# Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-24476 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** December 4, 2019 - **Citation:** 84 FR 66458 ## Text 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. 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 rule-comments@sec.gov. 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 itself has become the “forum for shareholder suffrage.” 2 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). 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. 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). 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 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.”). 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 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. 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 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”). 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 9 17 CFR 240.14a-8(c). 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 10 17 CFR 240.14a-8(i)(12). 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 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”). 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 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. 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 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 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. 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 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”). 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 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 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. 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. 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. 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 × 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 × 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 Threshold established in 1998 1998 threshold adjusted for 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 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 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 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). Registrant $2,000 Threshold as a percentage of market value $15,000 Threshold as a percentage of market value $25,000 Threshold as a percentage of 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 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? 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 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. 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 that encouraging this trend would be beneficial both to companies and to shareholders. 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”). 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. 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. 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 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. 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. 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 72 Id. 73 Id. This limitation would continue to apply under the proposed amendments. 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. 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 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. 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 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). 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. 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. 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 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. § 844 (2017). 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 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. 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 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. 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 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. 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 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. Members of other groups have indicated that “[r]esubmissions for a 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 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. 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. 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. 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. 107 106 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. 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.” 108 108 See 1948 Proposing Release, supra note 6. 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. 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. 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. 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. 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. 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. 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: 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. • 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. 116 116 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. 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 shareholders with the opportunity to build support for their proposals. 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. 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. 122 119 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. 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. 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. 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 comment on whether such an exception should be added to the rule. 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.”). 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? [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-24476. Public record. Not legal advice.