SEC Proposed Rule Amendments on Shareholder Proposals and Proxy Advisors: Implications for Issuers, Investors and Proxy Advisors

Abe Friedman is Partner and Head, Krystal Berrini is Partner, and Allie Rutherford is a Managing Director at PJT Camberview. This post is based on a PJT Camberview memorandum by Mr. Friedman, Ms. Berrini, Ms. Rutherford, Bob McCormick, and Eric Sumberg.

The Commissioners of the Securities and Exchange Commission (SEC) voted 3-2 on November 5 to propose amendments to rules governing shareholder proposals and proxy advisors. As proposed, the shareholder proposal rule would, among other changes, significantly raise both the ownership thresholds for shareholder proposal submissions and the vote outcome hurdles for proposal resubmissions. The proposed proxy advisor rules would label proxy research as proxy solicitation materials, require greater disclosure of conflicts and provide opportunities for issuers and activists to review and append commentary to the proxy advisors’ reports.

These proposed rules are the latest in a series of actions the SEC has taken on these two topics as part of the broader review of the Proxy Process which was begun in 2010 with the Concept Release on the U.S. Proxy System and reinvigorated in 2018 at the direction of SEC Chairman Jay Clayton.

Potential Impact of Proposed Amendments on Investor and Proxy Advisor Activities

The proposed rules appear primarily issuer-friendly, potentially limiting the number of shareholder proposal submissions and providing all U.S. issuers with two opportunities to review proxy advisor reports and append their commentary to these reports as well. However, these proposed changes may also drive investors to seek to influence issuers in ways that build upon or amplify emerging trends and encourage proxy advisors to adhere to check-the-box style governance. For example, if investors perceive their ability to influence the ESG and compensation practices of companies in which they are invested is limited by these proposed rules, they may:

  • Join or create issue-specific investor coalitions. Building on the momentum of certain environmental and sector-based coalitions, investors may turn with increasing frequency to the convening power of investor coalitions which seek change through letter writing, collective engagement and vote campaigns
  • Increase votes against directors. Investors may launch more campaigns against directors and/or vote against other proposals on the ballot to express their views in the absence of an opportunity to vote on shareholder proposals
  • Take a harder line on shareholder proposals. If fewer shareholder proposals make it to the ballot, asset managers may come under increased pressure to better demonstrate to asset owners (their source of capital) their commitment to stewardship through support for those proposals or enhanced disclosure around their engagement efforts, particularly in instances when they decline to support shareholder proposals

The proposed changes may have impacts on other elements of the voting process, such as:

  • Proxy advisors and certain investors may take a more black and white approach to vote decisions. The SEC’s proposed guidance regarding material omissions of fact may prompt proxy advisors to take a more rigid approach to following stated guidelines rather than taking a more case-by-case approach to evaluating management and shareholder proposals. Certain investors with more limited resources to dedicate to proxy voting and analysis may take a similar approach
  • Companies will have less time to engage with investors on the content of proxy advisor reports. The requirement for proxy advisors to provide two opportunities for review of their reports prior to publication may delay final publication of the reports, which would give investors less time to review reports prior to the vote deadline. This could limit investors’ ability to engage with companies to resolve any concerns or seek additional information which would allow them to make case-by-case determinations and potentially override existing voting guidelines
  • Activists and others soliciting votes will have equal access to proxy advisor reports. The proposed rules place issuers and investors conducting non-exempt solicitations (e.g. activists conducting a proxy contest) on equal ground with regard to their ability to review and append responses to proxy advisor reports. This would not apply to investors conducting exempt solicitations

Takeaways for Issuers

While the final form of these proposals will be shaped by input provided during the comment period, and any new requirements will be subject to a one-year transition period following publication of the final rule, the shifts in the landscape are already apparent. In recent years, many large institutional investors have sought to differentiate themselves by building out their stewardship and proxy voting teams, investing more resources in research and voting processes and creating their own models to better assess issuers’ governance, compensation and sustainability practices.

Looking ahead to the 2020 proxy season and beyond, boards and management teams should be prepared for an even less predictable investor environment. To stay ahead of these changes, issuers should prioritize engagement with investors that is tailored to company-specific circumstances, understand investors’ voting policies, models and ESG priorities, and continue to build relationships with the individuals responsible for making voting decisions.

Recent SEC Actions on the Proxy Process and Specifics of Recent Proposed Changes

In recent months, the SEC has taken action on proxy advisors and shareholder proposals through Commission-level interpretation and guidance as well as policy announcements from the Division of Corporation Finance:

  • In August 2019, the SEC released Commission-level interpretation and guidance that clarified prior staff guidance issued in SLB 20 in 2014 that proxy advisor vote recommendations are considered solicitations under securities laws and as a result are subject to the anti-fraud provisions of Exchange Act Rule 14a-9 relating to proxy voting advice. In addition, the SEC released concurrent Commission-level guidance directed to investment advisors in regard to their proxy voting responsibilities and the extent to which they can rely on proxy advisors for advice on proxy voting decisions
    • In October 2019, ISS announced that it had filed suit against the SEC challenging the legality of the process by which the guidance was promulgated as well as the substance of the SEC’s view of what constitutes a solicitation
  • In September 2019, the Division of Corporation Finance announced that as part of its effort to efficiently and effectively provide guidance in the “no-action” process, its staff would no longer provide written responses to issuers and shareholder proponents in all instances where a company seeks to exclude a shareholder proposal from its proxy statement. Instead, beginning in 2020, the staff may respond in writing (when it “believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8”), orally and in some cases may not provide any response at all. The SEC has said publicly that it will furnish on its website a chart that tracks the staff’s actions on “no-action” requests

The amendments proposed earlier in November build upon and, in some instances, supersede the SEC’s prior actions. Both proposals will be published in the Federal Register in the coming days, which will commence a 60-day public comment period. Notable highlights include:

Shareholder Proposals

The SEC proposes:

  • Updating the ownership thresholds for shareholders to submit a proposal from $2,000 or 1% of a company’s securities for one year to at least $2,000 of company stock for at least three years, at least $15,000 for at least two years, or at least $25,000 for at least one year;
  • Requiring that shareholder proponents state that they are able to meet with the target company in person or on the phone between 10 and 30 calendar days from submission and provide contact information and dates to meet;
  • Updating the “one proposal” rule to clarify whether a single person can submit more than one proposal at the same meeting regardless of whether they are the proponent or representative of a shareholder on whose behalf they are submitting a proposal; and
  • Raising resubmission thresholds for shareholder proposals:
    • The current resubmission thresholds of 3%, 6% and 10% of votes cast for matters voted on, respectively, once, twice or three or more times in the last five years would be increased to thresholds of 5%, 15% and 25%, respectively
    • Further, notwithstanding if a shareholder proposal received at least 25% of the votes cast on its most recent submission, a new provision would prohibit resubmission if the proposal has been voted on three or more times in a five-year period and it (1) has not received majority support or (2) experienced a decline of 10% or more compared to the immediately preceding vote

Proxy Advisors

The SEC proposes:

  • Codifying that a person furnishing proxy voting recommendations, research and analysis is considered to be engaging in proxy solicitation. This proposed amendment would codify the interpretation and guidance provided in August by the Commission.
  • Revising rules regarding exemptions from the information and filing requirements of the proxy rules, conditioning the granting of those exemptions to proxy advisors on their adherence to the following conditions:
    • Disclosure of material conflicts of interest in proxy voting advice such as any material interests of the proxy advisor in the matters about which it is providing advice, material relationships to registrants, other soliciting persons or shareholder proponents to whom it is providing advice, any other information regarding the interest, transaction or relationship of the proxy advisor or affiliate that is material to assessing the proxy voting advice in light of the particular interest, transaction or circumstances and the policies and procedures in place to identify and address such conflicts;
    • Providing an opportunity for issuers and those who are soliciting to give feedback on proxy advisor reports prior to issuance. This period would be five business days if a proxy is filed 45 calendar days prior to an annual meeting and three business days if it is filed between 45 and 25 calendar days prior to a meeting. If a proxy is filed within 25 calendar days of the meeting, there would be no obligation for the proxy advisor to allow for this opportunity to maintain its exemption; and
    • Providing an opportunity for issuers and those who are soliciting to review a final report no later than two business days prior to its publication to proxy advisor clients (regardless of whether the company or soliciting person previously availed themselves of the opportunity to review the report). Issuers and those who are soliciting would be allowed to provide a written response that would be included via hyperlink in the final proxy advisor report
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