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SEC Amendments Not in Best Interests of Shareholders, US Academic Cautions

Although institutional investors often support votes to challenge company policy, it is typically individuals who initiate them.

Recent rule changes passed by the US Securities and Exchange Commission (SEC) could potentially drown out the voice of the shareholder in corporate America, according to a US professor of law.

In September, the SEC voted 3-2 to adopt amendments to the shareholder proposal rule, which governs the process for shareholder proposals to be included in a company’s proxy statement.

Yaron Nili, Assistant Professor of Law at the University of Wisconsin Law School, warned of the “detrimental impacts” of the SEC’s changes on shareholders, stakeholders and the overall quality of corporate governance in the US, in an article for ProMarket, the publication of the Stigler Center at the University of Chicago School of Business.

The overall aim of the reforms is to strengthen the requirement that proposers have a meaningful economic stake or investment interest in the company to which they are seeking to present a matter before shareholders. The most notable amendments to Rule 14a-8 include revisions to the initial submission and resubmission thresholds that shareholders must satisfy in order for shareholder proposals to be accepted.

Although large institutional investors often lend their support to shareholder proposals, Nili points out that they almost never initiate motions to change or challenge management policy, leaving this role almost exclusively to individuals. In a recent study, Nili showed that just five individuals accounted for close to 40% of all shareholder proposals submitted to S&P 1500 companies in 2018, with the same individuals submitting more than half of the proposals that received a majority of shareholder support.

Although large investors very rarely submit proposals, “they oftentimes support the proposals submitted by investors barely meeting the previously low minimum ownership thresholds”, he noted.

The Rule 14a-8(b), or the initial submission threshold, required a shareholder to hold at least US$2,000 or 1% of a company’s securities for at least one year. Under the new rules, shareholders wishing to submit a proposal will have to fulfill one of the following criteria: hold US$2000 in company securities for a minimum three years; US$15,000 for at least two years; or US$25,000 for a minimum of one year.

Under the resubmission threshold, or Rule 14a-8(i)(12), the barriers to resubmitting unsuccessful proposals were raised. Proposals earlier included in the company’s proxy statement now need at least 5% votes in favour for a similar proposal to be resubmitted within three years. Proposals submitted two or three times within five years will need 15% and 25% support, respectively, to be eligible for resubmission in the following three years. The thresholds have been increased from 3%, 6% and 10% respectively.

The amendments also include a one-proposal rule, restricting each individual shareholder to submission of only one shareholder proposal to a company for a particular meeting, whether as a shareholder or a representative of a shareholder.

Nili argued that the pre-existing shareholder proposal rule was one way through which every shareholder’s voice could be heard. “Forcing an item on the corporate agenda despite management’s objection has been one way to ensure that matters of importance to shareholders see the light of day, both by other shareholders and management itself,” he wrote.

The new thresholds could be damaging to both small and large shareholders, and a wider range of stakeholders, argued Nili, as they could make it harder for topics or concerns to gain interest and acceptance over time.

“Taken together, the new rules make it significantly harder for small retail investors to submit proposals to begin with, while also making it more challenging to submit proposals that require more time to build momentum. The SEC has potentially taken away one of the last tools that small retail investors had for a meaningful voice, and the price might be born out not only by shareholders, but by society as a whole,” he wrote.

Although the increased ownership thresholds would not necessarily lead to a “meaningful” reduction in the overall number of proposals, law firm Shearman & Sterling said restrictions to aggregation of ownership for the purposes of qualifying for the new thresholds may result in a reduction of some recurring proponent proposals. “The new resubmission thresholds should reduce how often companies receive the same proposal in successive years that repeatedly receive little shareholder support, which will be a welcome development for companies,” the firm said.

“Additionally, companies that have historically received multiple proposals in the same proxy season from the same individual serving as a representative of different shareholders (and we know who these individuals are) should see a reduction of proposals from the “usual” shareholder proponents with the new one-proposal limit to ‘each person’.”

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