The Securities and Exchange Commission voted Wednesday to raise the requirements for investors who wish to submit a shareholder proposal and approved higher thresholds for resubmitting shareholder proposals in subsequent years.
In a 3-2 vote, with the commission's two Democrats dissenting, the SEC amended Exchange Act Rule 14a-8 by replacing the current ownership threshold to submit a shareholder proposal, which requires holding at least $2,000 or 1% of a company's stock for at least one year, with three alternative thresholds: $2,000 of the company's stock for at least three years; $15,000 for two years or $25,000 for one year, among other changes.
The SEC also raised the vote thresholds a proposal must get to be eligible for resubmission. Under the amendment, proposals must get at least 5% support in the first year, 15% in the second and 25% in the third in order to be resubmitted within a five-year span, up from the current thresholds of 3%, 6% and 10%, respectively.
SEC Chairman Jay Clayton said the amendments will modernize the commission's shareholder proposal regulations to the benefit of all shareholders and public companies. "A shareholder proponent should not be able to command the time and attention of the company and other shareholders to review, consider and vote on a proposal if 9 out of 10 votes cast by their fellow shareholders have been against the proposal after it's been submitted for a vote three or more times in five years," Mr. Clayton said.
Republican Commissioner Elad L. Roisman, who supported the amendments, said they aim to strike a better balance by ensuring that a shareholder who submits a proposal to a public company has interests that are more likely to be aligned with the other shareholders.
But Democratic Commissioner Allison Herren Lee said Wednesday's amendments, coupled with the SEC's action in July that requires proxy advisory firms to disclose conflicts of interests to clients and allows companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients, "collectively put a thumb on the scale for management in the balance of power between companies and their owners."
Ms. Lee added that the amendments will be most "keenly felt in connection" with environmental, social and governance issues and added that they will "restrict shareholders' ability to oversee and engage with management of the companies they own. They do not properly value shareholder proposals or shareholder rights. And they will restrain shareholder efforts on issues that are of pressing importance to them and to our broader economy."
Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, welcomed the SEC's actions and said its shareholder proposals rules were in need of an update. "The Eisenhower-era rules on shareholder proposals no longer reflected the needs of 21st-century investors and businesses," Mr. Quaadman said in a statement. "They allowed special-interest activists to push narrow agendas unrelated to the success of public companies and investor return."
Others, like Fiona Reynolds, CEO of the Principles for Responsible Investment, which represents more than 3,000 investors with more than $90 trillion in assets, see things differently. Ms. Reynolds said in a statement that the amendments hurt investors' ability to have their voices heard on key issues related to ESG factors.
"The rule amendments finalized today make it far more difficult for investors to use the shareholder process to encourage management to behave more responsibly on climate, human rights and other critical ESG issues that are material to the value of their investments," Ms. Reynolds said. "The SEC is setting a precedence that devalues the critical progress of ESG considerations by investors, and one that could potentially undermine the success of investment outcomes down the line."
In a separate statement, Andrew Behar, CEO of As You Sow, a non-profit organization promoting environmental and social corporate responsibility through shareholder advocacy and coalitions, said the amendments will "force shareholders to escalate to litigation and other means."
The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after Jan. 1, 2022.
