SEC Votes to Restrict Shareholder Proposals

SEC Votes to Restrict Shareholder Proposals

SEC headquarters in Washington. (Photo: Diego Radzinschi/ALM)

The SEC has voted to raise the threshold for shareholder proposals to be included in a company’s proxy statement.

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

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

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

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

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

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

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

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

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

Commissioner Allison Herren Lee also opposed the changes because of their impact on markets and small investors. “Retail investors will be greatly disenfranchised … the rights of smaller investors [are] valued at zero.”

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

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

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