SEC Announces Final Rules Regarding Proxy Voting Advice and Proposed Rules Regarding Shareholder Proposals

By: David A. Bell, Robert A. Freedman, Ran Ben-Tzur, Ron C. Llewellyn

On July 13, 2022, the U.S. Securities and Exchange Commission (1) adopted amendments (the “Amendments”) to the proxy rules related to proxy advisory firms and (2) released proposed rules (“Proposed Rules”) regarding the ability of companies to exclude certain shareholder proposals from proxy statements.

Proxy Advisory Rules

By way of background, on July 22, 2020, the SEC adopted amendments to the proxy rules that confirmed its previous guidance that voting recommendations and related materials provided by proxy advisory firms are “solicitations” subject to the SEC’s antifraud rules (the “2020 Amendments”). In addition, these amendments established certain conditions that had to be met for proxy advisory firms to rely on the exemptions from filing full proxy solicitation materials. In addition, the 2020 Amendments added a Note (e) to Rule 14a-9 of the Securities Exchange Act of 1934 (the “Exchange Act”) that indicated situations that could constitute material misstatements or omissions in providing proxy voting advice. For more information regarding these amendments, see our prior Alert.

The SEC proposed the Amendments on November 17, 2021, after it had previously announced that it would not enforce the 2020 Amendments pending the outcome of a regulatory review (see our prior Alert). The Amendments adopt these proposals in the form that they were proposed. 

The Amendments

The Amendments rescind Exchange Act Rule 14a-2(b)(9)(ii), which had been added by the 2020 Amendments. That section required that to be exempt from filing full proxy materials in connection with the issuance of their advice, a proxy advisory firm must:

  • Provide a subject company with the proxy advisory firm’s proxy voting advice regarding the company prior to or simultaneous with its release to the firm’s clients.
  • Provide its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by a company that is the subject of such advice, in a timely manner before the shareholder meeting.

The Amendments also delete safe harbors and exclusions related to Rule 14a-2(b)(9)(ii).

Furthermore, the Amendments delete Note (e) to Rule 14a-9, which provides that failure to disclose material information regarding proxy voting advice, such as the proxy advisory firm’s methodology, sources of information or conflicts of interest, may be misleading. Some had argued that this language was ambiguous and created a litigation risk for proxy advisory firms. The SEC reaffirmed in the adopting release that the deletion of Note (e) would not affect the application of Rule 14a-9 to proxy voting advice.

The SEC retained the requirement from the 2020 Amendments that proxy advisory firms provide their clients with conflict-of-interest disclosures to remain exempt from filing proxy materials with the SEC. Proxy voting advice also remains a “solicitation” under the proxy rules and remains subject to liability under Exchange Act Rule 14a-9, which prohibits false or misleading statements in connection with a solicitation.

Finally, the SEC rescinded its supplemental voting guidance to investment advisors regarding their proxy voting obligations that were based in part on the conditions under Rule 14a-2(b)(9)(ii).

The Amendments and the recission of the supplemental voting guidance are effective 60 days after publication in the Federal Register.

Key Takeaways

While the Amendments may result in proxy voting advice and companies’ related responses being less accessible, it underscores the importance for companies to actively engage with their key institutional investors to understand any issues regarding a company’s governance practices raised by proxy advisory firms as part of their proxy voting recommendations. Proactively addressing such issues can help to mitigate any adverse proxy voting recommendations and clarify any erroneous information that may impact proxy voting.    

SEC’s Proposed Rules for Shareholder Proposals

As noted above, the Proposed Rules would revise Rule 14a-8 of the Exchange Act to narrow the bases upon which companies could exclude shareholder proposals on the grounds that such proposals:

  • Included subject matter that had been substantially implemented
  • Were duplicative of another proposal that will be included in the proxy statement for the same meeting
  • Were resubmissions of proposals previously presented to stockholders and had not achieved the level of support specified in the rules

The changes to existing Rule 14a-8 required by the Proposed Rules appear at the end of this discussion of the Proposed Rules. 

In 2020, the SEC amended Rule 14a-8 (“2020 Shareholder Proposal Rules”) to, primarily, raise the thresholds of share ownership required to submit a proposal for inclusion in a company’s proxy statement and to increase the levels of support required for a proposal to be eligible for resubmission at future shareholder meetings. See our prior Alert. The Proposed Rules would not retract the 2020 Shareholder Proposal Rules. However, the Proposed Rules will make it easier for shareholders to include proposals relating to matters that arguably have been substantially implemented, are duplicative or have been resubmitted.

The Proposed Rules would:

  • Amend the substantial implementation exclusion to specify that a proposal may be excluded if the company has already implemented the essential elements of the proposal.
  • Amend the substantial duplication exclusion to require a proposal to address the same subject matter and seek the same objective by the same means.
  • Amend the resubmission exclusion to provide that a resubmission is a shareholder proposal that substantially duplicates (i.e., addresses the same subject matter and seeks the same objective by the same means as) a previously included proposal.

The proposing release for the Proposed Rules contains examples that illustrate how it will be more difficult under the Proposed Rules than under the current rules for companies to exclude shareholder proposals (our emphasis added).

Substantially Implemented  

The SEC’s staff has historically concurred in the exclusion of proposals seeking the adoption of a proxy access provision that allows an unlimited number of shareholders who collectively have owned 3% of the company’s outstanding common stock for three years to nominate up to 25% of the company’s directors, if the company had adopted a proxy access bylaw allowing a shareholder or group of up to 20 shareholders owning 3% of its common stock continuously for three years to nominate up to 20% of the board. Under the Proposed Rules, because the ability of an unlimited number of shareholders to aggregate their shareholdings to form a nominating group generally would be an essential element of the proposal, exclusion would not be appropriate.

Another example is that when a proposal calls for a company to issue a report about a particular topic, a company’s existing reports or disclosures about that topic may not implement the essential elements of the proposal, especially if the plain language of the proposal explains how the company’s existing reports or disclosures are insufficient. Additionally, when a proposal requests a report from the company’s board of directors (such as disclosure regarding the board’s assessment of a topic or the board’s process in approaching a topic), the staff may determine that the company has not implemented an essential element of the proposal if the report comes from management rather than the board, if the proposal demonstrates a clear emphasis on reporting directly from the board.

Duplicative

Consider the following two proposals: (1) a proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation and (2) a proposal requesting a report to shareholders on the company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities. In considering the application of the duplication exclusion to these proposals, the staff previously had concurred that the proposals were substantially duplicative when analyzing the principal thrust or focus of the proposals. Under the Proposed Rules, however, these proposals would not be deemed substantially duplicative because, although they both address the subject matter of the company’s political and lobbying expenditures, they seek different objectives by different means.

Resubmissions

The staff previously had viewed the following proposals as addressing the same subject matter for purposes of the resubmission exclusion: (1) a proposal requesting that the board adopt a policy prohibiting the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a “government service golden parachute”) and (2) a proposal requesting that the board prepare a report to shareholders regarding the vesting of such government service golden parachutes that identifies eligible senior executives and the estimated dollar value of each senior executive’s government service golden parachute. Under the Proposed Rules, although these proposals concern the same subject matter (namely, government service golden parachutes for senior executives), exclusion would not be warranted because they do not seek the same objectives by the same means.

The period to comment upon the Proposed Rules ends on the later of 30 days from the date of publication of the Proposed Rules in the Federal Register or September 12, 2022.

Key Takeaways

We believe that if adopted, the Proposed Rules are very likely to cause a substantial increase in the number of shareholder proposals included in company proxy statements. Shareholders face the likelihood of having to (1) distinguish between shareholder proposals and company action already taken to address the subject matter of such proposals, (2) parse through different proposals in the proxy statement addressing the same basic subject matter, and (3) revisit proposals on topics that have previously been submitted. While we do not believe that the expense to companies, and indirectly, to their shareholders, or the benefit to shareholders of substantially increasing the number of proposals presented justifies the adoption of the Proposed Rules, we expect that the Proposed Rules are likely to be adopted as proposed by a split SEC. 

Changes in Proposed Rules from existing sections of Rule 14a-8:

(10) Substantially implemented: If the company has already substantially implemented the essential elements of the proposal;

(11) Duplication: If the proposal substantially duplicates (i.e., addresses the same subject matter and seeks the same objective by the same means as) another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting;

(12) Resubmissions: If the proposal addresses substantially duplicates (i.e., addresses the same subject matter and seeks the same objective by the same means as) a proposal, or proposals, previously included in the companys proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was:

(i) Less than 5 percent of the votes cast if previously voted on once;
(ii) Less than 15 percent of the votes cast if previously voted on twice; or
(iii) Less than 25 percent of the votes cast if previously voted on three or more times.

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