SEC adopts new rules for submitting shareholder resolution in US

Australia has enjoyed relatively few shareholder resolutions lodged prior to the AGMs compared to other markets. Although the number of these types of resolutions has been slowly creeping up over the past few years, it is still quite challenging for a single minority shareholder to lodge a resolution at an ASX-listed company.

The criteria for submitting a shareholder resolution vary from market to market, but typically include specific share ownership held during a specified period. The criteria associated with shareholder proposals in the United States include ownership of at least US$2,000 of common stock for at least one year. Limited to 500 words, the resolution must be submitted at least 120 days before the date of release of the annual proxy statement. 

However, on 23 September 2020, the U.S. Securities and Exchange Commission (SEC) adopted a new controversial rule that creates a challenge for investors to submit or resubmit shareholder proposals at US companies under Exchange Act Rule 14a-8. The new rule imposes a tiered share ownership - at least US$2,000 if held for at least three years, at least US$15,000 if held for at least two years and at least US$25,000 if held for at least one year. There are, however, additional new criteria for shareholders previously not considered, as follows: 

1.    The shareholder must be able to engage with the company between 10 and 30 days after submitting a shareholder proposal to discuss the content of the resolution. 
2.    One person may not submit more than one proposal. 
3.    The prior shareholder support thresholds also determine a shareholder eligibility to submit a resolution. These are increasing from 3/6/10% to 5/15/25% for matters voted on once, twice or three or more times, respectively, in the past five years if the most recent vote occurred within the past three years. 

As currently required, the shareholder must also provide the company with a written statement of his or her intention to continue to hold US$2,000 of voting securities through the date of the meeting for which the proposal is submitted. The amendments will apply to any shareholder proposal submitted for an annual meeting or special meeting held on or after January 1, 2022.

The amendments are intended to facilitate constructive engagement between companies and shareholders and help prevent misuse of the shareholder proposal process. But the opponents of the changes argue that the new rules will severely limit the ability of individual shareholders with smaller investments to utilize the shareholder proposal. There are also concerns about the impact the amendments may have on shareholder proposals on environmental and social topics, which have seen a marked increase in number and support in the past years. Between 2015 and 2019, a total of 1,033 shareholder-initiated ESG resolutions were voted at US company AGMs, representing an average of 207 per year. The SEC estimated that 170 shareholders submitted shareholder proposals in 2018, out of an estimated 65 million investors in U.S. public companies.

For more information on the amendments, please click here.