SEC Votes to Restrict Shareholder Proposals

The U.S. Securities and Exchange Commission (SEC) has voted to raise the threshold for shareholder proposals to be included in a company’s proxy statement.

The amendments to Section 14A-8 of the Securities and Exchange Act of 1934 require that a shareholder own at least $2,000 worth of stock for three years to sponsor a first-time proxy proposal, up from one year currently. 

A shareholder could also submit a proposal if he or she, or an institution like an endowment, owned $25,000 worth of stock for one year or $15,000 for two years.

Proxy proposal resubmissions, which allow proposals the time to gather momentum, also face tighter restrictions under the new regulations. A minimum 5 percent vote is required for a first resubmission in the following five years, up from 3 percent. Proposals resubmitted twice, or three or more times, in the prior five years would require minimum votes of 15 percent and 25 percent in support, respectively, in the following three years, up from 6 percent and 10 percent.

The new rules will take effect 60 days after publication in the Federal Register and apply to any shareholder proposals submitted for an annual or special meeting held on or after January 1, 2020. They were first proposed in November 2019.

SEC chairman Jay Clayton said in a statement that the amendments “ensure there is an appropriate alignment of interests between shareholder-proponents and their fellow shareholders, and illustrate again why retrospective review and, as appropriate, modernization of our rules is necessary.”

The rules had not changed much since amendments approved in 1954 and 1998.

Commissioner Elad Roisman noted the amendments “aim to ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals to be included in a company proxy’s statement, paid for by all shareholders.”

Recently confirmed commissioner Caroline Crenshaw said the expected benefit for companies will come at the expense of the small shareholder. The amendments are “designed to reduce costs for corporations” but will simultaneously hurt smaller investors who cannot afford to invest $25,000 or wait years to suggest a solution to a problem they’ve already identified.

“The rule puts the great majority of investors to a harsh choice: maintain a diversified and well-balanced portfolio as experts recommend but be shut out from corporate discourse, or participate in the conversation but take on the greater risk that investing $25,000 of retirement savings in a single stock will pay off,” said Crenshaw in a statement.

Commissioner Allison Herren Lee also opposed the changes because of their impact on markets and small investors. “Retail investors will be greatly disenfranchised,” she said in a statement, adding that the decision indicates the rights of smaller investors are valued at zero.

The new rules are especially problematic for investor groups focused on environmental, social, and governance (ESG) factors that affect companies. 

Danielle Fugere, president of As You Sow, noted that the SEC vote “comes at a time when shareholders are appropriately acknowledging—and asking their companies to address—a wide range of social and environmental issues that have the potential to harm our environment, economy, and companies’ value. The market is moving inexorably into a new era of sustainable business practices; the SEC’s new rule demonstrates a failure to understand and support this necessary transition.” 

Her colleague Andrew Behar, the CEO of As You Sow, said the changes “will force shareholders to escalate to litigation and other means.”

From: ThinkAdvisor