Today, the Securities and Exchange Commission (SEC or Commission) adopted amendments to the Shareholder Proposal Rules (Shareholder Proposal Rule) to modernize and increase the share ownership requirement for submitting shareholder proposals and the voting thresholds for resubmitting a proposal that previously failed to gain a majority vote. Nareit has long urged the SEC to raise these two thresholds, which have not been substantively amended since 1998 and 1954, respectively. The Shareholder Proposal Rule, adopted on a 3-2 vote, with the two Democratic Commissioners dissenting, will become effective for all shareholder meetings to be held on or after Jan. 1, 2022.
Addressing the resubmission thresholds for re-proposing failed shareholder proposals has been a top Nareit proxy policy objective in the last few years. On Feb. 3, Nareit submitted a comment supporting the SEC’s Nov. 5, 2019 proposal (2019 Proposal) that formed the basis of this final rule, which was developed with the assistance of a task force of Nareit member volunteers. Nareit also worked over a period of years with several other business and industry groups such as the U.S. Chamber of Commerce to advocate for these reforms and met with relevant SEC Commissioners and staff several times, often with small groups of Nareit corporate members, to urge the SEC to reassess these rules.
Below is a summary of the key features of the Shareholder Proposal Rule.
Rule 14a-8(b) – Eligibility Requirements for Introducing a Shareholder Proposal
In his statement at today’s meeting, Chairman Jay Clayton emphasized that updating the current $2,000 threshold/one-year minimum ownership requirement for introducing a shareholder proposal, which has been unchanged since its 1998 adoption, is long overdue. In the final rule, the SEC adopted the sliding eligibility requirement set forth in the 2019 Proposal, which will require that a shareholder-proponent must continuously hold at least:
- $2,000 of the issuer’s securities for at least three years; or
- $15,000 of the issuer’s securities for at least two years; or
- $25,000 of the issuer’s securities for at least one year.
As an accommodation to concerns expressed in comments about possible curtailment of the rights of current shareholders, the final Shareholder Proposal Rule provides that investors who currently are eligible to submit proposals under the current $2,000 threshold/one-year minimum holding period, but currently do not satisfy the new requirements, will continue to be eligible to submit proposals through the expiration of a transition period extending to all annual or special meetings held prior to Jan. 1, 2023, provided they continue to hold at least $2,000 of an issuers securities.
The final amendments to the 14a-8(b) eligibility requirements also adopt several other new requirements set forth in the 2019 Proposal. These include:
- A new requirement that a shareholder-proponent be available to meet with the issuer in person, or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submitting a shareholder proposal;
- A prohibition on aggregating shareholdings for purposes of meeting the ownership requirements;
- A new requirement that a shareholder-proponent relying on a representative must document this delegation and a prohibition on any representative submitting more than one proposal at any meeting; and,
- A new requirement applying the one-proposal rule to “each person” rather than to “each shareholder,” intended to prevent a shareholder-proponent from simultaneously submitting a proposal in its own name and as a representative at the same meeting.
Rule 14a-8(i)(12) – Resubmission of Shareholder Proposals
The SEC adopted the amendments to the requirements for resubmitting a failed shareholder proposal with few changes from the 2019 Proposal. As adopted, the modified criteria for resubmission of shareholder proposals will permit issuers to exclude proposals that received votes lower than 5% if voted on once in the last five years; 15%, if voted on twice in the last five years; and, 25% if voted on three or more times in the last five years. Under the current SEC rules adopted in 1954, the resubmission thresholds are of 3%, 6%, and 10%, respectively.
However, in the face of much criticism, the SEC eliminated the so-called “momentum” feature of its 2019 Proposal, which would have additionally permitted issuers to exclude shareholder proposals that had been previously voted on three or more times in the last five years, notwithstanding having received at least 25% on its most recent submission, if the proposal received less than 50% and also experienced a decline in shareholder support of 10% or more compared to the immediately preceding vote.
As noted above, Nareit strongly supported these updates to the requirements for resubmitting failed shareholder proposals. Nareit’s comment noted that “Nareit members believe that roughly 20-30% of the proposals that they receive are resubmitted, or are substantially similar, to previously submitted proposal” and that many REITs have “concluded that the current rules governing the introduction of shareholder proposals have given rise to a variety of misuses of the shareholder proposal process.” These have included opportunistic proposals submitted to lodging REITs over a period of several years as a ploy to gain leverage over management in an unrelated labor negotiation, or to achieve a self-serving goal unrelated to the subject of the proposal.
The SEC Shareholder Proposal Rule Remains Controversial
Addressing the SEC’s outdated shareholder proposal requirements has been a long-term priority policy objective not only for Nareit, but also for groups such as U.S. Chamber of Commerce, the Business Roundtable and others. However, this rulemaking was and is likely to remain unusually contentious. In their dissenting statements, SEC Commissioners Allison Lee and Caroline Crenshaw sharply criticized the Shareholder Proposal Rule, emphasizing that hundreds of comments opposing the rule were submitted to the SEC.
Opponents included public pension investor groups, several Senators and other advocacy groups who argued that it would effectively deprive retail shareholders of the rights and ability to use the shareholder proposal process to advance their interests. Over the summer, this SEC rulemaking was targeted by some House Appropriators, who inserted a provision in the House Appropriations bill that would have defunded the SEC’s rulemaking efforts on this matter.
Moreover, although the Shareholder Proposal Rule is now scheduled to take effect before the end of this year, the outcome of the November elections will be important in determining its future. The Shareholder Proposal Rule should be subject to the 1996 Congressional Review Act (CRA), which permits Congress to disapprove a broad range of regulatory rules within 60 continuous legislative days of enactment (the 60-day period resets if Congress adjourns sine die during that time). There is precedent for CRA actions reversing final agency rules upon a change in administrations. In January 2017, the Republican-controlled Congress used the CRA to reverse more than a dozen agency rules finalized under President Obama.
Please contact Nareit Senior Vice President & Deputy General Counsel, Victoria P. Rostow, (firstname.lastname@example.org; (202) 739-9431) with any questions that you may have about this matter, or related issues.