The right of shareholders to vote is a key element of stock ownership, but the questions of how shareholders may vote and what matters are submitted for consideration at the annual meeting are surrounded by controversy. Issues such as investor access to management’s proxy and the use of a universal ballot remain contentious, and each year public companies face the challenge of dealing with proposals submitted by shareholders for inclusion in the annual proxy statement.
Exchange Act Rule 14a-8 governs the shareholder proposal process. In this rule, the SEC established the eligibility requirements for shareholders who seek to submit a proposal to the company, and also sets out procedural and substantive grounds that companies may use to exclude proposals from the proxy statement.
Recently, the Business Roundtable, an association of corporate CEOs, said that the Rule 14a-8 process “is outdated and needs modernization.” According to the Roundtable, the process, originally intended to replicate attendance and participation by shareholders at annual meetings, has evolved into a vehicle for minority investors to pursue special interests “which have no rational relationship to the creation of shareholder value and conflict with what an investor may view as material to making an investment decision.”
According to the Roundtable, the current eligibility requirements are no longer appropriate in today’s markets. The minimum ownership threshold, according to the Roundtable, “falls well short of any reasonable material ownership standard for public companies.”
Before the early 1980s, no eligibility thresholds applied to shareholder proposals, and owners of single shares could submit matters for inclusion in the proxy. The SEC imposed minimum ownership requirements in 1983, and currently, a shareholder must have continuously held at least $2,000 in market value, or 1 percent of the company’s securities for at least one year as of the date the shareholder submits the proposal. According to the Roundtable, during a recent proxy season, shareholder holdings in companies at which they submitted shareholder proposals ranged from a low of $2,172 to a high of $16,433 in dollar amount ownership, and from a low of .000003 percent to a high of .00008 percent in percentage ownership.
The Roundtable suggested that the SEC should use a holding requirement based solely on the percentage of stock ownership, with a required ownership percentage of 0.15 percent for proposals submitted to the largest companies and up to 1 percent for proposals submitted to smaller companies. Additionally, if a proposal were submitted by a group or by a proponent acting by proxy, the Roundtable suggested that the ownership percentage be increased to up to three percent. The group also suggested that a longer holding period, such as three years instead of the current one, would better align the interests of shareholder proponents with the long-term success of the company.
The changes suggested by the Roundtable would foreclose access to the shareholder proposal process to all but the largest institutional investors. This appears to be a rather drastic solution, given that despite the rather accessible ownership threshold, public companies are not awash in shareholder proposals. There are nearly 6,000 companies listed on either the New York Stock Exchange or NASDAQ, with thousands more listed on smaller exchanges or traded over the counter. These companies receive roughly 900 proposals combined in an average year, and most focus on a few well-defined categories, so that companies can anticipate and prepare for the proposals they receive.
One Roundtable suggestion that could improve the process involves the actual nuts and bolts of requesting relief. The group noted that the Rule 14a-8 no-action letter process is administered by the staff, with little input at the Commission level. In the Roundtable’s view, this decentralized, issue-by-issue review leads to inconsistent guidance and interpretation of the rules, especially over the course of time. The process also lacks transparency, as the staff rarely explains the reasoning that led to any particular result.
The Roundtable said that the process could be improved by using SEC advisory opinions rather than no-action letters. The Commission, rather than the staff, would issue opinions on major policy issues rather than dealing with questions one at a time through the Rule 14a-8 process. Alternatively, if the SEC retains the current no-action letter process, the group urged the Commission to establish enhanced review and oversight mechanisms to achieve greater consistency and transparency.