roundtable dated June 3, 2019;
U.S. Chamber of Commerce Center for Capital Markets Competitiveness
dated November 12, 2018 and December 20, 2018; Center on Executive
Compensation dated August 1, 2018; Chevron Corporation dated August
20, 2019; Exxon Mobil Corporation dated July 26, 2019; Group 1
Automotive, Inc. dated January 11, 2019; Institute for Policy
Innovation dated October 11, 2018; Investment Company Institute
dated March 15, 2019; National Association of Manufacturers dated
October 30, 2018; Nareit dated November 12, 2018; Nasdaq, Inc. dated
November 14, 2018; Nasdaq, Inc. et al. dated February 4, 2019;
Society for Corporate Governance dated November 9, 2018; The Capital
Group Companies, Inc. dated November 14, 2018; The Vanguard Group
dated September 20, 2019; Tyler Technologies, Inc. dated September
20, 2019.
\20\ See letters in response to the Proxy Process Roundtable
from Addenda Capital et al. dated November 13, 2018; Adrian
Dominican Sisters dated December 11, 2018; American Federation of
Labor and Congress of Industrial Organizations dated November 9,
2018; Anonymous (19 commenters); California Public Employees'
Retirement System dated December 11, 2018; California State
Teachers' Retirement System dated November 30, 2018; City of New
York Office of the Comptroller dated January 2, 2019; Conference for
Corporate Responsibility Indiana and Michigan dated December 4,
2018; Council of Institutional Investors dated January 31, 2019;
Theodore S. Cochrane dated January 2, 2019; Congregation of Sisters
of St. Agnes dated December 4, 2018; Congregation of St. Basil dated
December 3, 2018; CtW Investment Group dated January 16, 2019; Dana
Investment Advisors dated November 30, 2018; Decatur Capital
Management Inc. dated August 13, 2019; Dominican Sisters Grand
Rapids dated December 2, 2018; Dominican Sisters of Springfield
Illinois dated December 3, 2018; The Episcopal Church received
December 11, 2018; Everence Financial dated December 6, 2018; FAIRR
Initiative dated December 4, 2018; Franciscan Sisters of Perpetual
Adoration dated December 5, 2018; Glass Lewis dated November 14,
2018; Green Century Capital Management, Inc. dated December 5, 2018;
Interfaith Center on Corporate Responsibility dated November 6,
2018; Investor Voice, SPC dated November 14, 2018; Jantz Management
LLC dated October 7, 2019; Jesuit Committee on Investment
Responsibility dated December 10, 2018; Loring, Wolcott & Coolidge
dated December 4, 2018; James McRitchie received November 27, 2018
and August 22, 2019; Mercy Investment Services, Inc. dated December
3, 2018; MFS Investment Management dated November 14, 2018; Midwest
Coalition for Responsible Investment dated December 6, 2018;
Missionary Oblates of Mary Immaculate dated December 12, 2018;
Morningstar, Inc. dated December 17, 2018; NorthStar Asset
Management, Inc. dated December 4, 2018; Pax World Funds dated
November 9, 2018; Pension Investment Association of Canada dated
April 17, 2019; Praxis Mutual Funds dated December 6, 2018;
Presbyterian Church U.S.A. dated November 13, 2018; Priests of the
Sacred Heart dated December 3, 2018; Province of St. Joseph of the
Capuchin Order dated December 3, 2018; Racine Dominicans dated
December 5, 2018; Robert E. Rutkowski dated November 15, 2018;
Shareholder Rights Group dated September 17, 2018; Sisters of
Charity--Halifax dated December 5, 2018; Sisters of St. Joseph of
Orange dated December 18, 2018; Sisters of the Holy Cross dated
December 10, 2018; Sisters of the Presentation of the Blessed Virgin
Mary dated December 3, 2018; State of New York Office of the State
Comptroller dated November 13, 2018; Trinity Health dated November
9, 2018; US SIF dated November 9, 2018; ValueEdge Advisors dated
July 17, 2019; Washington State Investment Board dated November 14,
2018; Kyle Wright dated December 4, 2018.
\21\ See, e.g., letters in response to the Proxy Process
Roundtable from American Securities Association dated June 7, 2019;
Blackrock, Inc. dated November 16, 2018; Business Roundtable dated
November 9, 2018; Exxon Mobil Corporation dated July 26, 2019;
Nasdaq, Inc. dated November 14, 2018; Society for Corporate
Governance dated November 9, 2018.
\22\ See letters in response to the Proxy Process Roundtable
from Blackrock, Inc. dated November 16, 2018; Society for Corporate
Governance dated November 9, 2018.
\23\ See letter in response to the Proxy Process Roundtable from
Exxon Mobil Corporation dated July 26, 2019.
\24\ See letter in response to the Proxy Process Roundtable from
the American Securities Association dated June 7, 2019 (citing H.R.
Rep No. 115-904, at 2 (2018)).
\25\ See, e.g., letters in response to the Proxy Process
Roundtable from Council of Institutional Investors dated November 8,
2018 (citing Ceres et al., The Business Case for the Current SEC
Shareholder Proposal Process 11-12 (2017), available at https://www.ussif.org/files/Public_Policy/Comment_Letters/Business%20Case%20for%2014a-8.pdf (``Ceres Business Case''));
Addenda Capital et al. dated November 13, 2018 (citing Adam M.
Kanzer, The Dangerous ``Promise of Market Reform'': No Shareholder
Proposals, Harvard Law School Forum on Corporate Governance and
Financial Regulation (Jun. 15, 2017), available at https://corpgov.law.harvard.edu/2017/06/15/the-dangerous-promise-of-market-reform-no-shareholder-proposals/).
\26\ See, e.g., letters in response to the Proxy Process
Roundtable from Business Roundtable dated November 9, 2018; Center
on Executive Compensation dated August 1, 2018.
\27\ See letter in response to the Proxy Process Roundtable from
Mercy Investment Services, Inc. dated December 3, 2018.
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Below we discuss the proposed amendments to Rule 14a-8, which have
been informed by the public input we have received, including in
response to the Proxy Process Roundtable. We welcome feedback and
encourage interested parties to submit comments on any or all aspects
of the proposed amendments. When commenting, it would be most helpful
if you include the reasoning behind your position or recommendation.
II. Discussion of Proposed Amendments
A. Rule 14a-8(b)--Eligibility Requirements
1. Relevant History and Background of Rule 14a-8(b)
At the time the shareholder-proposal rule was initially adopted, a
shareholder-proponent's eligibility to submit a proposal was not
conditioned on owning a minimum amount of a company's securities, or
holding the securities for a specified period of time. Instead, the
rule enabled ``a qualified security holder'' to submit a proposal for
inclusion in the company's proxy materials.\28\ In 1947, the rule text
was revised to specify that ``any security holder entitled to vote at a
meeting of security holders of the issuer'' could submit a
proposal.\29\ In 1976, the Commission considered, but decided not to
adopt, minimum ownership requirements, believing that there was not
``sufficient justification'' at that time for such requirements because
the existing eligibility requirements ``have not been abused.'' \30\
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\28\ See Release No. 34-3347 (Dec. 18, 1942) [7 FR 10655 (Dec.
22, 1942)].
\29\ See Adoption of Revised Proxy Rules, Release No. 34-4037
(Dec. 17, 1947) [12 FR 8768 (Dec. 24, 1947)].
\30\ See Adoption of Amendments Relating to Proposals by
Security Holders, Release No. 34-12999 (Nov. 22, 1976) [41 FR 52994
(Dec. 3, 1976)] (``1976 Adopting Release'').
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However, the Commission later reconsidered the matter in response
to ``criticisms of the current rule that have increased with the
pressure placed upon the existing mechanism by the large number of
proposals submitted each year and the increasing complexity of the
issues involved in those proposals, as well as the susceptibility of
certain provisions of the rule and the staff's interpretations
thereunder to abuse by a few proponents and issuers.'' \31\ The
Commission found merit in the views of many commenters that ``abuse of
the security holder proposal rule could be curtailed by requiring
shareholders who put the company and other shareholders to the expense
of including a proposal in a proxy statement to have some measured
economic stake or investment interest in the corporation.'' \32\ The
Commission accordingly amended the rule in 1983 to require shareholder-
proponents to own ``at least 1% or $1,000 in market value of securities
entitled to be voted at the meeting'' and to ``have held such
securities for at least one year.'' \33\ Co-proponents, however, were
permitted to aggregate their holdings for purposes of meeting the
ownership requirements.\34\
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\31\ 1982 Proposing Release, supra note 2. at 47421. The
Commission further explained: ``It has been suggested that under
current construction of the rule, a few proponents have been able to
use the rule as a publicity mechanism to further personal interests
that are unrelated to the interests of security holders as security
holders and that certain sophisticated proponents, who submit
proposals annually to a variety of issuers, are able to require the
inclusion of a proposal which has generated little security holder
interest by simply changing its form or minimally varying its
coverage. The rule was not designed to burden the proxy solicitation
process by requiring the inclusion of such proposals.'' Id. at 47422
n.8.
\32\ See 1983 Adopting Release, supra note 6.
\33\ Id. In addition, the Commission noted in 2007 that the one-
year holding period ensures that shareholder proposals are submitted
``by shareholders with a significant long-term stake in the
company.'' See 2007 Proxy Access Proposing Release, supra note 12.
\34\ See 1983 Adopting Release, supra note 6.
---------------------------------------------------------------------------
In 1998, the Commission raised the $1,000 threshold to $2,000.\35\
When it proposed this increase, the Commission explained that the
revision was partly to adjust for inflation.\36\ Upon adoption of the
$2,000 threshold, the Commission noted that ``[t]here was little
opposition to the proposed increase among commenters.'' \37\ While the
Commission had elected not to propose an amount higher than $2,000
``out of concern that a more significant increase could restrict access
to companies' proxy materials by smaller shareholders,'' \38\ the
Commission noted upon adopting the $2,000 threshold that several
commenters ``do not believe the increase is great enough to be
meaningful, especially in light of the overall increase in stock prices
over the last few years.'' \39\ The Commission accordingly indicated
that it had ``decided to limit the increase to $2,000 for now.'' \40\
The Commission also sought comment on whether to shorten or lengthen
the one-year holding period,\41\ but it was not revised because, at
that time, ``there was no significant support for any modifications''
to that
[[Page 66462]]
aspect of the rule.\42\ The Commission has not revised the share
ownership requirements since 1998.
---------------------------------------------------------------------------
\35\ See 1998 Adopting Release, supra note 8.
\36\ The Commission explained that the actual inflation
adjustment would have been $600, which would have set the new
threshold at $1,600. A new threshold of $2,000 was proposed,
however, to account for future inflation and to simplify the
calculation process. See Amendments to Rules on Shareholder
Proposals, Release No. 34-39093 (Sep. 18, 1997) [62 FR 50682 (Sep.
26, 1997)] (``1997 Proposing Release'').
\37\ See 1998 Adopting Release, supra note 8.
\38\ See 1997 Proposing Release, supra note 36.
\39\ See 1998 Adopting Release, supra note 8.
\40\ Id. (emphasis added).
\41\ See 1997 Proposing Release, supra note 36.
\42\ See 1998 Adopting Release, supra note 8.
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2. Public Views on Rule 14a-8(b)
In recent years, some observers have advocated increasing the
amount of securities a shareholder must own to be eligible to submit a
shareholder proposal.\43\ These groups have suggested alternative
ownership requirements, such as eliminating the flat dollar threshold
in favor of relying solely on a percentage-of-shares-owned test,\44\ or
raising the ownership threshold to $50,000, indexed annually for
inflation.\45\ Some observers have suggested raising the ownership
requirements to lessen the burden on companies,\46\ or to ensure that
shareholder-proponents have a meaningful stake in the companies to
which they submit proposals.\47\ Others have suggested keeping the
existing $2,000 requirement, or limiting any increase, to avoid
excluding smaller investors,\48\ and some have suggested that dropping
the flat dollar threshold in favor of a percentage-only test would
significantly limit shareholders' ability to submit shareholder
proposals for inclusion in companies' proxy materials.\49\ Several
observers also have suggested lengthening the current one-year holding
period requirement,\50\ while at least one observer has suggested
shortening it.\51\
---------------------------------------------------------------------------
\43\ See, e.g., Business Roundtable, Responsible Shareholder
Engagement and Long-Term Value Creation (Oct. 31, 2016), available
at https://s3.amazonaws.com/brt.org/archive/reports/BRT%20Shareholder%20proposal%20paper-final.pdf (``BRT Report'');
Nasdaq, The Promise of Market Reform: Reigniting America's Economic
Engine (last updated Feb. 2018), available at https://www.nasdaq.com/docs/Nasdaq_Blueprint_to_Revitalize_Capital_Markets_April_2018_tcm5044-43175.pdf (``Nasdaq Report''); U.S. Dep't of Treasury, A Financial
System That Creates Economic Opportunities 32 (Oct. 2017), available
at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``Treasury
Report''); see also letters in response to the Proxy Process
Roundtable from Advent Capital Management, Inc. dated July 29, 2019;
Braemar Hotels & Resorts Inc. dated January 4, 2019; Business
Roundtable dated November 9, 2018 and June 3, 2019; Center on
Executive Compensation dated August 1, 2018; Group 1 Automotive,
Inc. dated January 11, 2019; National Association of Manufacturers
dated October 30, 2018; Nasdaq, Inc. dated November 14, 2018;
Nasdaq, Inc. et al. dated February 4, 2019; Society for Corporate
Governance dated November 9, 2018; The Capital Group Companies dated
November 14, 2018. At the Commission's 38th Annual Government-
Business Forum on Small Business Capital Formation held on August
14, 2019, one of the forum participant recommendations was to amend
the submission thresholds.
\44\ See BRT Report, supra note 43; Nasdaq Report, supra note
43.
\45\ See letter in response to the Proxy Process Roundtable from
Society for Corporate Governance dated November 9, 2018.
\46\ See id.
\47\ See, e.g., Nasdaq Report, supra note 43.
\48\ See Ceres et al., An Investor Response to the U.S.
Chamber's Proposal to Revise SEC Rule 14a-8, (Nov. 9, 2017),
available at http://www.iccr.org/sites/default/files/resources_attachments/investor_response_to_chamber_14a-8_nov_9_final_2.pdf; see also letters in response to the Proxy
Process Roundtable from Addenda Capital et al. dated November 13,
2018; Dominican Sisters of Adrian, Michigan dated December 11, 2018;
American Federation of Labor and Congress of Industrial
Organizations dated November 9, 2018; Anonymous (19 commenters);
California Public Employees' Retirement System dated December 11,
2018; California State Teachers' Retirement System dated December 3,
2018; Conference for Corporate Responsibility Indiana and Michigan
dated December 3, 2018; Congregation of Sisters of St. Agnes dated
December 4, 2018; Council of Institutional Investors dated January
31, 2019; Theodore S. Cochrane dated January 2, 2019; Congregation
of St. Basil dated December 3, 2018; CtW Investment Group dated
January 16, 2019; Dominican Sisters--Grand Rapids dated December 2,
2018; Dominican Sisters of Springfield Illinois dated December 3,
2018; The Episcopal Church received December 11, 2018; Everence
Financial dated December 6, 2018; FAIRR Initiative dated December 4,
2018; Form Letter A (18,614 letters); Franciscan Sisters of
Perpetual Adoration dated December 5, 2018; Glass Lewis dated
November 14, 2018; Interfaith Center on Corporate Responsibility
dated November 6, 2018; Investor Voice, SPC dated November 14, 2018;
Jesuit Committee on Investment Responsibility dated December 10,
2018; Loring, Wolcott & Coolidge dated December 4, 2018; James
McRitchie received November 27, 2018; Mercy Investment Services,
Inc. dated December 3, 2018; MFS Investment Management dated
November 14, 2018; NorthStar Asset Management, Inc. dated December
4, 2018; Pax World Funds dated November 9, 2018; Pension Investment
Association of Canada dated April 17, 2019; Praxis Mutual Funds
dated December 6, 2018; Presbyterian Church (U.S.A.) dated November
13, 2018; Priests of the Sacred Heart dated December 3, 2018;
Province of St. Joseph of the Capuchin Order dated December 3, 2018;
Racine Dominicans dated December 5, 2018; Robert E. Rutkowski dated
November 15, 2018; Shareholder Rights Group dated December 4, 2018;
Sisters of Charity--Halifax dated December 5, 2018; Sisters of the
Presentation of the Blessed Virgin Mary dated December 3, 2018;
Sisters of St. Joseph of Orange dated December 18, 2018; Sisters of
the Holy Cross dated December 10, 2018; State of New York Office of
the State Comptroller dated November 13, 2018; Trinity Health dated
November 9, 2018; Washington State Investment Board dated November
14, 2018.
\49\ See Letter to Jeb Hensarling, Chairman and Maxine Waters,
Ranking Member, House Financial Services Committee from Jeffrey P.
Mahoney, General Counsel, Council of Institutional Investors, dated
April 24, 2017, available at https://democrats-financialservices.house.gov/uploadedfiles/letter_-_cii_04.27.2017.pdf.
\50\ See BRT Report, supra note 43; see also letters in response
to the Proxy Process Roundtable from Advent Capital Management, LLC
dated July 29, 2019; Business Roundtable dated November 9, 2018;
Nasdaq, Inc. dated November 14, 2018; The Vanguard Group, Inc. dated
September 20, 2019.
\51\ See Roundtable Transcript, supra note 13, at 150, comments
of Brandon Rees, Deputy Director of Corporations and Capital
Markets, American Federation of Labor and Congress of Industrial
Organizations.
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3. Need for Proposed Amendments
The shareholder-proposal process established by Rule 14a-8
facilitates engagement between shareholders and the companies they own.
The rule also enables individual shareholders to shift to the company,
and ultimately other shareholders, the cost of soliciting proxies for
their proposals. Because it shifts burdens from proponents to
companies, it is susceptible to overuse.\52\ As the Commission has
previously recognized, the ownership threshold and holding period in
Rule 14a-8(b) aim 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, and before the shareholder may use the company's proxy
statement to command the attention of other shareholders to consider
and vote upon the proposal.\53\
---------------------------------------------------------------------------
\52\ See Frank H. Easterbrook & Daniel R. Fischel, The Economic
Structure of Corporate Law 85 (1991) (Under Rule 14a-8, ``the
majority must subsidize the activities of the minority who are
allowed to make proposals without incurring the costs.'').
\53\ See 1982 Proposing Release, supra note 2; 1983 Adopting
Release, supra note 6.
---------------------------------------------------------------------------
Much has changed since the Commission last considered amendments to
Rule 14a-8, including the level and ease of engagement between
companies and their shareholders. For instance, shareholders now have
alternative ways, such as through social media, to communicate their
preferences to companies and effect change.\54\
---------------------------------------------------------------------------
\54\ See, e.g., Donna Fuscaldo, Say Gives Retail Investors A
Voice And Tesla Listens, Forbes (Feb. 19, 2019), https://www.forbes.com/sites/donnafuscaldo/2019/02/19/say-gives-retail-investors-a-voice-and-tesla-listens/; Vanessa Fuhrmans, Some U.S.
Companies Bow to Social-Media Pressure, Sever NRA Ties, Wall Street
Journal (Feb. 24, 2018), https://www.wsj.com/articles/some-u-s-companies-bow-to-social-media-pressure-sever-nra-ties-1519431715.
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[[Page 66463]]
We are concerned that the $2,000/one-year threshold established in
1998 does not strike the appropriate balance today. We believe that
holding $2,000 worth of stock for a single year does not demonstrate
enough of a meaningful economic stake or investment interest in a
company to warrant the inclusion of a shareholder's proposal in the
company's proxy statement. As the table below demonstrates, the $2,000
threshold, adjusted for inflation, would be equal to $3,152 in 2019
dollars.\55\ Moreover, using the cumulative growth of the Russell 3000
Index as a proxy for the average increase in companies' values, a
$2,000 investment in a company in 1998 would be worth approximately
$8,379 today.\56\ We believe that the increase in price of shares and
changes in inflation have contributed, in part, to the need to revisit
the one-year holding period associated with the $2,000 threshold.
---------------------------------------------------------------------------
\55\ $3,152 = $2,000 x 1.576 (cumulative rate of inflation
between May 1998 and August 2019 using the CPI inflation calculator,
available at https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906).
\56\ $8,379 = $2,000 x 4.190 (cumulative rate of growth of the
Russell 3000 index between May 1998 and August 2019 assuming
dividends are reinvested). Data is retrieved from Compustat Daily
Updates--Index Prices.
Ownership Threshold Comparison
----------------------------------------------------------------------------------------------------------------
1998 threshold adjusted for
Threshold established in 1998 inflation Change in Russell 3000 Index
----------------------------------------------------------------------------------------------------------------
$2,000 $3,152 $8,379
----------------------------------------------------------------------------------------------------------------
We recognize that the amount of stock owned is not the only way to
demonstrate an interest in a company, particularly for small investors.
In many cases, the length of time owning the company's securities may
be a more meaningful indicator that a shareholder has a sufficient
interest that warrants use of the company's proxy statement. A
shareholder's demonstrated long-term investment interest in a company
may make it more likely that the shareholder's proposal will reflect a
greater interest in the company and its shareholders, rather than an
intention to use the company and the proxy process to promote a
personal interest or publicize a general cause. A shareholder's
demonstrated long-term investment interest may also make it more likely
that a shareholder will continue to hold the shares after the
shareholder's proposal is voted upon, and thus more likely that any
costs of implementing the shareholder's proposal will be borne in part
by the shareholder responsible for the proposal. We believe having a
longer holding period is particularly important if the dollar value of
the ownership interest is minimal because a person seeking to misuse
the shareholder-proposal process could more easily purchase the
smallest possible stake in a company to take advantage of the process.
4. Proposed Amendments
We are proposing to establish enhanced ownership requirements under
Rule 14a-8(b) that take into account both the amount of securities
owned and the length of time held, in determining a shareholder's
eligibility to submit a shareholder proposal. Under the proposed
ownership requirements, the shareholder-proposal process would remain
available to a wide range of shareholders, including those with smaller
investments, but would require those with smaller investments to hold
their shares for a longer period of time. We believe these new
thresholds would more appropriately balance the interests of
shareholders who seek to use the company's proxy statement to advance
their own proposals, on the one hand, with the interests of companies
and other shareholders who bear the burdens associated with the
inclusion of such proposals, on the other hand. We also believe the new
thresholds would be a better indicator of a shareholder's investment
interest in the company.
Under the proposed rule, a shareholder would be eligible to submit
a Rule 14a-8 proposal for inclusion in a company's proxy materials if
the shareholder satisfies one of three ownership requirements, each of
which is designed to show that the shareholder-proponent has a
demonstrated economic stake or investment interest in the company to
which the proposal is submitted. Specifically, a shareholder would be
eligible to submit a Rule 14a-8 proposal if the shareholder has
continuously held at least:
$2,000 of the company's securities entitled to vote on the
proposal for at least three years;
$15,000 of the company's securities entitled to vote on
the proposal for at least two years; or
$25,000 of the company's securities entitled to vote on
the proposal for at least one year.\57\
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\57\ Due to market fluctuations, the value of a shareholder's
investment in a company may vary throughout the applicable holding
period before the shareholder submits the proposal. In order to
determine whether the shareholder satisfies the relevant ownership
threshold, the shareholder should look at whether, on any date
within the 60 calendar days before the date the shareholder submits
the proposal, the shareholder's investment is valued at the relevant
threshold or greater, based on the average of the bid and ask
prices. See 1983 Adopting Release, supra note 6.
---------------------------------------------------------------------------
The proposed rule would retain the key elements of a minimum amount
of securities owned and minimum time period held, including retaining
the current $2,000 threshold for shares held continuously for at least
three years. The tiered approach under the proposed revision would
provide multiple options for demonstrating an ownership stake through a
combination of amount of securities owned and length of time held. We
believe this approach takes into account the varying situations of
shareholders and would be preferable to a one-size-fits-all approach.
Under the proposed rule, shareholders owning a smaller amount of
securities could utilize the rule, provided that ownership was
continuous over a longer period of time. The tiered approach would
enable other shareholders to demonstrate an economic stake or
investment interest through larger ownership interests and shorter
holding periods.
Under the proposed rule, the current $2,000 threshold would remain
the same to preserve the ability of long-term shareholders owning a
relatively small amount of shares to continue to utilize Rule 14a-8,
but these investors would be required to hold the securities for at
least three years to be eligible to submit a proposal. In light of the
small investment amount required under this ownership tier, we believe
that a longer holding period is warranted to demonstrate a
shareholder's sufficient investment interest in the company and, in
turn, to justify requiring the company to include such a shareholder's
proposal in its proxy statement.
We are proposing two additional eligibility options for
shareholders, reflecting differences in amount of securities held and
length of time held. We believe that the proposed thresholds
[[Page 66464]]
of $15,000 for at least two years and $25,000 for at least one year are
each indicative of a shareholder having an economic stake or investment
interest in the company that would justify requiring the company to
include such a shareholder's proposal in its proxy statement.
We also propose to eliminate the current 1 percent ownership
threshold, which historically has not been utilized. The vast majority
of investors that submit shareholder proposals do not meet a 1 percent
ownership threshold.\58\ In addition, we understand that the types of
investors that hold 1 percent or more of a company's shares generally
do not use Rule 14a-8 as a tool for communicating with boards and
management.\59\
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\58\ See letter to Bill Huizenga, Chairman and Carolyn B.
Maloney, Ranking Member, Subcommittee on Capital Markets,
Securities, and Investment Committee on Financial Services from
Jeffrey P. Mahoney, General Counsel, Council of Institutional
Investors, dated May 22, 2018 (explaining that ``[e]ven [the Council
of Institutional Investors'] largest public pension fund members
rarely hold 1% of a public company''), available at https://www.cii.org/files/May%2022,%202018%20Letter%20to%20Capital%20Markets%20Subcommittee%20(
final).pdf; letter to The Honorable Maxine Waters, Ranking Member,
Committee on Financial Services from Jack Ehnes, Chief Executive
Officer, CalSTRS, (June 5, 2017), at 1 (``While one percent may
sound like a small amount, even a large investor like the $200
billion CalSTRS fund does not own one percent of publicly traded
companies.''), available at https://www.calstrs.com/sites/main/files/fileattachments/06-05-2017_maxine_financial_choice_act.pdf;
Statement of New York City Comptroller Scott M. Stringer on the
April 19th Discussion Draft of the Financial CHOICE Act of 2017
(Apr. 25, 2017), at 1 (``Despite being among the largest pension
investors in the world, we rarely hold more than 0.5% of any
individual company, and most often hold less.''), available at
https://comptroller.nyc.gov/newsroom/testimonies/statement-of-new-york-city-comptrollerscott-m-stringer-on-the-april-19th-discussion-draft-of-the-financial-choice-act-of-2017-act/.
\59\ See, e.g., Roundtable Transcript, supra note 13, at 150,
comments of Brandon Rees, Deputy Director of Corporations and
Capital Markets, American Federation of Labor and Congress of
Industrial Organizations.
---------------------------------------------------------------------------
The following table compares the proposed dollar thresholds as a
percentage of market value as of December 2018 for the S&P 500 Index
constituents and May 2019 for the Russell 3000 Index constituents: \60\
---------------------------------------------------------------------------
\60\ Data for the S&P 500 constituents is retrieved from CRSP
and data for the Russell 3000 constituents is retrieved from Market
Capitalization Ranges, FTSE Russell Market, https://www.ftserussell.com/research-insights/russell-reconstitution/market-capitalization-ranges (last visited Oct. 31, 2019).
----------------------------------------------------------------------------------------------------------------
$2,000 $15,000 $25,000
Threshold as a Threshold as a Threshold as a
Registrant percentage of percentage of percentage of
market value market value market value
----------------------------------------------------------------------------------------------------------------
Largest Registrant in the S&P 500 Index......................... 0.0000003 0.0000019 0.0000032
500th Registrant in the S&P 500 Index........................... 0.0001 0.0005 0.0009
3,000th Registrant in the Russell Index......................... 0.0013 0.0098 0.0164
----------------------------------------------------------------------------------------------------------------
The proposed rule would not allow shareholders to aggregate their
securities with other shareholders to meet the applicable minimum
ownership thresholds to submit a Rule 14a-8 proposal. Although the
Commission allowed shareholders to aggregate their holdings when it
first adopted ownership thresholds in 1983, it did not provide reasons
for doing so. We believe that allowing shareholders to aggregate their
securities to meet the new proposed thresholds would undermine the goal
of ensuring that every shareholder who wishes to use a company's proxy
statement to advance a proposal has a sufficient economic stake or
investment interest in the company.
Shareholders, however, would continue to be permitted to co-file or
co-sponsor shareholder proposals as a group if each shareholder-
proponent in the group meets an eligibility requirement. Shareholder-
proponents often co-file or co-sponsor a shareholder proposal for a
variety of reasons, such as conveying to the company's management,
board, and other shareholders that the proposal has support from other
shareholders. A lead filer is sometimes designated as the primary point
of contact for the proposal, and each co-filer authorizes the lead
filer to negotiate with the company and/or withdraw the proposal on the
co-filer's behalf. Currently the rules do not require shareholder-
proponents to designate a lead filer or make explicit other
arrangements, but we believe this practice could facilitate engagement
and reduce administrative burdens on companies, co-filers, and the
staff. We believe that, as a best practice, shareholder-proponents
should clearly state in their initial submittal letter to the company
that they are co-filing the proposal with other proponents and identify
the lead filer, specifying whether such lead filer is authorized to
negotiate with the company and withdraw the proposal on the co-filer's
behalf. Although we are not proposing to require this practice in our
rules, we request comment as to whether we should revise the rules to
require that co-filers identify a lead filer.\61\
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\61\ We note that ambiguities in the nature of coordination on a
proposal's submission could prompt companies to seek exclusion under
Rule 14a-8(i)(11). Specifically, if two or more shareholder-
proponents submit substantially duplicative proposals but fail to
clearly indicate that they intend to co-file or co-sponsor the
proposal, the later-received proposal may be susceptible to
exclusion under Rule 14a-8(i)(11).
---------------------------------------------------------------------------
We believe the proposed tiered thresholds would appropriately
balance shareholders' ability to submit proposals with the attendant
burdens. We are mindful of concerns that any revisions to the ownership
requirements may have a greater effect on shareholders with smaller
investments. We believe that the amendments we are proposing today
adequately preserve the ability of smaller shareholders to submit
proposals. Importantly, the proposed thresholds allow small and large
shareholders to continue to participate in the shareholder-proposal
process. We are, however, seeking comment on whether we should use
other thresholds and/or criteria for determining eligibility to submit
shareholder proposals and, if so, what thresholds or criteria should be
considered.
We request and encourage any interested person to submit comments
regarding the proposed amendments, specific issues discussed in this
release, and other matters that may have an effect on the proposals. We
note that comments are of the greatest assistance if accompanied by
supporting data and analysis of the issues addressed in those comments.
Request for Comment
1. We are proposing to amend Rule 14a-8(b) to establish new
ownership requirements for establishing an investor's eligibility to
submit a shareholder proposal to be included in a company's proxy
statement. Should we amend Rule 14a-8(b) as proposed?
[[Page 66465]]
2. The proposed amendments seek to strike a balance between
maintaining an avenue of communication for shareholders, including
long-term shareholders, while also recognizing the costs incurred by
companies and their shareholders in addressing shareholder proposals.
Are there other considerations we should take into account?
3. Should we adopt a tiered approach, providing multiple
eligibility options, as proposed? Are there other approaches that would
be preferable instead?
4. How is a sufficient economic stake or investment interest best
demonstrated? Is it by a combination of amount invested and length of
time held, as proposed, or should another approach to eligibility be
used?
5. Are the proposed dollar amounts and holding periods that we
propose for each of the three tiers appropriate? Are there other dollar
amounts and/or holding periods that would better balance shareholders'
ability to submit proposals and the related costs? Should any dollar
amounts be indexed for inflation or stock-market performance?
6. We are proposing to maintain the $2,000 ownership level, but
increase the corresponding holding period to three years. Should we
also increase the $2,000 threshold? If so, what would be an appropriate
increase? For example, should we adjust for inflation (e.g., $3,000) or
otherwise establish a higher amount?
7. Are there potential drawbacks with the tiered approach? If so,
what are they?
8. Instead of adopting a tiered approach, should we simply increase
the $2,000/one-year requirement? If so, what would be an appropriate
threshold?
9. Should the current 1 percent test be eliminated, as proposed?
Should the 1 percent threshold instead be replaced with a different
percentage threshold? Are there ways in which retaining a percentage-
based test would be useful in conjunction with the proposed tiered
thresholds?
10. Should we instead use only a percentage-based test? If so, at
what percentage level? Are there practical difficulties associated with
a percentage-based test such as calculation difficulties that we should
take into consideration?
11. Should we prohibit the aggregation of holdings to meet the
thresholds, as proposed? Would allowing aggregation of holdings be
consistent with a shareholder having a sufficient economic stake or
investment interest in the company to justify the costs associated with
shareholder proposals?
12. If we were to allow shareholders to aggregate their holdings to
meet the thresholds, should there be a limit on the number of
shareholders that could aggregate their shares for purposes of
satisfying the proposed ownership requirements? If so, what should the
limit be? For example, should the number of shareholders that are
permitted to aggregate be limited to five so as to reduce the
administrative burden on companies associated with processing co-filed
submissions?
13. Should we require shareholder-proponents to designate a lead
filer when co-filing or co-sponsoring a proposal? Would doing so
facilitate engagement and reduce administrative burdens on companies
and co-filers? If we required shareholder-proponents to designate a
lead filer, should we require that the lead filer be authorized to
negotiate the withdrawal of the proposal on behalf of the other co-
filers? Would such a requirement encourage shareholders to file their
own proposals rather than co-file? Would the number of shareholder
proposal submissions increase as a result?
14. What other avenues can or do shareholders use to communicate
with companies besides the Rule 14a-8 process? Has the availability and
effectiveness of these other channels changed over time?
15. Unlike other issuers, open-end investment companies generally
do not hold shareholder meetings each year. As a result, several years
may pass between the submission of a shareholder proposal and the next
shareholder meeting. In these cases, the submission may no longer
reflect the interest of the proponent or may be in need of updating, or
the shareholder may no longer own shares or may otherwise be unable to
present the proposal at the meeting. Should any special provisions be
considered, after some passage of time (e.g., two years, three years,
five years, etc.), to require shareholders to reaffirm submission of
shareholder proposals for open-end investment companies or, absent
reaffirmation, for the proposals to expire?
16. Does the Rule 14a-8 process work well? Should the Commission
staff continue to review proposals companies wish to exclude? Should
the Commission instead review these proposals? Is there a different
structure that might serve the interests of companies and shareholders
better? Are states better suited to establish a framework governing the
submission and consideration of shareholder proposals?
B. Proposals Submitted on Behalf of Shareholders
1. Background
Companies receive proposals under Rule 14a-8 from individuals and
entities that may not qualify to submit proposals at a particular
company in their own name, but have arrangements to serve as a
representative to submit a proposal on behalf of individuals or
entities that have held a sufficient number of shares for the requisite
period. We also understand that shareholders may wish to use a
representative for a number of reasons, including to obtain assistance
from someone who has more experience with the shareholder-proposal
process or as a matter of administrative convenience. Often, the
shareholder has an established relationship with the representative
(e.g., the shareholder has previously used the representative to submit
proposals on his or her behalf, or the representative serves as the
shareholder's investment adviser). In practice, the representative
typically submits the proposal to the company on the shareholder's
behalf along with necessary documentation, including evidence of
ownership (typically in the form of a broker letter) and the
shareholder's written authorization for the representative to submit
the proposal and act on the shareholder's behalf. After the initial
submission, the representative acts on the shareholder's behalf in
connection with the matter, and communications between the shareholder
and company related to the shareholder proposal are generally handled
by the representative.
Rule 14a-8 does not address a shareholder's ability to submit a
proposal for inclusion in a company's proxy materials through a
representative; absent Commission regulation, this practice has been
governed by state agency law.\62\ Nevertheless, proposals are submitted
by representatives who may or may not themselves have an economic stake
in the relevant company. Some commenters have raised concerns about the
use of a representative in the shareholder-proposal process.\63\ For
[[Page 66466]]
example, some observers have suggested that it may be difficult in some
cases to ascertain whether the shareholder in fact supports the
proposal that has been submitted on their behalf.\64\ When a
representative speaks and acts for a shareholder, there may be a
question as to whether the shareholder has a genuine and meaningful
interest in the proposal, or whether the proposal is instead primarily
of interest to the representative, with only an acquiescent interest by
the shareholder. This uncertainty may also raise questions about
whether the eligibility requirements of Rule 14a-8(b) have been
satisfied.\65\ We also note that it can be burdensome for companies to
verify the purported agency relationship where the documentation
provided by the person or entity submitting the proposal does not
clearly establish that relationship.
---------------------------------------------------------------------------
\62\ Although Rule 14a-8 does not address a shareholder's
ability to submit a proposal through a representative, it
contemplates a representative presenting a proposal on the
shareholder's behalf at a shareholders' meeting. Specifically, Rule
14a-8(h) states that the shareholder, or a ``representative who is
qualified under state law to present the proposal on [the
shareholder's] behalf, must attend the meeting and present the
proposal.'' 17 CFR 240.14a-8(h).
\63\ See, e.g., BRT Report, supra note 43; Statement of Darla C.
Stuckey, President and CEO, Society for Corporate Governance, Before
the H. Comm. on Financial Services Subcomm. on Capital Markets and
Government Sponsored Enterprises, Sept. 21, 2016; see also letter in
response to the Proxy Process Roundtable from Exxon Mobil
Corporation dated July 26, 2019.
\64\ See, e.g., Statement of Darla C. Stuckey, President and
CEO, Society for Corporate Governance, Before the H. Comm. on
Financial Services Subcomm. on Capital Markets and Government
Sponsored Enterprises, Sept. 21, 2016.
\65\ In 2017, the staff of the Division of Corporation Finance
(the ``Division'') issued Staff Legal Bulletin No. 14I (``SLB 14I'')
to address some of the challenges and concerns stemming from a
shareholder's use of an agent in the shareholder-proposal process.
In SLB 14I, the Division explained that, in evaluating whether the
eligibility requirements of Rule 14a-8(b) have been satisfied, it
would look to whether a shareholder who uses an agent in the
shareholder-proposal process provides documentation describing the
shareholder's delegation of authority to the agent. SLB 14I also
explained that, where this information is not provided, there may be
a basis to exclude the proposal under Rule 14a-8(b). SLB 14I
represents the views of the staff of the Division. It is not a rule,
regulation, or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved its content. SLB
14I, like all staff guidance, has no legal force or effect, it does
not alter or amend applicable law, and it creates no new or
additional obligations for any person.
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2. Proposed Amendments
To help address these challenges and concerns, we are proposing to
amend the eligibility requirements of Rule 14a-8 to require
shareholders that use a representative to submit a proposal for
inclusion in a company's proxy statement to provide documentation
attesting that the shareholder supports the proposal and authorizes the
representative to submit the proposal on the shareholder's behalf.
Specifically, the proposed rule would require documentation that:
Identifies the company to which the proposal is directed;
Identifies the annual or special meeting for which the
proposal is submitted;
Identifies the shareholder-proponent and the designated
representative;
Includes the shareholder's statement authorizing the
designated representative to submit the proposal and/or otherwise act
on the shareholder's behalf;
Identifies the specific proposal to be submitted;
Includes the shareholder's statement supporting the
proposal; and
Is signed and dated by the shareholder.
We believe an affirmative statement that the shareholder authorizes
the designated representative to submit the proposal and/or otherwise
act on the shareholder's behalf would help to make clear that the
representative has been so authorized. In addition, we believe that a
shareholder's affirmative statement that it supports the proposal would
help to ensure that the interest being advanced by the proposal is the
shareholder's own.
We believe that these proposed amendments would help safeguard the
integrity of the shareholder-proposal process and the eligibility
restrictions by making clear that representatives are authorized to so
act, and by providing a meaningful degree of assurance as to the
shareholder-proponent's identity, role, and interest in a proposal that
is submitted for inclusion in a company's proxy statement. We also
believe that the burden on shareholders of providing this information
would be minimal, and we note that much of it is often already provided
by shareholders. We also believe that these requirements would reduce
some of the administrative burdens on companies associated with
confirming the principal-agent relationship.
Request for Comment
17. We are proposing to amend Rule 14a-8's eligibility requirements
to require certain additional information when a shareholder uses a
representative to act on its behalf in the shareholder-proposal
process. Should we amend the rule as proposed?
18. Are the informational requirements we are proposing
appropriate? Should we require any additional information or action? If
so, what additional information or action should we require? For
example, should there be a notarization requirement? How would these
measures affect the burden on shareholders?
19. Is any of the proposed information unnecessary to demonstrate
the existence of a principal-agent relationship and/or the shareholder-
proponent's role in the shareholder-proposal process? If so, what
information is unnecessary?
20. Are there legal implications outside of the federal securities
laws that we should be aware of or consider in allowing a principal-
agent relationship in the context of the shareholder-proposal rule?
21. As part of the shareholder-proposal submission process,
representatives generally deliver to companies the shareholder's
evidence of ownership for purposes of satisfying the requirements of
Rule 14a-8(b). Where the shareholder's shares are held in street name,
this evidence comes in the form of a broker letter from the
shareholder's broker. Since a broker letter from the shareholder's
broker generally cannot be obtained without the shareholder's
authorization, does the fact that the representative is able to provide
this documentation sufficiently demonstrate the principal-agent
relationship and/or the shareholder's role in the shareholder-proposal
process? Is the answer different if the representative is the
shareholder's investment adviser that owes a fiduciary duty to the
shareholder?
C. The Role of the Shareholder-Proposal Process in Shareholder
Engagement
1. Background
While Rule 14a-8 provides a means for shareholder-proponents to
advance proposals and solicit proxies from other shareholders, the rule
is only one of many mechanisms for shareholders to engage with
companies and to advocate for the measures they propose. Other forms of
engagement, including dialogue between a shareholder and management,
may sometimes accomplish a shareholder's goals without the burdens
associated with including a proposal in a company's proxy statement.
Company-shareholder engagement can thus be an important aspect of the
shareholder-proposal process, which we encourage both before and after
the submission of a shareholder proposal. Proactive company engagement
with shareholders has increased in recent years,\66\ and shareholders
frequently withdraw their proposals as a result of company-shareholder
engagement.\67\ We believe
[[Page 66467]]
that encouraging this trend would be beneficial both to companies and
to shareholders.
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\66\ See letters in response to the Proxy Process Roundtable
from Business Roundtable dated June 3, 2019; Chevron Corporation
dated August 20, 2019; Society for Corporate Governance dated
November 9, 2018.
\67\ Company-shareholder engagement with respect to shareholder
proposals has led to an increase in the number of withdrawn
proposals in recent years. See, e.g., letters in response to the
Proxy Process Roundtable from Everence Financial dated December 6,
2018 (``an increasing number of resolutions end up being withdrawn
by the proponent because of conversations between [the proponent]
and the company''); Praxis Mutual Funds dated December 6, 2018
(same); Principles for Responsible Investment dated November 14,
2018 (``a growing number of shareholder proposals are withdrawn due
to corporate management developing workable solutions with
investors'').
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We understand that shareholder proposals are at times used as the
sole method of engaging with companies despite a company's willingness
to discuss, and possibly resolve, the matter with the shareholder.\68\
In those cases, Rule 14a-8 may cause a shareholder to burden a company
and other shareholders with a proxy vote that may have been avoided had
meaningful engagement taken place. While we recognize that engagement
may not always obviate the need for a proposal to be put to a vote, we
believe that shareholders should be required to state when they are
available to engage with a company when they submit a proposal for
inclusion in the company's proxy statement. We believe that such a
statement of availability would encourage greater dialogue between
shareholders and companies in the shareholder-proposal process, and may
lead to more efficient and less costly resolution of these matters.
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\68\ We recognize that some shareholder-proponents use a
shareholder proposal as a way to open a dialogue with management and
not with the objective of having the matter go to a vote. See
Roundtable Transcript, supra note 13, comments of Michael Garland,
Assistant Comptroller, Corporate Governance and Responsible
Investment, Office of the Comptroller, New York City.
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2. Proposed Amendment
We are proposing to amend Rule 14a-8(b) to add a shareholder
engagement component to the current eligibility criteria. Specifically,
the proposed amendment would require a statement from each shareholder-
proponent that he or she is 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.\69\ The
shareholder would be required to include contact information as well as
business days and specific times that he or she is available to discuss
the proposal with the company.\70\
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\69\ The proposal's date of submission is the date the proposal
is postmarked or transmitted electronically. In the event the
proposal is hand delivered, the submission date would be the date of
hand delivery.
\70\ The contact information and availability would have to be
the shareholder's, and not that of the shareholder's representative
(if the shareholder uses a representative). A shareholder's
representative could, however, participate in any discussions
between the company and the shareholder.
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We believe that this proposed eligibility requirement would
encourage shareholders to engage with companies, and could facilitate
useful dialogue between the parties by enabling the company to reach
out directly to a shareholder-proponent to understand his or her
concerns, potentially leading to a more mutually satisfactory and less
burdensome resolution of the matter.
Request for Comment
22. We are proposing to amend Rule 14a-8(b) to add a shareholder
engagement component to the current eligibility criteria that would
require a statement from the shareholder-proponent that he or she is
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. Should we adopt the amendment as proposed?
Could the shareholder engagement component be unduly burdensome or
subject to abuse rather than facilitating engagement between the
shareholder-proponent and the registrant? If so, how could we address
such undue burden or abuse?
23. We are also proposing to require that the shareholder-proponent
include contact information as well as business days and specific times
that he or she is available to discuss the proposal with the company.
Should we adopt this amendment as proposed? Should we specify any
additional requirements for the contact information or availability?
For example, should we require a telephone number or email address to
be included? Should we require a minimum number of days or hours that
the shareholder-proponent be available?
24. Would companies be more likely to engage with shareholders if
the proposed amendment was adopted? Are there other ways to encourage
such engagement that we should consider? Are there potential negative
consequences of encouraging such engagement between individual
shareholders and a company, or are there other potential negative
consequences of this proposal?
25. As proposed, a shareholder would have to provide a statement
that he or she is 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. Is this timeframe
appropriate? If not, what would be an appropriate timeframe?
26. If the shareholder uses a representative, should we also
require that the representative provide a similar statement as to his
or her ability to meet to discuss the proposal with the company?
27. Should companies be required to represent that they are able to
meet with shareholder-proponents?
28. What are ways that companies engage with shareholders outside
of the shareholder-proposal process?
D. One-Proposal Limit
1. Background
Rule 14a-8(c) provides that ``each shareholder may submit no more
than one proposal to a company for a particular shareholders'
meeting.'' As the Commission explained when it adopted this restriction
in 1976, the submission of multiple proposals by a single shareholder-
proponent ``constitute[s] 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.'' \71\
---------------------------------------------------------------------------
\71\ See 1976 Adopting Release, supra note 30.
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At the time the one-proposal limitation was adopted, the Commission
explained that it was ``aware of the possibility that some proponents
may attempt to evade the new limitations through various maneuvers,
such as having other persons whose securities they control submit . . .
proposals each in their own names.'' \72\ To combat this type of abuse,
the Commission clarified that the limitation ``will apply collectively
to all persons having an interest in the same securities (e.g., the
record owner and the beneficial owner, and joint tenants).'' \73\
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\72\ Id.
\73\ Id. This limitation would continue to apply under the
proposed amendments.
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We continue to believe that this one-proposal limit is appropriate.
In our view, the Commission's stated reasoning for the one-proposal
limit applies equally to representatives who submit proposals on behalf
of shareholders they represent. We believe permitting representatives
to submit multiple proposals for the same shareholders' meeting would
undermine the purpose of the one-proposal limit.
[[Page 66468]]
2. Proposed Amendment
We propose an amendment to Rule 14a-8(c) to apply the one-proposal
rule to ``each person'' rather than ``each shareholder'' who submits a
proposal. The amended rule would state, ``Each 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.'' Under the proposed rule, a
shareholder-proponent may not submit one proposal in its own name and
simultaneously serve as a representative to submit a different proposal
on another shareholder's behalf for consideration at the same meeting.
Similarly, a representative would not be permitted to submit more than
one proposal to be considered at the same meeting, even if the
representative would be submitting each proposal on behalf of different
shareholders. In our view, a shareholder submitting one proposal
personally and additional proposals as a representative for
consideration at the same meeting, or submitting multiple proposals as
a representative at the same meeting, would constitute 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. We believe this amendment to the rule text would more
consistently apply the one-proposal limit to shareholders and
representatives of shareholders.
The amendment is not intended to prevent shareholders from seeking
assistance and advice from lawyers, investment advisers, or others to
help them draft shareholder proposals and navigate the shareholder-
proposal process. Providing such assistance to more than one
shareholder would still be permissible. However, to the extent that the
provider of such services submits a proposal, either as a proponent or
as a representative, it would be subject to the one-proposal limit and
would not be permitted to submit more than one proposal in total. We
seek comment, however, on whether the proposed amendment would have
unintended consequences on the practice of shareholders using
representatives to submit shareholder proposals.
We also are seeking comments on whether we should eliminate the
practice of allowing natural-person shareholders to use a
representative to submit a proposal. We request comment on whether the
concerns raised by a shareholder's use of a representative would be
better addressed with an amendment to the rule text, as proposed, or by
prohibiting such use of a representative for the purpose of Rule 14a-8.
Request for Comment
29. We are proposing to amend Rule 14a-8(c) to explicitly state,
``Each 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.'' Should we
amend the rule as proposed?
30. Would the proposed amendment have unintended consequences on
shareholders' use of representatives or other types of advisers, such
as lawyers or investment advisers, and, if so, what are those
consequences?
31. Alternatively, should we amend Rule 14a-8 to explicitly state
that a proposal must be submitted by a natural-person shareholder who
meets the eligibility requirements and not by a representative? If so,
should we clarify that although a shareholder may hire someone to draft
the proposal and advise on the process, the shareholder must be the one
to submit the proposal?
32. Alternatively, should we require the shareholder-proponent to
disclose to the company how many proposals it has submitted in the past
to that company? For example, should we require disclosure of the
number of proposals the shareholder has submitted directly, through a
representative, or as a representative to the company in the last five
years? Should companies be required to disclose this information in the
proxy statement? Would this information be material to other
shareholders when considering how to vote on the proposal?
33. If adopted, would the proposed informational requirements
discussed in Section II.B alleviate the concerns addressed in this
section such that the proposed amendments to Rule 14a-8(c) would be
unnecessary?
34. In lieu of, or in addition to, limiting the number of proposals
a shareholder would be able to submit directly or as a representative
for other shareholders, should we adopt a total limit on the number of
proposals allowed to be submitted per company per meeting? If so, what
numerical limit would be appropriate, and how should such a limit be
imposed?
35. As an alternative or in addition to limiting the number of
proposals a shareholder would be able to submit directly or as a
representative for other shareholders, should we adopt a limit on the
aggregate number of shareholder proposals a person could submit in a
particular calendar year to all companies? If so, what would be an
appropriate limit, and how would such a limit be imposed?
36. Should we require companies to disclose how many proposals were
withdrawn and therefore not included in the proxy statement, and how
many were excluded pursuant to a no-action request?
E. Rule 14a-8(i)(12)--Resubmissions
1. Relevant History and Background of Rule 14a-8(i)(12)
Since 1948, the Commission has not required a company to include a
proposal in its proxy statement ``if substantially the same proposal
was submitted to the security holders for action at the last annual
meeting of security holders or at any special meeting held subsequent
thereto and received less than three percent of the total number of
votes cast in regard to the proposal.'' \74\ The Commission explained
that the purpose of the provision was ``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.'' \75\ In 1954, the Commission observed that
the ability to resubmit proposals that received 3 percent or more of
the vote ``resulted in the repetition year after year of proposals
which have evoked very modest stockholder interest,'' and amended the
provision to add two additional resubmission thresholds; 6 percent if
the matter had been previously voted on twice and 10 percent if the
matter had been previously voted on three or more times.\76\ As a
result from 1954 to until today, a shareholder proposal was excludable
if substantially the same proposal, or substantially the same subject
matter, had previously been submitted during the relevant lookback
period and received less than 3, 6, or 10 percent of the vote the last
time it was voted on if voted on once, twice, or three or more times,
respectively.\77\
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\74\ See Adoption of Amendments to Proxy Rules, Release No. 34-
4185 (Nov. 5, 1948) [13 FR 6678 (Nov. 13, 1948)].
\75\ See id.
\76\ See 1954 Adopting Release, supra note 11.
\77\ See id.
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[[Page 66469]]
In 1983, the Commission raised the 3 and 6 percent thresholds to 5
and 8 percent, respectively, but these new thresholds subsequently were
vacated because a court found that the Commission had not provided
adequate notice of its proposal to raise the thresholds. The Commission
accordingly reinstated the 3 and 6 percent thresholds in 1985, and it
elected not to propose new thresholds at that time.\78\
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\78\ See Proposals of Security Holders, Release No. 34-22625
(Nov. 14, 1985) [50 FR 48180 (Nov. 22, 1985)]. The U.S. District
Court for the District of Columbia held that there was inadequate
notice of the proposed rulemaking under the Administrative Procedure
Act, explaining that the Commission had requested comment on ``the
appropriate levels for the percentage tests,'' but ``did not propose
new percentage thresholds,'' did not ``reveal the theories that
prompted the SEC to propose the change,'' and did not indicate
``whether the agency proposed the percentages to be raised, lowered,
or maintained.'' See United Church Bd. for World Ministries v. SEC,
617 F. Supp. 837, 839 (D.D.C. 1985).
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In 1997, the Commission proposed increasing the resubmission
thresholds to 6, 15, and 30 percent and, in doing so, stated that ``a
proposal that has not achieved these levels of support has been fairly
tested and stands no significant chance of obtaining the level of
voting support required for approval.'' \79\ The Commission also
explained that it ``propose[d] to increase the second and third
thresholds by relatively larger amounts because the proposal will have
had two or three years to generate support.'' \80\ While the Commission
adopted other amendments (including increasing the share ownership
threshold), it chose not to adopt this proposed amendment to the
resubmission thresholds because ``many commenters from the shareholder
community [had] expressed serious concerns.'' \81\ The resubmission
thresholds have remained 3, 6, and 10 percent since 1954.
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\79\ See 1997 Proposing Release, supra note 36.
\80\ See id. These new thresholds were introduced as part of a
broader rulemaking that included other proposed revisions to Rule
14a-8 that, if adopted, were expected to result in fewer excludable
proposals under the rule, and one of the reasons the Commission gave
for proposing these revised resubmission thresholds was that higher
thresholds would ``counter-balance'' the effect the other revisions
would have had on the excludability of proposals.
\81\ See 1998 Adopting Release, supra note 8. Some commenters
had expressed concern that the increases ``would operate to exclude
too great a percentage of proposals--particularly those focusing on
social policy issues which tend to receive lower percentages of the
shareholder vote.'' Id.
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2. Public Views on Rule 14a-8(i)(12)
Over the last several years, public interest in revisiting the
resubmission thresholds has grown. For example, in April 2014, the
Commission received a rulemaking petition in support of revising the
thresholds (the ``Rulemaking Petition'').\82\ In response to the
Rulemaking Petition, the Commission received twenty-three comment
letters, expressing a range of views on possible changes to the
thresholds.\83\ There have also been other calls for reform in this
area,\84\ as well as congressional interest.\85\
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\82\ See Rulemaking Petition from the U.S. Chamber of Commerce,
National Association of Corporate Directors, National Black Chamber
of Commerce, American Petroleum Institute, American Insurance
Association, The Latino Coalition, Financial Services Roundtable,
Center on Executive Compensation, and Financial Services Forum,
April 9, 2014, available at https://www.sec.gov/rules/petitions/2014/petn4-675.pdf.
\83\ Comment letters received in response to the Rulemaking
Petition are available at https://www.sec.gov/comments/4-675/4-675.shtml.
\84\ See, e.g., BRT Report, supra note 43; Center for Capital
Markets Competitiveness, Shareholder Proposal Reform: The Need to
Protect Investors and Promote the Long-Term Value of Public
Companies (2017), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/023270_CCMC-SEC-Shareholder-Proposal-Reform-Report_Online_Report.pdf
(``CCMC Report''); Nasdaq Report, supra note 43; Treasury Report,
supra note 43. At the Commission's 38th Annual Government--Business
Forum on Small Business Capital Formation held on August 14, 2019,
one of the forum participant recommendations was to amend the
resubmission thresholds.
\85\ See, e.g., Corporate Governance: Fostering a System That
Promotes Capital Formation and Maximizes Shareholder Value: Hearing
Before U.S. H.R. Subcomm. on Capital Markets and Government
Sponsored Enterprises of the Committee on Financial Services, 114th
Cong. (2016); Proxy Process and Rules: Examining Current Practices
and Potential Changes: Hearing Before U.S. S. Comm. on Banking,
Housing, and Urban Affairs, 115th Cong. (2018); H.R. 5756, 115th
Cong. (2018); Financial CHOICE Act of 2017, H.R. 10, 115th Cong.
Sec. 844 (2017).
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Some groups have expressed support for raising the resubmission
thresholds because they believe the current thresholds no longer serve
their intended purpose.\86\ These observers suggest that resubmitted
proposals distract shareholders and their fiduciaries from potentially
more important matters by requiring them to spend additional time and
resources reconsidering issues that have already been rejected by a
majority of shareholders.\87\
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\86\ See, e.g., CCMC Report, supra note 84; Rulemaking Petition,
supra note 82.
\87\ See, e.g., Rulemaking Petition, supra note 82, at 8-9.
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In contrast, other groups suggest that, while the process may take
time, resubmitted proposals can increase interest in, and shareholder
support for, issues that at least some shareholders consider
important.\88\ In response to the Rulemaking Petition, one commenter
cited as an example of an issue that took time to gain broader
shareholder support, climate-change proposals, which averaged voting
support of approximately 5 percent in 1999 and approximately 38 percent
by 2017.\89\
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\88\ See Ceres Business Case, supra note 25; letter in response
to the Proxy Process Roundtable from Dominican Sisters of
Springfield Illinois dated December 3, 2018; letter in response to
the Rulemaking Petition from The Nathan Cummings Foundation dated
April 30, 2018.
\89\ See letter in response to the Rulemaking Petition from The
Nathan Cummings Foundation dated April 30, 2018.
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Some groups have suggested that a significant number of shareholder
proposals are resubmissions of previously-submitted proposals. For
example, one study indicates that 1,063 of 3,392 proposals that were
included in the proxy statements of Fortune 250 companies between 2007
and 2016 were resubmitted proposals.\90\ This report also states that
100 proposals were resubmitted three or more times between 2006 and
2013.\91\
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\90\ See James R. Copland & Margaret M. O'Keefe, An Annual
Report on Corporate Governance and Shareholder Activism, Manhattan
Institute for Policy Research (2016), available at https://media4.manhattan-institute.org/sites/default/files/pmr_2016.pdf.
\91\ Id.
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A separate report states that one-third of proposals voted on
between 2011 and 2018 were submitted two or more times at the same
company.\92\ This report also finds that approximately 95 percent of
proposals are eligible for resubmission after the first submission and
90 percent are eligible after the second and third submission, and that
``nearly all proposals that clear those thresholds and are submitted
again remain eligible in subsequent submissions.'' \93\ In addition,
the report indicates that the overwhelming majority of proposals that
win majority support do so the first time they are submitted, and less
than 9 percent of proposals that fail to win majority support the first
time go on to pass in a subsequent attempt.\94\ It further notes that
``[w]hen the SEC first adopted the [resubmission] thresholds, between
one-half and three-quarters of proposals failed to win sufficient
support for resubmission,'' and that ``the 3%, 6% and 10% resubmission
thresholds preclude a much smaller proportion of shareholder proposals
today than in the past.'' \95\
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\92\ See Brandon Whitehill, Clearing the Bar, Shareholder
Proposals and Resubmission Thresholds, Council of Institutional
Investors (Nov. 2018), available at https://docs.wixstatic.com/ugd/72d47f_092014c240614a1b9454629039d1c649.pdf (``CII Report''). For a
discussion of our findings with respect to this data, see infra note
197.
\93\ Id.
\94\ Id. at 8.
\95\ Id.
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Members of other groups have indicated that ``[r]esubmissions for a
[[Page 66470]]
third or fourth time are very rare,'' stating that since 2010 (and
presumably through the report's publication date in 2017), a total of
35 environmental and social proposals that received less than 20
percent of the shareholder vote for two or more years were
resubmitted.\96\ According to this report, these 35 proposals were
resubmitted to 26 companies.\97\
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\96\ See Jonas Kron, Trillium Asset Management & Brandon Rees,
AFL-CIO Office of Investment and co-chair CII Shareholder Advocacy
Committee, Frequently Asked Questions about Shareholder Proposals,
Council of Institutional Investors (last visited Oct. 30, 2019),
available at https://www.cii.org/files/10_10_Shareholder_Proposal_FAQ(2).pdf.
\97\ Id.
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Some observers argue that the resubmission thresholds should be
raised because companies incur significant expense as a result of
receiving shareholder proposals, including resubmitted proposals, that
are unlikely to win majority support.\98\ In response to the Proxy
Process Roundtable, some commenters expressed views that: Resubmitted
shareholder proposals often take a disproportionate amount of time
compared to annual management proposals; \99\ resubmitted proposals
exacerbate the costs of shareholder proposals; \100\ the cost in terms
of corporate resources spent to deal with resubmitted proposals is
significant; \101\ resubmitted proposals divert management time and
resources; \102\ and all shareholders bear the costs associated with
resubmitted shareholder proposals.\103\ Others contend that the costs
are much lower.\104\ It has also been suggested that the inability to
resubmit shareholder proposals may drive shareholders to pursue
alternative strategies that would be more costly and time-consuming for
companies.\105\ We are interested in obtaining, and request comment on,
additional data about the costs incurred as a result of receiving
shareholder proposals, including resubmitted proposals.
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\98\ See, e.g., Rulemaking Petition, supra note 82, at 16;
Statements of James R. Copland, Senior Fellow and Director, Legal
Policy, Manhattan Institute for Policy Research and Darla C.
Stuckey, President and CEO, Society for Corporate Governance, Before
the H. Comm. on Financial Services Subcomm. on Capital Markets and
Government Sponsored Enterprises, Sept. 21, 2016; see also letters
in response to the Proxy Process Roundtable from American Securities
Associations dated June 7, 2019; Exxon Mobil Corporation dated July
26, 2019 (stating that the company's cost per shareholder proposal,
including resubmitted proposals, is more than $100,000).
\99\ See letter in response to the Proxy Process Roundtable from
Investment Company Institute dated March 15, 2019.
\100\ See letter in response to the Proxy Process Roundtable
from Business Roundtable dated June 3, 2019.
\101\ See letter in response to the Proxy Process Roundtable
from U.S. Chamber of Commerce Center for Capital Markets
Competitiveness dated December 20, 2018.
\102\ See letter in response to the Proxy Process Roundtable
from National Association of Manufacturers dated October 30, 2018.
\103\ See letter in response to the Proxy Process Roundtable
from Society for Corporate Governance dated November 9, 2018.
\104\ See Adam M. Kanzer, The Dangerous ``Promise of Market
Reform'': No Shareholder Proposals, Harvard Law School Forum on
Corporate Governance and Financial Regulation (Jun. 15, 2017),
available at https://corpgov.law.harvard.edu/2017/06/15/the-dangerous-promise-of-market-reform-no-shareholder-proposals/
(``Kanzer 2017''); letter in response to the Rulemaking Petition
from the Shareholder Rights Group dated October 5, 2017, at 11.
\105\ See, e.g., letters in response to the Rulemaking Petition
from The McKnight Foundation dated June 11, 2018; Nathan Cummings
Foundation dated April 30, 2018.
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Various alternatives have been suggested for addressing the
concerns with resubmitted proposals. A number of those who support
raising the resubmission thresholds have suggested that raising them to
6, 15, and 30 percent would be appropriate.\106\ One commenter
suggested thresholds of 10, 25, and 50 percent, where failure to
achieve the thresholds would render a proposal excludable for an amount
of time equal to the number of years the proposal had previously been
included in the company's proxy statement.\107\
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\106\ See, e.g., BRT Report, supra note 43; CCMC Report, supra
note 84; letters in response to the Proxy Process Roundtable from
American Securities Association dated June 7, 2019; Braemer Hotels &
Resorts dated January 4, 2019; U.S. Chamber of Commerce Center for
Capital Markets Competitiveness dated November 12, 2018; Center on
Executive Compensation dated November 12, 2018; Group 1 Automotive,
Inc. dated January 11, 2019; Nareit dated November 12, 2018; Nasdaq,
Inc. et al. dated February 4, 2019; Society for Corporate Governance
dated November 9, 2018; Tyler Technologies, Inc. dated September 20,
2019.
\107\ See letter in response to the Proxy Process Roundtable
from Exxon Mobil Corporation dated July 26, 2019.
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3. Need for Proposed Amendments
We continue to believe, as the Commission stated when it first
proposed a resubmission threshold for shareholder proposals in 1948,
that resubmission thresholds are appropriate to ``relieve the
management of the necessity of including proposals that have been
previously submitted to security holders without evoking any
substantial security holder interest therein.'' \108\
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\108\ See 1948 Proposing Release, supra note 6.
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Having considered the feedback discussed above, and recognizing the
range of views expressed, we are concerned that the current
resubmission thresholds may allow proposals that have not received
widespread support from a company's shareholders to be resubmitted--in
some cases, year after year--with little or no indication that support
for the proposal will meaningfully increase or that the proposal
ultimately will obtain majority support. Companies and their
shareholders bear the burdens associated with management's and
shareholders' repeated consideration of these proposals and/or their
recurrent inclusion in the proxy statement. While we recognize that
some proposals may necessitate resubmission to obtain majority support,
we do not believe shareholders whose proposals are unlikely ever to
obtain or at least without a significant change in circumstances obtain
such support--and thus to reflect the interests of a majority of
shareholders--should be permitted to require companies and other
shareholders to bear the costs associated with their proposals. If a
proposal fails to generate meaningful support on its first submission,
and is unable to generate significantly increased support upon
resubmission, it is doubtful that the proposal will earn the support of
a majority of shareholders in the near term or without a significant
change in circumstances.\109\ In light of these concerns, we are
proposing to increase the resubmission thresholds to allow companies to
exclude resubmitted proposals that have not received broad support and
appear less likely to be on a sustainable path toward achieving
majority shareholder support. In these circumstances, we believe a
``cooling-off'' period may be warranted to help ensure that the
inclusion of such proposals does not result in unjustified burdens on
companies and shareholders.
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\109\ Based on our review of shareholder proposals that received
a majority of the votes cast between 2011 and 2018, approximately
90% received such support on the first submission. Of the remaining
10%, 60% received 40% or more of the votes cast on the initial
submission. See discussion infra Section IV.B.3.iv.
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[[Page 66471]]
Under the current rule, proposals that are not supported by up to
approximately 97 percent of votes cast on the first submission, 94
percent on the second submission, and 90 percent on the third or
subsequent submissions remain eligible for resubmission. We recognize
that initially lower levels of shareholder support do not always
indicate how shareholders will vote on an issue in the future.
Nevertheless, we are concerned that thresholds of 3, 6, and 10 percent
may not demonstrate sufficient shareholder support to warrant
resubmission, or adequately distinguish between proposals that
ultimately are more likely to obtain majority support upon resubmission
and those that are not. As one commenter has noted, ``the current
thresholds leave no less than 90% of proposals eligible for
resubmission.'' \110\ These resubmitted proposals are permitted despite
the fact that, according to the commenter, less than 9 percent of
proposals that fail to win majority support the first time go on to
pass in a subsequent attempt.\111\ Thus, it appears that under the
current thresholds the vast majority of shareholder proposals are
eligible for resubmission regardless of their likelihood of gaining
broader shareholder support or, ultimately, garnering a majority of the
votes cast, at least in the near term.
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\110\ See CII Report, supra note 92, at 16. Based on our
analysis, approximately 94% of proposals remain eligible for
resubmission after the initial submission, 90% after the second
submission, and 94% after the third or subsequent submission under
the current resubmission thresholds. In total, approximately 93% of
proposals remain eligible for resubmission under the current
resubmission thresholds. Of these eligible proposals that were
submitted from 2011 to 2018, approximately 6.5% garnered majority
support at some point during that period following initial
submission. See discussion infra Section IV.B.3.iv.
\111\ See CII Report, supra note 92, at 8. Based on our analysis
of proposals submitted between 2011 and 2018, 6.5% of resubmitted
proposals that failed to win majority support on the first
submission went on to pass in a subsequent attempt.
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In addition, the current resubmission thresholds may not have the
same effect today on resubmissions as they did when they were initially
adopted. According to one commenter, the percentage of shareholder
proposals eligible for resubmission today is considerably higher than
at the time the thresholds were first introduced, when ``between one-
half and three-quarters of proposals failed to win sufficient support
for resubmission.'' \112\ It has been suggested that this difference
may be due to a number of factors, including the role proxy advisory
firms now play in the shareholder voting process,\113\ and greater
participation by institutional investors in that process.\114\
Consequently, we are concerned that the current thresholds may not be
functioning effectively to alleviate companies and their shareholders
of the obligation to consider, and spend resources on, matters that
have previously been voted on and rejected by shareholders without
sufficient indication that a proposal will gain traction among the
broader shareholder base in the near future.
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\112\ See CII Report, supra note 92, at 6 (citing Lewis D.
Gilbert, Dividends and Democracy 108 (1956) (noting that ``[b]etween
half and three quarters of the proposals being submitted would be
banned'' by the Commission's proposed thresholds of 3%, 7%, and
10%)). We note that the Commission ultimately adopted thresholds of
3%, 6%, and 10%.
\113\ Cf. Rulemaking Petition, supra note 82, at 6-7.
\114\ See CII Report, supra note 92, at 6.
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4. Proposed Amendments
To address these concerns, we are proposing revisions to Rule 14a-
8(i)(12) that would replace the current resubmission thresholds of 3,
6, and 10 percent with new thresholds of 5, 15, and 25 percent,
respectively, and add an additional provision to the rule that would
allow companies to exclude proposals that have been submitted three or
more times in the preceding five years if they received more than 25
percent, but less than 50 percent, of the vote and support declined by
more than 10% the last time substantially the same subject matter was
voted on compared to the immediately preceding vote. We believe these
proposed amendments would allow proposals to receive due consideration
without imposing on companies and their shareholders the burden of
having to repeatedly consider matters on which they have already
indicated a lack of interest, or where interest has waned.
(i) Proposed Resubmission Thresholds
Under proposed Rule 14a-8(i)(12), a shareholder proposal may be
excluded from a company's proxy materials if it deals with
substantially the same subject matter as a proposal,\115\ or proposals,
previously included in a company's proxy materials within the preceding
five calendar years if the most recent vote occurred within the
preceding three calendar years and that vote was:
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\115\ The condition in Rule 14a-8(i)(12) that the shareholder
proposals deal with ``substantially the same subject matter'' does
not mean that the previous proposal(s) and the current proposal must
be identical. In 1983, the Commission amended the language in the
exclusion from ``substantially the same proposal'' to
``substantially the same subject matter.'' See 1983 Adopting
Release, supra note 6. In doing so, the Commission explained that
the purpose of amending the exclusion was to ``counter the abuse of
the security holder proposal process by certain proponents who make
minor changes in proposals each year so that they can keep raising
the same issue despite the fact that other shareholders have
indicated by their votes that they are not interested in that
issue.'' Id. When considering whether proposals deal with
substantially the same subject matter, the staff has focused on
whether the proposals share the same ``substantive concerns'' rather
than the ``specific language or actions proposed to deal with those
concerns.'' Id. We are not proposing changes to the ``substantially
the same subject matter'' standard, but seek comment on whether such
a change would be appropriate or necessary in light of the proposed
amendments.
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Less than 5 percent of the votes cast if previously voted
on once;
Less than 15 percent of the votes cast if previously voted
on twice; or
Less than 25 percent of the votes cast if previously voted
on three times or more.\116\
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\116\ Only votes for and against a proposal would be included in
the calculation of the shareholder vote. Abstentions and broker non-
votes would not be included in the calculation.
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We are proposing a modest increase to the initial resubmission
threshold of 2 percent, and more significant increases to the second
and third thresholds of 9 and 15 percent, respectively. As a result,
there will be a 10 percent spread between the first and second
threshold and the second and third threshold. We believe that more
significant revisions to the second and third thresholds are
appropriate due to the fact that a proposal will have already been
considered by shareholders two or three times before becoming subject
to these thresholds.
Currently, 90 percent or more of all proposals are eligible for
resubmission at each threshold.\117\ Under the current thresholds, many
of these proposals fail to obtain meaningful, or majority, support upon
resubmission. From 2011 to 2018, there were 864 unique proposals that
were resubmitted.\118\ Of these, only 54 (6.5%) ultimately garnered
majority support (as noted in Table 9 in Section IV.C.2.iii below, only
one of these would have been excludable under the proposed resubmission
thresholds). The proposed increases in the resubmission thresholds to
5, 15, and 25 percent reflect our experience with shareholder proposals
and are intended to reduce the number of proposals eligible for
resubmission that have little or no chance of gaining meaningful, or
majority, shareholder support while still providing
[[Page 66472]]
shareholders with the opportunity to build support for their proposals.
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\117\ See supra note 110.
\118\ The number of unique proposals that were resubmitted
refers to the count of proposals that were resubmitted and voted on
at least once during the sample period 2011 to 2018. The number of
proposals (864) differs from the number referred to in the tables in
Section IV.B.3.iv (1,442) because the latter is not limited to
unique proposals.
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In particular, our proposed increase for the initial resubmission
threshold from 3 to 5 percent would exclude proposals that are very
unlikely to earn majority support upon resubmission, but would still
permit a very large percentage of proposals to be resubmitted.\119\ We
believe that a cooling-off period is warranted if a matter is unable to
garner the support of at least 1 in 20 shareholders upon its initial
submission. Based on our analysis of the proposals that ultimately
garnered majority support from 2011 to 2018, 90 percent did so on the
first submission, and more than half of the proposals that were
resubmitted garnered more than 40 percent on the first submission.\120\
Of the remaining proposals, nearly all garnered support of at least 5
percent on the first submission.\121\ While we recognize that there
have been a few instances in which proposals that have failed to
receive at least 5 percent of the votes cast have gone on to garner
significantly greater shareholder support, these instances appear to be
infrequent and may be the result of factors other than or in addition
to the resubmission.\122\
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\119\ Of the proposals resubmitted between 2011 and 2018, we
estimate that approximately 85% would have been eligible for
resubmission under the proposed resubmission thresholds. See infra
Table 9 in Section IV.C.2.iii.
\120\ See infra Section IV.B.3.iv.
\121\ Id.
\122\ Based on our review of shareholder proposals that received
a majority of the votes cast on a second or subsequent submission
between 2011 and 2018, only 2% of the proposals that have failed to
receive at least 5% of the votes cast have gone on to garner
majority support. See infra Section IV.B.3.iv.
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The proposed increase for the second and third resubmission
thresholds to 15 and 25 percent are also intended to provide a better
indicator of proposals that are more likely to ultimately obtain
majority support than the current thresholds. We believe that proposals
receiving these levels of support will have better demonstrated a
sustained level of shareholder interest to warrant management and
shareholder consideration upon resubmission, subject to the discussion
in Section II.E.4.ii below. As indicated in Section IV.B.3.iv below,
these thresholds are below the average and median support for initial
submissions of 34 and 30 percent, respectively. Of the resubmitted
proposals that ultimately obtain majority support, the overwhelming
majority garner more than 15 percent on their second try and more than
25 percent on their third submission.\123\ As with the initial
resubmission threshold, these thresholds would exclude proposals that
are unlikely to earn majority support, but would still permit a
significant number of proposals to be resubmitted.\124\ We believe that
a cooling-off period also is warranted if, after three or more
submissions, more than 75 percent of the votes cast have not supported
the matter.
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\123\ Based on our review of shareholder proposals that received
a majority of the votes cast on a second or subsequent submission
between 2011 and 2018, 95% received support greater than 15% on the
second submission, and 100% received support greater than 25% on the
third or subsequent submission. In addition, of the 22 proposals
that obtained majority support on their third or subsequent
submissions, approximately 95% received support of over 15% on their
second submission, and 100% received support of over 25% on their
third or subsequent submission. See infra Section IV.B.3.iv.
\124\ See infra Section IV.B.3.iv.
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We recognize, as discussed in Section IV below, that raising the
resubmission thresholds would be expected to result in the exclusion of
more proposals than currently. Our analysis in Table 9 in Section
IV.C.2.iii indicates that under the proposed 15%/25% thresholds, there
would be 14%/27% more proposals that would be excludable than under the
current rules. While these are increases in the overall number of
excludable proposals, we believe these thresholds would better
distinguish those excludable proposals that are on a path toward more
meaningful shareholder support from those that are not. In other words,
we believe that, under the proposed resubmission thresholds, any
increase in the number of excludable proposals that would have been on
a path toward more meaningful shareholder support would be small.
We also believe that the proposed resubmission thresholds would
reduce the costs associated with management's and shareholders'
repeated consideration of these proposals and their recurrent inclusion
in the proxy statement while still maintaining shareholders' ability to
submit proposals, and engage with companies, on matters of interest to
shareholders. We believe that the proposed resubmission thresholds may
lead to the submission of proposals that will evoke greater shareholder
interest in, and foster more meaningful engagement between, management
and shareholders, as the proposed thresholds would incentivize
shareholders to submit proposals on matters that resonate with the
broader shareholder base to avoid exclusion under Rule 14a-8(i)(12).
We believe that the proposed resubmission thresholds strike an
appropriate balance between reducing the costs to companies of
responding to proposals that do not garner significant shareholder
support and may be unlikely to do so in the future, with preserving
shareholders' ability to engage with a company and other shareholders
through the shareholder-proposal process. In addition, as is currently
the case, the resubmission thresholds would not act as a permanent bar
and, thus, shareholders would be able to resubmit substantially similar
proposals after a three-year cooling-off period. We recognize, however,
that there may be alternative thresholds that could also achieve this
balance, and we seek public comment on whether the proposed thresholds
strike the correct balance.
We also considered whether to propose any changes to the vote-
counting methodology. For example, we considered whether votes by
insiders should be excluded from the calculation of votes cast for
purposes of determining whether the resubmission thresholds have been
satisfied. In addition, we considered whether to apply a different
vote-counting methodology for companies with dual-class voting
structures.\125\ We elected not to propose alternative vote-counting
methodologies, however, because we believe that including these votes
in the voting calculation more accurately captures the sentiment of all
shareholders, including insiders and controlling shareholders.
Nevertheless, we seek comment on whether changes to the current vote-
counting methodology are necessary. We also considered whether to adopt
an exception to the rule that would allow an otherwise excludable
proposal to be resubmitted if there are material developments that
suggest a resubmitted proposal may garner significantly more votes than
when previously voted on. We elected not to propose such an exception,
however, because we believe it would be difficult in many cases to
determine how the intervening developments would affect shareholders'
voting decisions. We seek
[[Page 66473]]
comment on whether such an exception should be added to the rule.
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\125\ Cf. letter in response to the Proxy Process Roundtable
from CtW Investment Group dated January 16, 2019 (noting that
increasing the resubmission thresholds will make it more difficult
to satisfy the resubmission thresholds at companies with dual-class
voting structures); letter in response to the Rulemaking Petition
from the Shareholder Rights Group dated October 5, 2017 (``When one
considers dual class share ownership, insider ownership and the non-
involvement of passive investors, the percent of support for a
proposal reflected by the Rule's counting methods may reflect a
sharp underestimate of the support by those investors known to
actively consider shareholder proposals.'').
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Request for Comment
37. Should we maintain the current approach of three tiers of
resubmission thresholds but increase the thresholds to 5, 15, and 25
percent, as proposed? Would alternative thresholds such as 5, 10, and
15 percent, or 10, 25, and 50 percent, be preferable? If so, what
should the thresholds be? Should we instead adopt the thresholds that
were proposed by the Commission in the 1997 Proposing Release (i.e., 6,
15, and 30 percent)? Do the proposed resubmission thresholds better
distinguish those proposals that are on a path to meaningful
shareholder support from those that are not?
38. Alternatively, should we remove resubmission thresholds for the
first two submissions and, instead, allow for exclusion if a matter
fails to receive majority support by the third submission within a
certain number of years? Under such an approach, what would be an
appropriate lookback period and how long should the cooling-off period
be (e.g., three years, five years, or some other period of time)?
39. What are the estimated costs companies incur as a result of
receiving resubmitted proposals? Are the costs different for
resubmitted proposals than for initial submissions? In particular,
which specific costs incurred (e.g., printing costs, staff time, fees
paid to external parties such as legal advisors or proxy solicitors,
management time, board time, etc.) may differ between resubmitted
proposals and initial submissions?
40. Is there a voting threshold that, if not achieved initially, a
proposal is unlikely to surpass in subsequent years? Conversely, is
there a voting threshold that, if achieved, a proposal is unlikely to
fall below in subsequent years?
41. Should we shorten or lengthen the relevant five-year and three-
year lookback periods? If so, what should the lookback periods be?
42. Should the vote-counting methodology under Rule 14a-8(i)(12) be
revised? For example, should shares held by insiders be excluded from
the voting calculation, or should broker non-votes and/or abstentions
count as votes ``against''? Should there be a different vote-counting
methodology for companies with dual-class voting structures? If so,
what should that methodology be?
43. Would the proposed changes in resubmission thresholds
meaningfully affect the ability of shareholders to pursue initiatives
for which support may build gradually over time? Do legal or logistical
impediments to shareholder communications affect the ability of
shareholders to otherwise pursue such longer horizon initiatives? If
so, how? Are there ways to mitigate any potential adverse effects of
the proposed resubmission thresholds while limiting costs to companies
and shareholders?
44. When considering whether proposals deal with substantially the
same subject matter, the staff has focused on whether the proposals
share the same ``substantive concerns'' rather than the ``specific
language or actions proposed to deal with those concerns.'' Should we
consider adopting this standard, or its application? Should we consider
changing this standard, or its application? For example, should we
adopt a ``substantially the same proposal'' standard?
(ii) Momentum Requirement for Proposals Addressing Substantially the
Same Subject Matter as Those Previously Voted on Three or More Times in
the Preceding Five Calendar Years
In addition to raising the resubmission thresholds to 5, 15, and 25
percent, we are proposing to amend Rule 14a-8(i)(12) to allow companies
to exclude proposals dealing 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 percent threshold if (i) the most recently
voted on proposal received less than a majority of the votes cast and
(ii) support declined by 10 percent or more compared to the immediately
preceding shareholder vote on the matter (the ``Momentum
Requirement''). For example, under such a requirement, a proposal would
be excludable where proposals dealing with substantially the same
subject matter had previously been voted on three times in the
preceding five calendar years and received 26 percent of the votes cast
on the third submission compared to 30 percent on the second
submission. In this case, the percentage of votes cast on the third
submission (26 percent) declined by more than 10 percent compared to
the percentage of votes cast on the second submission (30 percent) and,
thus, proposals dealing with substantially the same subject matter
would be excludable during the relevant lookback period.
The purpose of this requirement would be to relieve management and
shareholders from having to repeatedly consider, and bear the costs
related to, matters for which shareholder interest has declined. We
note that it would apply only to matters that have been previously
voted on three or more times in the preceding five years, giving
shareholder-proponents a number of years to advocate for, and the
broader shareholder base ample opportunity to consider, the matters
raised. We further believe that a 10 percent decline in the percentage
of votes cast may demonstrate a sufficiently significant decline in
shareholder interest to warrant a cooling-off period. Nevertheless, we
seek comment on whether 10 percent is an appropriate figure, or whether
some other method or figure would be more appropriate, to gauge
shareholder interest.
The Momentum Requirement would not apply where the previously voted
on proposal(s) received a majority of the votes cast at the time of the
most recent shareholder vote, even if shareholder support had declined
by 10 percent or more compared to the immediately preceding vote.\126\
We believe proposals that receive a majority of the votes cast have
demonstrated a sufficient level of shareholder interest to qualify for
resubmission. In addition, it is our understanding that companies
frequently act on proposals, including non-binding proposals, that
receive a majority of the votes cast, which can reduce the likelihood
of resubmitted proposals.
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\126\ If, after receiving a majority of the votes cast, a matter
receives less than a majority of the votes cast upon a subsequent
submission, the Momentum Requirement would apply. We believe that
the same rationale underlying the Momentum Requirement applies where
shareholder support declines below a majority of the votes cast, but
we seek comment on this point.
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Request for Comment
45. Should we adopt the Momentum Requirement, as proposed? If so,
should we adopt this requirement instead of, rather than in addition
to, the proposed resubmission thresholds? Would this requirement be
difficult to apply in practice?
46. As proposed, a proposal that receives a majority of the votes
cast at the time of the most recent shareholder vote would not be
subject to the Momentum Requirement. Is there a voting threshold below
a majority of the votes cast that demonstrates a sufficient level of
shareholder interest in the matter to warrant resubmission regardless
of whether future proposals addressing substantially the same subject
matter gain additional shareholder support? If so, what is an
appropriate threshold?
47. As proposed, a proposal that receives a majority of the votes
cast at
[[Page 66474]]
the time of the most recent vote would not be excludable under the
Momentum Requirement. Should this exception to the Momentum Requirement
be limited to the most recent shareholder vote, or should it apply to a
different lookback period such as three years or five years?
48. Should the Momentum Requirement apply to all resubmitted
proposals, not just those that have been resubmitted three or more
times? For example, assuming adoption of the proposed resubmission
thresholds, should a proposal be excludable if proposals addressing
substantially the same subject matter received 19 percent on the first
submission and 16 percent on the second submission, even though 16
percent exceeds the relevant proposed threshold of 15 percent for a
second submission?
49. Does a 10 percent decline in the percentage of votes cast
demonstrate a sufficiently significant decline in shareholder interest
to warrant a cooling-off period for any proposal receiving less than
majority support? Would a different percentage--such as 20, 30, or 50
percent--or an alternative threshold, be more appropriate?
50. Should the cooling-off period for proposals that fail the
Momentum Requirement be shorter than the cooling-off period for
proposals that fail to satisfy the existing resubmission thresholds? If
so, what would be an appropriate cooling-off period?
51. Are there other mechanisms we should consider that would
demonstrate that a proposal has lost momentum? For example, should
there be a separate basis for exclusion if the level of support has not
increased by more than 10 percent in the last two votes in the previous
five years? Or, should there be a separate basis for exclusion if the
level of support does not reach 50 percent within 10 years of first
being proposed? If so, what would be an appropriate cooling-off period?
III. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the proposed amendments, and any suggestions for additional changes.
With respect to any comments, we note that they are of greatest
assistance to our rulemaking initiative if accompanied by supporting
data and analysis of the issues addressed in those comments and by
alternatives to our proposals where appropriate.
IV. Economic Analysis
A. Introduction
We are proposing to amend certain procedural requirements and the
provision relating to resubmitted proposals under the shareholder-
proposal rule. We are sensitive to the economic effects that may result
from the proposed rule amendments, including the benefits, costs, and
the effects on efficiency, competition, and capital formation. Section
3(f) of the Exchange Act, Section 2(b) of the Securities Act of 1933,
and Section 2(c) of the Investment Company Act require us, when
engaging in rulemaking that requires us to consider or determine
whether an action is necessary or appropriate in (or, with respect to
the Investment Company Act, consistent with) the public interest, to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
Additionally, Section 23(a)(2) of the Exchange Act requires us, when
making rules or regulations under the Exchange Act, to consider, among
other matters, the impact that any such rule or regulation would have
on competition and states that the Commission shall not adopt any such
rule or regulation which would impose a burden on competition that is
not necessary or appropriate in furtherance of the Exchange Act.
We discuss the potential effects of the proposed rule amendments as
well as possible alternatives to the proposed amendments below. Where
possible, we have attempted to quantify the costs, benefits, and
effects on efficiency, competition, and capital formation expected to
result from the proposed rule amendments. In some cases, however, we
are unable to quantify the economic effects because we lack the
information necessary to provide a reasonable and reliable estimate.
Where we are unable to quantify the economic effects of the proposed
rule, we provide a qualitative assessment of the potential effects and
encourage commenters to provide data and information that would help
quantify the benefits, costs, and the potential impacts of the proposed
rule amendments on efficiency, competition, and capital formation.
B. Economic Baseline
The baseline against which the costs, benefits, and the impact on
efficiency, competition, and capital formation of the proposed rule
amendments are measured consists of the current regulatory framework
and the current practices for shareholder proposal submissions.
1. Current Regulatory Framework
State laws, corporate bylaws, and federal securities laws jointly
govern the shareholder-proposal process. Under state law, a shareholder
generally has the right to appear in person at an annual or special
meeting and put forth a resolution to be voted on by the shareholders.
Such resolutions can include, for example, proposals to adopt, amend,
or repeal bylaws or to request the board to take certain actions. State
law also governs shareholders' ability to submit a proposal through a
representative.\127\ Company bylaws can limit shareholders' ability to
attend or present at shareholder meetings. Federal securities law
governs communications in advance of shareholder meetings, including
solicitation of proxies for items to be voted on at the meeting.
Federal securities law also requires companies to allow shareholders to
vote by proxy at shareholder meetings and requires companies to include
a shareholder's proposal in the company's proxy statement unless a
ground for exclusion is met. Most shareholders currently vote in
advance of shareholder meetings through the proxy process.
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\127\ See supra Section II.B.
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Rule 14a-8 addresses when a company must include a shareholder
proposal in its proxy statement at an annual or special meeting of
shareholders.\128\ Rule 14a-8 also sets forth procedural and
substantive bases upon which a company can exclude a shareholder
proposal from its proxy statement. Under Rule 14a-8(b), to be eligible
to submit a proposal, a proponent ``must have continuously held 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
year by the date [the proponent] submit[s] the proposal.'' The
Commission currently allows investors to aggregate their securities
with other investors to meet the applicable minimum ownership
thresholds to submit a Rule 14a-8 proposal. The rule does not currently
require a shareholder-proponent to provide information specific to the
use of a representative in the shareholder-proposal process, or state
when he or she is able to meet with the company to discuss the
proposal.
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\128\ A shareholder may alternatively solicit proxies by filing
its own proxy statement that complies with the federal proxy rules.
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Rule 14a-8(c) provides that a shareholder may submit no more than
[[Page 66475]]
one proposal to a company for a particular shareholders' meeting.
Rule 14a-8(i)(12) allows companies to exclude a shareholder
proposal that ``deals with substantially the same subject matter as
another proposal or proposals that has or have been previously included
in the company's proxy materials within the preceding 5 calendar
years'' if the matter was voted on at least once in the last three
years and did not receive: (i) 3 percent of the vote if previously
voted on once; (ii) 6 percent of the vote if previously voted on twice;
or (iii) 10 percent of the vote if previously voted on three or more
times.
2. Affected Entities
The proposed amendments to Rule 14a-8(b), Rule 14a-8(c), and Rule
14a-8(i)(12) could affect all companies subject to the federal proxy
rules that receive shareholder proposals, the proponents of these
proposals, and other non-proponent shareholders of these
companies.\129\ Companies that have a class of equity securities
registered under Section 12 of the Exchange Act are subject to the
federal proxy rules, including Rule 14a-8.\130\ In addition, there are
certain registered companies that voluntarily file proxy materials.
Finally, Rule 20a-1 under the Investment Company Act subjects all
management companies to the federal proxy rules.\131\
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\129\ The proposed amendments could also have second-order
effects on providers of administrative and advisory services related
to proxy solicitation and shareholder voting.
\130\ We are not aware of any asset-backed issuers that have a
class of equity securities registered under Section 12 of the
Exchange Act. Most asset-backed issuers report pursuant to under
Section 15(d) of the Exchange Act and thus are not subject to the
federal proxy rules. Nine asset-backed issuers had a class of debt
securities registered under Section 12 of the Exchange Act as of
December 2018. As a result, these asset-backed issuers are not
subject to the federal proxy rules.
Foreign private issuers are exempt from the federal proxy rules
under Rule 3a12-3(b) of the Exchange Act. 17 CFR 240.3a12-3(b).
\131\ Rule 20a-1 of the Investment Company Act requires
management companies to comply with regulations adopted pursuant to
Section 14(a) of the Exchange Act that would be applicable to a
proxy solicitation if it were made in respect of a security
registered pursuant to Section 12 of the Exchange Act. See 17 CFR
270.20a-1.
``Management company'' means any investment company other than a
face-amount certificate company or a unit investment trust. See 15
U.S.C. 80a-4.
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As of December 31, 2018, there were 5,746 companies that had a
class of securities registered under Section 12 of the Exchange Act
(including 98 Business Development Companies (``BDCs'')).\132\ As of
the same date, there were 120 companies that did not have a class of
securities registered under Section 12 of the Exchange Act that
voluntarily filed proxy materials.\133\ As of August 31, 2019, there
were 12,718 management companies that were subject to the federal proxy
rules: (i) 12,040 open-end funds, out of which 1,910 were Exchange
Traded Funds (``ETFs'') registered as open-end funds or open-end funds
that had an ETF share class; (ii) 664 closed-end funds; and (iii) 14
variable annuity separate accounts registered as management investment
companies.\134\ The summation of these estimates yields 18,584
companies where there is a possibility of being affected by the
proposed rule amendments.\135\
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\132\ We estimate the number of companies with a class of
securities registered under Section 12 of the Exchange Act by
reviewing all Forms 10-K filed during calendar year 2018 with the
Commission and counting the number of unique companies that identify
themselves as having a class of securities registered under Section
12(b) or Section 12(g) of the Exchange Act. Foreign private issuers
that filed Forms 20-F and 40-F and asset-backed issuers that filed
Forms 10-D and 10-D/A during calendar year 2018 with the Commission
are excluded from this estimate. See supra note 130.
BDCs are all entities that have been issued an 814-reporting
number. Our estimate includes BDCs that may be delinquent or have
filed extensions for their filings, and it excludes 6 wholly owned
subsidiaries of other BDCs.
\133\ We identify registered companies that voluntarily file
proxy materials as companies reporting pursuant to Section 15(d) of
the Exchange Act but not registered under Section 12(b) or Section
12(g) of the Exchange Act that filed any proxy materials during
calendar year 2018 with the Commission. The proxy materials we
consider in our analysis are Forms DEF14A, DEF14C, DEFA14A, DEFC14A,
DEFM14A, DEFM14C, DEFR14A, DEFR14C, DFAN14A, N-14, PRE 14A, PRE 14C,
PREC14A, PREM14A, PREM14C, PRER14A and PRER14C. Form N-14 can be a
registration statement and/or proxy statement. We manually review
all Forms N-14 filed during calendar year 2018 with the Commission
and we exclude from our estimates Forms N-14 that are exclusively
registration statements.
To identify companies reporting pursuant to Section 15(d) but
not registered under Section 12(b) or Section 12(g) of the Exchange
Act, we review all Forms 10-K filed in calendar year 2018 with the
Commission and count the number of unique companies that identify
themselves as reporting pursuant to Section 15(d) of the Exchange
Act and not registered under Section 12(b) or Section 12(g) of the
Exchange Act.
\134\ We estimate the number of unique management companies by
reviewing all Forms N-CEN filed between June 2018 and August 2019
with the Commission. Open-end funds are series of trusts registered
on Form N-1A. Closed-end funds are trusts registered on Form N-2.
Variable annuity separate accounts registered as management
companies are trusts registered on Form N-3.
The number of potentially affected Section 12 and Section 15(d)
reporting companies is estimated over a different time period (i.e.,
January 2018 to December 2018) than the number of potentially
affected management companies (i.e., June 2018 to August 2019)
because there is no complete N-CEN data for the most recent full
calendar year (i.e., 2018). Management companies started submitting
Form N-CEN in September 2018 for the period ended on June 30, 2018
with the Commission.
\135\ 18,584 = 5,746 companies with a class of securities
registered under Section 12 of the Exchange Act + 120 companies
without a class of securities registered under Section 12 of the
Exchange Act that voluntarily filed proxy materials + 12,718
management companies.
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The above mentioned estimates are an upper bound of the number of
potentially affected entities because a substantial portion of these
entities would not be expected to file proxy materials or receive a
shareholder proposal in a given year. Out of the 18,584 potentially
affected entities mentioned above, 5,690 filed proxy materials with the
Commission during calendar year 2018.\136\ Out of the 5,690 companies,
4,758 (84%) were Section 12 or Section 15(d) reporting companies and
the remaining 932 (16%) were management companies.\137\
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\136\ See supra note 133 for details on the estimation of
companies that filed proxy materials with the Commission during
calendar year 2018.
\137\ According to data from Forms N-CEN filed with the
Commission between June 2018 and August 2019, there were 965
management companies that submitted matters for its security
holders' vote during the reporting period: (i) 729 open-end funds,
out of which 86 were ETFs registered as open-end funds or open-end
funds that had an ETF share class; (ii) 235 closed-end funds; and
(iii) one variable annuity separate account (see Form N-CEN Item
B.10). The discrepancy in the estimated number of management
companies using proxy filings (i.e., 932) and Form N-CEN data (i.e.,
965) likely is attributable to the different time periods over which
the two statistics are estimated.
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[[Page 66476]]
Proponents of shareholder proposals also could be affected by the
proposed rule amendments. We estimate that there were 170 proponents--
38 individual proponents and 132 institutional proponents--that
submitted a shareholder proposal that was included in a proxy statement
and was subsequently voted on as lead proponent or co-proponent during
calendar year 2018.\138\
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\138\ Data is retrieved from proxy statements (see infra note
182). See infra Section IV.C.2.i for a discussion of limitations of
the proxy statement data.
We also estimate that there were 278 proponents that submitted a
voted, omitted, or withdrawn proposal as lead proponent or co-
proponent during calendar year 2018. Data is retrieved from ISS
Analytics. See infra Section IV.B.3.i for a discussion of
limitations of the ISS Analytics data.
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Non-proponent shareholders of companies also could be affected by
the proposed rule amendments. As broad context, we note that the ratio
of the number of estimated proponents whose proposals appeared in proxy
statements during 2018 (170) to the number of direct and indirect
investors in companies subject to the proxy rules is extremely small.
According to a recent study based on the 2016 Survey of Consumer
Finances, approximately 65 million households owned stocks directly or
indirectly (through other investment instruments).\139\ Our analysis of
institutional investor data also shows that there were 4,558 unique
institutional investors during 2018.\140\ The ratio is roughly three
proponent shareholders per million investors.
---------------------------------------------------------------------------
\139\ See Jesse Bricker et al., Changes in U.S. Family Finances
from 2013 to 2016: Evidence from the Survey of Consumer Finances,
103 Fed. Res. Bull., Sept. 2017, at 20, 39, available at https://www.federalreserve.gov/publications/files/scf17.pdf (51.9% of the
126.0 million families represented owned stocks). This is a
triennial survey, and the latest data available as of this time is
from the 2016 survey.
Based on industry data provided by a proxy services provider, we
estimate that there were 22.2 million retail accounts that directly
held shares of U.S. public companies during calendar year 2017. The
number of retail accounts is an approximation of the number of
retail investors because each retail investor can hold multiple
accounts and multiple retail investors can hold a single account.
Further, the data covers a subset of all retail accounts (i.e.,
approximately 80% of all retail accounts).
\140\ Data is retrieved from the Thomson Reuters Institutional
(13f) Holdings dataset. Unique institutional investors are the
unique Manager Numbers that filed a Form 13F at least for one
quarter during calendar year 2018 with the Commission. The estimated
number of institutional investors is a lower bound of the actual
number of institutional investors because only institutional
investors that exercise discretion over $100 million or more in
Section 13(f) securities must file Form 13F with the Commission.
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3. Current Practices
i. General Discussion
In this section, we provide descriptive statistics on shareholder
proposals to understand the baseline against which we compare the
effects of the proposed amendments, informing the analysis of the
potential effects of the proposed amendments to Rule 14a-8 in later
sections. In particular, we provide descriptive statistics on all
proposals and descriptive statistics by proposal outcome over time
(i.e., voted, omitted, and withdrawn proposals). We provide these
statistics to understand how the number of proposals has changed over
time, including because, from the perspective of a company, the costs
and benefits of a shareholder proposal may vary with the outcome of the
proposal.
Similarly, we provide descriptive statistics by the type of company
that receives the proposal (i.e., large versus small companies), by
proposal topic (i.e., governance, environmental, and social proposals),
and by proponent type (i.e., institutions versus individuals). These
factors are relevant to our analysis of the proposed amendments to the
ownership and resubmission thresholds because the economic effects of
the proposed amendments may depend on company size, proposal topic, and
proponent type.\141\ Further, we provide descriptive statistics on the
concentration of proposals to better understand how the proposal
submission is distributed across the various proponents.\142\
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\141\ These statistics are also relevant in light of commenters'
concerns that the proposed amendments may affect certain proposals
and proponents differently. See, e.g., letter in response to the
Proxy Process Roundtable from Shareholder Rights Group dated October
25, 2019.
\142\ These statistics are also relevant in light of commenters'
concerns that a few shareholders submit the majority of the
proposals. See infra note 166.
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Finally, we provide descriptive statistics on the voting support
and the probability of obtaining majority support for all proposals, by
proposal topic, and by proponent type. This analysis allows us to
provide some evidence on the effects of the proposed amendments on
proposals that may garner high and/or majority shareholder support, and
to examine whether the proposed amendments to the resubmission
thresholds may have larger effects for some types of proposals and
proponents than for others.
To understand current and historical practices for shareholder
proposals, we study a sample of submitted shareholder proposals to
Russell 3000 companies that were either (i) included in companies'
proxy statements; (ii) identified by companies for exclusion through
the SEC staff no-action process (whether ultimately voted on by
shareholders, excluded by the company, or withdrawn by the proponent);
or (iii) submitted by the proponents (based on information provided by
the proponents) but never appeared on the company's proxy
statement.\143\ The study of a sample of submitted shareholder
proposals allows us to establish a baseline against which we will
compare effects of the proposed amendments. Figure 1 shows the number
of shareholder proposals submitted to Russell 3000 companies between
1997 and 2018. The dashed line in Figure 1 shows the number of
submitted shareholder proposals between 1997 and 2003, and the solid
line shows the number of submitted proposals from 2004 to 2018. Data on
submitted proposals prior to 2004 is incomplete. Hence, our economic
analysis focuses on shareholder proposals submitted between 2004 and
2018. Nevertheless, to provide an understanding of longer term trends
in the number of submitted proposals, we use data prior to 2004 for the
purposes of Figure 1 only.
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\143\ Unless stated otherwise, all data in this section is
retrieved from ISS Analytics. ISS Analytics identifies proposals
that were withdrawn based on whether the proponent had submitted a
withdrawal letter to the company as part of the no-action process,
or whether the proponent had informed ISS or otherwise made known
(for example, through its website) that it had withdrawn the
proposal. To the extent that a proponent did not submit a withdrawal
letter to the company or did not inform ISS Analytics or otherwise
make known that it had withdrawn the proposal, our sample may not
include all withdrawn proposals.
We exclude from our analysis shareholder proposals related to
proxy contests for the election of directors because these proposals
are usually included in shareholders' (as opposed to companies')
proxy statements and thus are not subject to Rule 14a-8.
---------------------------------------------------------------------------
Between 1997 and 2018, shareholders submitted a total of 20,804
proposals to Russell 3000 companies. Out of the 20,804 proposals,
14,860 were submitted in the 2004 to 2018 period. Shareholders
submitted 831 proposals to Russell 3000 companies in 2018, representing
a 4 percent decrease relative to the number of shareholder proposals
submitted in 2017. As Figure 1 shows, the number of submitted
shareholder proposals has fluctuated from a low of 745 in 2001 to a
high of 1,136 in 2008, with an average of 946 submitted shareholder
proposals between 1997 and 2018. Our analysis shows no discernible
trend in the number of submitted shareholder proposals in the 1997 to
2018 period.\144\
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\144\ In this and all subsequent analyses, to examine if there
is a statistically significant time trend in the data, we regress
the variable of interest to a year trend variable, and we test
whether the coefficient on the trend variable is statistically
different from zero. We use a two-tailed t-test and a 90% confidence
interval. See, e.g., William H. Greene, Econometric Analysis (6th
ed. 2007) (``Greene (2007)'').
The p-value on the trend variable is equal to 0.35.
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[[Page 66477]]
[GRAPHIC] [TIFF OMITTED] TP04DE19.006
Figure 2 shows the percentage of voted, omitted, and withdrawn
shareholder proposals for Russell 3000 companies between 2004 and 2018.
We study the percentage of voted, omitted, and withdrawn proposals
separately because each of these categories of proposals may impose
different burdens on--and also provide different benefits to--companies
and their shareholders. Voted proposals are those that went to a
shareholder vote. Omitted proposals are those that were omitted
following an issuance of a no-action letter by Commission staff.\145\
Withdrawn proposals are primarily those that the proponent voluntarily
withdrew after reaching an agreement with management or without
reaching an agreement.\146\
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\145\ A proposal may be omitted without a no-action letter from
the Commission staff. In particular, a company may give notice to
the Commission that it will exclude the proposal or give notice to
the Commission that it plans to exclude the proposal and seek relief
from a court. Those proposals likely are captured in the withdrawn
proposals category in our ISS Analytics dataset because ISS
Analytics only classifies proposals for which the Commission staff
has issued a no-action letter as omitted proposals.
\146\ We classify as ``withdrawn'' proposals that: (i) Were
withdrawn by the proponent (3,292 or 76.8% of all withdrawn
proposals); (ii) were not found in the company's proxy materials and
for which it is yet to be determined whether they were withdrawn or
omitted (802 or 18.7% of all withdrawn proposals); (iii) were on the
ballot but never came to a vote because the proponent did not appear
at the meeting to present the proposal (120 or 2.8% of all withdrawn
proposals); (iv) the proponent indicated it intended to submit but
that were never actually submitted (52 or 1.2% of all withdrawn
proposals); (v) were not voted on because the meeting was cancelled,
usually due to a merger, acquisition, bankruptcy, or calling of a
special meeting (18 or 0.4% of all withdrawn proposals); and (vi)
were not voted on because the meeting was postponed, usually due to
a merger, acquisition, bankruptcy, or calling of a special meeting
(4 or 0.1% of all withdrawn proposals). The above mentioned proposal
categories are available through ISS Analytics.
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As Figure 2 shows, out of all proposals submitted to Russell 3000
companies between 2004 and 2018, 56 percent went to a shareholder vote,
15 percent were omitted following a no-action letter issued by
Commission staff, and 29 percent were withdrawn. The percentage of
voted, omitted, and withdrawn proposals has largely remained stable
during our sample period.\147\
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\147\ Untabulated analysis shows no statistically significant
trend in the number of voted, omitted, and withdrawn proposals over
time (p-values are equal to 0.93, 0.37, and 0.34, respectively).
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[[Page 66478]]
[GRAPHIC] [TIFF OMITTED] TP04DE19.007
Out of the 831 proposals submitted in 2018, 447 were voted, 123
were omitted, and 261 were withdrawn.\148\ The proposed rule amendments
would enhance disclosure requirements for proposals submitted through a
representative. To understand how frequently proposals are submitted
through a representative, we manually collect information on the
identity of the proponents and representatives from the proxy
statements, and we estimate that from the 447 voted proposals submitted
for inclusion in a company's proxy materials for 2018 shareholder
meetings, 363 provided some information related to the identity of the
proponents, out of which 67 (or 18% = 67/363) were submitted by a
representative.\149\
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\148\ A few proposals were submitted to companies outside of the
Russell 3000 index. Using FactSet's corporate governance database,
SharkRepellent (available at https://sharkrepellent.net), we
estimate that in 2018, there were 19 voted shareholder proposals at
11 companies outside of the Russel 3000 index. Our analysis focuses
on proposals submitted to companies within the Russell 3000 index
because this sample represents the vast majority of submitted
shareholder proposals.
\149\ We potentially underestimate the percentage of proposals
submitted by a representative because companies might provide
information on the identity of the proponent but might not mention
that the proposal was submitted via a representative in the proxy
statement.
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In all subsequent analysis in this section (except for the analysis
that relates to voting support), we examine all submitted proposals
(rather than focusing on just one of voted, omitted, or withdrawn
proposals) to determine the potential impact of the proposed amendments
because Rule 14a-8 applies to all submitted proposals.
Next, we compare the average number of proposals submitted to large
and small companies because the frequency of submitted proposals, and
thus the effects of the proposed amendments, may vary with company
size. In particular, Figure 3 compares the average number of proposals
submitted to large companies relative to our universe of companies
(i.e., Russell 3000 companies). Large companies are represented by the
S&P 500 constituents.\150\ As Figure 3 shows, S&P 500 companies (i.e.,
solid line in Figure 3) received on average 1.56 proposals each year,
and Russell 3000 companies (i.e., dashed line in Figure 3) received on
average 0.33 proposals each year during our sample period. The average
number of proposals submitted to S&P 500 companies is statistically
significantly higher than the average number of proposals submitted to
Russell 3000 companies during our sample period.\151\ The average
number of proposals submitted to S&P 500 companies has decreased from
1.85 in 2004 to 1.24 in 2018, representing a 33 percent decrease during
our sample period, and the average number of proposals submitted to
Russell 3000 companies has decreased from 0.38 in 2004 to 0.28 in 2018,
representing a 26 percent decrease during our sample period.\152\
Results are qualitatively similar when we compare voted rather than all
submitted shareholder proposals for S&P 500 and Russell 3000
companies.\153\
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\150\ The median market capitalization of Russell 3000
constituents was $1.7 billion as of May 10, 2019 and the median
market capitalization of S&P 500 constituents was $22 billion as of
August 30, 2019. See Market Capitalization Ranges, FTSE Russell
Market, https://www.ftserussell.com/research-insights/russell-reconstitution/market-capitalization-ranges (last visited Sept. 23,
2019); S&P 500, S&P Dow Jones Indices, https://us.spindices.com/indices/equity/sp-500 (last visited Sept. 23, 2019).
We retrieve data on whether a proposal was submitted to an S&P
500 and/or a Russell 3000 company from ISS Analytics.
The ISS Analytics data only covers Russell 3000 companies. S&P
500 companies usually are a subset of the Russell 3000 companies. To
the extent that some S&P 500 companies are not part of the Russell
3000 index, our analysis underestimates the average number of
proposals submitted to S&P 500 companies, because those proposals
are missing from our data.
\151\ In this and all subsequent analysis, we use a two-tailed
t-test and a 90% confidence interval to compare differences in means
across groups.
The p-value is equal to zero.
\152\ Untabulated analysis shows a statistically significant
downward trend in the average number of proposals submitted to S&P
500 and Russell 3000 companies during our sample period (p-values
are equal to zero).
\153\ Untabulated analysis shows that the average number of
voted proposals for S&P 500 companies has decreased from 0.99 in
2004 to 0.70 in 2018, representing a 29% decrease during our sample
period, and the average number of voted proposals for Russell 3000
companies has decreased from 0.20 in 2004 to 0.15 in 2018,
representing a 26% decrease during our sample period.
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Overall, our analysis shows that larger companies receive more
proposals than smaller companies, and the number of proposals received
by both large and small companies has decreased over time.
[[Page 66479]]
[GRAPHIC] [TIFF OMITTED] TP04DE19.008
We also examine the frequency of submitted proposals by proposal
topic because the effects of the proposed amendments may vary by
proposal topic. More specifically, the effects of the proposed
amendments to the resubmission thresholds may vary by proposal topic
because the topic of a proposal may be related to the voting support of
a proposal as well as the time it may take for a proposal to garner
majority support. However, we also recognize that the garnering of
support over time may be the result of a variety of factors other than
or in addition to the continued inclusion of the proposal in the proxy.
In addition, the effects of the proposed amendments to the ownership
thresholds may vary by proposal topic to the extent that the proposed
amendments have a disproportionate effect on different types of
proponents and the type of proposal varies by proponent type.
Figure 4 shows the percentage of all submitted shareholder
proposals by proposal topic over time. ISS Analytics classifies
proposals into three categories: Governance, environmental, and social
proposals.\154\ The results of any analysis that involves
classification of proposals into various categories should be
interpreted with caution for various reasons, including because there
is a level of subjectivity involved in the classification of the
proposals to the various categories. For example, proposals on board
diversity could be considered either governance or social proposals. In
addition, each proposal category includes a wide range of proposals.
For example, governance proposals can include proposals related to
executive compensation as well as proposals related to the sale of
company assets.
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\154\ We retrieve data on the topic of the shareholder proposal
from ISS Analytics. In this dataset, proposals are classified in
three categories: Governance, environmental, and social. Governance
proposals include, among others, proposals related to audits, board
issues, compensation, voting, proxy matters, and shareholder
meetings. Environmental proposals include, among others, proposals
related to sustainability, greenhouse gas emissions, climate change,
community/environmental impact, and renewable energy. Social
proposals include, among others, proposals related to political
contributions, sexual orientation, political lobbying disclosure,
human rights, and board diversity. We manually classify 250
proposals with missing shareholder proposal topics into one of the
three above-mentioned topics by reviewing the description of the
shareholder proposal in the ISS Analytics dataset. We do not
reclassify other proposals in the ISS Analytics dataset to ensure
the replicability of our analysis. We exclude from this analysis 33
proposals with missing shareholder proposal topics and missing
descriptions of the shareholder proposal because we lack the
necessary information to classify these proposals into one of the
three above-mentioned categories.
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Our analysis shows that, during our sample period, 59 percent of
the submitted shareholder proposals (i.e., 8,829 proposals) regarded
governance issues, 11 percent (i.e., 1,601 proposals) regarded
environmental issues, and 30 percent (i.e., 4,397 proposals) regarded
social issues. The percentage of governance proposals relative to all
submitted proposals has decreased from 70 percent in 2004 to 44 percent
in 2018, with a corresponding increase in the percentage of
environmental proposals from 5 percent in 2004 to 16 percent in 2018
and an increase in the percentage of social proposals from 25 percent
in 2004 to 39 percent in 2018.\155\ Results are qualitatively similar
when we examine voted (rather than submitted) shareholder proposals by
topic.\156\
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\155\ Untabulated analysis shows a statistically significant
downward trend in the percentage of governance proposals (p-value is
equal to zero) and a statistically significant upward trend in the
percentage of environmental and social proposals over time (p-values
are equal to zero).
\156\ Untabulated analysis shows that the percentage of voted
governance proposals relative to all voted proposals has decreased
from 69% in 2004 to 62% in 2018, with a corresponding increase in
the percentage of voted environmental proposals from 3% in 2004 to
11% in 2018, and a small decrease in the percentage of voted social
proposals from 28% in 2004 to 27% in 2018.
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Overall, our analysis shows an increase in the frequency of social
and environmental proposals and a decrease in the frequency of
governance proposals during our sample period.
[[Page 66480]]
[GRAPHIC] [TIFF OMITTED] TP04DE19.009
Next, we analyze the frequency of submitted proposals by proponent
type because the effects of the proposed amendments may vary with the
type of proponent. This is because the level and duration of holdings,
as well as chosen proposal topics, may vary with proponent type. Figure
5 shows the percentage of submitted shareholder proposals by proponent
type over time. We classify proponents into three categories:
Individuals, institutions, and unknown.\157\ As Figure 5 shows, the
average percentage of proposals submitted by individuals (i.e., gray-
shaded area in Figure 5) was 31 percent during our sample period, and
it ranged from a low of 26 percent in 2011 to a high of 39 percent in
2018. Further, as Figure 5 shows, the average percentage of proposals
submitted by institutions (i.e., line-patterned area in Figure 5) was
67 percent during our sample period, and it ranged from a low of 59
percent in 2018 to a high of 71 percent in 2011. Our analysis shows no
significant time-series trends in the percentage of proposals submitted
by individuals and institutions.\158\ Institutions submitted
approximately twice the number of proposals submitted by individuals,
and the difference in the number of proposals submitted by institutions
and individuals was statistically significant.\159\ The percentage of
proposals with missing proponent information (i.e., black-shaded area
in Figure 5) has decreased from 6 percent in 2004 to 2 percent in 2018,
but this decrease is statistically insignificant.\160\ Our results are
qualitatively similar when we examine the percentage of voted rather
than submitted shareholder proposals by proponent type over time.\161\
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\157\ We retrieve data on proponent types from ISS Analytics.
Whenever there are multiple proponents submitting a proposal, the
proponent type corresponds to the type of the lead proponent.
Whenever the proponent type is missing, we manually classify the
proponent into one of the three categories (i.e., individual,
institution, or unknown) using the proponent name. Individual
proponents are all retail investors. Institutional proponents
comprise: (i) Asset managers (25% of all institutional proposals);
(ii) unions (25% of all institutional proposals); (iii) pension
funds (20% of all institutional proposals); (iv) religious
organizations (12% of all institutional proposals); (v) nonprofit
organizations (11% of all institutional proposals); and (vi) others
(8% of all institutional proposals). An institutional proponent is
classified as ``other'' whenever the proponent does not fall into
any of the other institutional proponent categories. ``Unknown''
proponents are those with missing identities. The identity of the
proponent presumably is missing in the ISS Analytics dataset because
companies are not required to disclose the identity of the proponent
in the proxy statements. See 17 CFR 240.14a-8(l) (Rule 14a-8(l)).
\158\ The p-values are equal to 0.19 and 0.64, respectively.
\159\ The p-value is equal to zero.
\160\ Untabulated analysis shows a statistically significant
downward trend in the percentage of proposals submitted by
proponents with missing identity over time (the p-value is equal to
0.17).
\161\ The average percentage of voted proposals that were
submitted by individuals was 32% during our sample period, and it
ranged from a low of 25% in 2011 to a high of 49% in 2018. The
average percentage of voted proposals that were submitted by
institutions was 64% during our sample period, and it ranged from a
low of 48% in 2018 to a high of 71% in 2011.
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Overall, our analysis shows that institutions submitted proposals
more frequently than individuals, and the percentage of proposals
submitted by institutions and individuals has not changed significantly
during our sample period.
[[Page 66481]]
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We also study the number of unique proponents and average number of
proposals submitted by each proponent to shed some light on the
concentration of shareholder proposals across proponents. Figures 6A,
6B, and 6C show the number of unique proponents (i.e., gray bars) and
the average number of proposals submitted by each proponent over time
(i.e., black line) for all proponents, for proponents that are
individuals, and for proponents that are institutions, respectively.
For this analysis, we count separately proposals submitted by
proponents and proposals submitted by co-proponents. We exclude
proposals with missing proponent identity. To avoid over-counting the
number of unique proponents and undercounting the average number of
proposals submitted by each proponent, we review and manually correct
the proponent names whenever ISS Analytics uses variations of the same
name for a proponent (e.g., ``CalPERS'' and ``California Public
Employees' Retirement System''). Nevertheless, to the extent that the
same proponent appears with a slightly different name in our dataset,
our analysis potentially overestimates the number of unique proponents
and underestimates the average number of proposals submitted by each
proponent.
As Figure 6A shows, the average number of unique proponents was 228
during our sample period, and it ranged from a low of 181 in 2011 to a
high of 286 in 2004. The average number of proposals submitted by each
proponent was 4.9 during our sample period, and it ranged from a low of
3.9 in 2004 to a high of 6.7 in 2015. Untabulated analysis shows no
time-series trends in the number of unique proponents and the average
number of proposals submitted by each proponent during our sample
period.\162\
---------------------------------------------------------------------------
\162\ The p-values are equal to 0.84 and 0.45, respectively.
---------------------------------------------------------------------------
A different picture emerges when splitting the observations into
proposals submitted by individuals (Figure 6B) and institutions (Figure
6C).\163\ As Figure 6B shows, the average number of unique proponents
that were individuals was 90 during our sample period, and it ranged
from a low of 64 in 2012 to a high of 155 in 2004. The average number
of proposals submitted by each individual proponent was 3.9 during our
sample period, and it ranged from a low of 2.3 in 2004 to a high of 5.2
in 2017. Untabulated analysis shows a statistically significant
downward trend in the number of unique individual proponents and a
statistically significant upward trend in the average number of
proposals submitted by each individual proponent.\164\
---------------------------------------------------------------------------
\163\ For proposals that are submitted through a representative,
when classifying proponents into institutions and individuals, ISS
takes into account the identity of the shareholder rather than the
identity of the representative that submitted the proposal.
\164\ The p-values are equal to zero.
---------------------------------------------------------------------------
As Figure 6C shows, the average number of unique proponents that
were institutions was 143 during our sample period, and it ranged from
a low of 107 in 2006 to a high of 207 in 2017. The average number of
proposals submitted by each institutional proponent was 5.7 during our
sample period, and it ranged from a low of 3.7 in 2017 to a high of 7.6
in 2007. Untabulated analysis shows a statistically significant upward
trend in the number of unique institutional proponents and a
statistically significant downward trend in the average number of
proposals submitted by each institutional proponent.\165\
---------------------------------------------------------------------------
\165\ The p-values are equal to zero and 0.04, respectively.
---------------------------------------------------------------------------
Overall, the results of our analysis suggest that there has been an
increase (decrease) in the concentration of proposals submitted by
individuals (institutions) during our sample period.
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Relatedly, an academic study, using a sample of shareholder
proposals submitted to S&P 1500 companies between 2003 and 2014, shows
that five individual proponents submitted 78 percent of all proposals
submitted by individuals and 27 percent of all proposals submitted by
all proponents.\166\
---------------------------------------------------------------------------
\166\ Nickolay Gantchev & Mariassunta Giannetti, The Costs and
Benefits of Shareholder Democracy 8-9, 37 (European Corporate
Governance Institute, Working Paper No. 586/2018, 2018) (``Gantchev
& Giannetti (2018)''). 27% = (290 + 222 + 157 + 133 + 125)/3,384.
These statistics are estimated using the identity of the proponents
rather than the identity of the representatives, in cases where a
representative submitted a proposal on behalf of a proponent.
For related statistics, see letters in response to the Proxy
Process Roundtable from U.S. Chamber of Commerce Center for Capital
Markets Competitiveness dated November 12, 2018, at 11 (``[D]uring
2017, just three individuals . . . sponsored 25% of proposals
submitted at the Fortune 250.''); Ceres dated November 13, 2018, at
6 (``From 2004-2017, the Chevedden, Steiner, and McRitchie families
submitted 14.5% of the 11,706 proposals filed.''); Mercy Investment
Services, Inc. dated December 3, 2018, at 2 (same); Investment
Company Institute dated November 14, 2018, at 1-3 of attachment.
---------------------------------------------------------------------------
Finally, we examine voting outcomes for all proposals, by proposal
topic, and by proponent type to inform analysis of the effects of the
proposed amendments on proposals that may garner high shareholder
support. In addition, the level of voting support may determine which
shareholder proposals would be affected by the proposed amendments to
Rule 14a-8(i)(12). Figures 7A, 7B, and 7C show the average voting
support for all proposals, by proposal topic, and by type of proponent,
respectively. Voting support is defined as the ratio of ``for'' votes
divided by the sum of ``for'' and ``against'' votes.\167\ As Figure 7A
shows, the average voting support was 33 percent in 2018, and it ranged
from a low of 27.8 percent in 2004 to a high of 37.5 percent in 2009,
with an average of 33.4 percent during our sample period.\168\
---------------------------------------------------------------------------
\167\ We define voting support as the ratio of ``for'' divided
by the sum of ``for'' and ``against'' votes because this is how
voting support is defined for the purposes of Rule 14a-8(i)(12). See
supra note 116. Abstentions and broker non-votes are excluded from
the calculation of voting support for the purposes of Rule 14a-
8(i)(12). See supra note 116.
\168\ Untabulated analysis shows no statistically significant
trend in the average voting support for all proposals during our
sample period (the p-value is equal to 0.40).
---------------------------------------------------------------------------
As Figure 7B shows, the average voting support for governance
proposals (i.e., solid line in Figure 7B) has remained stable during
our sample period at an average of 42.1 percent, while there has been
an upward trend in the average voting support for environmental and
social proposals (i.e., dotted and dashed lines in Figure 7B).\169\ In
particular, the average voting support for environmental proposals
increased from a low of 11.8 percent in 2004 to a high of 28.9 percent
in 2018, with an average of 21.9 percent during our sample period. The
average voting support for social proposals increased from a low of 9.3
percent in 2005 to a high of 24.6 percent in 2018, with an average of
17.4 percent during our sample period. Untabulated analysis also shows
that the average voting support for governance proposals is
statistically significantly higher than the average voting support for
environmental and social proposals, and the average voting support for
environmental proposals is statistically significantly higher than the
average voting support for social proposals.\170\
---------------------------------------------------------------------------
\169\ Untabulated analysis shows a statistically significant
upward trend in the average voting support for environmental and
social proposals (p-values are equal to zero) and no statistically
significant trend in the average voting support for governance
proposals during our sample period (the p-value is equal to 0.83).
\170\ The p-values are equal to zero.
---------------------------------------------------------------------------
Finally, as Figure 7C shows, the average voting support for
proposals submitted by institutions (i.e., solid line) has remained
stable during our sample period at an average of 35.4 percent during
our sample period, and the average voting support submitted by
individuals (i.e., dashed line) has remained stable during our sample
period at an average of 32.2 percent.\171\ Untabulated analysis also
shows that the average voting support for proposals submitted by
institutions is statistically significantly higher than the average
voting support for proposals submitted by individuals.\172\
---------------------------------------------------------------------------
\171\ Untabulated analysis shows no statistically significant
trend in the average voting support for proposals submitted by
institutions and individuals during our sample period. The p-values
are equal to zero 0.22 and 0.97 respectively.
\172\ The p-value is equal to 0.01.
---------------------------------------------------------------------------
In sum, our analysis shows that the average voting support of all
proposals has remained stable during our sample period, but there is an
increase in the average voting support for environmental and social
proposals over the sample period.
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Figures 8A, 8B, and 8C show the percentage of proposals that
received majority support for all proposals, by proposal topic, and by
proponent type, respectively. Majority support is defined as more than
50 percent of the ``for'' votes divided by the sum of ``for'' and
``against'' votes.\173\ We examine the percentage of proposals that
received majority support as opposed to some other voting threshold
because studies show that the probability of implementation of a
shareholder proposal increases significantly once the proposal receives
majority support.\174\
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\173\ See supra note 167.
\174\ For example, a 2010 study by Ertimur et al. shows that
``proposals that won at least one majority vote in the past are more
likely to be implemented (34.2% versus 22.9%).'' See Yonca Ertimur,
Fabrizio Ferri, & Stephen R. Stubben, Board of Directors'
Responsiveness to Shareholders: Evidence from Shareholder Proposals,
16 J. Corp. Fin. 53 (2010) (``Ertimur et al. (2010)''). Similarly, a
2017 study by Bach and Metzger showed that ``when the 50%-threshold
is passed, there is a very sizeable jump of about 20% of the
implementation likelihood.'' See Laurent Bach & Daniel Metzger, How
Do Shareholder Proposals Create Value? (Working Paper, Mar. 2017)
(``Bach & Metzger (2017)''). However, only crossing the management-
defined majority threshold (as opposed to the simple majority
threshold defined as the ratio of ``for'' votes divided by the sum
of ``for'' and ``against'' votes) has an effect of the probability
that the proposal is implemented. Id. The management-defined
majority threshold may differ from a simple majority threshold. Id.
In 43% of their sample, the management threshold is the same as the
simple majority threshold. See id. In our analysis, we define
majority support as the simple majority threshold because we lack
data on the management-defined majority threshold.
---------------------------------------------------------------------------
As Figure 8A shows, there is a statistically significant downward
trend in the percentage of proposals that received majority support
during our sample period.\175\ In particular, the percentage of
proposals that received majority support ranged from a high of 27.7
percent in 2009 to a low of 11.9 percent in 2018, with an average of
20.6 percent during our sample period.
---------------------------------------------------------------------------
\175\ The p-value is equal to zero.
---------------------------------------------------------------------------
As Figure 8B shows, few environmental and social proposals received
majority support during our sample period, while one out of three
governance proposals received majority support.\176\ More specifically,
the percentage of governance proposals that received majority support
(i.e., solid line in Figure 8B) ranged from a high of 37.7 percent in
2009 to a low of 14.9 percent in 2018, with an average of 30.6 percent
during our sample period. The percentage of environmental proposals
that received majority support (i.e., dotted line in Figure 8B) ranged
from a low of 0 percent in 2004 to a high of 16.3 percent in 2018, with
an average of 2.6 percent during our sample period. The percentage of
social proposals that received majority support (i.e., dashed line in
Figure 8B) ranged from a low of zero percent in 2010 to a high of 4.5
percent in 2016, with an average of 1.8 percent during our sample
period. Untabulated analysis shows that there is a statistically
significant downward trend in the percentage of governance proposals
that received majority support, and a statistically significant upward
trend in the percentage of environmental and social proposals that
received majority support during our sample period.\177\ Interpretation
of these results should be undertaken with caution due to various
factors, including the uncertainties inherent in categorization and the
evolution of voting support for proposals over time.
---------------------------------------------------------------------------
\176\ Untabulated analysis shows that the percentage of
governance proposals that received majority support is statistically
significantly higher than the percentage of environmental and social
proposals that received majority support (the p-values are equal to
zero), and the percentage of environmental proposals that received
majority support is not statistically significantly different than
the percentage of social proposals that received majority support
(the p-value is equal to 0.23).
\177\ The p-values are equal to 0.01, 0.02, and 0.05,
respectively.
---------------------------------------------------------------------------
As Figure 8C shows, there is a statistically significant downward
trend in the percentage of proposals submitted by individuals that
received majority support, while the percentage of proposals submitted
by institutions that received majority support has not changed
significantly during our sample period.\178\ In particular, the
percentage of proposals submitted by individuals that received majority
support (i.e., dashed line in Figure 8C) ranged from a high of 35
percent in 2009 to a low of 12.3 percent in 2014, with an average of
23.7 percent during our sample period. In addition, the percentage of
proposals submitted by institutions that received majority support
(i.e., solid line in Figure 8C) ranged from a high of 24.3 percent in
2013 to a low of 11.1 percent in 2018, with an average of 18.7 percent
during our sample period. The percentage of proposals submitted by
individuals that received majority support is statistically
significantly higher than the percentage of proposals
[[Page 66486]]
submitted by institutions that received majority support.\179\
---------------------------------------------------------------------------
\178\ The p-values are equal to zero and 0.48, respectively.
\179\ The p-value is equal to 0.02.
---------------------------------------------------------------------------
In sum, our analysis shows that there is a decrease in the number
of proposals that received majority support during our sample period
and this decrease is primarily attributable to governance proposals and
proposals submitted by individuals.
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BILLING CODE 8011-01-C
Because many proposals are non-binding, not all proposals that
garner majority support are implemented. Using a sample of governance-
related proposals for S&P 1500 companies between 1997 and 2011,
previous studies have shown that between 31 percent and 56 percent of
the shareholder proposals that received majority support were
implemented by management, and this percentage has increased over
time.\180\ These studies have also shown that the probability of a
proposal being implemented depends on the influence of the proponent,
the type of proposal, the past performance of the company, and whether
voting support exceeds majority support as defined by a company's
governing documents.\181\
---------------------------------------------------------------------------
\180\ Bach and Metzger use a sample of governance-related
proposals for S&P 1500 companies between 1997 and 2011 and find that
56% of the proposals that received majority support were implemented
by management, and this percentage increased from 29% in 1997 to 70%
in 2011. Bach & Metzger (2017), supra note 174. Ertimur et al. use a
sample of governance-related proposals for S&P 1500 companies
between 1997 and 2004 and find that 31% of the proposals that
received majority support were implemented by management, and this
percentage increased from 16% in 1997 to 40% in 2004. Ertimur et al.
(2010), supra note 174. The differences in the statistics of the two
cited papers is likely due to the different definition of
implemented proposals. Bach and Metzger consider a proposal to be
implemented ``if management adopts the content of the proposal
within two years after the shareholder meeting,'' while Ertimur et
al. consider a proposal to be implemented if ``the board takes a
significant step toward a partial or full implementation within one
year from the majority vote.'' See Bach & Metzger (2017), supra note
174; Ertimur et al. (2010), supra note 174. A 2007 study by Thomas
and Cotter provide similar rates of implementation of shareholder
proposals that received majority support as Ertimur et al. (2010).
See Randall S. Thomas & James F. Cotter, Shareholder Proposals in
the New Millennium: Shareholder Support, Board Response, and Market
Reaction, 13 J. Corp. Fin. 368 (``Thomas & Cotter (2007)'').
\181\ See Thomas & Cotter (2007), supra note 180; Ertimur et al.
(2010), supra note 174; Bach & Metzger (2017), supra note 174.
---------------------------------------------------------------------------
ii. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and
Rule 14a-8(c)
To provide insight into the distribution of ownership across
proponents, we perform two sets of analysis. First, we review
proponents' ownership information as disclosed in companies' proxy
statements for proposals to be considered at shareholder meetings held
in 2018.\182\ Companies have discretion in the type of information they
must include in the proxy statements regarding proponents.\183\ In
particular, the company's proxy statement must either include the name
and address of the proponents as well as the number of the voting
securities that the proponent holds, or alternatively, a statement that
this information will be provided to shareholders upon request.
Whenever the company discloses the identity of the proponents, the
company may disclose the identity of all or a subset of the proponents.
Whenever the company discloses proponents' ownership information, the
company may disclose the actual dollar value, the actual number of
shares, a minimum dollar value, or a minimum number of shares held by
the proponent. In addition, whenever the company discloses proponents'
ownership information, the company may disclose ownership information
for a subset of the proponents submitting a proposal, and the company
may disclose actual holdings information for some of the proponents and
minimum holdings information for the rest of the proponents submitting
the same proposal. The type of ownership information the company
discloses (i.e., actual holdings versus minimum holdings and dollar
value versus number of shares) frequently depends on the type of
information provided in the proof-of-ownership letter furnished by the
proponent. In particular, proponents also have discretion in the type
of information they must provide in the proof-of-ownership
letters.\184\ Proponents may disclose the exact duration and level of
their holdings or they may confirm that they meet the minimum ownership
thresholds. For these reasons, data on proponent ownership from proxy
statements may not be representative of the overall distribution of
proponent ownership.
---------------------------------------------------------------------------
\182\ Proxy statements filed with the Commission are available
at https://www.sec.gov/edgar/searchedgar/companysearch.html.
\183\ See Rule 14a-8(l).
\184\ See Rule 14a-8(b).
---------------------------------------------------------------------------
Table 1 summarizes the distribution of proponents' ownership in our
sample of proposals.\185\ There were 447 unique voted proposals for
shareholder meetings held in 2018. Out of the 447 proposals, 287, or 64
percent, contained information on proponents' actual and/or minimum
holdings, whereas the remaining 160, or 36 percent, did not
[[Page 66488]]
contain information on proponents' ownership. In our sample of proxy
statements, there were 198 proponents that submitted 150 unique
proposals for which the proxy statements mentioned the proponents'
actual holdings, and 159 proponents that submitted 139 unique proposals
for which the proxy statements mentioned the proponents' minimum
holdings.\186\
---------------------------------------------------------------------------
\185\ There is some information on proponents' duration of
ownership in only 5 out of the 447 reviewed proposals. Because the
sample is small, we do not provide descriptive statistics on
proponents' duration of ownership using information from the proxy
statements.
\186\ Multiple proponents may submit a single proposal. Hence,
the number of proponents in Table 1 can be higher than the number of
proposals. Also, for the same reason, within each panel, the sum of
proposals for the various ownership ranges can be higher than the
total number of proposals. For example, in the Actual Holdings
panel, the sum of proposals for the various ownership ranges (i.e.,
158 = 2 + 75 + 16 + 65) is higher than the total number of proposals
in the panel (i.e., 150).
Further, companies may disclose information on actual holdings
for some proponents and information on minimum holdings for other
proponents submitting the same proposal. Hence, in Table 1, the sum
of the proposals with (i) information on proponents' actual holdings
(i.e., 150 proposals); (ii) information on proponents' minimum
holdings (i.e., 139 proposals); and (iii) no information on
proponents' holdings (i.e., 160 proposals) is higher than the number
of unique proposals in our sample (i.e., 447).
The proxy statements provide information on the identity of the
proponents for a subset of the proposals with no holdings
information.
---------------------------------------------------------------------------
From the 198 proponents with actual holdings information, (i) 3
proponents, or 2 percent, held less than $2,000 worth of shares, and
those proponents submitted 2 unique proposals; (ii) 85 proponents, or
43 percent, held more than or equal to $2,000 but less than $15,000
worth of shares, and those proponents submitted 75 unique proposals;
(iii) 16 proponents, or 8 percent, held more than or equal to $15,000
but less than $25,000 worth of shares, and those proponents submitted
16 unique proposals; and (iv) 94 proponents, or 47 percent, held more
than or equal to $25,000 worth of shares, and those proponents
submitted 65 unique proposals.\187\ The median ownership for proponents
with actual holdings information was $16,758 and the average ownership
was $17.4 million.\188\
---------------------------------------------------------------------------
\187\ In cases where the company reports the number of shares
rather than the dollar amount of the proponent's holdings, we
convert the number of shares to dollars using the average of the bid
and ask prices during a 60-day period before the filing date of the
proxy statement. We use the filing date of the proxy statement
rather than the date that the proponent submitted the proposal (see
supra note 57) because proxy statements do not report the date of
the shareholder proposal submission. Stock prices are retrieved from
CRSP.
\188\ In untabulated analysis, we examine whether the
probability that a proposal would receive majority support depends
on the proponents' ownership level. To measure voting support, we
use the ISS Analytics data for the sample of proposals that were
voted on in 2018 shareholder meetings. We only use data on
proponents with information on their exact holdings. We compare the
probability that the proposal would receive majority support for
proposals submitted by proponents with above and below median dollar
ownership levels and we find a negative and statistically
significant relation between the probability that a proposal would
receive majority support and the level of proponents' ownership (p-
value equal to 0.06), but we find no relation between the level of
the voting support and the level of proponents' ownership (p-value
equal to 0.14). The results of this analysis should be interpreted
with caution because of the small sample used for this analysis.
---------------------------------------------------------------------------
From the 159 proponents with minimum holdings information, (i) all
of the proponents held at least $2,000 worth of shares, and those
proponents submitted 139 unique proposals; (ii) 23 proponents, or 14
percent, held at least $15,000 worth of shares, and those proponents
submitted 23 unique proposals; and (iv) 16 proponents, or 10 percent,
held at least $25,000 worth of shares, and those proponents submitted
16 unique proposals.
As mentioned above, in our sample, there were three proponents
(i.e., one percent of all proponents with ownership information), whose
individual holdings were below the current $2,000 ownership threshold,
and those proponents submitted two unique proposals (i.e., one percent
of all proposals submitted by proponents with ownership information in
the proxy statements). For one of the two proposals, there were two co-
proponents, whose both aggregate and individual holdings did not meet
the $2,000 current ownership threshold.\189\ For the other of the two
proposals, there were four co-proponents, whose aggregate holdings met
the $2,000 current threshold and the individual holdings of one of the
co-proponents did not meet the $2,000 current ownership threshold.
---------------------------------------------------------------------------
\189\ The dollar value of proponents' ownership may be measured
with error in cases where we use the filing date of the proxy
statement to estimate the dollar value of proponents' ownership (see
supra note 187). Hence, the aggregate holdings of the proponents
that submitted the abovementioned proposal may be higher than or
equal to $2,000.
---------------------------------------------------------------------------
Further, in our sample, two entities submitted more than one
proposal, directly or indirectly, to a company for a particular
shareholders' meeting. In particular, one entity submitted two
proposals to one company and another entity submitted two proposals to
each one of six different companies, resulting in a total of 14
submitted proposals.
Table 1--Proponents' Ownership (From Proxy Statements)
------------------------------------------------------------------------
Number of Number of
proponents proposals
------------------------------------------------------------------------
Actual Holdings......................... 198 150
Holdings <$2,000.................... 3 2
Holdings >=$2,000, but <$15,000..... 85 75
Holdings >=$15,000, but <$25,000.... 16 16
Holdings >=$25,000.................. 94 65
Minimum Holdings........................ 159 139
Holdings >$0........................ 159 139
Holdings >=$2,000................... 159 139
Holdings >=$15,000.................. 23 23
Holdings >=$25,000.................. 16 16
No Holdings Information................. 156 160
------------------------------------------------------------------------
Sources: CRSP, ISS Analytics, Proxy Statements from EDGAR.
Second, we review proponents' ownership information from the proof-
of-ownership letters submitted in connection with the proposal that can
be found as an attachment to the Commission staff's no-action letters
issued under Rule 14a-8 during calendar year 2018.\190\ Our sample
comprises 254 unique shareholder
[[Page 66489]]
proposals submitted by 242 unique proponents, yielding 485 proponent-
proposal pairs. For 433, or 89 percent of all proponents that submitted
a proposal for which the company submitted a no-action request, there
is information on proponents' actual and/or minimum holdings. For the
remaining 52 proponents, or 11 percent, there is no information on
proponents' actual or minimum holdings. Further, there are 284
proponents that submitted 155 unique proposals, for whom there is
information on their actual holdings, and 149 proponents that submitted
99 unique proposals, for whom there is only information on proponents'
minimum holdings.\191\
---------------------------------------------------------------------------
\190\ The no-action letters that include the proof-of-ownership
letters are available at https://www.sec.gov/divisions/corpfin/cf-noaction/2019_14a-8.shtml and https://www.sec.gov/investment/investment-management-no-action-letters#P87_900. We analyze a sample
(rather than the universe) of all proof-of-ownership letters
attached to no-action letters available on the Commission's website
because ownership data in proof-of-ownership letters are
unstructured, and thus information must be manually collected.
\191\ Multiple proponents may submit a single proposal. Hence,
the number of proponents in Table 2 can be higher than the number of
proposals. Also, for the same reason, within each panel, the sum of
proposals for the various ownership ranges can be higher than the
total number of proposals in the corresponding panel. For example,
in the Actual Holdings panel, the sum of proposals for the various
ownership ranges (i.e., 199 = 6 + 98 + 16 + 79) is higher than the
total number of proposals in the panel (i.e., 155).
In Table 2, the sum of the proposals with (i) information on
proponents' actual holdings (i.e., 155 proposals); (ii) information
on proponents' minimum holdings (i.e., 99 proposals); and (iii) no
information on proponents' holdings (i.e., 34 proposals) is higher
than the number of unique proposals in our sample (i.e., 254)
because for the same proposal, the proof-of-ownership letters
submitted by the proponents can provide information on proponents'
actual and/or minimum holdings.
---------------------------------------------------------------------------
From the 284 proponents with actual holdings information, (i) eight
proponents, or three percent, held less than $2,000 worth of shares,
and those proponents submitted six unique proposals; (ii) 140
proponents, or 49 percent, held more than or equal to $2,000 but less
than $15,000 worth of shares, and those proponents submitted 98 unique
proposals; (iii) 19 proponents, or seven percent, held more than or
equal to $15,000 but less than $25,000 worth of shares, and those
proponents submitted 16 unique proposals; and (iv) 117 proponents, or
41 percent, held more than or equal to $25,000 worth of shares, and
those proponents submitted 79 unique proposals.\192\ The median
ownership for proponents with actual holdings information is $13,076,
and the average ownership is $11.8 million.
---------------------------------------------------------------------------
\192\ Data on proponent ownership from proof-of-ownership
letters may not be representative of the overall distribution of
proponent ownership because companies do not seek to omit every
shareholder proposal. Companies sought to omit proposals by
requesting a no-action letter from the Commission staff for 31% of
shareholder proposals during the calendar year 2018. The percentage
of proposals that companies sought to omit in 2018 is estimated as
the number of unique proposals for which the Commission received a
no-action request in 2018--see supra note 190--divided by the number
of all unique proposals (i.e., voted, omitted, and withdrawn
proposals) to be considered in 2018 shareholder meetings from ISS
Analytics. Hence, this percentage is an approximation of the actual
percentage of proposals that companies sought to omit in 2018
because some of the no-action requests received by the Commission in
2018 regarded 2019 shareholder meetings.
In addition, data on proponent ownership from proof-of-ownership
letters is limited because proponents are not required to disclose
in the proof-of-ownership letter their exact stock ownership but
only to confirm that they meet the minimum ownership thresholds. See
Rule 14a-8(b).
In cases where the proponent reports the number of shares rather
than the dollar amount of his/her holdings, we convert the number of
shares to dollars using the average of the bid and ask prices during
the 60 calendar days before the date the shareholder submitted the
proposal. See supra note 57. In cases where the no-action letter
does not contain the date that the proposal was mailed or emailed,
we use the date that the company received the proposal to estimate
the highest of the average of the bid and ask prices during a 60-day
period. In cases where the no-action letter does not contain the
date that the proposal was mailed or emailed or the date that the
company received the proposal, we use the date that the proposal was
signed by the proponent. Stock prices are retrieved from CRSP.
---------------------------------------------------------------------------
From the 149 proponents with minimum holdings information, (i) 148
proponents, or 99 percent, hold at least $2,000 worth of shares, and
those proponents submitted 98 unique proposals; (ii) 18 proponents, or
12 percent, hold at least $15,000 worth of shares, and those proponents
submitted 18 unique proposals; and (iii) 12 proponents, or eight
percent, hold at least $25,000 worth of shares, and those proponents
submitted 12 unique proposals.
As Table 2 shows, in our sample, there are nine proponents with
individual holdings below the current $2,000 ownership threshold (i.e.,
eight proponents with exact holdings information and one proponent with
minimum holdings information below the $2,000 threshold) and those
proponents submitted seven unique proposals. For one of the seven
proposals, there were two co-proponents, whose aggregate holdings met
the $2,000 current ownership threshold. For another one of the seven
proposals, there was only one proponent whose holdings did not meet the
$2,000 threshold.\193\ For the remaining five proposals, there was at
least one other co-proponent whose share ownership met the current
$2,000 threshold.
---------------------------------------------------------------------------
\193\ Commission staff issued a no-action letter for this
proposal following the company's request because the proponent did
not satisfy the minimum ownership requirement under Rule 14a-8(b).
Table 2--Proponents' Ownership (From Proof-of-Ownership Letters)
------------------------------------------------------------------------
Number of Number of
proponents proposals
------------------------------------------------------------------------
Actual Holdings......................... 284 155
Holdings <$2,000.................... 8 6
Holdings >=$2,000, but <$15,000..... 140 98
Holdings >=$15,000, but <$25,000.... 19 16
Holdings >=$25,000...................... 117 79
Minimum Holdings........................ 149 99
Holdings <$2,000.................... 149 99
Holdings >=$2,000................... 148 98
Holdings >=$15,000.................. 18 18
Holdings >=$25,000.................. 12 12
No Holdings Information................. 52 34
------------------------------------------------------------------------
Sources: CRSP, Proof-of-Ownership Letters attached to no-action letters
found on Commission's website.
Data on proponent ownership from proxy statements and proof-of-
ownership letters cannot inform the analysis of shareholder-proponents'
duration of holdings in excess of one year.\194\ One commenter has
provided an estimate of average holding period of four to eight months
across all types of
[[Page 66490]]
shareholders.\195\ We solicit public comment on the duration of
ownership for all shareholders, and specifically for shareholders
likely to submit shareholder proposals, in Section IV.E below.
---------------------------------------------------------------------------
\194\ See supra note 185 and accompanying text. Because under
current eligibility requirements, shareholder-proponents are
required to have held shares for at least one year, we can
reasonably assume a minimum of one year ownership duration for
proponents' reported holdings unless the proposal was challenged on
the basis of not satisfying the ownership eligibility requirements.
\195\ See letter in response to the Proxy Process Roundtable
from the Shareholder Rights Group dated December 4, 2018, at 9
(noting ``[t]he average time an investor held a share holding a
stock [sic] in the 1960s when the rule was passed was eight years,
today it is between four and eight months'').
There is limited academic research on share ownership duration,
primarily due to data limitations. Some studies infer average
duration of holdings for all shareholders (rather than just
proponents) from data on aggregate share trading volumes. In
particular, one white paper has looked at share turnover for NYSE
listed securities to estimate an average duration of holdings of
less than two years in 2014. See Michael W. Roberge et al.,
Lengthening the Investment Time Horizon (2016), available at https://www.pionline.com/article/20161101/WHITE_PAPERS/161109903. Any such
analysis inferring average duration of holdings across all investors
masks potential heterogeneity of holding periods across different
types of investors. In particular, because some of the trading
volume may come from high-frequency traders, these average
statistics may underestimate the holding duration of institutional
and individual investors likely to submit shareholder proposals.
Other academic research has relied on information on holdings
for specific types of shareholders. In particular, one strand of
literature has looked at daily trading records of 78,000 households
from January 1991 to December 1996 from a U.S. discount brokerage
house. A survey article notes that the estimated average holding
period for individuals in this sample is 16 months. See Brad M.
Barber & Terrance Odean, The Behavior of Individual Investors, 2
Handbook of the Economics of Finance, 1533, 1539 (2013). Another
paper finds that the median holding period of individual investors
in this dataset is 207 trading days. See Deniz Anginer, Snow Xue
Han, & Celim Yildizhan, Do Individual Investors Ignore Transaction
Costs? 6 (Working Paper, 2018), available at https://ssrn.com/abstract=2972845. Another strand of literature uses information from
13F filings with the Commission to estimate statistics of duration
of holdings for a subset of institutional investors. For example,
one paper documents that the value-weighted composition of long-term
institutional investors with securities holdings in public U.S.
companies has nearly doubled from approximately 35 percent since the
early 2000s to 65 percent in 2017. Long-term institutional investors
are defined as those with an implied average holding period of
longer than three years. See Wei Jiang, Who Are the Short-Termists?,
J. Applied Corp. Fin., Fall 2018, at 19 (2018). A second paper
documents a median duration of holdings of approximately two years
in 2015 among this set of investors. See K.J. Martijn Cremers &
Simone M. Sepe, Institutional Investors, Corporate Governance, and
Firm Value, 41 Seattle U.L. Rev. 387, 403 (2018).
Lastly, we provide some evidence on holding periods using data
on reported sales of corporate stocks retrieved from individual tax
returns. See Janette Wilson & Pearson Liddell, Sales of Capital
Assets Data Reported on Individual Tax Returns, 2007-2012, IRS
Statistics of Income Bull., Winter 20167, at 58, available at
https://www.irs.gov/pub/irs-soi/soi-a-inca-id1604.pdf (Table 4B). In
2012 (the last year with available data), we estimate that among all
transactions with reported holding duration, 46% were for corporate
stocks held for a period longer than one year, 27% were for stocks
held longer than 2 years, and 18% were for stocks held longer than 3
years. Estimates of holdings duration from reported sales may not be
representative of the overall distribution of duration of
stockholdings because the propensity to sell a stock may be
dependent on the amount of time the stock has been held. See Zoran
Ivkovi[cacute], James Poterba, & Scott Weisbenner, Tax-Motivated
Trading by Individual Investors, 95 Amer. Econ. Rev. 1605 (2005).
---------------------------------------------------------------------------
iii. Discussion Specific to Proposals Submitted on Behalf of
Shareholders
As mentioned in Section IV.B.3.i above, from the 447 proposals
submitted for a vote at a shareholder meeting in 2018, 363 provided
information related to the identity of the proponents. Out of those 363
proposals, 67 (or 18 percent) were submitted by a representative. The
documentation that would be mandated by the proposed amendments is
generally non-public. We are able to verify if the proponent provided
the documentation that would be mandated by the proposed amendments
only in cases where the company submitted a no-action request for the
proposal at issue, and thus submitted to the Commission the necessary
supporting documentation, including the shareholder proposal and
related disclosures. Companies submitted a no-action request for 12 out
of the 67 proposals submitted by a representative.\196\ In eight out of
the 12 requests, the proponent provided all documentation that would be
mandated by the proposed amendments. In the remaining four cases, the
shareholder proposal attached to the no-action letter posted on the
Commission's website was signed by the representative rather than the
proponent.
---------------------------------------------------------------------------
\196\ See supra note 190 (providing links to no-action letters).
---------------------------------------------------------------------------
iv. Discussion Specific to Rule 14a-8(i)(12)
To understand current practices for shareholder proposal
resubmissions, we study a sample of shareholder proposal resubmissions
for Russell 3000 companies from 2011 to 2018.\197\ Out of the 3,620
proposals that went to a vote between 2011 and 2018, 2,168 (60 percent)
were a first submission, 678 (19 percent) were a second submission, and
the remaining 774 (21 percent) were a third or higher submission (see
Table 3 below).\198\ During the same time period, the average support
for first time proposals was 34 percent and the median support was 30
percent. The average support for second and third or higher submissions
was slightly lower than first-time proposals, each receiving
approximately 30 percent and 32 percent, on average.\199\
---------------------------------------------------------------------------
\197\ See CII Report, supra note 92. Because the CII Report does
not use data on shareholder proposal submissions prior to 2011, the
analysis in the report is conducted under the assumption that all
proposals submitted in the earlier years are first-time submissions.
Nevertheless, some proposals in the earlier years are actually
resubmissions from previous years. As a result, the CII Report
underestimates the number of resubmitted proposals in the sample and
overestimates the number of proposals eligible for resubmission in
the following year. To correct for these biases, we supplement data
in the CII Report with data on voted shareholder proposals from ISS
Analytics during the years 2006 to 2010. We apply the CII Report's
methodology to identify resubmitted proposals for years 2011 to 2013
using the description of the shareholder proposal in the ISS data.
As a result, we identify 1,442 shareholder proposals as
resubmissions compared to 1,314 in the CII Report. Therefore, some
of the statistics on resubmitted proposals in our analysis differ
from those presented in the CII Report.
When considering eligibility for resubmission, we only consider
whether the proposal is eligible for resubmission in the following
year, and not whether the proposal is eligible for resubmission at
some other point in the future. This distinction is important
because, under the current resubmission thresholds, all proposals
are eligible for resubmission following a three-year cooling-off
period. Of all the proposals resubmitted during 2011 to 2018, 84%
were voted on in the previous year and 12% (5%) were not voted in
the previous year, but were voted on two (three) years prior.
Statistics on resubmitted shareholder proposals are subject to
measurement error because ISS Analytics' classification of
resubmitted shareholder proposals is not always the same as what the
Commission's staff or courts might deem to be a proposal on
``substantially the same subject matter.''
Lastly, the total number of voted shareholder proposals in the
CII Report is slightly lower than the counts in the ISS Analytics
data. For example, there are 423 shareholder proposals that appear
as first-time submissions or resubmissions in the CII Report during
2018, while we estimate that 447 shareholder proposals were voted on
during the same period using the ISS Analytics data. See supra
Section IV.B.3.i.
\198\ A proposal is categorized as first submission if it has
not been voted on in the preceding three calendar years. A proposal
is categorized as second (third or greater) submission if it has
been voted on within the preceding three calendar years and it has
been voted on once (two or more times) in the past five calendar
years.
\199\ Throughout the analysis in this section, when comparing
estimates across subsamples of the data (e.g., average support for
first time and second time proposals, or the propensity to resubmit
proposals across proposal types, etc.), we verify that the estimates
are statistically different from one another. In particular, we test
whether the difference in a particular pair of estimates is
statistically significant using hypothesis tests for continuous and
discrete random variables and a p-value of 10%. See, e.g., Greene
(2007), supra note 144.
The median support for second-time submissions, 29 percent, was
slightly lower than first-time submissions, while the median support
for third-time or subsequent submissions, 31 percent, was slightly
higher. While the difference in median voting support between first-
time and second-time submissions is statistically significant, the
difference in the median voting support between first-time and third
or subsequent submissions is not.
[[Page 66491]]
Table 3--Shareholder Proposals by Number of Submissions, 2011-2018
----------------------------------------------------------------------------------------------------------------
% of proposals
Number of Average % Median % eligible for
proposals % of proposals support support resubmission
next year
----------------------------------------------------------------------------------------------------------------
First........................... 2,168 60 34 30 94
Second.......................... 678 19 30 29 90
Third or subsequent............. 774 21 32 31 94
-------------------------------------------------------------------------------
Total....................... 3,620 100 32 30 93
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
Some types of proposals are more likely to be resubmitted than
others and thus, the effect of proposed amendments to the resubmission
thresholds may vary with proposal type. Therefore, what follows is a
discussion of how the likelihood of shareholder proposal resubmission
is related to: (i) Prior voting support; (ii) proposal topic; (iii)
firm size; (iv) dual-class structure of shares; and (v) proponent type.
Shareholders' propensity to resubmit previously voted proposals
depends on the voting support a proposal has previously received. Using
a sample of voted shareholder proposals from 2011 to 2018, we find that
a shareholder proposal was more likely to be resubmitted in the
following year if it has garnered greater than 10 percent, but less
than majority, support (see Table 4 below).\200\ In particular, among
proposals that were eligible to be resubmitted in the following year
under the current resubmission thresholds, 32 percent of proposals that
received less than 10 percent of votes in favor were actually
resubmitted in the following year, as compared to 44 percent of
proposals that received between 10 percent and 50 percent of votes in
favor. We assume that because shareholder proposals garnering majority
support are more likely to be implemented than those receiving lower
levels of support, these proposals are less likely to be
resubmitted.\201\
---------------------------------------------------------------------------
\200\ For this analysis, we look at proposals submitted during
the calendar years 2011 to 2017 and whether they were resubmitted in
the following year using data from 2012 to 2018. Because we do not
have data on whether these proposals were resubmitted in 2019, we
exclude proposals submitted in 2018.
The analysis shows that, in our sample, 10 shareholder proposals
submitted to nine companies were resubmitted and voted on despite
being eligible for exclusion under the current resubmission
thresholds. Five of these proposals were resubmitted in the year
following a previous vote during 2011 to 2017. Thus, these five
proposals are included in the results presented in Table 4.
\201\ See supra note 180 and accompanying text.
Table 4--Shareholder Proposals Support and Resubmissions by Proposal Topic, 2011-2017
----------------------------------------------------------------------------------------------------------------
% Vote for <10% 10%-50% >=50% Total
----------------------------------------------------------------------------------------------------------------
All Proposals:
Number of proposals......................... 648 1,997 552 3,197
Eligible for resubmission................... 418 1,997 552 2,967
(% of proposals)........................ (65%) (100%) (100%) (93%)
Resubmitted................................. 133 878 65 1,076
(% of eligible proposals)............... (32%) (44%) (12%) (36%)
Governance Proposals:
Number of proposals......................... 176 1,196 522 1,894
Eligible for resubmission................... 117 1,196 522 1,835
(% of proposals)........................ (66%) (100%) (100%) (97%)
Resubmitted................................. 28 453 62 543
(% of eligible proposals)............... (24%) (38%) (12%) (30%)
Environmental Proposals:
Number of proposals......................... 152 301 9 462
Eligible for resubmission................... 105 301 9 415
(% of proposals)........................ (69%) (100%) (100%) (90%)
Resubmitted................................. 36 132 2 170
(% of eligible proposals)............... (34%) (44%) (22%) (41%)
Social Proposals:
Number of proposals......................... 320 500 21 841
Eligible for resubmission................... 196 500 21 717
(% of proposals)........................ (61%) (100%) (100%) (85%)
Resubmitted................................. 69 293 1 363
(% of eligible proposals)............... (35%) (59%) (5%) (51%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
The tendency to resubmit shareholder proposals differs by proposal
topic (see Table 4 above). Because governance-related shareholder
proposals received greater voting support than environmental and social
shareholder proposals, on average, governance-related proposals were
more likely to be eligible for resubmission in the following year.\202\
Despite more proposals being eligible for resubmission, governance-
related
[[Page 66492]]
proposals were less likely to be resubmitted than environmental and
social proposals. In particular, among proposals that received less
than 10 percent support, 24 percent of governance-related shareholder
proposals eligible for resubmission in the following year were actually
resubmitted, as compared to 34 percent of environmental and 35 percent
of social shareholder proposals eligible for resubmission. Among
proposals that received between 10 percent and 50 percent support, 38
percent of governance-related shareholder proposals eligible for
resubmission in the following year were actually resubmitted, as
compared to 44 percent of environmental and 59 percent of social
shareholder proposals eligible for resubmission.
---------------------------------------------------------------------------
\202\ See Section IV.B.3.i for an analysis of voting support by
shareholder proposal topic. We rely on the proposal categorization
from the CII Report, supra note 92, to group proposals into
governance, environmental, and social categories.
---------------------------------------------------------------------------
The tendency to resubmit shareholder proposals also differs by the
type of company. In particular shareholder proposals received by S&P
500 companies were more likely to be resubmitted in the following year
than shareholder proposals received by those companies not in the S&P
500 (see Table 5 below). For example, among shareholder proposals
receiving less than 10 percent support, 33 percent of eligible
shareholder proposals were resubmitted at S&P 500 companies, as
compared to 22 percent at non-S&P 500 companies. Among shareholder
proposals receiving between 10 percent and 50 percent support, 47
percent of eligible shareholder proposals were resubmitted at S&P 500
companies, as compared to 31 percent at non-S&P 500 companies.
Table 5--Shareholder Proposals Support and Resubmissions by Company Size, 2011-2017
----------------------------------------------------------------------------------------------------------------
% Vote for <10% 10%-50% >=50% Total
----------------------------------------------------------------------------------------------------------------
S&P 500:
Number of proposals......................... 556 1,663 337 2,556
Eligible for resubmission................... 359 1,663 337 2,359
(% of proposals)........................ (65%) (100%) (100%) (92%)
Resubmitted................................. 120 774 47 941
(% of eligible proposals)............... (33%) (47%) (14%) (40%)
Non S&P 500:
Number of proposals......................... 92 334 215 641
Eligible for resubmission................... 59 334 215 608
(% of proposals)........................ (64%) (100%) (100%) (95%)
Resubmitted................................. 13 104 18 135
(% of eligible proposals)............... (22%) (31%) (8%) (22%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
Fewer shareholder proposals were eligible for resubmission in the
following year in companies with dual-class shares as compared to those
without such shares (see Table 6 below).\203\ Among shareholder
proposals that received less than 10 percent in voting support, only 50
percent were eligible for resubmission the following year for companies
with dual-class shares, as compared to 66 percent for companies without
dual-class shares. However, eligible shareholder proposals at dual-
class companies were more likely to be resubmitted in the following
year. Among proposals eligible for resubmission in the following year,
71 percent were resubmitted at dual-class companies, while only 29
percent were resubmitted at non-dual class companies.
---------------------------------------------------------------------------
\203\ To identify firms with two or more classes of common
shares, we use the classification of dual-class firms in the ISS
Governance dataset.
Table 6--Shareholder Proposals Support and Resubmissions by Type of Company Shares, 2011-2017
----------------------------------------------------------------------------------------------------------------
% Vote for <10% 10%-50% >=50% Total
----------------------------------------------------------------------------------------------------------------
Companies with dual-class shares:
Number of proposals......................... 48 116 4 168
Eligible for resubmission................... 24 116 4 144
(% of proposals)........................ (50%) (100%) (100%) (86%)
Resubmitted................................. 17 69 0 86
(% of eligible proposals)............... (71%) (59%) (0%) (60%)
Companies without dual-class shares:
Number of proposals......................... 600 1,881 548 3,029
Eligible for resubmission................... 394 1,881 548 2,823
(% of proposals)........................ (66%) (100%) (100%) (93%)
Resubmitted................................. 116 809 65 990
(% of eligible proposals)............... (29%) (43%) (12%) (35%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
The tendency to resubmit shareholder proposals also differs by the
type of proponent (see Table 7 below). In particular shareholder
proposals submitted by individual proponents receiving between 10
percent and 50 percent of the votes in support were less likely to be
resubmitted than proposals submitted by other proponent types.\204\
---------------------------------------------------------------------------
\204\ Shareholder proposals with individual proponents were less
likely to be resubmitted than proposals with non-individual
proponents for all three proposal types: Governance-related,
environmental, and social. However, the difference is most
pronounced for social proposals, for which individuals were five
times less likely to resubmit eligible proposals.
[[Page 66493]]
Table 7--Shareholder Proposals Support and Resubmissions by Type of Proponent, 2011-2017
----------------------------------------------------------------------------------------------------------------
% Vote for <10% 10%-50% >=50% Total
----------------------------------------------------------------------------------------------------------------
Individual proponents:
Number of proposals......................... 171 725 182 1,078
Eligible for resubmission................... 97 725 182 1,004
(% of proposals)........................ (57%) (100%) (100%) (93%)
Resubmitted................................. 29 266 11 306
(% of eligible proposals)............... (30%) (37%) (6%) (30%)
Non-individual proponents:
Number of proposals......................... 477 1,272 370 2,119
Eligible for resubmission................... 321 1,272 370 1,963
(% of proposals)........................ (67%) (100%) (100%) (93%)
Resubmitted................................. 104 612 54 770
(% of eligible proposals)............... (32%) (48%) (15%) (39%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
We also analyze how voting support changes with the number of times
a particular proposal is submitted. Fifty-two percent of resubmitted
shareholder proposals saw an increase in voting support relative to the
last time they were voted on (see Table 8 below). Shareholder proposals
that got less than 10 percent voting support in the past were more
likely to see increases in voting support as compared to proposals
receiving between 10 percent and 50 percent of votes in favor. For
those proposals for which voting support increased, the average
increase in voting support is approximately six percent for all
proposals, six percent for governance-related proposals, and five
percent for environmental and social proposals.
Table 8--Change in Voting Support for Resubmitted Proposals, 2011-2018
----------------------------------------------------------------------------------------------------------------
% Vote for <10% 10%-50% >=50% Total
----------------------------------------------------------------------------------------------------------------
All Proposals:
Number of proposals......................... 178 1,165 109 \205\ 1,452
% Proposals with increase in voting......... 55% 52% 47% 52%
Average increase in voting support.......... 7% 5% 6% 6%
Governance Proposals:
Number of proposals......................... 42 657 106 805
% Proposals with increase in voting......... 52% 50% 48% 50%
Average increase in voting support.......... 17% 6% 6% 6%
Environmental Proposals:
Number of proposals......................... 47 157 2 206
% Proposals with increase in voting......... 62% 55% 0% 56%
Average increase in voting support.......... 4% 5% N/A 5%
Social Proposals:
Number of proposals......................... 89 351 1 441
% Proposals with increase in voting......... 53% 54% 0% 53%
Average increase in voting support.......... 5% 5% N/A 5%
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
Lastly, we analyze the extent to which initial support for
shareholder proposals is related to the likelihood of the shareholder
proposal ultimately obtaining majority support.\206\ During 2011 to
2018, 533 unique shareholder proposals have garnered majority support,
of which 479 (90 percent) obtained majority support on their initial
submission.\207\ Of the remaining 54 shareholder proposals that
received majority support following a resubmission, 32 (60 percent)
obtained majority support on their second submission and 22 (40
percent) obtained majority support on their third or subsequent
submissions. Figure 9 below shows the distribution of first submission
voting support for the 54 shareholder proposals that garnered majority
support following a resubmission. Of these, approximately 60 percent
started with support of over 40 percent in their first submission, and
98 percent started with support of over 5 percent in their first
submission. Of the 22 proposals that obtained majority support on their
third or subsequent submissions, approximately 95 percent received
support of over 15 percent on their second submission, and 100 percent
received support of over 25 percent on their third or subsequent
submission.
---------------------------------------------------------------------------
\205\ The total number of proposals in Table 8 represents the
total number of proposals that were resubmitted (not first time
submissions) in the years 2011 to 2018, which differs from the total
number of proposals in Tables 4, 5, 6, and 7 (i.e., 3,197
proposals). This is because the analysis on the propensity to
resubmit shareholder proposals excludes proposals resubmitted in
2011 and those that were resubmitted after a period longer than one
year. See supra note 200.
\206\ Note that in this analysis, we may be underestimating the
likelihood of proposals ultimately obtaining majority support,
especially for proposals toward the end of our sample that could get
majority support following a future resubmission. For example, if a
new proposal fails to garner majority support in 2018, but is
resubmitted in 2019, our data does not allow us to see whether such
a proposal would garner majority support following a resubmission in
a year after 2018. See supra note 200.
\207\ Note that this number is lower than 552 proposals
receiving majority support in Table 4. This is because the former
measure counts unique proposals while the latter counts each time a
proposal is submitted and receives over 50% support. Therefore, in
some instances, the latter measure will count twice a proposal that
receives majority support, is resubmitted, and receives majority
support again.
---------------------------------------------------------------------------
[[Page 66494]]
[GRAPHIC] [TIFF OMITTED] TP04DE19.020
The results of the analyses in Tables 3-8, Figure 9, and
accompanying text should be interpreted with caution--our analysis of
shareholder proposal resubmissions is subject to selection bias because
the data only includes resubmissions that appeared in proxy materials.
The data does not capture resubmissions that were withdrawn because
proponents reached an agreement with management or because proponents
decided to withdraw the resubmission for other reasons, and it does not
capture resubmissions that were excluded pursuant to one of the
substantive bases under Rule 14a-8.\208\
---------------------------------------------------------------------------
\208\ For a similar discussion, see the letter in response to
the Proxy Process Roundtable from the Shareholder Rights Group dated
December 4, 2018, at 13.
---------------------------------------------------------------------------
C. Benefits and Costs and Effects on Efficiency, Competition, and
Capital Formation of Proposed Rule Amendments
Below we discuss the anticipated economic effects of the proposed
rule amendments. Section IV.C.1 discusses economic considerations
relevant to shareholder proposals generally, Section IV.C.2 discusses
the general economic effects of the proposed rule amendments, Section
IV.C.3 discusses the specific benefits and costs of each proposed
amendment, and Section IV.C.4 discusses the effects of the proposed
amendments on efficiency, competition, and capital formation.
1. General Economic Considerations Relevant to Shareholder Proposals
As mentioned in Section IV.B above, Rule 14a-8 was designed to
facilitate shareholders' ability under state law to appear in person at
an annual or special meeting and, subject to certain requirements
governed by state law and the company's governing documents, present
their own proposals for a vote by shareholders at that meeting. By
giving proponents the ability to have their proposals included
alongside management's in the company's proxy statement, Rule 14a-8
allows shareholders to consider and vote on matters raised by other
shareholders for consideration at an annual or special meeting of
shareholders.
A shareholder proposal could be value enhancing not only because it
could motivate a value-enhancing change,\209\ but also because it could
limit insiders' entrenchment \210\ and provide management with
information about the views of shareholders.\211\ On the other hand, a
shareholder proposal may not be value enhancing, and companies may bear
direct costs associated with the consideration of a proposal and/or its
inclusion in the proxy statement and these costs may be passed down to
shareholders. A shareholder proposal may not be value enhancing if it
serves the interests of a minority rather than the majority of
shareholders.\212\ Shareholders may also bear costs associated with
their own consideration of a proposal. Our economic analysis does not
speak to whether any particular shareholder proposal or type of
proposals are value enhancing, whether the proposed amendments would
exclude value-enhancing proposals, or whether the proposed amendments
would have a disproportionate effect on proposals that are more or less
value enhancing.
---------------------------------------------------------------------------
\209\ See, e.g., Vicente Cu[ntilde]at, Mireia Gine, & Maria
Guadalupe, The Vote Is Cast: The Effect of Corporate Governance on
Shareholder Value, 67 J. Fin. 1943 (2012) (``Cu[ntilde]at et al.
(2012)'').
\210\ See, e.g., Bach & Metzger (2017), supra note 174.
\211\ See, e.g., J. Robert Brown, Jr., Corporate Governance,
Shareholder Proposals, and Engagement Between Managers and Owners
(University of Denver Sturm College of Law, Legal Research Paper
Series, Working Paper No. 17-15, 2017) (``Brown (2017)'').
\212\ For a related argument, see the letter in response to the
Proxy Process Roundtable from Business Roundtable dated November 9,
2018.
---------------------------------------------------------------------------
In addition, companies and their shareholders may bear opportunity
costs associated with considering proposals that are ultimately not
supported by a majority of shareholders or implemented by a company
instead of engaging in other value-enhancing activities.\213\
Therefore, the value of a shareholder proposal depends fundamentally on
the tradeoff between the potential for value-creation and the cost
borne by companies and their shareholders. Furthermore, the value of
shareholder proposals is limited by the
[[Page 66495]]
extent to which shareholders participate in the voting process and the
extent to which management implements those proposals.
---------------------------------------------------------------------------
\213\ See, e.g., CCMC Report, supra note 84; Rulemaking
Petition, supra note 82, at 8-9; Roundtable Transcript, supra note
13, comments of Ning Chiu, Counsel, Capital Markets Group, Davis
Polk & Wardwell LLP, at 127; Tom Quaadman, Executive Vice President,
U.S. Chamber of Commerce Center for Capital Markets Competitiveness,
at 136; Dannette Smith, Secretary to the Board of Directors and
Senior Deputy General Counsel, UnitedHealth Group, at 148-49;
letters in response to the Proxy Process Roundtable from Blackrock,
Inc. dated November 16, 2018; Business Roundtable dated November 9,
2018; Society for Corporate Governance dated November 9, 2018
(discussing costs associated with shareholder proposals).
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Some empirical literature has examined whether proposals are value
enhancing by studying the stock price reaction around announcements
associated with shareholder proposals, and finds that shareholder
proposals are, on average, associated with small or negligible changes
in target companies' market value.\214\ More specifically, a literature
review of prior studies in this area shows that shareholder proposals
are associated, with an average 0.06 percent short-window stock price
reaction.\215\ These results, however, mask significant cross-sectional
variation in the valuation effects of shareholder proposals. In
particular, literature finds significant stock market reaction to
shareholder proposals that pass by a small margin relative to proposals
that fail by a small margin on the day of the vote. For example, one
study found a 1.3 percent higher increase in stock price on the day of
the vote for proposals that pass by a small margin compared to
proposals that fail by a small margin.\216\
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\214\ The majority of prior studies find no long-term effects of
shareholder proposals on companies' returns, earnings, operations,
and corporate governance. See, e.g., Matthew R. Denes, Jonathan M.
Karpoff, & Victoria B. McWilliams, Thirty Years of Shareholder
Activism: A Survey of Empirical Research, 44 J. Corp. Fin. 405
(2017) (``Denes et al. (2017)''). We focus our discussion on short-
term market reactions to shareholder proposals because findings on
the long-term effects are less reliable than the findings on the
short-term effects as it can be hard to attribute the long-term
effects to the shareholder proposals.
\215\ See Denes et al. (2017), supra note 214. The results of
these studies should be interpreted with caution because they do not
identify a clean announcement date for proposals by which to gauge
the market reaction. For example, companies frequently include
multiple proposals in the same proxy statement and they announce
other news, such as dividends, at shareholder meetings. For related
arguments, see Thomas & Cotter (2007), supra note 180.
\216\ See Cu[ntilde]at et al. (2012), supra note 209. One reason
why the market reaction is concentrated in proposals that pass by a
small margin is that for proposals that pass or fail by a large
margin, the stock price may already reflect the voting outcome
because it is largely anticipated. For proposals that fail by a
small margin, there is typically negligible or no stock price
reaction because proposals that fail even by a small margin are
significantly less likely to be implemented than proposals that pass
by a small or large margin. See also Bach & Metzger (2017), supra
note 174.
Nevertheless, Bach & Metzger also argue that the estimates of
stock price reaction around majority support thresholds likely are
biased because of the ability of management to sway the outcome of
the vote, although the direction of this bias is difficult to
estimate. Laurent Bach & Daniel Metzger, How Close Are Close
Shareholder Votes?, 32 Rev. Fin. Stud. 3183 (2019) (``Bach & Metzger
(2019)'').
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The market reaction can differ with the topic of the shareholder
proposal. For example, one study finds more positive market reaction
for shareholder proposals related to eliminating poison pills and
proposals seeking the adoption of cumulative voting relative to other
types of governance proposals.\217\ Another study finds larger market
reaction for shareholder proposals that reduce antitakeover protection
than other types of governance-related proposals.\218\ Some literature
provides evidence that environmental and social proposals that pass by
a small margin elicit a positive stock market reaction on the day of
the shareholder meeting.\219\
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\217\ Stuart L. Gillan & Laura T. Starks, Corporate Governance
Proposals and Shareholder Activism: The Role of Institutional
Investors, 57 J. Fin. Econ. 275 (2000) (``Gillan & Starks (2000)'').
This study examines a sample of proposals submitted between 1987 and
1994. Hence, the generalizability of some of the findings of this
study could be limited.
\218\ See Cu[ntilde]at et al. (2012), supra note 209.
\219\ Caroline Flammer, Does Corporate Social Responsibility
Lead to Superior Financial Performance? A Regression Discontinuity
Approach, 61 Mgmt. Sci. 2549 (2015). Nevertheless, the study also
notes that ``although [the] results imply that adopting close call
[environmental and social] proposals is beneficial to companies,
they do not necessarily imply that [environmental and social]
proposals are beneficial in general.'' Id. In particular, the study
finds that shareholder proposals on social and environmental issues
receive low shareholder support, on average, and only a small and
unrepresentative sample of shareholder proposals on social and
environmental issues is associated with positive stock market
reactions. Id.
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Market reaction to shareholder proposals also can depend on the
type of the proponent. For example, Gillan and Starks (2000) find that
market reaction is higher for proposals sponsored by individuals than
institutions, whereas Cu[ntilde]at et al. (2012) show that market
reaction is higher for proposals submitted by institutions than
individuals.\220\ Gantchev and Giannetti (2018) show that market
reaction is higher for proposals submitted by individuals that submit
proposals infrequently.\221\ Matsusaka et al. (2019) find a negative
market reaction to shareholder proposals submitted by labor unions in
years that a new labor contract must be negotiated.\222\
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\220\ The different findings of the cited papers likely are
attributable to different samples and methodologies used.
\221\ Gantchev & Giannetti (2018), supra note 166.
\222\ John G. Matsusaka, Oguzhan Ozbas, & Irene Yi,
Opportunistic Proposals by Union Shareholders, 32 Rev. Fin. Stud.
3215 (2019). For similar evidence of stock market reaction to union-
sponsored proposals, see Jie Cai & Ralph A. Walkling, Shareholders'
Say on Pay: Does it Create Value?, 46 J. Fin. & Quantitative
Analysis 299 (2011) and Andrew K. Prevost, Ramesh P. Rao, & Melissa
A. Williams, Labor Unions as Shareholder Activists: Champions or
Detractors?, 47 Fin. Rev. 327 (2012).
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Finally, the market reaction to shareholder proposals typically is
higher for firms that would benefit the most from the changes sought by
the shareholder proposal. For example, Renneboog and Szilagyi (2011)
find that the market reaction around the dates the proposals were first
announced is higher for firms with poor governance quality,\223\ and
Cu[ntilde]at et al. (2012) show that market reaction to governance-
related proposals on the day of the shareholder meeting is higher for
firms with a large number of antitakeover provisions in place.\224\
---------------------------------------------------------------------------
\223\ Luc Renneboog & Peter G. Szilagyi, The Role of Shareholder
Proposals in Corporate Governance, 17 J. Corp. Fin. 167 (2011). The
dates the proposals were first announced were (i) the mailing dates
of the definitive proxy statements; (ii) the dates of a preliminary
statement released by the target firm; or (iii) the dates that the
proxy materials were filed by the proponent in the event of a proxy
contest. Governance quality is measured using two separate indices:
(i) An index that tracks 24 antitakeover provisions and (ii) an
index that tracks the following six provisions: Staggered boards,
limits to shareholder bylaw amendments, poison pills, golden
parachutes, and supermajority requirements for mergers and charter
amendments.
\224\ Cu[ntilde]at et al. (2012), supra note 209, use a sample
of shareholder proposals that Riskmetrics classifies as governance-
related. These proposals are broadly classified into the following
six categories: (i) Antitakeover proposals, (ii) compensation, (iii)
voting, (iv) auditors, (v) board structure, and (vi) other.
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As mentioned above, companies may bear both direct and opportunity
costs associated with the consideration of a proposal, and these costs
may be passed down to shareholders.\225\ In particular, to the extent
applicable, companies incur costs to: (i) Review the proposal and
address issues raised in the proposal; (ii) engage in discussions with
the proponent(s); (iii) print and distribute proxy materials, and
tabulate votes on the proposal; (iv) communicate with proxy advisory
firms and shareholders (e.g., proxy solicitation costs); (v) if they
intend to exclude the proposal, file a notice with the Commission; and
(vi) prepare a rebuttal to the submission.
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\225\ Costs would not be passed down to shareholders if managers
absorbed some of these costs by decreasing their compensation or by
offsetting the cost increases by decreasing other types of costs.
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[[Page 66496]]
There is disagreement among commenters regarding the costs
associated with processing shareholder proposals.\226\ Based on data
from a 1996 SEC questionnaire, the average cost for a company to
determine whether to place a proposal on a ballot was $58,309 and the
average cost to print and distribute proxy materials, and tabulate
votes on the proposal was $78,795.\227\ Commenters, however, have
expressed concerns that these cost estimates likely are unreliable
because: (i) They likely cover the cost of all proposals received by a
company in a year, not the cost of a single proposal; (ii) they are
averages, based on a wide range of responses from companies; (iii)
printing and mailing costs have decreased in recent years due to the
increased use of electronic dissemination of proxy materials; \228\ and
(iv) they capture the overall cost of printing and distributing proxy
materials, not the cost of an additional shareholder proposal.\229\
More recently, a representative from an industry group estimated a cost
of $50,000 per proposal.\230\ In response to the Proxy Process
Roundtable, one commenter also stated that the company's cost per
shareholder proposal, including resubmitted proposals, is more than
$100,000,\231\ while another commenter cited to a House Report that
estimated the cost associated with shareholder proposals to be
$150,000.\232\ In addition, the Commission has previously estimated
that companies spend, on average, $11,600 to file with the Commission a
notice that they intend to exclude a shareholder proposal, which is
equivalent to $13,602 today.\233\ We lack data to estimate the dollar
cost of the remaining activities associated with shareholder proposal
submissions, but we request comment and data on these costs in Section
IV.E below.
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\226\ See supra notes 21-25 and accompanying text.
\227\ The cumulative rate of inflation between May 1998 and
August 2019 is 157.6%. See Consumer Price Index (CPI) Inflation
Calculator, U.S. Dep't of Labor, Bureau of Labor Statistics (last
visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906. The average
costs to companies were $37,000 and $50,000, respectively. See 1998
Adopting Release, supra note 8.
$58,309 = $37,000 x 1.576.
$78,795 = $50,000 x 1.576.
\228\ The processing fee for the electronic dissemination of
proxy materials cannot exceed 50 cents per set of proxy materials.
See NYSE Rule 451.90. Automatic Data Processing Inc. estimated that
``the average cost of printing and mailing a paper copy of a set of
proxy materials during the 2006 proxy season was $5.64.'' See
Shareholder Choice Regarding Proxy Materials, Release No. 34-56135,
(Jul. 26, 2007) [72 FR 42221 (Aug. 1, 2007)]. There is also a
processing fee for the dissemination of proxy materials via mail.
The processing fee for the dissemination of proxy materials via mail
can be lower than the processing fee for the dissemination of proxy
materials via email. See letter from the Investment Company
Institute (Jan. 17, 2019), at 3, available at https://www.ici.org/pdf/18_ici_nysefees_ltr.pdf (noting that ``[e]very beneficial
account pays the NYSE schedule maximum fee of 15 cents in processing
fees to receive a paper shareholder report in the mail. . . . Every
beneficial account pays the NYSE schedule maximum fee of 25 cents
(15 cents plus 10 cents) to receive a shareholder report by
email.''). The letter from the Investment Company Institute refers
to processing fees to disseminate a shareholder report, but we
expect that the processing fees to disseminate proxy materials would
be comparable. Nevertheless, the cost of printing and mailing the
proxy materials would offset any cost savings arising from lower
processing fees for proxy materials disseminated via mail compared
to proxy materials disseminated via email. See, e.g., Broadridge,
2019 Proxy Season Key Statistics and Performance Rating (2019),
available at https://www.thecorporatecounsel.net/member/Memos/Broadridge/09_19_2019.pdf (estimate of cost savings as a result of
the increased electronic dissemination of proxy materials).
\229\ See, e.g., letter in response to the Proxy Process
Roundtable from the Shareholder Rights Group dated December 4, 2018;
Kanzer (2017), supra note 104, at 2-3; Brown (2017), supra note 211.
\230\ See Statement of Darla C. Stuckey, President and CEO,
Society for Corporate Governance, Before the H. Comm. on Financial
Services Subcomm. on Capital Markets and Government Sponsored
Enterprises, Sept. 21, 2016, at 8 (noting ``a lower legal cost
estimate based on anecdotal discussions with [the Society for
Corporate Governance] members of $50,000 per proposal'').
\231\ See letter in response to the Proxy Process Roundtable
from Exxon Mobil Corporation dated July 26, 2019.
\232\ See letter in response to the Proxy Process Roundtable
from the American Securities Association dated June 7, 2019, at 4.
\233\ See Facilitating Shareholder Director Nominations, Release
No. 34-62764 (Aug. 25, 2010) [75 FR 56668 (Sept. 16, 2010)], at
56742 n. 797. $11,600 = 116 hours/notice x 0.25 time of outside
professionals x $400 hourly wage of outside professionals; $13,602 =
$11,600 x 1.173 cumulative rate of inflation between November 2010
and August 2019. See Consumer Price Index (CPI) Inflation
Calculator, U.S. Dep't of Labor, Bureau of Labor Statistics (last
visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906.
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We note that the cost of processing a resubmission may be lower
than the cost of processing a first-time proposal.\234\ Further, some
of the above mentioned costs, such as the expenses to draft a no-action
request or campaigning to increase retail voters' participation,
involve a degree of management discretion as to the level of expenses
incurred, and there is disagreement about the level of such expenses
that is value-enhancing.\235\
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\234\ See, e.g., letter in response to the Proxy Process
Roundtable from the Shareholder Rights Group dated December 4, 2018,
at 14 (noting ``[o]ur experience as proponents of proposals leads us
to believe that companies expend less resources on proposals that
are resubmitted. If resources are expended in opposition to
proposals, the lion's share of those resources and board attention
to a proposal are most likely expended in the first effort to oppose
the proposal''). In certain instances, however, resubmissions could
be costlier than initial submissions. For example, companies might
decide to challenge a resubmission and incur the associated costs
following low support for the initial submission.
\235\ See, e.g., Brown (2017), supra note 211, at 21; Kanzer
(2017), supra note 104, at 2; James McRitchie, SRI Funds & Advisors
Send Open Letters on Lawsuits Against Shareholders, CorpGov.net
(Mar. 24, 2014), https://www.corpgov.net/2014/03/sri-funds-advisors-send-open-letters-on-lawsuits-against-shareholders/; see also letter
in response to the Proxy Process Roundtable from Investor Voice, SPC
dated November 14, 2018, at 3.
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Shareholder proposals also impose opportunity costs on companies
and their shareholders because management, the board, and the voting
shareholders could spend the time spent on processing a shareholder
proposal and voting on the proposal to engage in other value-enhancing
activities. We are unable to estimate the dollar amount of some of the
direct administrative costs and opportunity costs associated with
shareholder proposals because we lack the necessary data. Thus, we seek
comment on these costs, and any corresponding cost savings of the
proposed amendments, in Section IV.E below.
As mentioned above, in addition to the costs to companies that may
be passed down to shareholders, individual shareholders may bear costs
associated with their own consideration and voting on a proposal.
Although these costs may be difficult to quantify, many investment
advisers (among others) retain proxy advisory firms to perform a
variety of services to reduce the burdens associated with proxy voting
determinations, including determinations on shareholder proposals.
2. General Economic Effects of the Proposed Amendments
i. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule
14a-8(c)
The proposed amendments to the ownership thresholds in Rule 14a-
8(b) would allow companies to exclude the following additional
proposals relative to the proposals that can be excluded under the
current ownership thresholds: \236\ (i) Proposals submitted by
shareholders that hold at least $2,000 and less than $15,000 worth of
shares for a period between one and three years and (ii) proposals
submitted by shareholders that hold at least $15,000 and less than
$25,000 worth of shares for a period between one and two
[[Page 66497]]
years.\237\ The proposed amendments to Rule 14a-8(b) would not allow
shareholders to aggregate their holdings, and, therefore, companies
would be able to exclude proposals submitted by shareholders that do
not individually meet the minimum ownership thresholds under Rule 14a-
8. In addition, the proposed amendments to Rule 14a-8(b) would require
a shareholder-proponent to provide contact information as well as
availability to discuss the proposal with the company, and, where a
representative is used, documentation authorizing the representative to
submit the proposal on the shareholder-proponent's behalf. Lastly, the
proposed amendments to 14a-8(c) would allow companies to exclude
proposals where the proponent, either individually or serving as a
representative, has submitted more than one proposal for the same
meeting. As a result, the proposed amendments could increase the number
of excludable shareholder proposals because they could discourage
proponents from submitting proposals that would not satisfy the
requirements of the proposed amendments to Rule 14a-8(b) and Rule 14a-
8(c) and they could allow issuers to exclude proposals that do not
satisfy the requirements of the proposed amendments to Rule 14a-8(b)
and Rule 14a-8(c).\238\
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\236\ As of August 2019, the $2,000 threshold as adopted in May
1998 would be equal to $3,152 after adjusting for inflation, see
supra note 55, and it would be equal to $8,379 after adjusting for
the growth in Russell 3000 index, see supra note 56.
\237\ Proposals submitted by shareholders that hold less than
$2,000 worth of shares or hold the shares for less than one year are
excludable under the current rule, and thus are not listed as
additional excludable proposals under the proposed amendments to the
ownership thresholds.
\238\ The effect of the proposed rule amendments on proponents'
willingness to submit proposals is distinct from the effect of the
proposed rule amendments on company's ability to exclude certain
proposals because companies occasionally allow proposals that do not
meet the current eligibility thresholds to be voted on. At the same
time, companies may expend additional time and resources to exclude
proposals that are submitted despite not being eligible for
submission. Hence, to the extent that the proposed rule amendments
would discourage proponents from submitting certain proposals, the
proposed rule amendments would have an effect that may be different
than and incremental to the effect of companies' ability to exclude
certain proposals.
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To estimate the number of proponents and proposals that could be
excludable as a result of the proposed amendments to Rule 14a-8(b) and
Rule 14a-8(c), we analyze proponents' ownership information using data
from proxy statements (see Table 1 above). With respect to any dollar
ownership category, the data does not indicate whether the proponents
in that category held their shares for more than one year. Assuming all
proponents held the shares for at least three years, the proposed
amendments to the ownership thresholds would not result in the
exclusion of any additional proponents or proposals to be considered in
shareholder meetings held in 2018 relative to the current
threshold.\239\ On the other hand, if one were to assume (again,
without any data to support the assumption) that all proponents bought
the shares one year in advance of the shareholder submission and plan
to hold those shares only through the date of the meeting, we find that
the increase in the ownership threshold from $2,000 with a one-year
holding period to $25,000 with a one-year holding period could result
in the exclusion of 51 percent of the proponents and 56 percent of the
proposals that were submitted to be considered at shareholder meetings
held in 2018, assuming also that none of those proponents would
increase their holdings to meet the new thresholds in order to be able
to file a proposal.\240\
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\239\ We have data that shows which shareholder-proponents held
varying minimum holdings, based on information the companies
provided in the proxy statements. However, we have not prepared
estimates of excludable proposals under the proposed amendments
based on that data since it is not clear how much each shareholder-
proponent actually holds and why the company selected the specific
minimum that they decided to report.
\240\ 51% = 43% + 8%. We estimate that the total number of
excludable proponents is 101. Eighty-five proponents, or 43 percent,
held between $2,000 and $15,000, while 16 proponents, or 8 percent,
held between $15,000 and $25,000 worth of shares.
56% = (84 excludable proposals)/(150 proposals with exact
information on proponents' ownership). Note that the number of
proposals that would be excludable is different from the summation
of the proposals from the ``# of proposals'' column in Table 1 above
because the latter double-counts proposals that were submitted by
multiple proponents.
In estimating the number of excludable proposals, we make the
following assumptions about proposals that are submitted by multiple
proponents. First, we assume that a proposal would still be
submitted if at least one of the co-proponents met the proposed
dollar ownership threshold. Assuming that a proposal with multiple
proponents would be excludable if at least one proponent does not
meet the proposed eligibility requirements, the number of excludable
proposals would be 90 or 60 percent.
Second, in cases where we have data on exact ownership for some
proponents and minimum ownership for the remaining proponents
submitting a joint proposal (there are two such proposals), we
assume proponents reporting minimum holdings would continue to be
eligible to submit the proposal under proposed amendments. Assuming
that a proposal would be submitted only in cases where the
proponents reporting minimum holdings have reported minimum holdings
in excess of $25,000, the number of excludable proposals would be 84
or 56 percent.
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The proposed rule amendments also would prohibit shareholders from
aggregating their holdings to meet the applicable minimum ownership
thresholds to submit a Rule 14a-8 proposal. As shown in Table 1 above,
there are three proponents that submitted two unique proposals, whose
individual holdings were below the $2,000 threshold. One of the two
proposals was submitted by two co-proponents, whose both aggregate and
individual holdings did not meet the $2,000 current ownership
threshold, and this proposal is excludable under the current rules. For
the other of the two proposals, there were four co-proponents, whose
aggregate holdings met the $2,000 threshold, but the individual
holdings of one of the co-proponents did not meet the $2,000 threshold.
Assuming that a proposal would be submitted if at least one of the co-
proponents met the ownership threshold and assuming no change in the
ownership threshold, the proposed amendments to proponents' ability to
aggregate their holdings would not result in the exclusion of any
proposals relative to the current requirements.
Finally, our analysis of proxy statements suggests that 7, or 2
percent of, additional proposals would be excludable under the proposed
amendments to Rule 14a-8(c) (i.e., one-proposal limit).\241\
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\241\ 2% = (7 excludable proposals)/(363 proposals with
proponents' identity information in the proxy statements submitted
to be considered in 2018 shareholder meetings).
Our analysis assumes that persons that submitted multiple
proposals to the same company and for the same shareholder meeting,
either directly or indirectly, would withdraw all but one proposal.
---------------------------------------------------------------------------
We also analyze proponents' ownership information using data from
proof-of-ownership letters that have been made available as part of no-
action requests submitted to the staff during calendar year 2018 (see
Table 2 above). With respect to any dollar ownership category, the data
does not indicate whether the proponents in that category held their
shares for more than one year. Assuming proponents held the shares for
three years, the proposed amendments to the ownership thresholds would
not result in the exclusion of any additional proponents or proposals
to be considered in shareholder meetings held in 2018 relative to the
current threshold.\242\ On the other hand, if one were to assume
(again, without any data to support that assumption) that all
proponents bought the shares one year in advance of the shareholder
submission and plan to hold those shares only through the date of the
meeting, we find that the increase in the ownership threshold from
$2,000 with a one-year holding period to $25,000 with a one-year
holding period could result in the exclusion of 56 percent of the
proponents and 40 percent of the proposals, for which the
[[Page 66498]]
company submitted a no-action request to Commission staff, assuming
also that none of those proponents would increase their holdings to
meet the new thresholds in order to be able to file a proposal.\243\
---------------------------------------------------------------------------
\242\ See supra note 239.
\243\ 56% = 49% + 7%. We estimate that the total number of
excludable proponents is 159. One hundred and forty proponents, or
49 percent, held between $2,000 and $15,000, while 19 proponents, or
7 percent, held between $15,000 and $25,000.
40% = (62 excludable proposals)/(155 proposals for which the
proof-of-ownership letters provided exact information on proponents'
ownership). Note that the number of proposals that would be
excludable is different from the summation of the proposals from the
``# of proposals'' column in Table 2 above because the latter
double-counts proposals that were submitted by multiple proponents.
In estimating the number of excludable proposals, we make the
following assumptions about proposals that are submitted by more
than one proponent. First, we assume that a proposal would still be
submitted if at least one of the co-proponents met the proposed
dollar ownership threshold. Assuming that a proposal with multiple
proponents would be excludable if at least one proponent does not
meet the proposed eligibility requirements, the number of excludable
proposals would be 102 or 66 percent.
Second, in cases where we have data on exact ownership for some
proponents and minimum ownership for the remaining proponents
submitting a joint proposal (there are 27 such proposals), we assume
proponents reporting minimum holdings would continue to be eligible
to submit the proposal under proposed amendments. Assuming that a
proposal would be submitted only in cases where the proponents
reporting minimum holdings have reported minimum holdings in excess
of $25,000, the number of excludable proposals would be 72 or 46
percent.
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The proposed rule amendments also would prohibit shareholders from
aggregating their holdings to meet the applicable minimum ownership
thresholds to submit a Rule 14a-8 proposal. As shown in Table 2, there
are nine proponents that submitted seven unique proposals, whose
individual holdings were below the $2,000 threshold. For one of the
seven proposals, there were two co-proponents, whose aggregate holdings
met the $2,000 current ownership threshold. For another one of the
seven proposals, there was only one proponent whose holdings did not
meet the $2,000 threshold, and this proposal is excludable under the
current threshold. For the remaining five proposals, there was at least
one other co-proponent, whose share ownership met the current $2,000
threshold. Hence, assuming that a proposal would be submitted if at
least one of the co-proponents met the ownership threshold and assuming
no change in the ownership thresholds, the proposed amendments could
result in the exclusion of one unique proposal, or 0.4 percent of the
proposals with ownership information for which the company submitted a
no-action request to the Commission staff.\244\
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\244\ 0.4% = (1 excludable proposal under the proposed
prohibition to aggregation of holdings)/(227 proposals with
proponents' ownership information attached to the no-action
letters).
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The results of the analysis of the proponents' ownership
information using data from proxy statements and proof-of-ownership
letters should be interpreted with caution for several reasons. First,
we are unable to estimate the number of excludable proponents taking
into account the proposed amendments to both the dollar and the
duration thresholds because we lack data on proponents' duration of
ownership, but, as noted above, there would be no impact to long-term
shareholders who have held their shares for three years or more.\245\
While we have limited data on duration of ownership from proxy
statements or proof-of-ownership letters, we recognize that there may
be a relation between duration of ownership and the propensity of a
shareholder to submit a proposal. In particular, longer ownership
duration could be an indicator that a shareholder has sufficient
interest in engaging with the company and is therefore more likely to
submit a shareholder proposal. On the other hand, we may observe
shareholders buying and holding on to their shares for long periods of
time because they are following a passive investment strategy and are
therefore less likely to engage with management or other shareholders.
We hypothesize that these types of shareholders would be less likely to
submit shareholder proposals. Depending on whether the former or the
latter effect is more prevalent, the effect of the proposed amendments
to the ownership thresholds could be closer to the lower or higher end
of the range of excludable proposals discussed above, respectively.
---------------------------------------------------------------------------
\245\ Staff received some non-public retail share ownership data
from a market participant who requested confidential treatment for
the data. Those data provide some information about level and
duration of ownership but do not allow us to identify those
shareholders that have submitted or are likely to submit shareholder
proposals. Additional challenges posed by the data include that the
sample spans a limited time period and information about holdings
cannot be aggregated to the shareholder level. We would welcome
empirical data to assist in estimating the number of excludable
proponents under the proposed thresholds, and we encourage
commenters to submit data to the public comment file that allow us
to aggregate holdings to the shareholder level, identify
shareholders likely to submit shareholder proposals, and that span a
sufficiently long time period.
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Second, our analysis is subject to sample selection bias because
the ownership data in the proof-of-ownership letters only concerns
proponents whose proposals were the subject of a no-action request, and
the ownership data in the proxy statements only concerns proposals that
ultimately were included in the proxy statement and went to a
vote.\246\
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\246\ In particular, it is difficult to draw inferences about
the total effect of proposed amendments to the eligibility
requirements on precluding shareholders from submitting proposals or
on the number of excludable submitted proposals using ownership data
from proxy statements or proof-of-ownership letters included with
no-action requests. For example to the extent that companies may be
more likely to choose to request no-action relief for proposals of
certain types of proponents or topics, our results may not be
generalizable for the full set of submitted proposals. We estimate
that of the proposals for which companies have requested no-action
relief, 51% were submitted by individual proponents. Therefore,
compared to the number of total submissions by individual proponents
in 2018 (39% estimated in Section IV.B.3.i above), our analysis may
be over-representative of the proposals submitted by individuals.
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Third, our analysis is subject to self-reporting bias because the
proof-of-ownership letters are not required to disclose the proponents'
exact holdings but only need to affirm that proponents meet the minimum
ownership requirements.\247\ Relatedly, companies are not required to
disclose the holdings of the proponents in their proxy statements. In
fact, 34 percent of the proof-of-ownership letters only state that the
proponents meet the minimum ownership requirements rather than report
the proponents' exact holdings.\248\ In addition, there is information
on ownership for only 70 percent of the proponents found in proxy
statements and there is information on minimum ownership for 45 percent
of the proponents with ownership information in the proxy
statements.\249\ Hence, the
[[Page 66499]]
generalizability of the results of our analysis to all proponents that
potentially could be affected by the proposed rule amendments is
limited.
---------------------------------------------------------------------------
\247\ In particular, of the 433 proposal-proponent pairs for
which we collected information on ownership from proof-of-ownership
letters, these letters disclosed exact, as opposed to minimum,
holdings information for 53 percent of individual proponents and 72
percent of non-individual proponents, and this difference is
statistically significant at the 1 percent level. Hence, our results
using only information on exact holdings may under-represent
individual proponents relative to non-individual ones.
\248\ 34% = 149/(149 + 284) from Table 2 above.
\249\ 70% = (198 + 159)/(198 + 159 + 156) from Table 1 above.
45% = 159/(198 + 159) from Table 1 above.
In particular, of the 348 proposal-proponent pairs for which
companies reported proponent identity and ownership information, the
proxy statements disclosed exact, as opposed to minimum, holdings
information for 41 percent of individual proponents and 69 percent
of non-individual proponents, and this difference is statistically
significant at the 1 percent level. Hence, our results using only
information on exact holdings may under-represent individual
proponents relative to non-individual ones.
The number of proposal-proponent pairs (i.e., 348) for which
companies reported proponent identity and ownership information is
lower than the sum of proponents with ownership information in Table
1 above (i.e., 357 = 198 + 159) because companies occasionally
provide the count and ownership of the proponents but do not provide
information on the identity of the proponents.
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We expect that more proposals would be excludable with increases in
share turnover. Literature documents a general upward trend in share
turnover over time.\250\ As share turnover increases and thus investors
hold shares for a shorter period of time, it becomes less likely that
investors would meet the ownership duration thresholds of the proposed
rule amendments.\251\ Further, the proposed increase in the ownership
requirements would become more difficult to satisfy with decreases in
the issuers' stock prices to the extent investors' holdings are at or
near the ownership thresholds. The reason is that proponents' holdings
are more likely to fall below the ownership dollar thresholds as the
market value of the company decreases.
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\250\ See, e.g., Tarun Chordia, Richard Roll, & Avanidhar
Subrahmanyam, Recent Trends in Trading Activity and Market Quality,
101 J. Fin. Econ. 243 (2011).
\251\ Proponents have discretion in how frequently they trade
shares, and thus they may decide to hold shares for a longer period
of time to satisfy the proposed ownership duration thresholds.
See supra note 198 for a discussion of changes in investors'
holding period over time.
---------------------------------------------------------------------------
We do not expect the proposed amendments to the ownership
thresholds to affect all types of shareholders and companies in the
same way. First, the proposed amendments could have a greater effect on
retail investors compared to institutional investors because the
average holdings of retail investors are typically lower than the
average holdings of institutional investors. Second, to the extent that
investors with smaller holdings are more likely to submit proposals on
certain topics, by reducing the number of such investors who are
eligible to submit proposals, the proposed rule amendments could
decrease the number of proposals on those topics more than other types
of proposals. For example, individual investors are more likely to
submit governance proposals than institutional investors. Untabulated
analysis shows that 86 percent of the proposals submitted by individual
investors are governance proposals, whereas 47 percent of the proposals
submitted by institutional investors are governance proposals.\252\
Hence, the proposed rule amendments could decrease the number of
governance proposals more than environmental and social proposals, but
this effect may be mitigated to the extent that institutional
proponents submit a larger fraction of shareholder proposals.\253\
Third, the proposed rule amendments could affect companies with smaller
market capitalization more than those with larger market
capitalization. The reason is that, for firms with smaller market
capitalization, proponents' holdings are more likely to be below the
proposed ownership thresholds, assuming that investors hold stocks
proportionately to the companies' market capitalization (i.e.,
investors hold the market portfolio).\254\ Fourth, the proposed
amendments could decrease the number of proposals received by companies
that have been public for fewer than three years more than the number
of proposals received by seasoned companies because the average
duration of investors' holdings would be, by their nature, shorter for
those firms.\255\
---------------------------------------------------------------------------
\252\ Data is retrieved from ISS Analytics for Russell 3000
companies between 2004 and 2018. See CII Report, supra note 92
(showing that retail investors largely focus on governance
proposals).
\253\ See supra Section IV.B.3.i.
\254\ See, e.g., John Y. Campbell, Household Finance, 61 J. Fin.
1553 (2006) (discussing households' stock holdings).
We note that smaller companies currently receive proposals less
frequently than larger companies, and thus, while there may be a
greater reduction in eligible proponents under the proposed
amendments at smaller companies, the overall impact of the proposed
increase in the ownership thresholds might be less pronounced for
smaller companies.
\255\ We note that newly-listed companies currently receive
proposals less frequently than seasoned companies, and thus the
overall impact of the proposed increase in the ownership thresholds
might be less pronounced for newly-listed companies. See Kron &
Rees, supra note 96, at 1; see also Roundtable Transcript, supra
note 13, comments of Jonas Kron, Senior Vice President and Director
of Shareholder Advocacy, Trillium Asset Management, at 142 (``Less
than 9 percent of Russell 3000 companies that have had an IPO since
2004 have received a shareholder proposal.''); Ning Chiu, Counsel,
Capital Markets Group, Davis Polk & Wardwell LLP, at 147
(acknowledging that ``IPO companies don't always get a lot of
proposals'').
---------------------------------------------------------------------------
The proposed rule amendment would also eliminate the alternative
one-percent ownership threshold. The one-percent ownership threshold
currently is rarely utilized in light of the $2,000/one-year threshold.
In particular, none of the proxy statements and proof-of-ownership
letters we reviewed refer to the one-percent ownership threshold as
evidence that the proponents met the current ownership thresholds (see
Section IV.B.3.ii above). Further, as of December 2018, there were no
companies for which the one-percent ownership threshold would be
relevant (i.e., the one-percent threshold would result in an ownership
requirement of less than $2,000).\256\ Hence, we believe that the
proposed elimination of the one-percent ownership threshold would not
have a significant economic effect.
---------------------------------------------------------------------------
\256\ We estimate the number of companies with market
capitalization below $200,000 as of December 2018. Data is retrieved
from CRSP.
---------------------------------------------------------------------------
ii. Discussion Specific to Proposed Amendments for Proposals Submitted
on Behalf of Shareholders
The majority of shareholders that submit a proposal through a
representative already provide the documentation that would be mandated
by the proposed amendments, consistent with existing staff
guidance.\257\ In particular, as discussed in Section IV.B.3.iii above,
67 percent of the proposals that were submitted through a
representative (67% = \8/12\) included the documentation that would be
mandated by the proposed amendments. For the remaining 33 percent of
the proposals that were submitted through a representative and provide
only some of the documentation mandated by the proposed amendments, we
expect that the cost of providing the proposed additional documentation
would be small because the information that would be required is
readily available to the proponents and the proposed disclosure is not
lengthy. Hence, we expect that the economic effects of this aspect of
the proposed amendments likely would be minimal.
---------------------------------------------------------------------------
\257\ See SLB 14I, supra note 65.
---------------------------------------------------------------------------
iii. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
The proposed amendments to Rule 14a-8(i)(12) comprise (i) the
proposed amendments to the resubmission thresholds and (ii) the
proposed Momentum Requirement. Relative to the current thresholds, the
proposed amendments to the resubmission thresholds would allow
companies to exclude the following additional resubmitted proposals:
(i) Those that received shareholder support between 3 and 5 percent on
a first submission; (ii) those that received shareholder support
between 6 and 15 percent on a second submission; and (iii) those that
received shareholder support between 10 and 25 percent on a third or
subsequent submission. In addition to the proposed amendments to the
resubmission thresholds, the proposed Momentum Requirement would allow
companies to exclude proposals previously voted on by shareholders
three or more times in the preceding five calendar years if the most
recent vote occurred within the preceding three calendar years and, at
the time of the most recent shareholder
[[Page 66500]]
vote, the proposal did not receive a majority of the votes cast and
support declined by 10 percent or more compared to the immediately
preceding shareholder vote on the same subject matter. As a result, the
proposed amendments to Rule 14a-8(i)(12) could increase the number of
excludable shareholder proposals because they could (i) decrease
proponents' willingness to submit proposals on matters for which it may
be difficult to garner sufficient support in the future or matters that
did not receive sufficient support to qualify for resubmission when
previously voted on and (ii) allow companies to exclude such proposals.
Using the 2011 to 2018 data on shareholder proposals for Russell
3000 companies, we estimate that the proposed amendments to the
resubmission thresholds would result in an additional 212 resubmitted
proposals being excludable (15 percent of the total resubmitted
proposals in this timeframe) (see Table 9 below).\258\ The largest
increase in the number of excludable proposals would result from the
increase in the third submission threshold. In particular, raising that
threshold from 10 percent to 25 percent would result in the
excludability of 27 percent of proposals that have been submitted three
or more times. Approximately 48 percent (i.e., 101 out of the 212) of
the newly excludable proposals saw no increase in support from the
previous time they were voted on. The other 52 percent (i.e., 111 out
of 212) saw increases in support, averaging 5 percent more votes in
favor of the proposal compared with the proposal's prior submission.
However, almost all of these newly excludable proposals (i.e., 211 of
212 proposals) ultimately failed to generate majority support.
---------------------------------------------------------------------------
\258\ This analysis assumes that shareholders' voting behavior
and proponents' proposal submission behavior would not change as a
result of the proposed amendments to the resubmission thresholds.
Also, we exclude from this analysis 10 shareholder proposals that
were resubmitted but were eligible for exclusion under the old
resubmission thresholds. See supra note 200.
Table 9--Resubmitted Shareholder Proposals Ineligible for Resubmission Under Proposed Thresholds, 2011-2018
----------------------------------------------------------------------------------------------------------------
Third or
Resubmitted after: First Second subsequent Total
submission submission submission
----------------------------------------------------------------------------------------------------------------
All Proposals:
Resubmitted proposals....................... 677 322 443 1,442
Excludable proposals under proposed
amendments:
Number (%).............................. 47 (7%) 45 (14%) 120 (27%) 212 (15%)
Number (%) with support increase........ 20 (3%) 29 (9%) 62 (14%) 111 (8%)
Average increase in support............. 7% 4% 5% 5%
Number (%) with majority support........ 1 (0%) 0 (0%) 0 (0%) 1 (0%)
Governance Proposals:
Resubmitted proposals....................... 355 191 255 801
Excludable proposals under proposed
amendments:
Number (%).............................. 14 (4%) 12 (6%) 60 (24%) 86 (11%)
Number (%) with support increase........ 5 (1%) 10 (5%) 37 (15%) 52 (6%)
Average increase in support............. 21% 7% 5% 7%
Number (%) with majority support........ 1 (0%) 0 (0%) 0 (0%) 1 (0%)
Environmental Proposals:
Resubmitted proposals....................... 118 43 42 203
Excludable proposals under proposed
amendments:
Number (%).............................. 10 (8%) 15 (35%) 12 (29%) 37 (18%)
Number (%) with support increase........ 8 (7%) 9 (21%) 5 (12%) 22 (11%)
Average increase in support............. 3% 1% 3% 2%
Number (%) with majority support........ 0 (0%) 0 (0%) 0 (0%) 0 (0%)
Social Proposals:
Resubmitted proposals....................... 204 88 146 438
Excludable proposals under proposed
amendments:
Number (%).............................. 23 (11%) 18 (20%) 48 (33%) 89 (20%)
Number (%) with support increase........ 7 (3%) 10 (11%) 20 (14%) 37 (8%)
Average increase in support............. 1% 4% 5% 4%
Number (%) with majority support........ 0 (0%) 0 (0%) 0 (0%) 0 (0%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.
Further, we estimate that the proposed Momentum Requirement would
result in an additional 57 (4 percent) resubmitted proposals being
excludable. Of these 57, 42 are governance proposals, 12 are social
proposals and 3 are environmental and all would be excludable following
a third or subsequent submission. Overall, the proposed amendments to
rule 14a-8(i)(12) could result in 269 (19 percent) additional
excludable proposals relative to the current resubmission
thresholds.\259\
---------------------------------------------------------------------------
\259\ The proposed amendments to rule 14a-8(i)(12) could result
in 30 additional excludable proposals in 2018.
---------------------------------------------------------------------------
We do not expect the proposed amendments to Rule 14a-8(i)(12) to
affect all types of shareholder proposals in the same way. First, the
proposed amendments to Rule 14a-8(i)(12) could have a greater impact on
shareholder proposals relating to environmental and social issues
compared to shareholder proposals on governance issues for the
following reasons. Shareholder proposals on environmental and social
issues tend to receive lower support than those on governance issues,
on average. In particular, as Figure 7B above shows, the average voting
support for governance proposals was 42.1 percent, the average voting
support for environmental proposals was 21.9 percent, and the average
voting support for social proposals was 17.4 percent during our sample
period, and the difference in the voting support between
[[Page 66501]]
governance and environmental and social proposals is statistically
significant.\260\ Further, proposals on environmental and social issues
are more likely to be resubmitted compared to proposals on governance
issues, and thus would be more likely to be affected by the changes in
the resubmission thresholds. In particular, as Table 4 above shows, 30
percent of the governance proposals that were eligible for resubmission
were actually resubmitted, while 41 percent of the environmental and 51
percent of social proposals that were eligible for resubmission were
actually resubmitted.
---------------------------------------------------------------------------
\260\ See supra note 154 for details on the classification of
shareholder proposals into environmental, social, and governance
proposals. Also see letters in response to the Proxy Process
Roundtable from AEquo, et al. dated May 14, 2019; Canadian Coalition
for Good Governance dated May 15, 2019; Shareholder Rights Group
dated December 4, 2018.
---------------------------------------------------------------------------
In addition, as shown by our analysis in Figure 10 (below),
shareholder proposals on social and environmental issues generally take
longer to gain support than proposals on governance issues.\261\ More
specifically, we analyze all of the shareholder proposals submitted to
Russell 3000 companies during 2011 to 2018 that received more than 25
percent of voting support at some point. Our analysis shows that while
more than 97 percent of the governance-related proposals received more
than 25 percent of the voting support in the first submission, only 83
percent of the social proposals and 90 percent of the environmental
proposals received more than 25 percent of the voting support in the
first submission. Almost all of the governance and environmental
proposals had received more than 25 percent of the voting support by
the third submission, whereas it took more than five submissions for
the social proposals to receive more than 25 percent of the voting
support.\262\ The results of the analysis in Figure 10 (below) suggest
that environmental and social proposals take longer to gain support
than proposals on governance issues. However, it is not clear how much
of the increased support for certain resubmitted environmental and
social proposals is attributable to proposals gaining traction through
the resubmission process as opposed to other factors, such as changing
opinions on environmental and social issues. In particular, various
proposals in each proposal category evolve over time as a result of
various factors, including shareholder engagement. For example, we
would expect that proponents would be incentivized to adjust their
proposals over time based on interactions with companies and other
shareholders with an eye toward garnering more support.
---------------------------------------------------------------------------
\261\ See, e.g., letter in response to the Proxy Process
Roundtable from CtW Investment Group dated January 16, 2019.
\262\ The conclusions are qualitatively similar if we analyze
shareholder proposals that receive majority support at some point.
Out of all governance-related shareholder proposals that garnered
majority support, 91% did so in the first submission, while only 61%
of the environmental proposals and 60% of the social proposals did
so in the first submission.
[GRAPHIC] [TIFF OMITTED] TP04DE19.021
Our analysis above suggests that the increase in the resubmission
thresholds could have a greater effect on shareholder proposals
relating to environmental and social issues compared to shareholder
proposals on governance issues. Out of the 269 additional excludable
proposals under the proposed rule amendments, 128 were related to
governance issues and 40 were related to environmental issues and 101
were related to social issues. Therefore, although environmental and
social proposals made up 44 percent (= 641/1,442) of all resubmitted
proposals in Russell 3000 firms during 2011 to 2018, these types of
proposals made up 52 percent (= 141/269) of newly excludable proposals
under the proposed amendments to the resubmission thresholds and the
Momentum Requirement.
Second and relatedly, the proposed amendments to Rule 14a-8(i)(12)
could have a greater effect on shareholder proposals submitted by non-
individual proponents because these proponents tend to submit
environmental and social proposals at a higher frequency than do
individual investors.\263\ In particular, the proposed increase in the
resubmission thresholds could increase the number of excludable
proposals
[[Page 66502]]
resubmitted by non-individual proponents by 186 (19 percent).\264\ In
contrast, the proposed increase in the thresholds could increase the
number of excludable proposals resubmitted by individual proponents by
92 (17 percent).
---------------------------------------------------------------------------
\263\ See supra note 252 and accompanying text.
\264\ Data is retrieved from the CII Report for shareholder
proposals submitted to Russel 3000 companies between 2011 and 2018.
See supra note 197.
Numbers of newly excludable proposals under proposed
resubmission thresholds are computed relative to the total
resubmitted proposals during the sample period by each type of
proponent.
---------------------------------------------------------------------------
Third, the proposed amendments to Rule 14a-8(i)(12) could have a
greater effect on larger companies because larger companies are more
likely to receive shareholder proposals.\265\ In particular, we find
that 20 percent of resubmitted shareholder proposals at S&P 500
companies would be excludable under the proposed resubmission
thresholds, as compared to 12 percent of proposals resubmitted to non-
S&P 500 firms.\266\
---------------------------------------------------------------------------
\265\ See supra Figure 3.
\266\ Data is retrieved from ISS Analytics and the CII Report
for shareholder proposals submitted to Russel 3000 companies between
2011 and 2018. See supra note 197.
---------------------------------------------------------------------------
Fourth, the proposed amendments to Rule 14a-8(i)(12) could have a
greater effect on companies with dual-class voting shares for which
insiders hold the majority of the voting shares.\267\ In particular, we
find that 32 percent of resubmitted shareholder proposals at companies
with dual-class shares would be newly excludable under the proposed
resubmission thresholds, as compared to 18 percent in companies without
dual-class shares.\268\ For these companies, shareholder proposals
generally receive lower levels of support than in other companies,
because insiders usually oppose shareholder proposals.\269\
---------------------------------------------------------------------------
\267\ Shareholder proposals are less likely to exceed the
resubmission thresholds whenever insiders hold a large percentage of
the voting stock. Nevertheless, commenters have expressed concerns
particularly in cases in which insiders hold a large percentage of
the voting stock through dual-class shares. See letters in response
to the Proxy Process Roundtable from the City of New York Office of
the Comptroller dated January 2, 2019; CtW Investment Group dated
January 16, 2019; see also letter in response to the Rulemaking
Petition from the Shareholder Rights Group dated October 5, 2017.
This is because dual-class shares result in the separation of voting
and cash flow rights, giving insiders disproportionate voting power
relative to their cash flow rights.
\268\ Data is retrieved from ISS Analytics and the CII Report
for shareholder proposals submitted to Russell 3000 companies
between 2011 and 2018. See supra note 197. Our analysis of proposals
submitted to companies with dual-class shares should be interpreted
with caution because our data does not allow us to identify
companies for which insiders hold the majority of dual-class shares.
Our data also does not allows us to distinguish companies for which
the dual-class shares provide differential voting rights as opposed
to other types of rights, such as dividend payments, to
shareholders.
\269\ Literature provides some evidence that insider holdings of
voting rights are larger in firms with dual-class voting shares, and
that in companies for which insiders hold the majority of the voting
shares, insiders are more likely to vote against shareholder
proposals. See Rob Bauer, Robin Braun, & Michael Viehs, Industry
Competition, Ownership Structure and Shareholder Activism (Working
Paper, Sept. 2010), available at https://ssrn.com/abstract=1633536.
---------------------------------------------------------------------------
3. Benefits and Costs of the Proposed Amendments
i. Benefits
a. General Discussion of Benefits
As a result of the proposed amendments, companies could exclude
more proposals and shareholders could be discouraged from submitting
proposals that likely would be excluded based on the proposed
amendments. Consequently, companies could experience cost savings
because they would be required to process fewer proposals (see Section
IV.B.3.i above for a detailed discussion of the costs associated with
shareholder proposals).\270\ Shareholders of these companies also could
benefit from the potential decrease in proposals to the extent that any
potential costs savings would be passed down to them in the form of
higher returns on their investment.
---------------------------------------------------------------------------
\270\ To the extent that proponents would continue submitting
proposals that would be excludable under the proposed rule
amendments, companies would incur costs to exclude those proposals
(e.g., issuers would need to file a notice with the Commission that
they intend to exclude the proposal). These costs would partially
offset any cost savings arising from the proposed rule amendments.
Any potential cost savings arising from the proposed rule
amendments could be limited by the extent to which proponents change
their behavior. For example, proponents could (i) alter their
portfolio allocation to meet the ownership thresholds; (ii) rotate
proposals on similar topics among different companies; or (iii)
submit proposals to the same company but on a different topic.
---------------------------------------------------------------------------
Shareholders also could benefit from the decrease in the number of
proposals because they could spend fewer resources reviewing and voting
on shareholder proposals. Relatedly, the decrease in the number of
proposals could result in more efficient use of shareholder
resources.\271\ More specifically, the decrease in the number of
proposals could allow shareholders to focus on the processing of
proposals that are more likely to garner majority support and be
implemented by management, which ultimately could benefit shareholders
because it would result in more efficient use of their resources.
---------------------------------------------------------------------------
\271\ See letter in response to the Proxy Process Roundtable
from Business Roundtable dated June 3, 2019, at 5 (noting
``shareholders can lose sight of matters of true economic
significance to the company if they are spending time considering
one, or even numerous, immaterial proposals. The resources and
attention expended in addressing shareholder proposals cost the
company and its shareholders in absolute dollars and management time
and, perhaps worse, divert capital resources to removal of an
immediate distraction and away from investment in value-adding
allocations, such as research and development and corporate
strategy.'').
---------------------------------------------------------------------------
b. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule
14a-8(c)
As discussed in Section IV.C.3.i.a above, the proposed amendments
to Rule 14a-8(b) and Rule 14a-8(c) could decrease the number of
proposals that companies must process, and thus could decrease the
costs associated with processing shareholder proposals. We estimate
that, as a result of the proposed amendments to Rule 14a-8(b) and Rule
14a-8(c), all Russell 3000 companies together could experience annual
cost savings associated with a decrease in the number of voted
proposals of up to $70.6 million per year.\272\ In addition,
[[Page 66503]]
the decrease in the number of proposals could free up resources so that
companies and their shareholders could pursue other value-enhancing
activities.
---------------------------------------------------------------------------
\272\ $70.6 million = $150,000 (i.e., cost estimate provided by
the American Securities Association in their letter in response to
the Proxy Process Roundtable dated June 7, 2019 (see supra note
232)) x 471 (i.e., maximum number of excludable proposals as a
result of the proposed amendments to Rule 14a-8(b) and Rule 14a-
8(c)). 471 = [84 (i.e., maximum number of excludable proposals as a
result of the proposed amendments in Rule 14a-8(b) using only data
for proposals with exact information on proponents' ownership in
proxy statements, see supra note 240) + 1 (i.e., incremental number
of excludable proposals as a result of the proposed amendments to
14a-8(c) using only data for proposals with exact information on
proponents' ownership)] x 831 (i.e., all proposals submitted to be
considered in 2018 shareholders' meetings)/150 (i.e., proposals with
exact information on proponents' ownership in proxy statements).
The following caveats apply to our cost savings estimates. Our
analysis assumes that the distribution of ownership for proponents
with exact ownership information in the proxy statements is the same
as the distribution of ownership for proponents with minimum or no
ownership information in the proxy statements and the distribution
of ownership for proponents that submitted proposals that were
ultimately withdrawn or omitted. Our analysis also applies the same
per-proposal cost estimate (i.e., $150,000) to voted, omitted, and
withdrawn proposals and it applies the same per-proposal cost
estimate to operating companies and management companies. Lastly,
our analysis assumes that companies will not reallocate the time and
resources that would free up as a result of the reduction in
proposals to process the remaining proposals.
On the other hand, the lower bound of cost savings would be $1.4
million. $1.4 million = $50,000 (i.e., cost estimate provided by
Darla Stuckey in her 2016 testimony before the House Committee on
Financial Services Subcommittee on Capital Markets and Government
Sponsored Enterprises, see supra note 230) x 28 (i.e., minimum
number of excludable proposals as a result of the proposed
amendments to 14a-8(b) and 14a-8(c)). 28 = [0 (i.e., minimum number
of excludable proposals as a result of the proposed amendments to
14a-8(b) using only proposals with exact information on proponents'
ownership in proxy statements, see supra Section IV.C.2.i) + 5
(i.e., incremental number of excludable proposals as a result of the
proposed amendments to 14a-8(c) using only proposals with exact
information on proponents' ownership in proxy statements)] x 831
(i.e., all proposals submitted to be considered in 2018
shareholders' meetings)/150 (i.e., proposals with exact information
on proponents' ownership).
---------------------------------------------------------------------------
As a result of the proposed increase in the ownership thresholds,
proponents could bear a larger percentage of the total cost that
companies and their shareholders incur to process a shareholder
proposal. For example, a shareholder that owns $25,000 worth of stock
in a company would bear a larger percentage of the costs associated
with processing a shareholder proposal relative to a proponent that
owns $2,000 worth of stock in a company. As a result of bearing a
larger percentage of the total costs, proponents could be less willing
to submit proposals that are less likely to garner majority support and
be implemented by management.
In addition, by eliminating shareholders' ability to aggregate
their holdings with those of other shareholders, the proposed
amendments would require each proponent to have a sufficient economic
stake or investment interest in the company to justify the costs
associated with a shareholder proposal.
Further, by providing that a person, directly or indirectly, may
submit only one proposal for a shareholder's meeting, the proposed
amendments would prohibit shareholders from imposing disproportionate
costs on the company and other shareholders by submitting multiple
proposals for the same meeting.
Finally, by requiring a statement from the proponent that he or she
is willing to meet with the company after submission of the shareholder
proposal, the proposed amendments could encourage direct communication
between the proponent and the company, which could promote more
frequent resolution of the proposals outside the voting process. Such
resolutions could decrease the costs that companies and their
shareholders incur to process shareholder proposals.
c. Discussion Specific to Proposed Amendments for Proposals Submitted
on Behalf of Shareholders
To the extent that the practices of certain proponents are not
consistent with the proposed amendments related to proposals submitted
through a representative, the proposed amendments could benefit
companies and other shareholders because they could demonstrate the
existence of a principal-agent relationship and could provide assurance
that the shareholder supports the proposals. Further, the proposed
amendments could result in cost savings to companies that would no
longer be required to expend resources to obtain some of the
information that is not provided by the proponents but would be
required under the proposed amendments.
d. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
As discussed in Section IV.C.3.i.a above, the proposed increase in
the resubmission thresholds and the proposed Momentum Requirement could
benefit companies and their shareholders because it could decrease the
number of proposals for companies and shareholders to consider. As a
result of the proposed amendments, we estimate that all Russell 3000
companies together could experience annual cost savings associated with
a decrease in the number of voted proposals of up to $8.9 million per
year.\273\
---------------------------------------------------------------------------
\273\ $8.9 million = $150,000 (i.e., cost estimate provided by
the American Securities Association in their letter in response to
the Proxy Process Roundtable, see supra note 232) x 59 (i.e., number
of excludable proposals as a result of the proposed amendments to
14a-8(i)(12)). 59 = 30 (i.e., number of excludable proposals as a
result of the proposed amendments to 14a-8(i)(12) that were included
in proxy statements to be considered in 2018 shareholder meetings) x
831 (i.e., proposals submitted to be considered in 2018
shareholders' meetings)/423 (i.e., voted proposals in the CII Report
in 2018). The following caveats apply to our cost savings estimates.
Our analysis applies the same per-proposal cost estimate (i.e.,
$150,000) to voted, omitted, and withdrawn proposals and to
operating companies and management companies. In addition, our
analysis assumes that the proposed amendments to 14a-8(i)(12) will
have the same effect on proposal eligibility of voted, withdrawn,
and omitted proposals. Lastly, our analysis assumes that companies
will not reallocate the time and resources that would free up as a
result of the reduction in proposals to process the remaining
proposals.
On the other hand, the lower bound of cost savings would be $3.1
million. $3.1 million = $50,000 (i.e., cost estimate provided by
Darla Stuckey in her 2016 testimony before the House Committee on
Financial Services Subcommittee on Capital Markets and Government
Sponsored Enterprises, see supra note 230) x 63 (i.e., number of
excludable proposals as a result of the proposed amendments to 14a-
8(i)(12)).
---------------------------------------------------------------------------
In addition, the decrease in the number of proposals could free up
resources so that companies and their shareholders could pursue other
value-enhancing activities. Relatedly, the proposed amendments to the
resubmission thresholds and the Momentum Requirement could exclude
proposals that have historically garnered low levels of support and
thus would allow shareholders to focus on the processing of proposals
that may garner higher levels of voting support and may be more likely
to be implemented by management.
The proposed amendments to the resubmission thresholds could also
benefit companies and their shareholders to the extent that they change
proponents' behavior. In particular, due to the higher thresholds,
proponents may spend more resources to more carefully prepare proposals
that are more likely to garner sufficient levels of shareholder
support. In addition, proponents may spend more resources to market
their proposal to other shareholders to increase support for their
proposal. As a result, companies and their shareholders could benefit
from the submission of shareholder proposals that are more likely to
receive higher levels of support and thus are more likely to be
implemented by management.
Similarly, the proposed resubmission thresholds may discourage the
submission of proposals that are less likely to garner majority voting
support.\274\ Similarly, the Momentum Requirement may discourage the
submission of proposals that garner significant but not majority
support and recently have experienced a decrease in shareholder
support, which may indicate waning shareholder interest in the
proposal.
---------------------------------------------------------------------------
\274\ Proponents incur costs to submit proposals, which may
already deter some proponents from resubmitting proposals that have
a low likelihood of receiving sufficient levels of shareholder
support.
---------------------------------------------------------------------------
ii. Costs
a. General Discussion of Costs
The proposed amendments could result in the exclusion of certain
proposals that would have otherwise been included in the proxy
statement and voted on. To the extent that such shareholder proposals
would be value enhancing, the potential exclusion of value-enhancing
proposals could be detrimental to companies and their
shareholders.\275\ One way the exclusion of certain proposals could be
[[Page 66504]]
detrimental is by limiting or slowing the adoption of potential
improvements.
---------------------------------------------------------------------------
\275\ See supra Section IV.C.I for a detailed discussion of
literature that examines the value of shareholder proposals.
The potential decrease in the number of shareholder proposals
also could be costly to the various providers of administrative and
advisory services related to shareholder voting because the demand
for the services of these providers could decrease. Examples of
these service providers include proxy advisory firms, tabulators of
voting, and proxy solicitors.
---------------------------------------------------------------------------
Shareholder proposals are one way for shareholders to communicate
with management and other shareholders. The proposed amendments would
alter the eligibility requirements in a manner that could increase
companies' ability to exclude certain proposals, which could restrict
shareholders' ability to use this avenue of communication with other
shareholders. In addition to increasing companies' ability to exclude
certain proposals, the proposed amendments could decrease shareholders'
willingness to submit certain proposals, which could further inhibit
communication between shareholders and also inhibit shareholders'
engagement with management.\276\
---------------------------------------------------------------------------
\276\ See supra note 48; see also letter in response to the
Proxy Process Roundtable from American Federation of Labor &
Congress of Industrial Organizations dated November 9, 2018.
---------------------------------------------------------------------------
By limiting the shareholder proposals channel of communication, the
proposed amendments could lead to proponents seeking alternative
avenues of influence, such as public campaigns, litigation over the
accuracy of proxy materials, or demands to inspect company documents.
As a result, companies could confront greater uncertainty in their
interaction with shareholders.\277\
---------------------------------------------------------------------------
\277\ See Brown (2017), supra note 211, at 24-25; see also
letter to Jeb Hensarling, Chairman, and Maxine Waters, Ranking
Member, House Financial Services Committee, from Jeffrey P. Mahoney,
General Counsel, Council of Institutional Investors, dated April 24,
2017, available at https://democrats-financialservices.house.gov/uploadedfiles/letter_-_cii_04.27.2017.pdf (stating that the proposed
rule amendments are ``likely to have unintended consequences,
including shareowners more often availing themselves of the blunt
instrument of votes against directors, and increased reliance on
hedge fund activists to push for needed corporate changes.''); Ceres
Business Case, supra note 25, at 11 (noting that ``[a]lternatives to
shareholder proposals include voting against directors, lawsuits,
books and records requests, and requests for additional regulations.
Each of these is more onerous and adversarial than including a 500-
word proposal in the proxy statement for the consideration of
shareholders''); letters in response to the Proxy Process Roundtable
from Council of Institutional Investors dated January 31, 2019; Los
Angeles County Employees Retirement Association dated October 30,
2018; MFS Investment Management dated November 14, 2018; US SIF
dated November 9, 2018.
---------------------------------------------------------------------------
Any negative effects of the proposed amendments would be more
pronounced for shareholders that follow passive index strategies
because those shareholders are more limited in their ability to sell
shares of an underperforming stock and thus might be more likely to
rely on the proxy proposal process to encourage value-enhancing
changes.\278\
---------------------------------------------------------------------------
\278\ See letter in response to the Proxy Process Roundtable
from the City of New York Office of the Comptroller dated January 2,
2019, at 1 (noting that ``[b]ecause of our long-term investment
horizon, and the fact that we allocate more than 80% of the funds'
investments in U.S. public equity through passive index strategies,
we cannot readily sell shares in a company when we have concerns
about the company's performance, board composition and quality,
management, executive compensation, workplace practices or
management of risks, including those related to climate change'');
Ceres Business Case, supra note 25, at 10 (noting that ``[w]hile
active investors have the option of selling shares of companies
whose management they do not trust to add value, passive investors'
options are more limited'').
At the same time, passive investors are more likely to hold
shares for a long period of time than active investors, and thus are
less likely to be affected by the proposed amendments to Rule 14a-
8(b).
---------------------------------------------------------------------------
b. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule
14a-8(c)
In addition to the costs discussed in Section IV.C.3.ii.a above,
the proposed amendments to 14a-8(b) and 14a-8(c) could impose certain
costs on shareholder-proponents. These costs could arise from: (i)
Shareholder-proponents' efforts to reallocate shareholdings in their
portfolio to satisfy the proposed dollar ownership thresholds; (ii)
decreased diversification of shareholder-proponents' portfolio because
a larger portion of their wealth may be invested in a particular
company; (iii) shareholder-proponents holding the shares for longer
periods of time to satisfy the proposed duration thresholds; and (iv)
shareholder-proponents making themselves available to communicate with
management after submitting a proposal. The latter costs to
shareholder-proponents consist of the direct costs of meeting with
management, and the opportunity costs associated with spending time to
meet with management instead of engaging in other activities. There are
also costs associated with disclosing the times the proponents would be
available to communicate with management but we believe that any such
costs likely are minimal.
Further the proposed change from a single-tier to three-tiered
ownership thresholds could increase compliance complexity because
companies and proponents would be required to consider multiple
thresholds to establish whether a proposal is eligible for exclusion.
The proposed increase in the ownership thresholds and the
prohibition of aggregation of shareholdings could disproportionately
affect certain types of shareholder-proponents. In particular, the
proposed amendments could disproportionately affect individuals.\279\
This disproportionate effect would be more costly if individuals submit
more value-enhancing proposals than institutions. Two academic papers
suggest that proposals submitted by individual investors elicit a
stronger market reaction than proposals submitted by institutional
investors,\280\ while one suggests otherwise.\281\ The potentially
negative consequences of this disproportionate effect on individuals
could be amplified by the fact that (i) institutional investors
generally may have more direct channels of communication with companies
than individual investors who rely more on the shareholder-proposal
process to communicate with management and other shareholders \282\ and
(ii) larger shareholders have, on average, greater success in seeing
their contested proposals ultimately included in the proxy.\283\
---------------------------------------------------------------------------
\279\ See supra Section IV.C.2.i.
\280\ See, e.g., Gillan & Starks (2000), supra note 217;
Gantchev & Giannetti (2018), supra note 166. Gillan and Starks
(2000) interpret the more positive stock market reaction to
proposals submitted by individuals compared to institutions as
consistent with the idea that the market views shareholder proposals
submitted by an institution as evidence of management's
unwillingness to negotiate with such investors. See Gillan & Starks
(2000).
\281\ See Cu[ntilde]at et al. (2012), supra note 209.
\282\ See, e.g., letters in response to the Proxy Process
Roundtable from MFS Investment Management dated November 14, 2018,
at 2 (noting ``[a]s a large institutional investor, we generally
have access to management teams and directors that smaller
shareholders may not have''); Pax World Funds dated November 9,
2018, at 2 (noting ``[w]hile some asset managers or owners with
hundreds of billions in assets can often engage with management and
boards as often as they wish, smaller investors' inquiries to
companies often die in investor relations departments.''); and the
Shareholders Right Group dated December 4, 2018, at 8-9 (noting
``larger investors often do not need the shareholder proposal
process in order to persuade companies to engage with them on their
concerns. In contrast, the shareholder proposal process provides an
appropriate avenue through which all shareholders, including Main
Street's shareholders, as well as their chosen representatives, can
raise issues and elicit consideration and support from their fellow
shareholders''); see also Ceres Business Case, supra note 25, at 9
(noting that ``[a] system that allows shareholders to file proposals
is needed in part because individual investors and smaller
shareholders nearly always lack large enough holdings to get the
board and management's attention in any other way''); Eugene Soltes,
Suraj Srinivasan, & Rajesh Vijayaraghavan, What Else do Shareholders
Want? Shareholder Proposals Contested by Firm Management (Working
Paper, July 2017) (``Soltes et al. (2017)'') (finding that the level
of shareholder ownership is positively associated with the
probability that a contested proposal is withdrawn, which is
consistent with the idea that large shareholders ``are more
influential and are more likely to have dialogue with managers that
would facilitate implementation of their proposal prior to a
shareholder vote'').
\283\ See Soltes et al. (2017), supra note 282.
---------------------------------------------------------------------------
As explained above, the proposed amendments could
disproportionately affect smaller companies that receive
[[Page 66505]]
proposals.\284\ This is because investors' holdings in smaller
companies are more likely to be below the proposed ownership thresholds
than investors' holdings in larger companies, assuming investors hold
the market portfolio.\285\ As a result, to the extent that the
proposals excluded as a result of the proposed amendments would be
value enhancing, any negative effects of the proposed amendments on
smaller companies could be larger than the effects on larger companies.
At the same time, however, smaller companies would enjoy larger cost
savings as a result of the potentially larger increase in the number of
excludable proposals. Hence, the net effect of the proposed rule
amendments on smaller relative to larger companies is unclear.
---------------------------------------------------------------------------
\284\ See supra Section IV.C.2.i.
\285\ See supra note 254.
---------------------------------------------------------------------------
Any effects of the proposed amendments would be, at least
partially, mitigated by the fact that companies can elect to include in
their proxy materials proposals of proponents that do not meet the
proposed eligibility requirements, if the companies believe that those
proposals would benefit shareholders.\286\
---------------------------------------------------------------------------
\286\ Our analysis of proponents' ownership information from
proxy statements shows that there was one proposal submitted by two
co-proponents whose aggregate holdings did not meet the $2,000
current ownership threshold. This proposal is excludable under the
current ownership threshold, but nevertheless appeared in the
company's proxy statement. See supra note 189 for caveats related to
this analysis.
---------------------------------------------------------------------------
c. Discussion Specific to Proposed Amendments for Proposals Submitted
on Behalf of Shareholders
Shareholders that submit a proposal through a representative could
incur minimal costs to ensure that their practices are consistent with
the proposed amendments. In addition, to the extent that the practices
of certain proponents are not consistent with the proposed amendments,
the proposed amendments could impose minimal costs on proponents to
provide this additional documentation. We lack data to quantify these
costs but we request comment on these costs in Section IV.E below.
d. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
The proposed amendment to the resubmission thresholds and the
proposed Momentum Requirement could impose costs on proponents because
they could spend more resources in preparing a proposal to seek to
garner sufficient levels of support to satisfy the proposed
requirements.
The proposed amendments also could increase the complexity of the
shareholder proposal eligibility requirements because the Momentum
Requirement would be a new requirement.
Literature also shows that management may spend resources to
influence the success rate of shareholder proposals.\287\ The Momentum
Requirement would allow companies to exclude proposals that do not meet
but are close to the majority threshold. Hence, the Momentum
Requirement could provide further incentives to management to expend
resources to influence the voting outcome of a shareholder proposal
because the benefit of influencing the voting outcome (i.e., three year
exclusion of the proposal) could be greater than under current rules.
---------------------------------------------------------------------------
\287\ Management may influence the voting outcome either by
encouraging shareholders that would favor them to vote or by
encouraging shareholders to vote in line with management. See Bach &
Metzger (2019), supra note 216.
---------------------------------------------------------------------------
As discussed in Section IV.C.2 above, the proposed amendments to
the resubmission thresholds and the proposed Momentum Requirement could
have a larger effect on certain types of proposals and companies. In
particular, the proposed amendments could have a larger effect on
larger companies because larger companies are more likely to receive
shareholder proposals.\288\ To the extent that the proposals excluded
as a result of the proposed amendments would be value enhancing, larger
companies could be more negatively affected by the proposed amendments
than smaller firms. The disproportionate effect on larger companies
could be amplified by the fact that larger companies are less likely to
be the target of hedge fund activism and thus experience improvements
through alternative forms of activism,\289\ and larger companies are
more likely to contest shareholder proposals.\290\ At the same time,
any negative effects could be at least partially mitigated by the fact
that larger companies would enjoy larger cost savings as a result of
the decrease in the number of proposal resubmissions.
---------------------------------------------------------------------------
\288\ See supra Section IV.B.3.i.
\289\ Alon Brav, Wei Jiang, Frank Partnoy, & Randall Thomas,
Hedge Fund Activism, Corporate Governance, and Firm Performance, 63
J. Fin. 1729 (2008).
\290\ Soltes et al. 2017, supra note 282.
---------------------------------------------------------------------------
The proposed amendments to the resubmission thresholds and the
proposed Momentum Requirement also could have a larger effect on
companies with dual-class voting shares for which insiders hold the
majority of the voting shares.\291\ At such controlled companies, it
may be difficult to get support for a shareholder proposal above the
proposed thresholds. While shareholder proposals may be less likely to
gain majority support and be implemented at these companies,\292\ they
may still provide a valuable communication mechanism between
shareholders. We note that the non-voting stock of companies for which
the majority of voting stock is held by insiders could trade at a
discount to compensate the owners of the non-voting stock for the
reduced ability of shareholder proposals to garner sufficient support
for those companies. In addition, literature suggests that the
probability of a proposal being implemented is negatively related to
insider ownership. Hence, the decrease in the number of resubmitted
proposals as a result of the proposed rule amendments for firms with
dual-class voting stock for which insiders hold the majority of the
voting shares likely would be limited because the probability of a
proposal being implemented in those firms would be already low.\293\
---------------------------------------------------------------------------
\291\ See supra Section IV.B.3.iv.
\292\ See Roundtable Transcript, supra note 13, comments of
Brandon Rees, Deputy Director of Corporations and Capital Markets,
American Federation of Labor and Congress of Industrial
Organizations, at 167; CII Report, supra note 197, at 21; Ceres
Business Case, supra note 25, at 14; letter in response to the Proxy
Process Roundtable from the City of New York Office of the
Comptroller dated January 2, 2019, at 11.
\293\ See, e.g., Ertimur et al. (2010), supra note 174.
A commenter also suggested that an increase in the resubmission
thresholds could provide stronger incentives to some proponents to
submit proposals on certain topics with the intent of obtaining low
levels of support for certain subject matters, and thus rendering
proposals on the same subject matter excludable for three years.
Nevertheless, we believe that any such activity is unlikely to be
widespread. See letter in response to the Proxy Process Roundtable
from the City of New York Office of the Comptroller dated January 2,
2019, at 11 (noting ``we have seen efforts to pre-empt proposals in
a given year urging stronger policies on climate change by a group
submitting a proposal to go in the opposite direction. With high
resubmission thresholds, that kind of mischief-making would be
encouraged on a broader scale as long as the SEC policy refers to
`the same subject matter' rather than `the same proposal' ''). For
related discussion, see also the letter in response to the Proxy
Process Roundtable from Sustainable Investments Institute dated
November 12, 2018, at 13 (noting ``[n]ew this year were proposals
from the free market activist group the National Center for Public
Policy Research (NCPPR) that used precisely the same resolved clause
as the one used in the main campaign on lobbying. In two instances,
because they were filed first, these resolutions pre-empted
proposals filed later from the disclosure advocates, on lobbying at
Duke Energy and about election spending at General Electric, where
the question turned on third-party spending groups. The NCPPR
proposals went to votes in each case and while the presenters argued
against disclosure in their support statement, investors appeared to
vote on the basis of what was in the resolved clause and support
levels were comparable to those filed by disclosure proponents--34.6
percent at Duke (33.3 percent last year) and 21.2 percent at GE (no
previous election proposals but 28.6 percent on a traditional
lobbying resolution in 2017).'').
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[[Page 66506]]
The potential costs of the proposed rule amendments would be more
pronounced in instances where material developments could change
shareholder support for the proposal but the proposal is otherwise
ineligible for resubmission under the proposed rule for a period of
time.\294\
---------------------------------------------------------------------------
\294\ See letter in response to the Proxy Process Roundtable
from the City of New York Office of the Comptroller dated January 2,
2019.
---------------------------------------------------------------------------
Any negative effects of the proposed amendments would be, at least
partially, mitigated by the fact that companies would be able to
exclude only proposals for which there is an observable measure of low
shareholder interest (i.e., low voting support among shareholders and
lack of momentum toward achieving a more substantial level of
shareholder support). In addition, any negative effects of the proposed
rule amendments would be mitigated by the fact that companies could
elect to include in their proxy materials resubmissions that would
otherwise be excludable if they believed that those resubmissions would
benefit shareholders.\295\ Also, companies' ability to exclude certain
resubmissions would be limited to a three-year cooling-off period
regardless of the level of support the proposal last received.
---------------------------------------------------------------------------
\295\ Among shareholder proposals resubmitted to Russell 3000
companies during 2011 to 2018, 10 proposals appeared in company
proxies and were voted on despite receiving low voting support in
prior submissions and being eligible for exclusion under the current
resubmission thresholds. See supra note 200.
---------------------------------------------------------------------------
Finally, any potential effects of the proposed amendments would be
moderated by changes in proponent behavior, such as submitting a
proposal on a different topic when the initial proposal is ineligible
for resubmission or submitting a proposal on the same topic but at a
different company to continue investor conversations on that topic.
4. Effects of Proposed Amendments on Efficiency, Competition, and
Capital Formation
To the extent that the proposed amendments could reduce the costs
of processing shareholder proposals and could free up management
resources for more valuable activities, the proposed amendments could
result in efficiency improvements. Any improvements in efficiency could
be offset by the costs associated with the exclusion of shareholder
proposals that could have resulted in changes that would have enhanced
efficiency.
Further, to the extent that the proposed amendments would permit
shareholders to focus on the processing of proposals that are more
likely to receive majority support and be implemented, the proposed
amendments could result in more efficient use of shareholder resources.
In addition, to the extent that the proposed amendments could
reduce costs to companies associated with the shareholder-proposal
process, the proposed amendments could be a positive factor in the
decision of firms to go public, which could positively affect capital
formation on the margin.\296\ Nevertheless, we believe that any such
effects likely would be minimal because most firms receive only few
proposals each year and the costs of responding to proposals likely are
a small percentage of the costs associated with being a public
company.\297\ In addition, companies that have recently had an initial
public offering infrequently receive shareholder proposals.\298\
---------------------------------------------------------------------------
\296\ See, e.g., letter in response to the Proxy Process
Roundtable from Center for Capital Markets Competitiveness dated
December 20, 2018, at 7 (noting ``[t]he decline in public companies
is a multifaceted issue with no single solution. . . . Those issues
include proxy advisory firm reforms as discussed earlier as well as
shareholder resubmission thresholds.'').
\297\ Between 1997 and 2018 for Russell 3000 companies that
received a proposal, the median number of proposals was one per
year. See Roundtable Transcript, supra note 13, comments of Brandon
Rees, Deputy Director of Corporations and Capital Markets, American
Federation of Labor and Congress of Industrial Organizations, at
140, 142 (noting ``the average publicly listed company in the United
States can expect to receive a shareholder proposal once every 7.7
years, and the median number of proposals received is one. . . .
[S]hareholder proposals make up less than 2 percent of the total
number of ballot items. Less than 4 percent of shareholder proposals
were filed at companies with under $1 billion in market
capitalization. Less than 9 percent of Russell 3000 companies that
have had an IPO since 2004.''); see also letters in response to the
Proxy Process Roundtable from Ceres dated November 13, 2019; Mercy
Investment Services, Inc. dated December 3, 2018, at 3; Presbyterian
Church U.S.A. dated November 13, 2018, at 3-4.
\298\ See supra note 297.
---------------------------------------------------------------------------
To the extent that the proposed amendments would have
disproportionate effects on U.S. relative to foreign firms because
foreign firms are not subject to federal proxy rules,\299\ the proposed
amendments could improve competition. Further, to the extent that the
proposed amendments to the ownership (resubmission) thresholds would
have disproportionate effects on smaller (larger) companies, the
proposed amendments could harm competition. Nevertheless, we expect
that any such effects likely would be minimal because the cost of
processing shareholder proposals likely is a small percentage of
companies' total cost of operations.
---------------------------------------------------------------------------
\299\ See supra note 130.
---------------------------------------------------------------------------
Finally we do not expect that the proposed amendments for proposals
submitted by a representative would have a meaningful effect on
efficiency, competition, and capital formation.
D. Reasonable Alternatives
1. Shareholder Ownership Thresholds
i. Alternative Ownership Thresholds
We considered a number of alternative approaches to the ownership
thresholds. First, we considered whether to simply increase the $2,000/
one-year threshold in the current requirement to a $50,000/one-year
threshold without providing additional eligibility options. Using
proponents' exact ownership information from the proxy statements and
assuming no change in proponents' ability to aggregate their holdings
to submit a joint proposal, such an increase would have resulted in the
excludability of 96 proposals, or 65 percent of the proposals with
exact proponents' ownership information to be considered at 2018
shareholder meetings.\300\ The advantage of increasing only the dollar
amount in the current threshold is that the rule would be easier to
implement and monitor. The disadvantage of such an approach would be
that shareholders would not have the flexibility to become eligible to
submit shareholder proposals by either increasing their holdings or
holding the shares of a company for a longer period of time as under
the proposed approach.
---------------------------------------------------------------------------
\300\ 65% = 97 (excludable proposals under a $50,000/one-year
threshold)/150 (proposals with exact proponents' ownership
information in proxy statements). For proposals that are submitted
by more than one proponent, these estimates assume that the
proposals would still be submitted if the aggregate ownership of the
co-proponents met the alternative dollar ownership threshold. For
proposals that are submitted by multiple proponents, some of which
provide exact and others provide minimum holdings information, we
assume that the ownership of the proponents with minimum holdings
information is equal to the lowest end of the ownership range.
---------------------------------------------------------------------------
Alternatively, we considered using a tiered approach, as proposed,
but with different combinations of minimum dollar amounts and holding
periods. For example, we considered $2,000 for five years, $15,000 for
three years and $25,000 for one year or $2,000 for three years, $10,000
for two years, and $50,000 for one year. We are unable to estimate the
incremental effects of the former alternative (i.e., $2,000 for five
years, $15,000 for three years, and $25,000 for one year) relative to
the
[[Page 66507]]
effects of the proposed amendments discussed in Section IV.C.2.i above
because we lack data on proponents' ownership duration. Assuming all
proponents held the shares for only one year, the increase in the
dollar ownership thresholds from $2,000 to $50,000 (i.e., third tier of
the alternative ownership threshold) could result in the exclusion of
97 proposals, or 65 percent of the proposals with exact proponents'
ownership information related to 2018 shareholder meetings.\301\ On the
other hand, assuming all proponents held the shares for at least three
years, the proposed ownership thresholds would not result in a change
in the number of excludable proposals relative to the current
thresholds.
---------------------------------------------------------------------------
\301\ See supra note 300.
---------------------------------------------------------------------------
Different thresholds could result in the exclusion of more or fewer
proposals, depending on the threshold. While we believe that the
proposed tiers would appropriately balance the interests of
shareholders who seek to use the company's proxy statement to advance
their own proposals, on the one hand, with the interests of companies
and other shareholders who bear the burdens associated with the
inclusion of such proposals, on the other hand, we solicit comment as
to whether any refinements of those thresholds would strike a better
balance.
We also considered whether to index the proposed ownership
thresholds for inflation. The benefit of such an approach would be that
thresholds would adjust over time without the need for additional
rulemaking. The disadvantage of such an approach would be that
compliance with the rule could be more cumbersome as companies and
proponents would have to monitor periodically evolving ownership
thresholds.
ii. Percent-of-Ownership Threshold
We considered whether to propose an ownership requirement based
solely on the percentage of shares owned. For example, we considered
eliminating the dollar ownership threshold and retaining the one-
percent ownership threshold. Using proponents' exact ownership
information from the proxy statements and assuming no change in
proponents' ability to aggregate their holdings to submit a joint
proposal, we estimate that using a one-percent ownership threshold and
removing the $2,000/one-year threshold would have resulted in 149
proposals, or 99 percent of the proposals to be considered in 2018
shareholder meetings that provide exact proponents' ownership
information, being excludable under the proposed amendments.\302\
---------------------------------------------------------------------------
\302\ 99% = 149 (number of excludable proposals under a 1%
threshold)/150 (proposals with exact proponents' ownership
information in proxy statements). For proposals that are submitted
by more than one proponent, these estimates assume that the
proposals would still be submitted if the aggregate ownership of the
co-proponents met the alternative percent-of-ownership threshold.
For proposals that are submitted by multiple proponents, some of
which provide exact and others provide minimum holdings information,
we assume that the ownership of the proponents with minimum holdings
information is equal to the lowest end of the ownership range.
---------------------------------------------------------------------------
The advantage of a percentage-of-ownership threshold is that it
would permit shareholders owning the same proportion of a larger
company as of a smaller company to submit a proposal. The percentage-
of-ownership threshold, however, would be marginally harder to
implement because of changes in the stock price of the company over
time. We also believe that a percentage-of-ownership threshold of one
percent would prevent the vast majority of shareholders from submitting
proposals,\303\ which, in turn, could have a chilling effect on
shareholder engagement. In addition, the types of investors that hold
more than one percent of a company's shares are more likely to be able
to communicate directly with management, and thus do not typically use
shareholder proposals.\304\
---------------------------------------------------------------------------
\303\ See supra note 302.
\304\ See supra note 282.
---------------------------------------------------------------------------
2. Shareholder Resubmission Thresholds
i. Alternative Resubmission Thresholds
We considered proposing different resubmission thresholds,
including raising the thresholds to 5/10/15 percent, 6/15/30 percent,
or 10/25/50 percent. All three alternatives threshold levels would
increase the number of proposals eligible for exclusion relative to the
baseline, with the first expected to have smaller effects relative to
the proposed amendments and second and third expected to have larger
effects relative to the proposed amendments. We estimate that 92 (6
percent), 328 (23 percent), and 668 (46 percent) additional proposals
that were resubmitted between calendar years 2011 and 2018 would have
fallen below the 5/10/15 percent, 6/15/30 percent, and 10/25/50 percent
thresholds, respectively. In addition, we are requesting comment on
whether the rule should remove resubmission thresholds for the first
two submissions and, instead, allow for exclusion if a matter fails to
receive majority support by the third submission. Under this
alternative, no proposal would be eligible for exclusion on its first
two submissions, allowing shareholder proposals at least two years to
gain traction. We estimate that 418 (29 percent) additional proposals
that were resubmitted between calendar years 2011 and 2018 would have
failed to garner majority support by third submission.\305\ We also are
requesting comment on the appropriate cooling-off periods under this
approach, such as three and five years.
---------------------------------------------------------------------------
\305\ This estimate is an upper bound of the number of
excludable proposals under this alternative because it would allow
all proposals following first and second submissions to be
resubmitted. We cannot identify all proposals that would have been
resubmitted but were not because they were eligible for exclusion
under the current resubmission thresholds for first and second
submissions.
---------------------------------------------------------------------------
ii. Different Vote-Counting Methodologies
We considered whether to propose changes to how votes are counted
for purposes of applying the resubmission thresholds. For example, we
considered whether votes by insiders should be excluded from the
calculation of the fraction of votes that a proposal received. We also
considered whether to apply a different vote-counting methodology for
companies with dual-class voting structures. One commenter has
highlighted how the presence of a subset of shareholders with special
voting rights could make the voting threshold requirement difficult to
satisfy.\306\ The advantage of applying different kind of vote-counting
methodologies for votes by insiders and for companies with dual-class
shares is that it would make it easier for shareholder proposals to
meet the resubmission thresholds and thus potentially could mitigate
management entrenchment for those firms.\307\ The disadvantage of such
an approach is that companies and their shareholders would continue to
incur costs associated with processing proposals that are less likely
to garner majority support and be implemented by management.
---------------------------------------------------------------------------
\306\ See letter in response to the Proxy Process Roundtable
from City of New York Office of the Comptroller dated January 2,
2019.
\307\ See supra note 267.
---------------------------------------------------------------------------
iii. Exception to the Rule if Circumstances Change
We considered whether to propose an exception to the proposed rule
amendments that would allow an otherwise excludable proposal to be
resubmitted if there were material developments that suggest a
resubmitted proposal may garner significantly more votes than when it
was previously voted
[[Page 66508]]
on. Several commenters pointed out the possibility of an unpopular
proposal gaining popularity in subsequent years following changes in
company circumstances or other market developments.\308\ We expect that
such an exception would lower the number of proposals eligible for
exclusion under the proposed amendments, but the magnitude of the
decrease would depend on what types of developments qualify for the
exception and how many companies experience these particular types of
developments. We expect the additional costs of such an exception would
include those associated with determining whether changes in
circumstances qualify for the exception. On the other hand,
shareholders may benefit from being able to submit proposals on matters
that would otherwise be excludable under Rule 14a-8(i)(12) and may have
gained popularity among shareholders following a material development
at the company.
---------------------------------------------------------------------------
\308\ See letters in response to the Proxy Process Roundtable
from the Shareholder Rights Group dated December 4, 2018; Teachers
Insurance and Annuity Association of America (TIAA) dated June 10,
2019; City of New York Office of the Comptroller dated January 2,
2019.
---------------------------------------------------------------------------
E. Request for Comment
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the amendments, if adopted, would
promote efficiency, competition, and capital formation. In addition, we
request comments on our selection of data sources, empirical
methodology, and the assumptions we have made throughout the analysis.
Commenters are requested to provide empirical data, estimation
methodologies, and other factual support for their views, in
particular, on costs and benefits estimates. In addition, we request
comment on the following:
1. Are there any entities affected by the proposed rule amendments
that are not discussed in the economic analysis? In which ways are
those entities affected by the proposed amendments? Please provide an
estimate of the number of any additional affected entities.
2. Are there any costs or benefits of the proposed rule amendments
that are not discussed in the economic analysis? If so, please describe
the types of costs and benefits and provide a dollar estimate of these
costs and benefits.
3. What would be the effects of the proposed rule amendments,
including any effects on efficiency, competition, and capital
formation? Would the proposed rule amendments be beneficial or
detrimental to proponents, companies, and the companies' shareholders,
and why in each case?
4. What is the dollar cost for companies to engage with proponents,
process, and manage a shareholder proposal (including up to or after a
vote on the proposal)? In particular, what is the dollar cost for
companies to: (i) Review the proposal and address issues raised in the
proposal; (ii) engage in discussion with the proponent; (iii) print and
distribute proxy materials and tabulate votes on the proposal; (iv)
communicate with proxy advisory firms and shareholders (e.g., proxy
solicitation costs); (v) if they intend to exclude the proposal, file
with the Commission a notice that they intend to exclude the proposal;
and (vi) prepare a rebuttal to the proposal? Do these costs vary with
the issue raised in the proposal? Do these costs vary with the type of
shareholder-proponent (i.e., institutional versus retail investor)? Are
these costs different for first-time submissions relative to
resubmissions? Do these costs vary with the number of resubmissions? Do
these costs vary with the number of proposals received by the company?
Do these costs vary with company size? Do these costs differ in cases
in which a no-action request is prepared and in other cases, such as
where a proposal's exclusion is challenged in court? Do managers have
discretion with respect to these costs?
5. In response to a questionnaire the Commission made available in
1997, some respondents indicated that costs associated with determining
whether to include or exclude a shareholder proposal averaged
approximately $37,000 (which figure may have included estimates for
considering multiple proposals). The Commission also sought information
about the average printing cost and 67 respondent companies reported
that the average cost was approximately $50,000. How do these costs
compare with costs today? Has ``notice and access'' or other
technological advancements had an effect on the costs associated with
disseminating proxy materials? If so, what are those effects?
6. What are the differences in cost incurred by companies with
respect to proposals for which a no-action request is prepared and
submitted to the staff and those for which a no-action request is not
prepared? What are the specific costs incurred?
7. In general, how do costs differ for proposals that are submitted
during shareholder meetings and not presented in the proxy and those
that are presented in the proxy?
8. What are the costs, if any, associated with shareholders'
consideration and voting on a shareholder proposal? Do these costs
differ depending on the shareholder proposal topic? Do these costs
differ depending on whether the shareholder proposal is a first-time
submission or a resubmission?
9. How likely is it that market practices would change in response
to the proposed rule amendments? What type of market practices that are
not discussed in the economic analysis would change in response to the
proposed rule amendments? For example, would larger shareholders become
more likely to submit proposals in cases where smaller shareholders
would no longer be eligible to submit proposals on their own? Are there
frictions associated with this type of reallocation? To what extent
would these changes in market practice or other effects mitigate the
potential effects of the proposed amendments?
10. To what extent would the proposed amendments affect incentives
for shareholders to engage with companies prior to and/or following the
submission of a shareholder proposal? What are the costs to
shareholders and companies associated with such engagement? To what
extent would the proposed amendments affect the outcome of such
engagement? Would the requirement that the proponent provide a
statement that he or she is willing to meet with the company after
submission of the shareholder proposal promote more frequent resolution
of the proposals outside the voting process? What would be the cost
savings, if any, to proponents and companies associated with such
resolutions? Do answers to the above questions differ when considering
individual or institutional shareholder-proponents?
11. Relatedly, would the proposed amendments affect shareholder
engagement outside of the shareholder-proposal process? Would the
possible reduction in the number of shareholder proposals allow company
resources to be directed towards alternative engagement efforts? What
are the costs associated with alternative types of shareholder
engagement to companies and shareholders?
12. What are the opportunity costs to companies and shareholders of
shareholder proposal submissions? Please provide a dollar estimate per
proposal for these opportunity costs. Do these opportunity costs vary
with the type of proposal, the type of proponent, or the type of
company? Please provide an estimate of the hours the board of directors
and management spend to
[[Page 66509]]
review and process each shareholder proposal.
13. Is the distribution of the dollar value and the duration of
firm-specific holdings different for institutional and individual
investors? Are there distributional differences when comparing the
subsets of individual and institutional shareholders likely to submit
shareholder proposals? Please provide any relevant data or summary
statistics of the holdings of retail and institutional investors
recently and over time.
14. Does the majority of shareholders that submit a proposal
through a representative already provide the documentation that would
be mandated by the proposed rule amendments? To the extent that the
practices of certain proponents are not consistent with the proposed
amendments, would the costs to proponents to provide this additional
documentation be minimal? Are there any costs and benefits of providing
the additional disclosures that we haven't identified in the economic
analysis? If so, please provide a dollar estimate for these costs and
benefits. Would the proposed amendments related to proposals submitted
by a representative have any effect on efficiency, competition, or
capital formation?
15. What is the relation, if any, between the level and duration of
proponent's ownership and the likelihood of submitting shareholder
proposals? What is the relationship, if any, between the level and
duration of proponents' ownership and the likelihood of submitting
shareholder proposals that are more likely to garner majority support
and be implemented by management? Do answers to the above questions
vary based on the shareholder type or proposal topic?
16. What are the concerns, if any, associated with drawing
inferences about the effects of the proposed amendments from analysis
of data on proponents' ownership from proxy statements and proof-of-
ownership letters?
17. To what extent are there additional costs to companies and
shareholders associated with applying a three-tiered ownership
threshold instead of a single-tier threshold in determining a
shareholder's eligibility to submit shareholder proposals?
18. We have observed instances of shareholder proposals going to a
vote despite being eligible for exclusion under Rule 14a-8. What are
the costs and benefits to companies of including such proposals in the
proxy statement? To what extent may these practices change if proposed
amendments are adopted?
V. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules and schedules that would be
affected by the proposed amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\309\ We are submitting the proposed
amendments to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA.\310\ The hours and costs associated with
preparing, filing, and sending the schedules, including preparing
documentation required by the shareholder-proposal process, constitute
paperwork burdens imposed by the collection of information. An agency
may not conduct or sponsor, and a person is not required to comply
with, a collection of information unless it displays a currently valid
OMB control number. Compliance with the information collection is
mandatory. Responses to the information collection are not kept
confidential and there is no mandatory retention period for the
information disclosed. The title for the affected collection of
information is: ``Regulation 14A (Commission Rules 14a-1 through 14a-21
and Schedule 14A)'' (OMB Control No. 3235-0059).
---------------------------------------------------------------------------
\309\ 44 U.S.C. 3501 et seq.
\310\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
We adopted the existing regulations and schedule pursuant to the
Exchange Act. The regulations and schedule set forth the disclosure and
other requirements for proxy statements filed by issuers and other
soliciting parties. A detailed description of the proposed amendments,
including the need for the information and its proposed use, as well as
a description of the likely respondents, can be found in Section II
above, and a discussion of the expected economic effects of the
proposed amendments can be found in Section IV above.
B. Summary of the Proposed Amendments' Effects on the Collections of
Information
The following table summarizes the estimated effects of the
proposed amendments on the paperwork burdens associated with Regulation
14A.
[[Page 66510]]
---------------------------------------------------------------------------
\311\ See supra Section IV.C.2.i. We estimate that the decrease
in the number of shareholder proposals could range from 0 to 56%,
depending on shareholders' holding periods. For purposes of the PRA,
we assume an estimated decrease of 28%.
\312\ In response to the Proxy Process Roundtable, commenters
provided several cost estimates associated with a company's receipt
of a shareholder proposal. These estimates are $87,000 (see letters
in response to the Proxy Process Roundtable from Blackrock, Inc.
dated November 16, 2018; Society for Corporate Governance dated
November 9, 2018); more than $100,000 (see letter in response to the
Proxy Process Roundtable from Exxon Mobil Corporation dated July 26,
2019); and approximately $150,000 (see letter in response to the
Proxy Process Roundtable from the American Securities Association
dated June 7, 2019). In addition, one observer estimated a cost of
approximately $50,000 ``based on anecdotal discussions with [members
of the Society for Corporate Governance].'' See Statement of Darla
C. Stuckey, President and CEO, Society for Corporate Governance,
Before the H. Comm. on Financial Services Subcomm. on Capital
Markets and Government Sponsored Enterprises, Sep. 21, 2016. At an
estimated hourly cost of $400 per hour, these estimated costs would
correspond to the following estimated burden hours: 125 hours
($50,000 / $400 = 125), 218 hours ($87,000 / $400 = 218), 250 hours
($100,000 / $400 = 250), and 375 hours ($150,000 / $400 = 375).
A July 2009 survey of Business Roundtable companies, in which 67
companies responded, indicated that the average burden associated
with preparing a no-action request related to a shareholder proposal
is approximately 47 hours with associated costs of $47,784. The
survey also indicated that the average burden for a company
associated with printing and mailing a single shareholder proposal
is 20 hours with associated costs of $18,982. See letter in response
to Facilitating Shareholder Director Nominations, Release No. 34-
60089 (Jun. 10, 2009) [74 FR 29024 (Jun. 18, 2009)] from Business
Roundtable dated August 17, 2009, available at https://www.sec.gov/comments/s7-10-09/s71009-267.pdf. Thus, based on the Business
Roundtable's survey, the combined effect of these two aspects of
processing a shareholder proposal was estimated at 67 hours with
associated costs of $66,766.
Informed by the range of estimates provided, we estimate that
the burden hours for a company associated with considering and
printing and mailing a shareholder proposal (not including burdens
associated with the no-action process) would be 100 hours (80 hours
associated with activities unrelated to printing and mailing, and 20
hours associated with printing and mailing). In addition, we
estimate that the burden hours associated with seeking no-action
relief would be 50 hours.
We further estimate that 40% of proposals are included in the
proxy statement without seeking no-action relief, 16% are included
after seeking no-action relief, 15% are excluded after seeking no-
action relief, and 29% are withdrawn. Thus, we estimate 107 burden
hours associated with a company's receipt of a shareholder proposal,
calculated as follows:
PRA Table 1--Estimated Paperwork Burden Effects of the Proposed
Amendments
------------------------------------------------------------------------
Proposed amendments Estimated effect
------------------------------------------------------------------------
Rule 14a-8(b)(1)(i):
Revise the ownership 28% decrease in the
requirements that shareholders must number of shareholder
satisfy to be eligible to submit proposal
proposals to be included in an issuer's submissions,\311\
Schedule 14A proxy statement to the resulting in a reduction
following levels: in the average burden
[cir] >=$2K to <$15K for at least 3 per response of 5.08
years;. hours.\312\
[cir] >=$15K to <$25K for at least 2
years; or
[cir] >=$25K for at least 1 year.
Rule 14a-8(b)(1)(iii):
Require shareholders to provide Increase in the average
the company with a written statement burden per response of
that they are able to meet with the 0.04 hours.\313\
company in person or via teleconference
no less than 10 calendar days nor more
than 30 calendar days after submission
of the shareholder proposal, and to
provide contact information as well as
business days and specific times that
they are available to discuss the
proposal with the company.
Rule 14a-8(b)(1)(iv):
Require shareholders to provide Increase in the average
certain written documentation to burden per response of
companies if the shareholder appoints a 0.01 hours.\314\
representative to act on its behalf in
submitting a proposal under the rule.
Rule 14a-8(b)(1)(v):
Disallow aggregation of holdings 0.2% decrease in the
for purposes of satisfying the ownership number of shareholder
requirements. proposal
submissions,\315\
resulting in a reduction
in the average burden
per response of 0.04
hours.\316\
Rule 14a-8(c):
Provide that shareholders and 2% decrease in the number
other persons cannot submit, directly or of shareholder proposal
indirectly, more than one proposal for submissions,\317\
the same shareholders' meeting. resulting in a reduction
in the average burden
per response of 0.36
hours.\318\
Rule 14a-8(i)(12):
Increase the prior vote 7% reduction in the
thresholds for resubmission of a number of shareholder
proposal that addresses substantially proposals by reducing
the same subject matter as a proposal the number of
previously included in company's proxy resubmissions,\319\
materials within the preceding 5 resulting in a reduction
calendar years if the most recent vote in the average burden
occurred within the preceding 3 calendar per response of 1.26
years to: hours.\320\
[cir] Less than 5% of the votes cast if
previously voted on once;.
[cir] less than 15% of the votes cast
if previously voted on twice; or
[cir] less than 25% of the votes cast
if previously voted on three or more
times.
Permit exclusion of proposals that
addresses substantially the same subject
matter as proposals that have been
previously voted on three or more times
in the last five years, notwithstanding
having received at least 25% of the
votes cast on the most recent
submission, if the most recently voted
on proposal (i) received less than 50%
of the votes cast and (ii) experienced a
decline in shareholder support of 10% or
more of the votes cast compared to the
immediately preceding vote.
--------------------------
Total................................ Net decrease in the
average burden per
response of 6.69
hours.\321\
------------------------------------------------------------------------
[[Page 66511]]
C. Incremental and Aggregate Burden and Cost Estimates for the Proposed
Amendments
---------------------------------------------------------------------------
100 hours for 40% of proposals (i.e., proposals that
are included in the proxy statement without seeking no-action
relief);
150 hours for 16% of proposals (i.e., proposals that
are included in the proxy statement after seeking no-action relief);
130 hours for 15% of proposals (i.e., proposals that
are excluded from the proxy statement after seeking no-action
relief); and
80 hours for 29% of proposals (i.e., proposals that are
withdrawn).
The reduction in the average burden per response of 5.08 hours
is calculated by multiplying the expected reduction in proposals
(28%) by the average number of proposals received between 1997 and
2018 (946) for a reduction in the total number of proposals of 265.
This reduction in the number of proposals (265) is then multiplied
by the estimated burden hours per proposal (107) for a total of
28,355 burden hours. This total number of burden hours (28,355) is
then divided by the total number of responses (5,586) for a
reduction in the average burden per response of 5.08 hours.
\313\ The increase in the average burden per response of 0.04
hours is calculated by multiplying the expected amount of time to
provide this information (20 minutes) by the expected average number
of expected proposals after taking account of the total reduction in
proposals submitted as a result of the proposed amendments (615) for
a total increase of 205 hours. This increase in burden hours (205
hours) is then divided by the total number of responses (5,586) for
an increase in the average burden per response of 0.04 hours.
\314\ The increase in the average burden per response of 0.01
hours is calculated by multiplying the expected amount of time to
provide this information (20 minutes) by the expected number of
proposals submitted by a representative. We estimate that
approximately 18% of proposals are submitted by a representative;
thus, we multiply the average number of expected proposals after
taking into account the reduction in proposals as a result of the
proposed amendments (615) by 18% for a total of 111 proposals
submitted by a representative. The number of proposals (111) is
multiplied by the estimated amount of time to provide this
information (20 minutes) for a total of 37 hours. This increase in
burden hours (37 hours) is then divided by the total number of
responses (5,586) for an increase in the average burden per response
of 0.01 hours.
\315\ See supra Section IV.C.2.i. We estimate that the decrease
in the number of proposals could range from 0 to 0.4%. For purposes
of the PRA, we assume an estimated decrease of 0.2%.
\316\ The reduction in the average burden per response of 0.04
hours is calculated by multiplying the expected reduction in
proposals (0.2%) by the average number of proposals received between
1997 and 2018 (946) for a reduction in the total number of proposals
of 2. This reduction in the number of proposals (2) is then
multiplied by the estimated burden hours per proposal (107) for a
total of 214 burden hours. This total number of burden hours (214)
is then divided by the total number of responses (5,586) for a
reduction in the average burden per response of 0.04 hours.
\317\ See supra Section IV.C.2.i.
\318\ The reduction in the average burden per response of 0.36
hours is calculated by multiplying the expected reduction in
proposals (2%) by the average number of proposals received between
1997 and 2018 (946) for a reduction in the total number of proposals
of 19. This reduction in the number of proposals (19) is then
multiplied by the estimated burden hours per proposal (107) for a
total of 2,033 burden hours. This total number of burden hours
(2,033) is then divided by the total number of responses (5,586) for
a reduction in the average burden per response of 0.36 hours.
\319\ See supra Section IV.C.2.iii, Table 9 for a discussion
regarding the estimated decrease in resubmitted proposals. That
discussion estimates that there would have been 269 additional
excludable resubmitted proposals (212 attributable to the revised
resubmission thresholds of 5%, 15%, and 25% and 57 attributable to
the Momentum Requirement) between 2011 and 2018 out of a total of
1,442 resubmitted proposals under the proposed amendments. A total
of 3,620 proposals were included in proxy statements during that
period. Thus, the estimated reduction in the number of shareholder
proposals is estimated by dividing 269 by 3,620, which yields 7%.
\320\ The reduction in the average burden per response of 1.26
hours is calculated by multiplying the expected reduction in
proposals (7%) by the average number of proposals received between
1997 and 2018 (946) for a reduction in the total number of proposals
of 66. This reduction in the number of proposals (66) is then
multiplied by the estimated burden hours per proposal (107) for a
total of 7,062 burden hours. This total number of burden hours
(7,062) is then divided by the total number of responses (5,586) for
a reduction in the average burden per response of 1.26 hours.
\321\ (5.08 + 0.04 + 0.36 + 1.26)-(0.04 + 0.01) = 6.69 hours
decrease in average burden per response.
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The paperwork burden estimate for Regulation 14A includes the
burdens imposed by our rules that may be incurred by all parties
involved in the proxy process leading up to and associated with the
filing of a Schedule 14A. This would include both the time that a
shareholder-proponent spends to prepare its proposals for inclusion in
a company's proxy statement, as well as the time that the company
spends to respond to such proposals. Our incremental and aggregate
reductions in paperwork burden as a result of the proposed amendments
represent the average burden for all respondents, including
shareholder-proponents and large and small registrants. In deriving our
estimates, we recognize that the burdens would likely vary among
individual proponents and registrants based on a number of factors,
including the propensity of a particular shareholder-proponent to
submit proposals, or the number of shareholder proposals received by a
particular company, which may be related to its line of business or
industry or other factors.
[[Page 66512]]
As shown in PRA Table 1, the burden estimates were calculated by
estimating the number of parties expected to expend time, effort, and/
or financial resources to generate, maintain, retain, disclose or
provide information required by the proposed amendments and then
multiplying by the estimated amount of time, on average, each of these
parties would devote in response to the proposed amendments. For
purposes of the PRA, the burden is to be allocated between internal
burden hours and outside professional costs. For Regulation 14A we
estimate that 75% of the burden is carried by the company or the
shareholder-proponent internally and that 25% of the burden of
preparation is carried by outside professionals retained by the company
or the shareholder-proponent at an average cost of $400 per hour.\322\
---------------------------------------------------------------------------
\322\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several issuers, law firms, and other
persons who regularly assist issuers in preparing and filing reports
with the Commission.
PRA Table 2--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Burden hour
Number of estimated reduction per Reduction in burden Reduction in internal hours Reduction in professional Reduction in professional
responses response hours for responses for responses hours for responses costs for responses
(A) \323\ (B) (C) = (A) x (B) (D) = (C) x 0.75 (E) = (C) x 0.25 (F) = (E) x $400
\324\
--------------------------------------------------------------------------------------------------------------------------------------------------------
5,586 6.69 37,370 28,027 9,343 $3,737,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
proposed amendments.
---------------------------------------------------------------------------
\323\ The number of estimated affected responses is based on the
number of responses in the Commission's current OMB PRA filing
inventory. The OMB PRA filing inventory represents a three-year
average. We do not expect that the proposed amendments will
materially change the number of responses in the current OMB PRA
filing inventory.
\324\ The estimated reductions in Columns (C), (D) and (E) are
rounded to the nearest whole number.
\325\ From Column (D) in PRA Table 2.
\326\ From Column (F) in PRA Table 2.
PRA Table 3--Requested Paperwork Burden Under the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Requested change in burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Number of Reduction in Reduction in
annual Current Current cost affected internal professional Annual Burden hours Cost burden
responses burden hours burden responses hours costs responses
(A) (B) (C) (D) (E) \325\ (F) \326\ (G) = (A) (H) = (B)-(E) (I) = (C)-(F)
--------------------------------------------------------------------------------------------------------------------------------------------------------
5,586 551,101 $73,480,012 5,586 28,027 $3,737,200 5,586 523,074 $69,742,812
--------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
Evaluate the accuracy and assumptions and estimates of the
burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-23-19.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be in writing, refer to File
No. S7-23-19 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this proposed rule. Consequently, a comment to OMB is best assured of
having its full effect if the OMB receives it within 30 days of
publication.
VI. Initial Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (``RFA'') \327\ requires the
Commission, in promulgating rules under Section 553 of the
Administrative Procedure Act, to consider the impact of those rules on
small entities. The Commission has prepared this Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with Section 603 of the
[[Page 66513]]
RFA.\328\ This IRFA relates to proposed amendments to Rule 14a-8 of the
Exchange Act.
---------------------------------------------------------------------------
\327\ 5 U.S.C. 601 et seq.
\328\ 5 U.S.C. 603.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposed Action
Rule 14a-8 facilitates the proxy process for shareholders seeking
to have proposals considered at a company's annual or special meeting;
however, the burdens associated with this process are primarily borne
by issuers. The proposed amendments are intended to balance
shareholders' ability to submit proposals with the attendant burdens
for companies and other shareholders associated with the inclusion of
such proposals in a company's proxy statement. The reasons for, and
objectives of, the proposed amendments are discussed in more detail in
Sections I and II, above.
B. Legal Basis
We are proposing amendments to the rules under the authority set
forth in Sections 3(b), 14 and 23(a) of the Securities Exchange Act of
1934, as amended.
C. Small Entities Subject to the Proposed Rules
The proposed amendments would affect some small entities that are
either: (i) Shareholder-proponents that submit Rule 14a-8 proposals, or
(ii) issuers subject to the federal proxy rules that receive Rule 14a-8
proposals. The RFA defines ``small entity'' to mean ``small business,''
``small organization'' or ``small governmental jurisdiction.'' \329\
The definition of ``small entity'' does not include individuals. For
purposes of the RFA, under our rules, an issuer of securities or a
person, other than an investment company, is a ``small business'' or
``small organization'' if it had total assets of $5 million or less on
the last day of its most recent fiscal year.\330\ We estimate that
there are approximately 881 issuers that are subject to the federal
proxy rules, other than investment companies, that may be considered
small entities. We are unable to estimate the number of potential
shareholder-proponents that may be considered small entities; \331\
therefore, we request comment on the number of these small entities.
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\329\ 5 U.S.C. 601(6).
\330\ 17 CFR 240.0-10(a).
\331\ For the purposes of our Economic Analysis, we have
estimated that there were 22,162,828 retail accounts that held
shares of U.S. public companies during calendar year 2017. There
were 170 unique proponents that submitted proposals that were
included in a company's proxy statement as lead proponent or co-
proponent during calendar year 2018. See supra Section IV.B.2. Out
of these 170 unique proponents, 38 were individuals and 132 were
non-individuals. Thus, no more than 132 of these unique proponents
would be considered small entities.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements
As noted above, the primary purpose of the proposed amendments is
to balance shareholders' ability to submit proposals with the attendant
burdens for companies and other shareholders associated with the
inclusion of such proposals. If adopted, the proposed amendments would
likely reduce the number of proposals required to be included in the
proxy statements of issuers subject to the federal proxy rules,
including small entities. In turn, the proposed amendments would likely
reduce the costs to these issuers of complying with Rule 14a-8. If
adopted, the proposed amendments may reduce the number of proposals
that shareholder-proponents that are small entities would be permitted
to submit to issuers for inclusion in their proxy statements. In turn,
these small entities may experience an increase in shareholder-
engagement costs to the extent these small entities elect to increase
their investment to meet the eligibility criteria or pursue
alternatives methods of engagement, such as conducting their own proxy
solicitation. The proposed amendments that would require shareholder-
proponents to provide written documentation regarding their ability to
meet with the issuer and relating to the appointment of a
representative would slightly increase the compliance burden for
shareholder-proponents, including those that are small entities.\332\
Compliance with the proposed amendments may require the use of
professional skills, including legal skills. The proposed amendments
are discussed in detail in Section II, above. We discuss the economic
impact, including the estimated costs and benefits, of the proposed
rule to all affected entities, including small entities, in Section IV
and Section V, above.
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\332\ See supra Section V.B.
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E. Duplicative, Overlapping or Conflicting Federal Rules
We believe that the proposed amendments would not duplicate,
overlap or conflict with other federal rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider alternatives
that would accomplish our stated objectives, while minimizing any
significant adverse impact on small entities. In connection with the
proposed amendments, we considered the following alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
Rule 14a-8 generally does not impose different standards or
requirements based on the size of the issuer or shareholder-proponent.
We do not believe that establishing different compliance or reporting
obligations in conjunction with the proposed amendments or exempting
small entities from all or part of the requirements is necessary. We
believe the proposed amendments are equally appropriate for
shareholder-proponents of all sizes seeking to engage with issuers
through the Rule 14a-8 process. While we do anticipate a moderate
increase in burden for shareholder-proponents, we do not believe that
imposing different standards or requirements based on the size of the
shareholder-proponent will accomplish the purposes of the proposed
amendments, and may result in additional costs associated with
ascertaining whether a particular shareholder-proponent may avail
itself of such different standards. For issuers, the proposed
amendments would not impose any significant new compliance obligations.
To the contrary, the proposed amendments would reduce the compliance
costs of affected issuers, including small entities, by decreasing the
number of shareholder proposals that may be submitted. For these
reasons, we are not proposing differing compliance or reporting
requirements or timetables for issuers that are small entities, or an
exception for small entities. However, we seek comment on whether and
how the proposed amendments could be modified to provide differing
compliance or reporting requirements or timetables for small entities
and whether such separate requirements would be appropriate.
We believe that the proposed amendments do not need further
clarification, consolidation or simplification for small entities,
although we solicit comment on how the proposed amendments could be
revised to reduce the burden on small entities.
[[Page 66514]]
The proposed amendments generally use design standards rather than
performance standards in order to promote uniform submission
requirements for all shareholder-proponents. We solicit comment as to
whether there are aspects of the proposed amendments for which
performance standards would be appropriate.
G. Request for Comment
We encourage the submission of comments with respect to any aspect
of this IRFA. In particular, we request comments regarding:
How the proposed rule and form amendments can achieve
their objective while lowering the burden on small entities;
The number of small entities, including shareholder-
proponents, that may be affected by the proposed amendments;
The existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis; and
How to quantify the impact of the proposed amendments.
Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Comments
will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed amendments are adopted, and will
be placed in the same public file as comments on the proposed
amendments themselves.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA),\333\ the Commission must advise OMB as to whether
the proposed amendments constitute a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
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\333\ 5 U.S.C. 801 et seq.
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An annual effect on the U.S. economy of $100 million or
more (either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether the proposed amendments would be a
``major rule'' for purposes of SBREFA. In particular, we request
comment on the potential effect of the proposed amendments on the U.S.
economy on an annual basis; any potential increase in costs or prices
for consumers or individual industries; and any potential effect on
competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.
VIII. Statutory Authority
The amendments contained in this release are being proposed under
the authority set forth in Sections 3(b), 14 and 23(a) of the Exchange
Act, as amended.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Amendments
In accordance with the foregoing, the Commission is proposing to
amend title 17, chapter II of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec. 240.14a-8 as follows:
0
a. Revise paragraphs (b)(1) and (2);
0
b. Revise paragraph (c); and
0
c. Revise paragraph (i)(12).
The revisions read as follows:
Sec. 240.14a-8 Shareholder proposals.
* * * * *
(b) * * *
(1) To 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 of the company's securities
entitled to vote on the proposal for at least 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; 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 Sec. 240.14a-8(b)(1)(i)(A) through (C),
through the date of the shareholders' meeting for which the proposal is
submitted; and
(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 contact
information as well as business days and specific times that you are
available to discuss the proposal with the company; and
(iv) If you use a representative to submit a shareholder proposal
and/or otherwise act on your behalf in connection with the shareholder
proposal, 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/or otherwise act on your
behalf;
(E) Identifies the specific proposal to be submitted;
(F) Includes your statement supporting the proposal; and
(G) Is signed and dated by you.
(v) For purposes of paragraph (b)(1)(i)(A) through (C), you may not
aggregate your holdings with those of another shareholder to meet the
requisite amount of securities.
(2) The following methods may be used to demonstrate 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 Sec. 240.14a-8(b)(1)(i)(A) through (C),
through the date of the meeting of shareholders.
(ii) If, 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
[[Page 66515]]
eligibility to the company in one of two ways:
(A) 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 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 Sec.
240.14a-8(b)(1)(i)(A) through (C), through the date of the meeting of
shareholders; or
(B) The second way to prove ownership applies only if you were
required to file, and filed, a Schedule 13D (Sec. 240.13d-101),
Schedule 13G (Sec. 240.13d-102), Form 3 (Sec. 249.103 of this
chapter), Form 4 (Sec. 249.104 of this chapter), and/or Form 5 (Sec.
249.105 of this chapter), or amendments to those documents or updated
forms, demonstrating that you meet at least one of the share ownership
requirements under Sec. 240.14a-8(b)(1)(i)(A) through (C). If you have
filed one or more of these documents with the SEC, you may demonstrate
your eligibility to submit a proposal by submitting to the company:
(1) A copy of the schedule(s) and/or form(s), and any subsequent
amendments reporting a change in your ownership level;
(2) 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 for at least three years, two years, or one year,
respectively; and
(3) Your written statement that you intend to continue to hold the
requisite amount of securities, determined in accordance with Sec.
240.14a-8(b)(1)(i)(A) through (C), through the date of the company's
annual or special meeting.
(c) Question 3: How many proposals may I submit? Each 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.
* * * * *
(i) * * *
(12)(i) Resubmissions. If the proposal 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 most recent vote occurred within the preceding three calendar
years and the most recent vote was:
(A) Less than 5 percent of the votes cast if previously voted on
once;
(B) Less than 15 percent of the votes cast if previously voted on
twice; or
(C) Less than 25 percent of the votes cast if previously voted on
three or more times.
(ii) A proposal that is not excludable under Sec. 240.14a-
8(i)(12)(i)(C) may nevertheless be omitted if it deals with
substantially the same subject matter as proposals previously voted on
by shareholders three or more times in the preceding five calendar
years if, at the time of the most recent shareholder vote, the
proposal:
(A) Received less than 50 percent of the votes cast; and
(B) The percentage of votes cast declined by 10 percent or more
compared to the immediately preceding shareholder vote on substantially
the same subject matter.
* * * * *
By the Commission.
Dated: November 5, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-24476 Filed 12-3-19; 8:45 am]
BILLING CODE 8011-01-P