Exclusion Preclusion: Statement on the Shareholder Proposals Proposal
July 13, 2022
Thank you, Mr. Chair. As you just heard, this recommendation concerns Exchange Act Rule 14a-8, the rule that governs when public companies must include shareholder proposals in their proxy statements. We last amended this rule less than two years ago and have yet to experience a full proxy season with these changes in effect. The September 2020 amendments recalibrated the rule to balance the benefit of allowing shareholder proposals to be included in a company’s proxy materials with the reality that consideration of such proposals consumes company and shareholder resources.
I cannot support today’s plan to upset that careful calibration by narrowing companies’ ability to exclude proposals that they have substantially implemented, are duplicative of other proposals, or are resubmissions of prior failed proposals. A better approach would be for the Commission to allow sufficient time to see how our 2020 rules operate, and then review the results to determine whether further changes are appropriate.
The Proposing Release speaks in dramatic terms of “shareholder suffrage,” but shareholders’ ability to vote in corporate elections is not at issue. Rather, the proposal we are considering is about whether shareholders have to vote on the same issues over and over again. The Proposing Release also speaks in pragmatic terms of reducing subjectivity in our shareholder proposal process. That objective is commendable to ensure consistency over time and across different companies and proponents. The proposed amendments, however, introduce new terms for our staff to interpret and market participants to debate. Any new ambiguity is likely to be resolved in favor of favored shareholder-proponents, and any new clarity is likely to narrow the three exclusion categories. Let me briefly address each of the three bases for exclusion at issue in this proposal.
- Rule 14a-8(i)(10) – Substantial Implementation
Under Rule 14a-8(i)(10), a company can exclude a shareholder proposal that “the company has already substantially implemented.” The release introduces a new test for assessing whether a company can exclude a proposal on this basis: whether or not “the company has already implemented the essential elements of the proposal.” What constitutes an “essential element” is not clear, but the release suggests that staff will defer to shareholder-proponents’ assessment of which elements are essential; the Proposing Release explains that “[i]n determining the essential elements of a proposal, we anticipate that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis.” The examples offered in the release describe as essential elements the ability to aggregate an unlimited number of shareholders’ holdings in a proxy access proposal and board authorship in a reporting provision. Another observer could easily conclude that these details are not at the heart of those proposals. Subjectivity lives on.
- Rule 14a-8(i)(11) – Duplication
Rule 14a-8(i)(11) allows a company to exclude a proposal that substantially duplicates another proposal that will appear on the company’s proxy card. The Proposing Release explains that, in assessing whether a proposal substantially duplicates another, the staff historically has looked at whether a new proposal shares the same “principal focus” as an earlier submitted proposal. The proposed new test will assess whether potentially duplicative proposals “address the same subject matter and seek the same objective by the same means.” Clarity in this case seems to mean defanging the exclusion. Unless proposals are seeking exactly the same things, it seems that neither will be excludable as duplicative. The likely result — one the Proposing Release acknowledges — is multiple potentially overlapping or even conflicting proposals on the same topic on the same proxy. Shareholder proponents, come one, come all!
- Rule 14a-8(i)(12) – Resubmissions
Under Rule 14a-8(i)(12), a company may exclude from its materials a shareholder proposal that addresses “substantially the same subject matter as a proposal . . . previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and received support below specified vote thresholds on the most recent vote. When this basis for exclusion was first introduced, a company could exclude a proposal only if it was substantially the same as a prior proposal that had failed to gain the specified amount of support. Proponents easily were able to evade exclusion of their proposals by recasting the form of the proposal, expanding its coverage, or changing its language such that it was not identical to a prior proposal. In 1983, the Commission, disavowing the strict interpretation of this exclusion, revised the rule so that a proposal would be excludable if it dealt with “substantially the same subject matter” as prior failed proposals.
Nearly 40 years later, we seem to have forgotten the lessons that motivated the 1983 amendments. The new proposal would exclude only proposals that “substantially duplicate” prior failed proposals, and incorporate the same new test we propose to introduce for the duplication exclusion: does the new proposal address the same subject matter and seek the same objective by the same means? The Proposing Release explains that the existing “standard unduly constrains shareholder suffrage because of its potential ‘umbrella’ effect — i.e., that it could be used to exclude proposals that have only a vague relation, or are not sufficiently similar, to earlier proposals that failed to receive the necessary shareholder support.” The proposed replacement test also suffers from another umbrella effect, i.e., that it will be used to shield shareholder proponents from the consequences of their failed votes. As with the duplication exclusion basis, the resubmission basis will not exclude any proposal unless it is nearly identical to a prior proposal. The shareholder proponents of today will seize on this new language to get around the resubmission limits just as their pre-1983 counterparts did with the “substantially the same proposal” standard in effect at that time.
A consideration of more recent Commission history only heightens concerns about this part of the proposal. The Commission’s September 2020 amendments increased the levels of support a shareholder proposal must receive to be eligible for resubmission at the same company’s future shareholders’ meetings from 3, 6, and 10 percent to 5, 15, and 25 percent, depending on how many times the proposal has been put to a vote. In conjunction with this change, as the Proposing Release acknowledges, the Commission specifically requested comment on whether it should change the resubmission exclusion basis or its application and, after considering the comments, declined to do so. As the Commission explained, the amended resubmission thresholds were designed to “lead to the submission of proposals that will evoke greater shareholder interest in, and foster more meaningful engagement between, management and shareholders, as the thresholds will incentivize shareholders to submit proposals on matters that resonate with a broader shareholder base to avoid exclusion under the rule.” A change in the wording or application of the exclusion to make it harder for companies to use would run directly counter to that objective.
We have not gone a full proxy season with these changes in effect, and already we are proposing rules that would directly undermine their purpose. If no two proposals will ever be judged duplicative under our standards, then no proposal would ever be deemed a “resubmission” at all. What is the purpose of resubmission thresholds?
I will conclude with a prediction: if this proposal is adopted, company proxy statements are likely to look like our rulemaking agenda—packed with items, many of which overlap with one another and rehash recently completed matters. I look forward to hearing whether commenters agree and would love to see evidence to the contrary. I am interested in hearing commenters’ responses to the following questions, among others:
- Would the proposed changes bring welcome clarity to companies and their shareholders?
- Would companies decide, given the small chance that the staff will grant their requests under the new standards, to stop seeking no-action relief to exclude proposals? If so, in light of all the time our staff spends on shareholder proposal no-action requests, would this result be good?
- How could we improve the proposal to ensure that these exclusions meet the Goldilocks test — excluding only the shareholder proposals that should be excluded?
The likelihood of receiving thoughtful comments in response to these questions and the many others in the proposal is diminished by the Commission’s continued unwillingness to afford adequate time for public comment. This proposal comes with a comment period of the later of thirty days from the date of publication in the Federal Register or sixty days from the date of website publication. For a proposal weighing in at less than 100 pages and limited in scope, such a comment period might seem acceptable. It is still shorter than the standard comment period. Moreover, in the past few months, we also have asked public companies to provide feedback on potential new requirements for: disclosure of requirements for cybersecurity risk and climate change, clawbacks, pay versus performance, and 10b5-1 plans. Investment advisers and investment companies have been asked to comment on all of these as well as: ESG rules, naming requirements for funds, cybersecurity risk management, and more. Viewed in this light, formulating comments on this proposal in the next sixty days seems like a much more daunting task.
In closing, I want to thank the staff in the Divisions of Corporation Finance and Risk and Economic Analysis and the Office of General Counsel and other offices throughout the Commission. In particular, I want to thank Kasey Robinson, who worked so hard on this rulemaking and expertly guided me through a series of before and after hypotheticals.
 Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Exchange Act Release No. 34-95267 (July 13, 2022) (https://www.sec.gov/rules/proposed/2022/34-95267.pdf) [hereinafter “Proposing Release”].
 Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, Exchange Act Release No. 34-89964 (Sept. 23, 2020), 85 Fed. Reg. 70240 (Nov. 4, 2020) [hereinafter “2020 Adopting Release”].
 Proposing Release, supra note 1, at 6.
 Proposing Release, supra note 1, at 6-7.
 17 CFR § 240.14a-8(i)(10).
 Proposing Release, supra note 1, at 14.
 Id. at 14.
 Id. at 15-16.
 17 CFR § 240.14a-8(i)(11).
 Proposing Release, supra note 1, at 17.
 Id. at 19.
 Id. at 20.
 17 CFR § 240.14a-8(i)(12).
 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 Fed. Reg. 47420, 47429 (Oct. 26, 1982).
 See Proposing Release, supra note 1, at 24.
 Id. at 27.
 See 2020 Adopting Release, supra note 2, at 70288.
 Id. at 70259.
 Proposing Release, supra note 1, at 1.
 Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Exchange Act Release Nos. 33-11038, 34-94382, 87 Fed. Reg. 16590 (Mar. 23, 2022).
 The Enhancement and Standardization of Climate-Related Disclosures for Investors, Exchange Act Release No. 34-94478, 87 Fed. Reg. 21334 (Apr. 11, 2022).
 Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Exchange Act Release No. 34-95057, 87 Fed. Reg. 35938 (June 14, 2022).
 Reopening of Comment Period for Pay Versus Performance, Exchange Act Release No. 34-94074, 87 Fed. Reg. 5751 (Feb. 2, 2022).
 Rule 10b5-1 and Insider Trading, Exchange Act Release No. 34-93782, 87 Fed. Reg. 8686 (Feb. 15, 2022).
 Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Investment Advisers Act Release No. 34-94985, 87 Fed. Reg. 36654 (June 17, 2022).
 Investment Company Names, Investment Company Act Release No. 33-11067, 34-94981, 87 Fed. Reg. 36594 (June 17, 2022).
 Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Investment Advisers Act Release No. 33-11028, Investment Company Act Release No. 34-94197, 87 Fed. Reg. 13524 (Mar. 9, 2022).
 SEC Proposed Rules, SEC, https://www.sec.gov/rules/proposed.shtml (last visited July 13, 2022).