Legislative Threat to Shareholder Rights

Dimitri T.G. Zagoroff is Content Manager and Internal Consultant at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum.

Shareholder rights are once again under legislative threat.

Introduced May 10, HR 5756 would require the SEC to adjust resubmission thresholds for shareholder proposals. The language mirrors that of the Financial CHOICE Act in calling for substantial increases to the level of support required for proposals to stay on the ballot: the threshold for first-year submissions would double from 3% to 6% support; more than double from 6% to 15% for second-year, and treble from 10% to 30% in the third-year.

Like last year’s HR 4015, which sought to regulate proxy advisors, the bill was proposed by Rep. Sean Duffy (R-WI). Like HR 4015, the bill effectively recycles provisions of the CHOICE Act, itself stalled in the Senate, on a standalone basis. And like HR 4015, HR 5756 marks an attempt to push back against investors amid a rising swell of shareholder activism.

Shareholder proposals play an important role in ensuring that owners get a say in how their companies are run, and in setting the broader agenda across the market. Making it harder for shareholder proposals to be resubmitted from year to year would make it that much harder for proponents to refine their ideas and build a coalition of support. This often takes several years, both to generate interest in the underlying topic, and to convince other shareholders that the specific proposal offers the appropriate means of addressing the topic.

In recent years, issues like climate change and the gender pay disparity at tech companies have been brought to the fore after investors requisitioned proposals demanding that their boards take action—and kept pushing those proposals, even if they initially received low levels of support. Those advocating for a review of submission thresholds argue that the 3% requirement is too low: in 2017, of the 498 SHPs that went to a vote, only 24 got under 3%. However, increasing second and third-year thresholds by up to 3x, to 15% and 30% respectively, sets the bar extremely high and may serve to stifle discussion on key issues before they can gain traction. Moreover, for companies with dual-class share structures (like Tyson, Google and Facebook, all of which have seen shareholder proposals recently), 30% support from independent shareholders is effectively impossible to achieve.

With elections looming and the CHOICE Act still outstanding, it’s unclear whether anything will come of this latest bill. Regardless, coming off another proxy season marked by increasing support for shareholder proposals, investors should keep an eye on HR 5756, and any other CHOICE Act provisions that find new life in standalone bills.

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