The U.S. Chamber of Commerce and several associations have submitted a joint comment letter objecting to the SEC’s July 2022 proposal to alter the conditions under which companies may exclude shareholder proposals from their proxies based on substantial implementation, duplication, or resubmission arguments. They believe that the proposal will empower parties that have little stake in public companies to pursue financially immaterial objectives. The letter’s signatories include the American Securities Association, Nareit, the National Association of Manufacturers, and NIRI: The Association for Investor Relations.
Proposal. The SEC proposed to amend three of the 13 bases on which a company may rely to exclude a shareholder proposal from its proxy materials, as follows:
- Substantial Implementation. The amendments would specify that a proposal may be excluded under this provision if the company has already implemented the “essential elements” of the proposal.
- Duplication. The amendments would state that a proposal “substantially duplicates” another proposal previously submitted for the same shareholder meeting if it addresses the same subject matter and seeks the same objective by the same means.
- Resubmission. The amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company’s prior shareholder meetings.
The commenters noted that in 2020, the SEC adopted changes to Rule 14a-8, including amendments to the rules governing resubmissions of proposals and disclosures regarding a proponent’s identity and economic interest in the underlying company (the 2020 Reforms). They argued that the 2020 Reforms were informed by a long examination of the proxy process by the SEC and Congress and were carefully calibrated to maintain the ability of long-term investors to submit proposals.
Empowering activists. In their view, the proposal in question undermines the 2020 Reforms and tilts the scales in favor of shareholder activists. They cited a Sullivan & Cromwell report which identified a trend toward a small group of activists and activist funds submitting a majority of proposals. In 2022, they said, ten proponents were responsible for 60 percent of all proposals submitted.
They argued further that many of the proposals deal with social, political, and environmental issues which have garnered very little support from retail investors. They pointed to a 2021 report from Broadridge which stated that environmental and social proposals were supported by 18 percent of shareholders in the 2021 proxy season, while 19 percent of shareholders supported proposals calling for greater disclosure about political spending. Dealing with shareholder proposals is costly, they stated, and the SEC’s proposal will force companies to incur those costs for proposals that are not widely supported.
Subjective determinations. The commenters believe that the proposed changes to Rule 14a-8(i)(10) will lead to subjective determinations as to whether an issuer has already substantially implemented all of the “essential elements” of a proposal. Similarly, the proposed changes to the definition of “substantially duplicates” under Rule 14a-8(i)(11) and Rule 14a-8(i)(12) will not provide issuers with any kind of clear guidelines to determine whether a proposal is excludable, they said. In their opinion, this could result in multiple proposals containing similar requests of issuers to be voted on and approved at the same annual meeting or year after year.
Regarding proposed changes to resubmission thresholds, the commenters asked the SEC to drop consideration of any further amendments that would undermine changes to the resubmission thresholds included in the 2020 Reforms. They noted that the increase in resubmission thresholds included in the 2020 Reforms was a long-considered change that should not be undone by effectively leaving it to proponents to determine whether a proposal “substantially duplicates” a previously submitted proposal that received low support.
The commenters also are of the view that the SEC failed to provide sufficient evidence or economic analysis to show that the proposal is in the best interest of investors. They said that the proposal’s economic analysis does not adequately consider the costs of the current system or estimate the effect that no-action relief has on stock performance. Given that the proposal will likely result in fewer no-action requests granted by SEC staff, they argued that the Commission should conduct a more thorough analysis about the overall economic impact of the proposal prior to adopting a final rule.