Rapid Rulemaking: SEC Update
Revisiting Shareholder Proposal Exclusions
By Samantha Eldredge, Spencer Young and Katie Xu
On July 13, 2022, the Securities and Exchange Commission (the “SEC”) proposed amendments (the “Proposed Amendments”) to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would revise three of the thirteen current bases for the exclusion of a shareholder proposal in a company’s proxy statement. The three exclusions include those set forth in Rule 14a-8(i)(10) (the “Substantial Implementation Exclusion”), Rule 14a-8(i)(11) (the “Duplication Exclusion”), and Rule 14a-8(i)(12) (the “Resubmission Exclusion”), each of which is discussed below in further detail.
According to the SEC, the Proposed Amendments will “promote more consistency and predictability” in the application of the exclusions and “facilitate shareholder suffrage and communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues.” Generally, the Proposed Amendments will achieve these goals by increasing shareholders’ ability to present varied perspectives on how to address similar issues and by setting forth a more understandable structure for the SEC’s application of the exclusions in the no-action letter process.
Under state law, shareholders have various governance rights over the companies in which they hold shares, including the right to bring issues before their fellow shareholders at a shareholder meeting for a vote. Rule 14a-8 of the Exchange Act provides that proposals submitted by shareholders that meet certain requirements must be included in a company’s proxy statement. Generally, shareholder proposals must be a “proper subject for action by the security holders” and meet various procedural and substantive requirements. However, a company may seek to exclude a shareholder proposal that falls in one of thirteen substantive bases for exclusion outlined in Rule 14a-8(i) of the Exchange Act, even if it otherwise meets the procedural and substantive requirements set forth in the proxy rules. In order to exclude a proposal under one of these bases, a company must file its reasons for exclusion with the SEC, generally via a no-action letter request. Between 2018 through 2021, the SEC received an average of 243 no-action requests related to the exclusion of shareholder proposals per year, with a significant percentage of such requests centered on the exclusions addressed in the Proposed Amendments.
The Proposed Amendments, if adopted, would be the second rulemaking by the SEC related to Rule 14a-8 of the Exchange Act since 2020. In addition, in November 2021, the SEC issued Staff Legal Bulletin No. 14L (“SLB 14L”), addressing the application of the exclusions in Rule 14a-8(i) of the Exchange Act and rescinding prior guidance, which has resulted in companies being less likely to exclude shareholder proposals that raise “significant social policy issues” like those centered on environmental, social and governance issues. In the release for the Proposed Amendments, the SEC included a brief reaffirmation of the 1998 standards for evaluating whether a shareholder proposal is considered “ordinary business” for the purposes of the exclusion set forth in Rule 14a-8(i)(7) of the Exchange Act, reasserting its view set forth in SLB 14L.
Overview of Proposed Amendments
Substantial Implementation Exclusion
The primary objective of the Substantial Implementation Exclusion is to curb shareholder proposals regarding issues previously addressed by a company’s management. In its present form, the Substantial Implementation Exclusion provides that a company may exclude a shareholder proposal that the company has “already substantially implemented.” What constitutes substantial implementation is a factual determination, one which the SEC believes “may be difficult to apply in a consistent and predictable manner” and is not sufficiently centered on whether the elements of a proposal have been acted upon by management. Along the same lines, shareholder rights activists provided feedback to the SEC pointing out the “variation and potential unpredictability” in the SEC’s interpretation of the exclusion.
The proposed amendment to the Substantial Implementation Exclusion seek to focus the analysis of the applicability of the exclusion on the “specific elements” of the proposal and whether the “essential elements” of the proposal, as determined by the SEC, have been implemented by management.
The Duplication Exclusion is geared to prevent the presentation of duplicative independent shareholder proposals at a single shareholder meeting. Currently, the Duplication Exclusion allows for exclusion of a shareholder proposal when it “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.” In order to determine whether a particular proposal meets the standard of the exclusion, the SEC looked to whether two proposals had a common “principal thrust” or “principal focus,” an exercise often requiring cumbersome fact-finding. Another concern with the current formulation is that because only the second of two potential duplicative proposals can be excluded, shareholders are incentivized to submit proposals quickly in order to avoid exclusion.
The proposed amendment to the Duplication Exclusion would clarify that “substantially duplicates” means whether a proposal “addresses the same subject matter and seeks the same objective by the same means.” The SEC believes this clarification will enable efficient processing of related no-action requests, while providing a consistent and foreseeable outcome. The Proposed Amendments also seek to provide guideposts for shareholders as they prepare a proposal for submission and to lessen motivation for preemptive proposals since two proposals relating to the same issue may be presented at one meeting so long as they propose different means by which to achieve the proposals’ objective.
The goal of the Resubmission Exclusion is to prevent shareholders from having to vote on proposals that have generated little interest when previously presented to the shareholders. The Resubmission Exclusion currently specifies that companies may exclude proposals that address “substantially the same subject matter” as a proposal, or proposals, previously included in a company’s proxy materials within the preceding five calendar years so long as the proposal was voted on at least once in the last three years and received support below certain specified thresholds. With the Proposed Amendments, the SEC is seeking to thread the needle between an overly broad exclusion that would enable companies to exclude proposals that call for varied actions and showcase shareholders’ differing perspectives because they are related to “substantially the same subject matter” as a recent failed proposal, and a narrow exclusion that would enable shareholders to resubmit failed proposals year-after-year with only minor tweaks. The SEC landed on applying the same standard as the Duplication Exclusion, meaning that under the Proposed Amendments, a proposal could be excluded via the Resubmission Exclusion if it “substantially duplicates” a prior proposal by “[addressing] the same subject matter and [seeking] the same objective by the same means.” In addition to promoting consistent and predictable determinations regarding the applicability of the Resubmission Exclusion, the SEC believes that the Proposed Amendments will “strike a more appropriate balance between effecting the purpose of the exclusion and preserving the ability of shareholders to engage with a company and other shareholders through the shareholder proposal process.”
The public comment period for the Proposed Amendments will end on September 12, 2022.
 The 2020 amendments generally revised the requirements a shareholder must meet in order to submit a shareholder proposal and increased the threshold levels a proposal must receive to be able to be resubmitted at a future shareholder meeting without being excluded.