It remains to be seen whether the new administration will actually drain the swamp or do away with political correctness, but one hope that some of us have – regardless of our views on the election – is that the SEC may finally get around to some issues that have been on the back burner for years.
One such issue is a long-overdue overhaul of the rules surrounding shareholder proposals, including the submission and resubmission thresholds for proposals under SEC Rule 14a-8. Many organizations, including the Society for Corporate Governance, have repeatedly urged the SEC to update these rules, which have been in place for many years. However, the SEC has been reluctant to plunge into the area due to the likely political firestorm that would result.
Now, another organization has jumped in. At the end of October, the Business Roundtable published “Modernizing the Shareholder Proposal Process”, a rational and well thought-out series of suggestions for bringing shareholder proposals into the 21st Century.
Some of the key points of the BRT’s publication are as follows:
- Update the Submission Threshold. The current submission threshold permits anyone who owns the lesser of only $2,000 in market value or 1% of a company’s outstanding stock for at least one year to submit a proposal. The dollar amount has remained unchanged for nearly 19 years and is not adjusted for inflation. As a practical matter, this threshold enables just about anyone to submit a proposal to any company, regardless of the reasonability or appropriateness of the proposal in general, much less to the company in question. Also, at least in my experience, because there is virtually no cost to submitting a proposal, many proponents have no understanding of how the shareholder proposal process works, which means that even the most shareholder-friendly companies have to devote substantial time and other resources to explaining the process to shareholders who assume that all they do is write a letter and they’re done. The BRT has suggested doing away with any dollar threshold and replacing it with a more appropriate percentage ownership threshold. It also suggests increasing the holding period to three years.
- Update Resubmission Thresholds. To be resubmitted, a proposal must have received at least 3% of the vote on its first submission, 6% on the second and 10% on the third. These thresholds were adopted at a time when most proposals didn’t stand a chance of getting as much as a 5% vote. However, times have changed, and it’s not uncommon for proposals to generate a 30% or more favorable vote. However, as the BRT points out, the rules now facilitate a “tyranny of the minority” in which proposals that garner a tiny percentage of votes can be resubmitted over and over again. In 1997, the SEC proposed to increase these thresholds to 6%, 15%, and 30% – still too low, in my mind – but the proposal was met with such a firestorm of opposition from the investor community that the SEC dropped the issue entirely.
- Expand Proponent Disclosure/Other Requirements. As the BRT points out, there are a number of proponents who appear to have taken advantage of the lenient submission requirements to submit the same proposal to numerous companies in which the proponents’ ownership is questionable. The BRT proposes to remedy this problem by requiring more rigorous disclosure requirements for proponents.
- Change the No-Action Process. Because of the process by which proposals may be excluded, a company seeking to exclude a proposal has to submit a request for a “no-action” letter from the Staff, basing the request on the various exclusions provided by the rules; the Staff then determines whether any of the exclusions applies. Aside from the Staff time it takes to address the requests, the process has led to a crazy quilt of responses over the years – for example, what is and is not a matter of “ordinary business” that is not a proper subject for a proposal. The BRT proposes to get the SEC Staff out of the business of determining suitability on a case-by-case basis by implementing an “advisory opinion” approach that might also have the benefit of more consistent policy over time.