The Advisors' Blog

– Liz Dunshee

Here’s the big news that our colleague John Jenkins wrote about today on TheCorporateCounsel.net: Yesterday, the SEC issued two controversial rule proposals that, if adopted, would significantly modify the proxy disclosure & solicitation process. There’s a lot to cover, so I’m going to do these one at a time. First, the SEC announced a rule proposal that would impose disclosure & other obligations on proxy advisors. The proposed rules would:

– Amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.

– Revise Rule 14a-2(b) to condition certain exemptions relied upon by proxy advisors on their compliance with three new requirements. In order to avoid complying with the full range of rules applicable to proxy solicitations, proxy advisors would have to disclose material conflicts of interest in their proxy voting advice, provide the company with an opportunity to review and comment on their advice before it is issued; and, if requested by the company, include in their voting advice a hyperlink directing the recipient of the advice to a written statement that sets forth the company’s position on the advice.

– Modify Rule 14a-9 to include examples of when failing to disclose certain information in the proxy voting advice could be considered misleading within the meaning of the rule.

The SEC was sharply divided on this proposal & its companion – both of which were approved by a 3-2 vote. Commissioner Jackson issued a statement on his decision to dissent from the proposal, which he characterized as limiting the ability of investors to “hold corporate insiders accountable.” Fellow Democratic Commissioner Allison Herren Lee issued a statement in which she said that both proposals would “suppress the exercise of shareholder rights.” In particular, she expressed concern that it would cause a 5-day delay for voting recommendations – if true, that would mean a lot of institutional investors wouldn’t vote until right before the meeting and companies would have very little time to react or follow up to request changes.

In contrast, Republican Commissioner Eliad Roisman issued his own statement in support of the proposal, which he said would help fiduciaries “receive more accurate, transparent, and complete information when they make their voting decisions.”

When Caesar crossed the Rubicon with his legions in 49 BC, he knew that he was taking a fateful step and reportedly exclaimed “Alea iacta est!” – “The die is cast!” Maybe I’m being a little dramatic, but it sure feels like there’s an element of that sentiment in the SEC’s action. While Commissioner Clayton issued a statement in which he stressed that the proposal is just that – a proposal – it seems inevitable that the regulatory ground is about to shift in a significant way.

But Wait! There’s More! SEC Proposes to Tighten Shareholder Proposal Thresholds

Because one highly controversial proposal wasn’t enough, the SEC also announced a rule proposal yesterday that would make it more difficult for shareholders to submit & resubmit proposals for inclusion in a company’s proxy statement. The rule proposal would, among other things:

– Amend Rule 14a-8(b) to replace the current $2,000/1% ownership for at least 1 year threshold with 3 alternative thresholds for submission: continuous ownership of at least $2,000 of the company’s securities for at least 3 years; at least $15,000 of the company’s securities for at least 2 years; or at least $25,000 of the company’s securities for at least 1 year.

– Amend Rule 14a-8(c) to apply the one-proposal rule to “each person” rather than “each shareholder,” which would effectively prohibit a shareholder-proponent from submitting one proposal in their own name and simultaneously submit another proposal in a representative capacity. Representatives would also be prohibited from submitting multiple proposals, even if the representative were to submit each proposal on behalf of different shareholders.

– Amend Rule 14a-8(i) to increase the current thresholds of 3%, 6% and 10% for resubmission of matters voted on once, twice or three or more times in the last five years to 5%, 15% and 25%, respectively. A new provision would also be added permitting exclusion of a proposal that’s received 25% approval on its most recent submission if it has been voted on 3 times in the last 5 years and both received less than 50% of the votes cast and experienced at least a 10% decline in support.

Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.

I’ve already noted the reaction of individual SEC commissioners to these two proposals, but outside commenters had plenty to say as well. For instance, the CII decried the proposals as apparently “intended to limit shareholders’ voice at public companies in which they invest,” while the U.S. Chamber of Commerce hailed them for ensuring that “investors will have access to transparent and unconflicted proxy advice as well as improv[ing] the proxy submission process.”