At an open meeting on November 5, 2019, the U.S. Securities and Exchange Commission (SEC) voted to propose amendments to 1) the exemptions from “solicitation” relied upon by proxy advisory firms and 2) certain of the procedural and substantive requirements relating to shareholder proposals.
A more detailed description of the proposed amendments can be found below. The SEC is accepting public comments on the proposed rules within 60 days of their publication in the Federal Register, and comments can be submitted here.
Proxy Voting Advice
On August 21, 2019, the SEC issued an interpretive release providing guidance on the applicability of the federal proxy rules to proxy voting advice, including, among other things, that 1) proxy voting advice constitutes a “solicitation” under the federal proxy rules and 2) proxy voting advice is subject to Rule 14a-9, the antifraud provisions of the federal proxy rules.
Following on the August interpretive release, last week, the SEC proposed amendments to the federal proxy rules relating to what it refers to as “proxy voting advice businesses,” or companies retained by investment advisers and other institutional investors “to assist them in making their voting determinations on behalf of clients and to handle other aspects of the voting process.” According to the SEC, these amendments aim “to enhance the accuracy and transparency of the information that proxy voting advice businesses provide to investors and others who vote on investors’ behalf, and thereby facilitate their ability to make informed voting decisions.” The SEC notes that, to its knowledge, there are five major proxy voting advice businesses, including Institutional Shareholder Services (ISS) and Glass Lewis & Co. The proposed amendments include the following.
- Solicitation. The proposed amendments codify the SEC’s position in the interpretive release that proxy voting advice is a “solicitation” for purposes of the federal proxy rules. Specifically, the definition of “solicitation” under Rule 14a-1(l) of the Securities Exchange Act of 1934 (Exchange Act) would be amended to include “any proxy voting advice that makes a recommendation to a security holder as to its vote, consent, or authorization on a specific matter for which security holder approval is solicited, and that is furnished by a person that markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice, and sells such proxy voting advice for a fee.” The SEC clarified that this amended definition would exclude responses by persons (such as broker-dealers or investment advisers) to unprompted requests from their clients for voting advice.
- Exemptions from Solicitation. Generally, proxy voting advice businesses rely on certain exemptions1 from the various filing and information requirements under the proxy rules. The proposed amendments condition the use of these exemptions by proxy voting advice businesses (but not others seeking to rely on these exemptions) on compliance with the following requirements:
- Disclosure of Material Conflicts. Proxy voting advice businesses would be required to disclose all material conflicts of interest in sufficient detail so that their clients “can understand the nature and scope of the interest, transaction, or relationship to appropriately assess the objectivity and reliability of the proxy voting advice they receive” (i.e., boilerplate language would not be sufficient). In addition, proxy voting advice businesses would be required to disclose their “policies and procedures, if any, used to identify and steps taken to address such potential and actual conflicts of interest.” All of these disclosures would be required to be disclosed with, and at the same time as, the proxy voting advice.
- Review and Comment Period. Proxy voting advice businesses would be required to provide the applicable company with three business days to review and provide feedback on the proxy voting advice if the company’s proxy statement is filed at least 25 days but less than 45 days prior to the meeting date, and five business days to review and provide feedback if the proxy statement is filed 45 or more days prior to the meeting date. No review period is required to be provided if the proxy statement is filed less than 25 days prior to the meeting date. In addition, proxy voting advice businesses must provide a copy of their final voting advice to the applicable company no later than two business days prior to delivery of such proxy voting advice to their clients. Proxy voting advice businesses would also need to extend these accommodations to any persons conducting non-exempt solicitations. Notably, proxy voting advice businesses would not be required to accept or incorporate any of the feedback received. In addition, proxy voting advice businesses would be permitted to require companies (or other persons conducting non-exempt solicitations) to keep the proxy voting advice confidential as a condition to receiving it, at least until the advice is disseminated to one or more of the proxy voting advice business’s clients.
- Inclusion of Written Statement. Upon request by the applicable company, proxy voting advice businesses would be required to include in their proxy voting advice a hyperlink (or other similar medium) to a written statement prepared by the company in response to the proxy voting advice. The hyperlink must be provided to the applicable proxy voting advice business by the company no later than the expiration of the two-business-day period following the date on which the company receives a copy of the final voting advice. This statement would be considered a “solicitation” under the federal proxy rules. Thus, it would be subject to Rule 14a-9 and the company would be required to file its statement as supplemental proxy materials with the SEC. Proxy voting advice businesses would also need to extend these accommodations to any persons conducting non-exempt solicitations.
If proxy voting advice businesses do not comply with the above requirements (subject to limited exceptions), the typical exemptions would not be available, and the proxy advisors must find another exemption, or comply with the applicable information and filing requirements, including, but not limited to, preparing and filing a separate proxy statement and proxy card, as well as furnishing those items to the shareholders that are being solicited. - Amendments to Rule 14a-9. The proposed amendments add to the list of examples of information that may be misleading under Rule 14a-9 to “highlight the types of information that a proxy voting advice business may, depending upon the particular facts and circumstances, need to disclose to avoid a potential violation of the rule.” This includes failures to disclose “the proxy voting advice business’s methodology, sources of information, conflicts of interest or use of standards that materially differ from relevant standards or requirements” (for example, some proxy voting advice businesses use heightened director independence standards that differ from SEC or stock exchange requirements).
Shareholder Proposals
The SEC also proposed amendments to “modernize” the procedural requirements and resubmission thresholds under Rule 14a-8. Under this shareholder proposal rule, generally, shareholders can submit proposals to the company for inclusion in the company’s proxy statement. Companies may exclude these proposals from their proxy statements if the proposal fails to meet any of several substantive requirements, or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements. The proposed amendments include the following.
- Ownership requirement. Under the existing rule, a shareholder-proponent must own at least $2,000 in market value or 1 percent of a company’s voting securities for at least one year. The proposed amendments provide for a tiered approach to ownership requirements, with a shareholder being eligible to submit a proposal if the shareholder continuously held at least: $2,000 of the company’s voting securities for at least three years; $15,000 of the company’s voting securities for at least two years; or $25,000 of the company’s voting securities for at least one year.
- Representatives. In some cases, representatives may submit proposals on a shareholder’s behalf. The proposed amendments require that shareholders who use representatives “provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf.” The SEC believes that this amendment would help to make clear that the representative has been authorized to act on the shareholder’s behalf and “would help to ensure that the interest being advanced by the proposal is the shareholder’s own.”
- Shareholder-Company Engagement. The proposed amendments require that the shareholder-proponent provide a statement to the company “that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal.” This statement would need to include contact information and the days and specific times that the shareholder-proponent is available to meet with the company to discuss the proposal. The SEC believes that this new requirement “would encourage shareholders to engage with companies, and could facilitate useful dialogue between the parties…potentially leading to a more mutually satisfactory and less burdensome resolution of the matter.”
- One Proposal Limit. The proposed amendments revise the existing one-proposal limit in Rule 14a-8(c) to apply to each person rather than each shareholder. The proposed amendments also broaden the rule 1) to prohibit a shareholder from submitting a proposal in its own name and also acting as a representative and submitting a proposal on behalf of another shareholder at the same company, and 2) to prohibit a representative from submitting more than one proposal at a meeting (even if the representative is representing different shareholders).
- Resubmission Thresholds. Under the existing rule, “if the proposal deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years, a company may exclude it from its proxy materials for any meeting held within 3 calendar years of the last time it was included if the proposal received: less than 3% of the vote if proposed once within the preceding 5 calendar years; less than 6% of the vote on its last submission to shareholders if proposed twice previously within the preceding 5 calendar years; or less than 10% of the vote on its last submission to shareholders if proposed three times or more previously within the preceding 5 calendar years.” The proposed amendments increase these thresholds to 5 percent, 15 percent, and 25 percent, respectively. In addition, the proposed amendments provide for a three-year cooling-off period by allowing companies to exclude proposals that have been submitted three or more times in the preceding five years if 1) they received more than 25 percent, but less than 50 percent, of the vote and 2) support declined by more than 10 percent from the last time that a vote occurred on substantially the same subject matter.
For more information on the SEC’s proposed amendments, including how to provide comments to the SEC, or any related matter, please contact any member of the firm’s public company representation practice.
1 In its proposal, the SEC stated that “[p]roxy voting advice businesses typically rely upon the exemptions in Rule 14a-2(b)(1) and Rule 14a-2(b)(3) to provide advice without complying with the filing and information requirements of the proxy rules.”