Dive Brief:
- The Securities and Exchange Commission on Wednesday formally proposed rescinding Rule 14a-8, advancing a widely-anticipated move reforming processes for shareholder proposals and proxy solicitations.
- The plan to revoke the federal rule, which establishes when companies must include shareholder proposals sometimes used by activist investors in proxy materials, shifts those decisions to be made according to state law and company governing documents, according to an SEC fact sheet. Simultaneously, the SEC also proposed to give companies more discretion and authority over matters that can be voted on in shareholder meetings.
- SEC Chair Paul S. Atkins said the proposal isn’t an attempt “to silence shareholders” but rather a “recognition” that Congress has not granted the SEC authorization to regulate the matter. “Companies and their shareholders should look to the state’s legislature — and if permitted by the state, the company’s governing documents — for the framework governing shareholder proposals, and resolve disputes in the state’s courts or other permitted forums,” Atkins said in a statement.
Dive Insight:
The moves come as Atkins continues to reshape securities rules. It follows on the heels of the agency’s proposal to make optional quarterly reporting by public companies.
In his statement Atkins said the Wednesday proposals reflect two of his higher priorities including ensuring the SEC doesn’t “intrude into” state corporate law and updating commission rules to reflect new market practices and technology.
The SEC also separately proposed several other proxy-related rule amendments, including a plan to eliminate the requirement that companies deliver an annual report to shareholders, ditch the deadline for when documents must be incorporated by reference in a proxy statement, and remove the requirement and ability to submit notices of exempt solicitation.
The public comment period will extend for 60 days following the proposals’ publication in the Federal Register, after which the SEC staff will review the feedback and consider whether to make any changes. An SEC spokesperson declined to comment on the proposal’s expected timeline.
Exactly how big a change it will be appears to depend on the players involved, with the plan drawing mixed reactions. Some decried it as a rollback of long-established rules that give investors a voice in the companies they have a stake in while others called it a win for companies or boards.
"For too long, special interests have exploited Rule 14a-8 to advance their own agendas at the expense of public companies and their shareholders," said Mike Flood, senior vice president of the U.S. Chamber's Center for Capital Markets Competitiveness, praising the SEC for ongoing work that is “encouraging more businesses to go public."
Ann Lipton, a professor at University of Colorado’s Colorado Law school, views it as a win for boards rather than investors who could previously use the current system to propose ideas like staggering boards to help improve how companies are run.
The proposal removes federal rules in place for decades that were designed to provide an avenue for investors to have a say in company operations as the organizations grew and shareholders became more dispersed, she said. Under the newly proposed rules the effort and burden related to shareholder proposals will be shifted to investors.
“If shareholders want to make a proposal they have to print their own proxy materials and pay to circulate them,” Lipton said in an interview, estimating that the cost of such a campaign could rise as high as $20,000 and asserting that it would effectively silence shareholders despite Atkin’s comments to the contrary. “It would be an awful lot of expense.”
Activist investor Mike Levin, who recently discussed the issue on the Shareholder Primacy podcast he co-hosts with Lipton, said the change would reduce a “perceived nuisance” for companies, though he expects a minority of companies to still include resolutions submitted by investors in their proxies.
He also said he expects it to have a “minimal impact” on financial activists such as himself who rarely use the process. In contrast, he sees it as a big setback for ESG-focused investors.
“For ESG investors that live and die by precatory proposals, this is an enormous change and problem,” Levin wrote in an email. Those type of investors used the proxy materials “as a means of promoting their platform or message, and they’ll need to find other channels for doing so.”
