Sec Speeches Cryptocurrency Remarks at the Society for Corporate Governance 2023 National Conference

Washington D.C.

Thank you, Christina [Maguire], for that introduction and congratulations on becoming President and CEO of the Society [for Corporate Governance] (the “Society”) this past January. I would like to start by recognizing Darla Stuckey, who retired in April [2023] and held leadership roles at the Society for nearly fourteen years, including her last eight as President and CEO. I had personally worked with Darla during her tenure and appreciated her efforts to advocate on behalf of the Society’s members. Darla led the Society’s efforts on numerous topics related to shareholders and corporate governance.

One of those topics is rule 14a-8[1] and shareholder proposals, a subject on which many SEC commissioners have provided their views over the years and, indeed, decades.[2] Today, I will add my thoughts on rule 14a-8 to this already robust collection.[3] I have been involved with this rule to some degree during the near-entirety of my 17-plus years with the Commission. I recall the many discussions on shareholder proposals that I had with the late Marty Dunn when I served on the Commission’s executive staff in the mid-2000s. As you might expect, however, my remarks today will reflect my views as an individual Commissioner and not necessarily the views of the full Commission or my fellow Commissioners.

I. Current Trends in Shareholder Proposals

At the Society’s 2015 national conference, then-Chair Mary Jo White reflected on that year’s proxy season.[4] It started with allowing Whole Foods to exclude a proxy access proposal pursuant to paragraph (i)(9) for conflicts with the company’s proposal,[5] only for the Commission staff to change its mind six weeks later and state that it would express no view on paragraph (i)(9) for the Whole Foods proposal and for the remainder of the season.[6] As Chair White noted, that proxy season was an “interesting” one.[7] I was serving as counsel to then-Commissioner Michael Piwowar at the time and was given a briefing by then-director [of the Division of Corporation Finance] Keith Higgins on the reversal. Let’s describe his explanation as also “interesting.” Now, fast forward to the current proxy season in 2023 and many of you might be thinking how much simpler times were in 2015.

Impact of Changed Staff Positions

The trends in shareholder proposals during the past two proxy seasons can be traced, in part, to changes to long-standing Commission staff positions on rule 14a-8. Staff Legal Bulletin No. 14L (“SLB 14L”),[8] issued in November 2021, reversed the staff’s views on paragraphs (i)(5)[9] and (i)(7),[10] which limit a company’s ability to exclude proposals if there are significant social policy issues.[11] While companies have not frequently sought to exclude proposals under paragraph (i)(5), paragraph (i)(7) was one of the most common bases for seeking exclusion.[12] SLB 14L reversed a position that had been in place for over twelve years.[13] In the year before SLB 14L, the staff concurred with a company’s argument to exclude a proposal pursuant to paragraph (i)(7) 40% of the time and did not concur 25% of the time.[14] These outcomes nearly reversed in the year after SLB 14L, when the staff concurred 23% of the time and did not concur 54% of the time.[15]

In addition to SLB 14L, the Commission proposed amendments to other bases for exclusions in paragraphs (i)(10),[16] (i)(11),[17] and (i)(12)[18] in July 2022.[19] While the amendments have not yet been adopted, some practitioners have noted that even before the proposal, Commission staff had already begun to reverse prior no-action positions and narrow the scope of these exclusions.[20] For paragraph (i)(10), the data offers some insight, as the staff previously concurred with exclusion 32% of the time and did not concur 30% of the time.[21] Subsequently, the staff concurred 10% of the time and did not concur 58% of the time.[22]

More Proposals and Lower Voting Support

During the past two proxy seasons, these changes have correlated with a substantial increase in the number of shareholder proposals submitted to companies and voted on at meetings. In 2023, at least 961 proposals were submitted pursuant to rule 14a-8, which represents an 18% increase from 2021.[23] The number of proposals that made it to a vote increased by 40% during the same period, resulting in 629 proposals voted on this season.[24] The increase was especially noticeable among environmental and social (“E&S”) proposals,[25] where the number of submissions increased by 52% and the number voted on increased by 125%.[26]

At what point will there be shareholder proposal overload, particularly for investors who hold a large number of companies as part of a diversified portfolio? While shareholder proposals that limit management entrenchment can add value to a company,[27] others may not. Already, some asset managers have expressed concern that the influx of shareholder proposals are not resulting in a corresponding increase in enterprise value.[28] Instead, these asset managers noted the proposals’ high level of prescriptiveness, lack of connection to material risks or long-term value, and decreased overall quality.[29]

Thus, it is not surprising that the average percentage of votes cast “for” proposals declined from 36% in 2021 to 24% in 2023.[30] Additionally, the percentage of proposals receiving a majority of votes cast declined from 19% to 5% during the same period.[31] With respect to E&S proposals, the decline has been even greater. The average percentage of votes cast for E&S proposals was 20% in 2023, compared to 37% in 2021.[32] Only 3% of E&S proposals received a majority of votes cast in 2023, compared to 23% in 2021.[33]

Tyranny of the Minority

The costs of a shareholder proposal go far beyond including 500 words in a proxy statement and a checkbox to the proxy card.[34] In 2020, the Commission estimated that a company can incur up to $150,000 to process a single proposal.[35] But more importantly, this amount does not include opportunity costs associated with the board’s and management’s time that could have been spent on value-creating activities for the company.[36] All shareholders bear these costs, even though only a minority of shareholders submit proposals. For the 2023 season, the top five shareholder proponents submitted approximately 55% of all proposals.[37]

Rule 14a-8 was not intended “to burden the proxy solicitation process by requiring the inclusion of proposals [submitted by a few proponents that are unrelated to the general interests of shareholders].”[38] As then-Commissioner Paul Atkins once said, “[W]e must be vigilant that the shareholder proposal process does not result in the tyranny of the minority.”[39] Therefore, there is reason to be concerned with the trajectory of current trends in shareholder proposals.

II. Policy Approaches for Consideration

If the current or projected state of shareholder proposals is not desirable, then companies, their shareholders, and the Commission should consider taking action to address such concerns. Here are ideas that can be grouped into three categories: (1) greater use of private ordering to manage shareholder proposals; (2) exclude proposals on social policy issues that lack a material relationship with the company; and (3) changes to how the Commission staff processes shareholder proposals.

Greater Use of Private Ordering

In a scenario where all shareholders attend a meeting and vote in person and no proxies are solicited, state law, including the company’s charter and bylaws, can impose requirements, such as an advance notice provision,[40] on a shareholder’s ability to add a proposal to the meeting agenda. If the company were to solicit proxies and a shareholder wished to include his or her proposal on the company’s proxy statement, the federal securities laws will govern the company’s proxy solicitation.

Rule 14a-8 allows a company to exclude a proposal if it is not a proper subject for action by shareholders under state law or otherwise violates state law.[41] However, simply because the shareholder is using the company’s proxy solicitation, can state law no longer impose requirements, such as share ownership thresholds and submission deadlines, on the shareholder’s ability to add the proposal to the meeting agenda? No – state law must continue to have a say. Section 14(a) of the Exchange Act[42] should not be read in a manner that allows the Commission to abrogate the role of state corporate law regarding the conduct of shareholder meetings, including any requirements or conditions on a shareholder’s ability to add a proposal to the meeting agenda.

Section 14(a) makes it unlawful for any person to solicit proxies “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”[43] But section 14(a) does not specifically preempt state corporate law or even specifically mention shareholder proposals. Congress has been very clear in the federal securities laws when it intends to preempt state law, such as in the National Securities Markets Improvement Act[44] or the Jumpstart Our Business Startups Act.[45]

Indeed, such a broad claim of Commission authority might raise issues under the major questions doctrine discussed in West Virginia v. EPA.[46] As the Supreme Court observed, “[e]xtraordinary grants of regulatory authority are rarely accomplished through ‘modest words,’ ‘vague terms,’ or ‘subtle device[s]’” and that Congress does not “typically use oblique or elliptical language to empower an agency to make a ‘radical or fundamental change’ to a statutory scheme.”[47]

Procedural Requirements by Private Ordering

Thus, rule 14a-8’s procedural bases for exclusion – contained in paragraphs (b) through (e)[48] – should be viewed as default standards that apply only if companies decline to establish their own standards in their governing documents.[49] If a company established its own standards, then neither the Commission nor its staff should be involved in determining whether the proponent satisfied those standards under state law; instead, any disagreement between the proponent and the company should be treated like any other dispute over an interpretation of a company’s governing documents and resolved in state court.

The widespread adoption of proxy access[50] has shown that private ordering can be effective for a matter that was significantly debated under both the federal securities law and state law. For shareholder proposals, private ordering can offer potential benefits to companies and their shareholders. First, it provides certainty that the procedural standards will not change based on who is leading the Commission. Relying on the Commission’s rules, or its staff’s positions, in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave. Second, private ordering allows a company to move away from the one-size-fits-all approach of rule 14a-8.[51] This empowers the fiduciaries of a company to establish requirements that best balance the benefits of shareholders proposals versus their costs, and specific to its shareholder base.[52] Finally, private ordering may enable companies to revise their shareholder proposal procedures more quickly in response to evolving governance trends.[53]

Undoubtedly, shareholder proposal requirements adopted through private ordering will capture the attention of proxy advisory firms. If a firm disapproves of a company’s requirements, it could recommend voting against the election of one or more members of the company’s board. A proxy advisory firm’s adverse recommendation can have a significant impact on the election.[54] However, as proxy access has shown, companies, their shareholders, and proxy advisory firms can find common ground. If institutional investors and asset managers have concerns with a “Wild West” environment for shareholder proposals, including any increased burden in satisfying their fiduciary obligations for proxy voting on proposals that are unlikely to impact pecuniary returns, then they may be motivated to help find this common ground.

Interplay between Federal Securities Law and State Law

Now that private ordering is beginning to sound appealing, you may be wondering whether rule 14a-8 – in its current form – permits companies to establish their own standards.[55] To help answer this question, we can look to the intent of rule 14a-8, which the Commission conceptualized in 1938.[56] Former Chairman Ganson Purcell provided the first detailed explanation of the rule in 1943 when he stated that the rule’s “philosophy” was to grant to a shareholder “those rights that he has traditionally had under [s]tate law[:] to appear at the meeting; to make a proposal; to speak on that proposal at appropriate length; and to have his proposal voted on.”[57] Requirements, such as owning a minimum number of shares and submitting a proposal by a certain date, are at the heart of a shareholder’s right to make a proposal under state law.[58] A shareholder’s use of the company’s proxy materials to solicit votes for its proposal does not change this fundamental premise.[59]

As recently as 2019, the Commission interpreted Chairman Purcell’s philosophy of rule 14a-8 as “facilitat[ing]” shareholders’ rights under state law.[60] However, the rule cannot “facilitate” such rights if it simply replaces them. To reflect the rule’s philosophy and intent, a company should have the right to adopt, in its governing documents, requirements[61] for shareholder proposals that differ from those set forth in rule 14a-8.[62] If this were not the case, then the federal securities law will have supplanted state law on the issue of whether a shareholder can add a proposal to the meeting agenda, because nearly all voting today occurs by proxy.[63] This federalization would upend our long history of recognizing the primacy of state law in governing the internal affairs of a corporation.

Relationship between Social Policy Issues and the Company

Turning to shareholder proposals with social policy issues, since the staff issued SLB 14L, many proposals have been submitted in an attempt to force public companies to take positions on various political issues.[64] Shareholder meetings were not intended under state corporate laws to be political battlegrounds or debating societies. As Chairman Purcell noted, rule 14a-8 was not intended to allow proponents to make political statements through their proposals.[65]

One Standard

Regardless of what may happen with respect to private ordering, the Commission should consider creating a single standard for evaluating social policy issues in shareholder proposals under rule 14a-8. Currently, social policy issues are analyzed in similar, yet slightly different, approaches under paragraphs (i)(5) and (i)(7).[66] Many practitioners in the 14a-8 bar probably agree that each paragraph’s standard is needlessly complicated on its own.

History of Paragraphs (i)(5) and (i)(7)

Today, social policy issues in shareholder proposals mostly arise under paragraph (i)(7).[67] However, the concept traces its roots to paragraph (i)(5).[68] In 1952, the Commission adopted the first three bases for excluding a proposal under rule 14a-8 and among these was the predecessor to paragraph (i)(5).[69] The predecessor paragraph stated that a proposal could be excluded if it was “primarily for the purpose of promoting general economic, political, racial, religious, social, or similar causes.”[70] In 1972, the Commission amended the predecessor paragraph to state that a proposal could be excluded if it was “not significantly related to the business of the issuer or is not within the control of the issuer” and provided the aforementioned litany of social policy issues as an example.[71] In 1976, the Commission removed this litany of social policy issues from the rule text.[72] However, in doing so, the Commission emphasized that the litany was “superfluous and unnecessary” and that the removal “should not be construed as [creating a different standard]” in applying the predecessor paragraph.[73] Accordingly, through the 1976 amendments to paragraph (i)(5), the history is clear that a company could exclude a proposal that promoted a general social policy issue because it, by definition, did not have a significant relationship to the company.

The 1976 amendments also introduced the concept of social policy issues in paragraph (i)(7) with the oft-cited nuclear power plant example.[74] That release did not expressly address whether a nexus between the social policy issue and the company was needed for a proposal to avoid exclusion under paragraph (i)(7). However, the Commission also did not indicate that the relationship or nexus between a proposal’s social policy issue and the company would be evaluated differently under paragraphs (i)(5) and (i)(7).[75]

Independent Basis to Exclude Based on Materiality

Given this history,[76] consideration should be given as to whether there should be a single standard used to evaluate proposals that focus on a social policy issue under rule 14a-8. If so, then exclusion should be based on a material relationship between the issue and the company. The degree of the relationship should be sufficiently unique so that social policy issues generally applicable to any company are excludable. The standard could be similar to that for risk factor disclosure, where the Commission requires disclosure of material risks and discourages inclusion of “risks that could apply generically to any registrant.”[77] Finally, the standard should be an independent basis to exclude a proposal, as opposed to an exception to a company’s ability to exclude pursuant to paragraph (i)(5) or (i)(7).[78]

Hence, a proposal would be excluded if it focuses on a social policy issue that is not materially related to the company. As with any materiality standard, quantitative and qualitative factors specific to a company would be considered.

Processing of Shareholder Proposals

Finally, the third category of considerations is efficiency in processing shareholder proposals.

Sending the Opposition Statement in Advance

The Commission should reassess whether companies still need to send the shareholder proponent a copy of the opposition statement before filing the definitive proxy statement.[79] This requirement dates to 1978,[80] when every proxy statement needed to first be filed in preliminary form to provide the Commission an opportunity to review it.[81] One rationale for this requirement was that proponents could take some of the burden off of the Commission by helping to review the accuracy of statements in opposition to their proposals.[82] However, the Commission no longer requires proxy statements soliciting votes for only certain matters, including rule 14a-8 shareholder proposals, to be filed in preliminary form for review.[83] Accordingly, there is no longer a need for proponents to assist the Commission in reviewing the portion of proxy statements related to shareholder proposals. Due to the anti-fraud rules applicable to proxy statements,[84] companies have every incentive to prepare materially accurate and complete opposition statements.[85]

Furthermore, when the rule was initially adopted, companies needed to send the proponent the opposition statement only ten days before filing,[86] in contrast to the current 30-day requirement.[87] The staff’s practice at the time was to respond to companies’ no-action requests approximately 20 days before the proxy statement’s filing date.[88] If the staff denied a company’s no-action request, the company would still have ten days to prepare an opposition statement.[89]

The staff’s current practice for responding to no-action requests no longer works with this timeline.[90] Instead, at the time the company needs to send the opposition statement – on the 30^th day before filing – it likely will not have received the staff’s no-action decision. As a result, the company will incur the costs for preparing an opposition statement that it may never use. Furthermore, at the 30-day deadline, the company may also still be negotiating with the proponent for the withdrawal of the proposal. The opposition statement may take a tone very different from the negotiation discussions, and requiring it to be sent in the middle of negotiations may disrupt the dynamics and process.

Finally, requiring a company to send its opposition statement to the proponent in advance of filing the proxy statement is inconsistent with other aspects of the Commission’s proxy rules. In proxy contests – a process in which the participants are much more invested compared to non-binding shareholder proposals – neither the company nor the activist shareholder is required to send its “fight letter” to the other side before filing it.[91] The lack of consistency on this practice might call into question the appropriateness of the Commission’s proxy rules.

Staff’s Participation in the Process

The Commission may also want to re-consider the staff’s role in the shareholder proposal process. Every proxy season, the staff creates a task force of attorneys to review no-action requests full time.[92] There is an incredible opportunity cost for this commitment, as these attorneys could be engaged in rulemaking, reviewing filings, or providing interpretive advice on other topics. While the staff’s no-action letters may provide companies with some degree of peace of mind for their decision to exclude proposals, only a court can adjudicate whether that decision complied with rule 14a-8.[93] Over the years, the Commission has considered removing the staff from some or all aspects of the process[94] but has not made any changes.

To the extent the staff continues to be involved in the process, a few changes should be considered. First, the staff should not make determinations on whether an issue is a social policy issue. These decisions are fact-intensive and inherently subjective. The staff undoubtedly makes good faith efforts to reach unbiased conclusions.[95] However, they should not be put in a position to make determinations on an issue that is well beyond the scope of applying the federal securities laws. Moreover, such social policy decisions can inject line staff members into the middle of Congressional investigations and oversight.

Second, the staff should consider refraining from making any determinations on whether a proposal violates an area of law other than federal securities law. These decisions arise in no-action requests seeking exclusion pursuant to paragraph (i)(1)[96] or (i)(2).[97] Although no-action requests pursuant to these paragraphs are generally accompanied by an opinion of counsel,[98] the staff is not expected to have expertise with respect to the issues of state law or foreign law covered by the opinion.[99]

While companies and shareholder proponents may have become accustomed to, and familiar with, the staff’s involvement on these issues under paragraphs (i)(1), (i)(2), (i)(5), and (i)(7), a court is the more appropriate forum for deciding issues that are not rooted in the federal securities laws.[100] If either the proponent or the Commission disagrees with a company’s decision to exclude a proposal, then the parties can litigate the issue in court.

Obtaining no-action relief from the staff is not necessary for market participants to make a good faith effort to comply with the federal securities laws. For example, the staff has, since at least 1979, generally not provided substantive responses to no-action requests involving whether a person is an affiliate.[101] Analysis of affiliate status is core to the federal securities laws. If market participants can conduct analysis on this topic without no-action relief, then they can also likely do so for shareholder proposals. In fact, this has occurred before when the staff refrained from evaluating requests under paragraph (i)(9) during the 2015 season.

By declining to provide a view on social policy issues and violations of law other than the federal securities laws, the staff would have more time and resources to prepare no-action letters responding to other bases for exclusion.[102] To address some market participants’ calls for greater transparency in the process,[103] the Commission could consider whether the staff’s letters should provide more explanation for its decisions. This approach would benefit both companies and shareholder proponents by helping them to better understand the staff’s views, so that they can present arguments tailored to those views.

III. Conclusion

To conclude, some ideas for consideration may require changes by the Commission to rule 14a-8 and to its staff’s practices. However, other ideas, such as for companies, their advisers, and their shareholders to explore possible private ordering for shareholder proposal requirements, may not require any legislative or regulatory action.

The Commission’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Commission will not succeed in that mission if it does nothing to prevent value-eroding shareholder proposals from being part of the annual meeting process. If the number of shareholder proposals continues to grow at double digit rates, a future SEC commissioner might reminisce about how much simpler proxy season and shareholder proposals were in 2023.

Thank you and enjoy the rest of this conference.

[2] See, e.g., Alison Herren Lee, A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC (Mar. 15, 2021), available at https://www.sec.gov/news/speech/lee-climate-change; Hester M. Peirce, Festivus, Fortnite, and Focus: Remarks before the Council of Institutional Investors Spring Conference (Mar. 5, 2019), available at https://www.sec.gov/news/speech/speech-peirce-030519; Mary Jo White, Building Meaningful Communication and Engagement with Shareholders (June 25, 2015) (“Chair White Speech”), available at https://www.sec.gov/news/speech/building-meaningful-communication-and-engagement-shareholde; and Daniel M. Gallagher, Activism, Short-Termism, and the SEC: Remarks at the 21st Annual Stanford Directors’ College (June 23, 2015), available at https://www.sec.gov/news/speech/activism-short-termism-and-sec. See, also, infra notes 39 and 56.

[3] While both corporate issuers with a class of equity securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and investment companies registered under the Investment Company Act of 1940 are subject to rule 14a-8, this speech focuses on the rule’s application to corporate issuers.

[4] See Chair White Speech.

[5] Rule 14a-8(i)(9), which permits a company to exclude a proposal if it directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.

[9] Rule 14a-8(i)(5), which permits a company to exclude a proposal if it relates to operations which account for less than five percent of the company’s total assets at the end of its most recent fiscal year, and for less than five percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.

[10] Rule 14a-8(i)(7), which permits a company to exclude a proposal if it deals with a matter relating to the company’s ordinary business operations.

[11] With respect to paragraph (i)(5), Staff Legal Bulletin No. 14I (Nov. 1, 2017) (“SLB 14I”), which SLB 14L rescinded, explained that a company could not rely on the paragraph to exclude a proposal that raised issues of social or ethical significance if the proposal was “significantly related to the company,” based on the “particular circumstances of the company” and “notwithstanding [the issues’] importance in the abstract.” Under SLB 14L, a company cannot rely on paragraph (i)(5) to exclude a proposal if it “raises issues of broad social or ethical concerns related to the company’s business.” Following SLB 14L, a proposal avoids exclusion if there is any relationship between the company and the social or ethical concern.

With respect to paragraph (i)(7), Staff Legal Bulletins No. 14H (Oct. 22, 2015) and 14E (Oct. 27, 2009) (“SLB 14E”) explained that a company cannot rely on paragraph (i)(7) to exclude a proposal (1) that “focus[es] on a significant policy issue” and (2) where “a sufficient nexus exists between the nature of the proposal and the company.” SLB 14I stated that whether the exception to the exclusion applied depended, in part, on “the connection between the significant policy issue and the company’s business operations.” Staff Legal Bulletin No. 14K (Oct. 16, 2019), which SLB 14L rescinded, emphasized that “a policy issue that is significant to one company may not be significant to another” and that the significance evaluation should be company specific. Under SLB 14L, the nexus requirement is no longer relevant and significance evaluation is no longer company specific. Following SLB 14L, a company cannot rely on paragraph (i)(7) to exclude a proposal that “raises issues with a broad societal impact” because those issues have “social policy significance,” regardless of the significance of the issues to the company.

[12] For the year before the staff issued SLB 14L, 3% of no-action requests sought relief pursuant to paragraph (i)(5), and 38% of no-action requests sought relief pursuant to paragraph (i)(7), which was the second highest among all bases for exclusion. See infra note 14.

[14] Statistics related to rule 14a-8 no-action requests are based on data provided by the Commission staff. Unless otherwise noted, statistics for a year are for the period from October 1 to September 30 of the following year. During this period, the staff receives most of its no-action requests between October 1 and March 31.

[15] For the period from October 1, 2022 to March 31, 2023, the staff concurred with a company’s argument to exclude a proposal pursuant to paragraph (i)(7) 45% of the time. However, this higher success rate may be due to companies becoming more judicious with their no-action requests based on paragraph (i)(7), after better understanding the staff’s position in SLB 14L. Companies made only 73 requests to exclude a proposal pursuant to paragraph (i)(7) during this six-month period from 2022 to 2023, as compared to 100 requests and 92 requests during the same period from 2021 to 2022 and 2020 to 2021, respectively. See supra note 14.

[16] Rule 14a-8(i)(10), which permits a company to exclude a proposal if the company has already substantially implemented the proposal.

[17] Rule 14a-8(i)(11), which permits a company to exclude a proposal if 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

[18] Rule 14a-8(i)(12), which permits a company to exclude a proposal if it addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s 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 less than a specified percentage of the votes cast (such percentage based on the number of times the proposal was previously voted).

[19] Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34-95267 (July 13, 2022) [87 FR 45052 (July 27, 2022)] (the “2022 Proposing Release”), available at https://www.sec.gov/rules/proposed/2022/34-95267.pdf.

[20] See, e.g., SEC Proposes to Substantially Restrict Grounds for Excluding Shareholder Proposals, Davis Polk (July 15, 2022) (“A foreshadowing of the [proposed amendments] was evident in [the 2022] proxy season, as the SEC staff made multiple determinations that appeared to be inconsistent with prior no-action letters and ultimately reversed many long-standing precedents, although under numerous bases and not just those contained in the [proposed amendments]. The upshot was that companies were able to exclude proposals much less frequently than in prior seasons, resulting in a significant uptick in the number of proposals placed on corporate ballots.”), available at https://www.davispolk.com/insights/client-update/sec-proposes-substantially-restrict-grounds-excluding-shareholder-proposals; SEC Proposes Amendments to the Shareholder Proposal Rules, Skadden, Arps, Slate, Meagher & Flom LLP (July 15, 2022) (“…the [s]taff took a number of positions during the 2022 proxy season that overturned long-standing no-action letter precedent. The proposed amendments would codify some of those positions and narrow three of the substantive bases available to companies to exclude proposals.”), available at https://www.skadden.com/insights/publications/2022/07/sec-proposes-amendments-to-the-shareholder-proposal-rules; and Recent SEC Proposal Would Make it More Challenging for Companies to Exclude Shareholder Proposals from Proxy Materials, FW Cook (Aug. 1, 2022) (“During the 2022 proxy season, the [s]taff essentially overturned long-standing no-action letter precedent. The proposed amendments would codify some of the [s]taff’s recent positions and limit three of the substantive bases otherwise relied upon by companies to exclude proposals.”), available at https://www.fwcook.com/Blog/Recent-SEC-Proposal-Would-Make-it-More-Challenging-for-Companies-to-Exclude-Shareholder-Proposals-from-Proxy-Materials-/.

[21] For the period from October 1, 2020 to September 30, 2021. See supra note 14.

[22] For the period from October 1, 2021 to September 30, 2022. See supra note 14.

[23] Statistics related to the number of shareholder proposals submitted, proposals voted on at meetings, and voting results are based on data from Proxy Analytics LLC. A proxy season refers to the period from July 1 to June 30 of the following year. Data is for companies included in the Russell 3000 Index.

[25] Determination of whether a proposal constituted an E&S proposal was made by Proxy Analytics LLC.

[27] See the 2022 Proposing Release at 45067 (“A shareholder proposal could improve a company’s performance because it could motivate a value-enhancing corporate policy change, limit insiders’ entrenchment, and provide management with information about the views of shareholders.”).

[28] See, e.g., For or Against? The Year in Shareholder Resolutions—2022, T. Rowe Price (Mar. 2023) (“Our observation is that the increase in the volume of proposals resulted in a decrease in their overall quality. We observed more inaccuracies in proposals this year, more poorly targeted resolutions, and more proposals addressing non‑core issues…In addition, we observed a marked increase in the level of prescriptive requests.”), available at https://www.troweprice.com/content/dam/trowecorp/Pdfs/For_or_Against_Shareholder_Resolutions.pdf; Investment Stewardship 2022 Annual Report, Vanguard (“[In 2022], we observed a rise in the number of shareholder proposals at U.S. public companies that, in our view, were overly prescriptive in dictating company strategy or day-to-day business operations or were not sufficiently linked to issues of long-term shareholder value at the company in question.”), available at https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/vanguard_inv_stew_2022_annual_report_april_2023.pdf; and 2022 Investment Stewardship Annual Report, BlackRock (“[BlackRock] saw a marked increase in the number of shareholder proposals on environmental and social issues. Many of these did not address a material business risk for the company or were overly prescriptive.”), available at https://www.blackrock.com/corporate/literature/publication/annual-stewardship-report-2022.pdf. While asset managers’ annual reports for the 2023 season are not yet available, they have, anecdotally, provided similar assessments to certain companies and their advisers.

[34] The Commission has stated that “companies incur costs to: (i) review the proposal and address issues raised in the proposal; (ii) engage in discussions with the shareholder-proponent(s); (iii) print and distribute proxy materials, and tabulate votes on the proposal; (iv) communicate with proxy advisory firms and shareholders (e.g., proxy solicitation costs); (v) if they intend to exclude the proposal, file a notice with the Commission; and (vi) prepare a rebuttal to the submission to the Commission.” The 2022 Proposing Release at note 126.

[37] Based on data from Proxy Analytics LLC. A shareholder was considered a proponent if it was the lead filer or the co-sponsor of a proposal. Four shareholder proponents that commonly act together were counted as one proponent. Certain entities and their stakeholders were counted as one proponent.

[38] See Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34-19135 (Oct. 14, 1982) [47 FR 47420, note 8 (Oct. 26, 1982)] (the “1982 Proposing Release”).

[40] See Goggin v. Vermillion, Inc., 2011 WL 2347704, at 4 (Del. Ch. June 3, 2011) (“Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting, ‘unless the corporation has duly imposed such a requirement.’ Advance notice requirements are ‘commonplace’ and ‘are often construed and frequently upheld as valid by Delaware courts.’ They are useful in permitting orderly shareholder meetings, but if notice requirements ‘unduly restrict the stockholder franchise or are applied inequitably, they will be struck down.’) (internal citations omitted).

[41] See 17 CFR 240.14a-8(i)(1)-(2).

[42] 15 U.S.C. § 78n(a).

[43] 15 U.S.C. § 78n(a)(1).

[44] National Securities Markets Improvement Act of 1996, Pub. L. 104-290, Oct. 11, 1996.

[45] Jumpstart Our Business Startups Act, Pub. L. 112-106, Apr. 5, 2012.

[46] West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587 (2022).

[48] 17 CFR 240.18(b)-(e).

[49] In 1982, the Commission proposed a similar shareholder proposal regime whereby companies could adopt a shareholder-approved plan containing alternative procedures to govern the process. However, the Commission’s proposal would have imposed minimum standards that the plan must follow, rather than default standards that the company could make more stringent or lenient. See the 1982 Proposing Release at 47422. The Commission did not adopt this proposal. Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34-20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)] (the “1983 Adopting Release”).

In 1997, the Commission surveyed companies and shareholder proponents about private ordering alternatives for the shareholder proposal process. Amendments to Rules on Shareholder Proposals, Release No. 34-39093 (Sept. 18, 1997) [62 FR 50682 (Sept. 26, 1997)] (the “1997 Proposing Release”), available at https://www.sec.gov/rules/proposed/34-39093.htm. Less than a majority of company respondents and a small percentage of shareholder respondents favored such alternatives. Id.

However, more recently, some commentators and market participants have advocated for a private ordering approach to shareholder proposals. See comment letter from the Manhattan Institute for Policy Research (Feb. 3, 2020), available at https://www.sec.gov/comments/s7-23-19/s72319-6741164-207698.pdf; comment letter from Exxon Mobil Corporation (Feb. 3, 2020), available at https://www.sec.gov/comments/s7-23-19/s72319-6794790-207771.pdf; and Our Perspective: SEC Should Truly Take “No Action” on Rule 14a-8 Shareholder Proposal Requests, Jones Day (Aug. 2019), available at https://www.jonesday.com/en/insights/2019/08/our-perspective-sec-should-truly-take.

[51] For example, a company could adopt submission deadlines for shareholder proposals that align with its proxy access deadlines and thereby simplify annual meeting and proxy statement preparations.

[52] For example, a controlled company may implement lower share ownership requirements for submitting a proposal compared to a company with dispersed ownership.

[53] For example, the ownership threshold was not updated between 1998 and 2020. For companies that do not believe that the current threshold is appropriate given recent developments in Commission rules and staff positions, changing the threshold via private ordering may be more desirable than waiting for Commission rulemaking.

[54] Shu, Chong, The Proxy Advisory Industry: Influencing and Being Influenced (June 8, 2023) (“[W]hen ISS recommends voting against a director’s election, its customers are 32 percent more likely to vote against the director compared to investors who do not subscribe to ISS. Similarly, when Glass Lewis recommends voting against a director, its customers are 37 percent more likely to vote against the director compared to other investors.”), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3614314.

[55] In SEC v. Transamerica Corporation et al., 163 F.2d 511 (3d Cir. 1947), the court held that a company, Transamerica, could not rely on a procedural requirement contained in its bylaws to exclude shareholder proposals that complied with the predecessor of rule 14a-8 (“rule X-14A-7”). According to one leading treatise, “[i]t is clear [from the court’s holding] that, at the very least, the Commission’s requirement cannot be evaded by means of procedural obstacles that are claimed to be lawful in the state of incorporation.” Louis Loss, Joel Seligman, & Troy Paredes, Securities Regulation 6.C.4 (6^th Edition 2020). However, this opinion should not be considered dispositive for whether a company can establish its own standards for the four procedural requirements in rule 14a-8. In this case, the shareholder proponent gave Transamerica notice in January 1946 of his intention to submit proposals for an April 1946 meeting. Transamerica acknowledged receipt of the proposals on February 1, 1946. However, when it mailed its proxy materials on March 18, 1946, it did not include the proposals in the notice of the meeting and announced its intention to not allow the proponent to present the proposals at the meeting. Transamerica relied on a bylaw provision stating that the proposals could be voted at a meeting only if they were included in the notice of the meeting. Transamerica did not allege that the proposals did not comply with rule X-14A-7 or were otherwise not proper for shareholder action under state law. Accordingly, Transamerica could have included the shareholder proposals in the notice of the meeting because they complied with rule X-14A-7. Instead, in an effort to not permit the proposals to be voted on at the meeting, Transamerica intentionally did not reference the compliant shareholder proposals in the notice. These facts significantly differ from a situation where a company adopts its own standards for rule 14a-8’s procedural bases for exclusion and follows those standards and permits compliant shareholder proposals to be included in its proxy statement and voted on at a meeting. For the detailed facts of this case, see the district court’s opinion. SEC v. Transamerica Corporation et al., 67 F.Supp. 326 (D.Del. 1946).

[56] See Securit[ies] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. at 16 (1943) (the “Chairman Purcell Testimony”) (“The obligation of management to tell stockholders generally of [shareholder] proposals by setting them forth in the management proxy material was established during the 1938 season. However, the rules contained no express mention of this matter and the 1940 revision contained an express provision concerning the privilege of stockholders to present proposals and to have them set forth in the management proxy material”). For the 1940 revisions, see Release No. 34-2376 (Jan. 12, 1940) [5 FR 174 (Jan. 12, 1940)].

[58] See the 1997 Proposing Release at 50683 (“The shareholder proposal process affects the internal governance of corporations, and it is state law—not federal securities law—which is primarily concerned with corporate governance matters.”).

[59] See the 2020 Adopting Release at 70262-70263 (“…[W]hile [r]ule 14a-8 provides a federal process for proxy voting and solicitation with respect to a shareholder proposal, matters of corporate organization such as voting rights and whether a proposal is a proper subject for action remain governed by state law.”) and Shareholder Proposals, Release No. 34-56160 (July 27, 2007) [72 FR 43466 (Aug. 3, 2007)] (“[T]he federal proxy authority is not intended to supplant state law, but rather to reinforce state law rights with a sturdy federal disclosure and proxy solicitation regime.”) (the “2007 Long Proposing Release”), available at https://www.sec.gov/rules/proposed/2007/34-56160.pdf.

[60] See Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-87458 (Nov. 5, 2019) [84 FR 66458, 66459 (Dec. 4, 2019)] (the “2019 Proposing Release”), available at https://www.sec.gov/rules/proposed/2019/34-87458.pdf. See also the 2007 Long Proposing Release at 43467 (“[Regulation 14A has] been designed to facilitate the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual, in-person gathering of security holders.”).

[61] While not technically a procedural basis for exclusion, paragraph (h) of rule 14a-8 set forth the requirements for a shareholder proponent to present its proposal at a meeting. Both courts and the Commission have stated that the right to present a proposal is a matter of state law. See Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores, Inc., 821 F.Supp. 877 (S.D.N.Y 1993), citing Statement of Informal Procedures for The Rendering of Staff Advice With Respect to Shareholder Proposals, Release No. 34-12599 (July 7, 1976) [41 FR 29989 (July 20, 1976)] (the “Statement on Informal Procedures”). If the procedural requirements contained in paragraphs (b), (c), (d), and (e) of rule 14a-8 were framed in a company’s governing documents as requirements to present a proposal at a meeting, then state law would seem to govern those requirements.

[62] If a company adopts procedural requirements in its governing documents that are more stringent than rule 14a-8, then the company’s shareholders may be deprived of the right to vote on certain shareholder proposals that they would have otherwise had the right to vote on under rule 14a-8’s standards. The Commission has suggested that section 14(a) of the Exchange Act was designed to protect “fair corporate suffrage.” See, e.g., the 2007 Long Proposing Release at 43466. However, some courts have disagreed with this interpretation. See, e.g., Business Roundtable v. S.E.C., 905 F.2d 406 (D.C. Cir. 1990). Regardless of whether “fair corporate suffrage” is an intent of section 14(a), allowing companies to adopt procedural shareholder proposal requirements does not impede this suffrage. The right to vote on a shareholder proposal is a matter of state law. If a proponent is ineligible to include its proposal on the meeting agenda, then shareholders never had a right to vote on the proposal. Section 14(a) cannot protect suffrage that did not exist, under state law, in the first place.

Additionally, a company that adopts different procedural requirements in its governing documents should not be viewed as having “waived” its obligations to comply with rule 14a-8, in violation of Exchange Act section 29(a). Because the procedural requirements of rule 14a-8 should be viewed as default standards subject to change under the company’s governing documents, any differing standards would be in accordance with the rule.

[63] See the 2019 Proposing Release at 66458 (“Because most shareholders do not attend public company shareholder meetings in person and, instead, vote their shares by the use of proxies that are solicited before the shareholder meeting takes place, the proxy solicitation process rather than the shareholder meeting itself has become the ‘forum for shareholder suffrage.’”).

[65] See the Chairman Purcell Testimony at 163 (“[I]f [a shareholder proponent] were going to use the corporate proxy machinery for making a stump speech for some political party, that obviously is without the spirit of [rule 14a-8]…”).

[66] Pursuant to SLB 14L, paragraph (i)(5) evaluates whether the proposal raises “issues of broad social or ethical concern” and paragraph (i)(7) considers whether the proposal has “social policy significance,” including whether it “raises issues with a broad societal impact.” While the staff’s application of the two paragraphs are similar in this context, it differs slightly when determining the social policy issue’s relationship to the company. According to the court in Lovenheim v. Iroquois Brands, Ltd., which SLB 14L cites to as a basis for its paragraph (i)(5) interpretation, a social policy “significant in the abstract but [without a] meaningful relationship to the business” would not justify an exception to exclusion under paragraph (i)(5). Lovenheim v. Iroquois Brands, Ltd., 618 F.Supp. 554, note 16 (D.D.C. 1985). SLB 14L appears to adopt this position by stating that the significant policy issues must be “related to the company’s business.” In contrast, under SLB 14L’s application of paragraph (i)(7), the significance, or nexus, of the social policy issue to the company is not a consideration. See, also, supra note 11.

[68] Even before the Commission adopted paragraph (i)(5)’s predecessor, the Director of the Division of Corporation Finance had issued an opinion stating that “[i]t was not the intent of [rule 14a-8] to permit stockholders to obtain the consensus of other stockholders with respect to matters which are of a general political, social or economic nature.” See Opinion of Baldwin B. Bane, Director of Corporation Finance Division, Release No. 34-3638 (Jan. 16, 1945) [11 FR 10988 (Sept. 27, 1946)].

[69] Amendment of Proxy Rules, Release No. 34-4775 (Dec. 11, 1952) [17 FR 11431 (Dec. 18, 1952)] (the “1952 Adopting Release”).

[70] Id. The fact that exclusion for general social policy issues was among the first set of exclusions created under rule 14a-8 indicates how core the concept is to the rule.

[71] Solicitation of Proxies, Release No. 34-9784 (Sept. 22, 1972) [37 FR 23179 (Oct. 31, 1972)].

[72] Adoption of Amendments Relating to Proposals by Security Holders, Release No. 34-12999 (Nov. 22, 1976) [41 FR 52994 (Dec. 3, 1976)] (the “1976 Adopting Release”).

[75] The Commission agreed with commenters’ view that “both [paragraphs] contain separate and justifiable grounds for the omission of a proposal and that there often are instances in which one is applicable to a proposal while the other is not” but did not discuss any differences in analyzing social policy issues under the two paragraphs. The 1976 Adopting Release at 52998.

[76] The Commission further amended paragraph (i)(5)’s predecessor in 1983 by adding the 5% tests present in paragraph (i)(5) today and maintaining the requirement that a proposal is excludable if it is not “significantly related to the company’s business.” See the 1983 Adopting Release. Less than two years after this amendment, the court in Lovenheim found that a proposal concerning paté de foie gras sales was of “ethical and social significance” and that it “implicate[d] significant levels of [the company’s] sales.” Lovenheim, supra note 66 at 561. However, paté de foie gras sales were less than 0.06% of the company’s revenues. Id. at 558. It is unclear how the court reached a conclusion that paté de foie gras sales were “significantly related to the company’s business” to prohibit exclusion. The court’s conclusion does not seem to reflect the Commission’s intent when it proposed the 1983 amendments that it ultimately adopted without modification. In the 1982 Proposing Release, the Commission noted that, at the time, the staff declined no-action relief “where the proposal…reflected social or ethical issues…raised by the [company]’s business, and the [company] conducts any such business, no matter how small.” See the 1982 Proposing Release at 47428. However, in proposing to amend the predecessor paragraph, the Commission stated that “the staff’s existing interpretation of [the predecessor paragraph] may unduly limit the exclusion.” Id.

The 1998 amendments to paragraph (i)(7) elaborated on how the Commission and its staff apply the paragraph but did not purport to change the standard set forth in the 1976 Adopting Release. See Amendments to Rules on Shareholder Proposals, Release No. 34-40018 (May 21, 1998) [63 FR 29106 (May 28, 1998)] (the “1998 Adopting Release”), available at https://www.sec.gov/rules/final/34-40018.htm.

[78] The inverse of the standard can continue to be an exception to a company’s ability to exclude pursuant to paragraph (i)(5) or (i)(7).

[79] The Commission considered removing this requirement in the 1997 Proposing Release because changes to opposition statements were rarely made as a result of the process. In deciding to not remove this requirement in the 1998 Adopting Release, the Commission noted that shareholder proponents “believed that the potential for proponent objections deters companies from making materially false or misleading statements, and encourages negotiation between the company and proponent.” The 1998 Adopting Release at 29113. As discussed below, companies are already incentivized to not make materially false or misleading statements, and this requirement may harm, rather than encourage, negotiations.

[80] Shareholder Communications, Shareholder Participation in The Corporate Electoral Process and Corporate Governance Generally, Release No. 34-15384 (Dec. 6, 1978) [43 FR 58522 (Dec. 14, 1978)] (the “1978 Adopting Release”).

[81] In 1987, the Commission began to allow proxy statements soliciting votes for only certain matters, including rule 14a-8 shareholder proposals, to be filed directly in definitive form. Proxy Rules; Amendments to Eliminate Filing Requirements for Certain Preliminary Material; Amendments with Regard to Rule 14a-8, Shareholder Proposals, Release No. 34-25217 (Dec. 21, 1987) [52 FR 48977 (Dec. 29, 1987)].

[82] The 1978 Adopting Release at 58529. The Commission’s other two reasons for the requirement were (1) allowing the proponent to review the opposition statement was equitable and (2) resolving the opposition statement’s factual accuracy during the review period for the preliminary proxy statement was in the best interests of everyone. Id.

[83] 17 CFR 240.14a-6(a).

[84] See 17 CFR 240.10b-5 and 17 CFR 240.14a-9.

[85] Shortly before the 1978 Adopting Release, a judge in the Southern District of New York ruled that false and misleading statements opposing a precatory shareholder proposals could not be the basis of a violation of rule 14a-9. See Sisters of the Precious Blood, Inc. v. Bristol-Myers Co., 431 F.Supp. 385 (S.D.N.Y. 1977). However, in a different, later case, the Court of Appeals for the Second Circuit reached a different conclusion. See United Paperworks International Union v. International Paper Company, 985 F.2d 1190 (2d Cir. 1993).

[86] The 1978 Adopting Release at 58529.

[87] See 17 CFR 240.14a-8(m)(3)(ii). If the staff’s no-action response requires the proponent to revise its proposal, then the company must send the opposition statement within five days of receiving the revised proposal. 17 CFR 240.14a-8(m)(3)(i).

[88] The 1978 Adopting Release at 58529.

[89] Id. at note 22 and accompanying text.

[90] Because the opposition statement needs to be sent to the proponent 30 days before filing the definitive proxy statement, the company would need to receive the staff’s decision on its no-action request at least 40 days before such filing. In recent proxy seasons, companies generally have not receive no-action decisions by that time.

[91] See 17 CFR 240.14a-6(b) and 17 CFR 240.14a-12.

[92] For the 2023 proxy season, nine staff members were on this task force from approximately mid-December to mid-March.

[93] See the Statement on Informal Procedures at 29990-29991.

[94] See, e.g., the 1982 Proposing Release at 47430, the 1997 Proposing Release at 50683, and the 2019 Proposing Release at 66465.

[95] Despite the staff’s best efforts to be unbiased in its decisions, its participation in the process of evaluating whether an issue is social policy issue can lead to an appearance of bias. For example, the Society noted that, during the 2022 proxy season, companies were successful in 50% of its no-action requests involving “anti-ESG” proposals, compared to a 38% success rate across all proposals and 31% success rate across all social/political proposals. See comment letter from the Society (Sept. 13, 2022), available at https://www.sec.gov/comments/s7-20-22/s72022-20142742-308679.pdf. Many factors can explain these differences in success rate. However, the staff can avoid any perceptions that it is favoring one political group over another by not providing its views on this topic.

[96] Rule 14a-8(i)(1), which permits a company to exclude a proposal if the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.

[97] Rule 14a-8(i)(2), which permits a company to exclude a proposal if the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject.

[98] See 17 CFR 240.14a-8(j)(2)(iii).

[99] The Commission considered this reason for having the staff no longer issue no-action letters with respect to paragraphs (i)(1) and (i)(2). See the 1982 Proposing Release at 47430.

[100] If a company believes that excluding a proposal is appropriate under these paragraphs, then it can exclude the proposal without seeking no-action relief from the staff. Pursuant to rule 14a-8(j), the company would still need to file its reasons for excluding the proposal and provide a copy to the shareholder proponent.

[101] See Resales of Restricted and Other Securities, Release 33-6099 (Aug. 2, 1979) [44 FR 46752 (Aug. 8, 1979)].

[102] For the period from October 1, 2022 to March 31, 2023, requests for exclusion pursuant to paragraphs (i)(1), (i)(2), (i)(5), and (i)(7) accounted for 35% of all requests for exclusion. See supra note 14.

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