Shareholder Proposals in Proxy Statements: Rules of the Road

Shareholders of a public company may desire to recommend certain actions to management or the board of directors. Under federal law, the rules for submitting shareholder proposals are set forth by the Securities and Exchange Commission (SEC). Specifically, SEC Rule 14a-8 governs the eligibility and procedural requirements for including a shareholder proposal in a company’s proxy statement.

The rules are intended to balance the competing objectives of providing public company investors with access to management while also discouraging frivolous shareholder proposals that are a distraction to the company. Under SEC Rule 14a-8, a shareholder proposal can be excluded from a company’s proxy statement if it fails to meet certain eligibility and procedural requirements or if the shareholder proposal falls within one of 13 subject matter exclusions set forth in the rule.

Common topics covered by public company shareholder proposals in recent years have included climate change impact disclosure, CEO succession planning, separation of the roles of CEO and chair of the board of directors, executive compensation, classified board structures, exclusive forum provisions, and diversity proposals.

Eligibility and Process Requirements:

In order for an investor to successful submit a shareholder proposal for inclusion in the company’s annual proxy statement, the investor must satisfy certain eligibility and procedural requirements.

Prior to the 1980s, a shareholder holding just a single share of a public company’s stock, even if held for a short period of time, was permitted to submit a shareholder proposal. The eligibility criteria for submitting a shareholder proposal have gotten more stringent over time.

Under the SEC’s current rules, the shareholder eligibility thresholds are based on a tiered system. If a shareholder meets the requirements of any of the following thresholds, the shareholder may submit a 14a-8 proposal: (i) continuous ownership of at least $2,000 in market value of the company’s securities entitled to vote for at least three years; (ii) continuous ownership of at least $15,000 in market value of the company’s securities entitled to vote for at least two years; or (iii) continuous ownership of at least $25,000 in market value of the company’s securities entitled to vote for at least one year.

The shareholder proposal, including any supporting statement, must not exceed 500 words. A shareholder is also limited to submitting one proposal per calendar year. The proposal should clearly articulate the specific issue and the desired course of action recommended to the company.

In addition, Rule 14a-8 requires that the shareholder submit a proposal sufficiently in advance. The notice provisions of Rule 14a-8 imposes specific deadlines. If you a submitting the 14a-8 proposal in advance of a company’s regularly scheduled annual meeting, the deadline is at least 120 calendar days before the date that the company released its proxy statement in connection with the previous year’s annual meeting.

Substantive Bases for Exclusion of a Shareholder Proposal:

Rule 14a-8 outlines 13 substantive bases for excluding a shareholder proposal from a company’s annual proxy statement. Those substantive categories include:

  1. Improper under state law
  2. Violation of law
  3. Violation of proxy rules
  4. Personal grievance; special interest
  5. Relevance
  6. Absence of power/authority
  7. Management functions
  8. Director elections
  9. Conflicts with company’s proposal
  10. Substantially implemented
  11. Duplication
  12. Resubmissions
  13. Specific amount of dividends

No-Action Requests:

A company seeking to exclude a shareholder proposal from its proxy statement should submit a no-action letter to the SEC that outlines its reasons for exclusion. This no-action letter usually must be submitted to the SEC no later than 80 calendar days prior to the company’s definitive proxy statement filing.

Board Discretion in Implementing Shareholder Proposals:

With the exception of a few specific items, under federal law companies are not forced to implement shareholder proposals that receive majority support. Rather it is left to the discretion of the company and its board of directors whether it is in the best interests of the company to implement the course of action recommended by the 14a-8 proposal. The board’s decision not to implement a shareholder proposal is generally protected by the business judgment rule, provided that an appropriate level of care was taken in arriving at the decision.

Common Shareholder Proposal Topics:

As expected, a significant number of proposals relate to requests for corporate governance changes by shareholders. Proposals pushing for increased climate disclosure, such as target setting related to carbon emissions, have picked up in recent years. Another category of 14a-8 proposals that have gained momentum in recent years relate to executive compensation. For example, shareholder proposals often target the link between equity grants to executive officers and performance. Compensation-related proposals also often focus on “golden parachutes,” which refer to the financial benefits guaranteed to certain high-ranking executives in the event that the company is sold and the executive is terminated as a result of the merger.