Securities Industry Commentator by Bill Singer Esq

SEC Reforms Its Whistleblower Program (BrokeAndBroker.com Blog)

SEC Charges Former Controller of Now-Bankrupt Company with Insider Trading (SEC Release)

SEC Obtains Emergency Asset Freeze, Charges Ring of Microcap Stock Manipulators Targeting Retail Investors (SEC Release)

SEC Obtains Final Judgments Against Biotechnology Company and Its CEO for Stock Offering Scheme (SEC Release)

SEC Adopts Amendments to Modernize Shareholder Proposal Rule (SEC Release)</a>

Modernizing the Shareholder Proposal Framework for the Benefit of All Shareholders (Statement by SEC Chair Jay Clayton)

Statement at Open Meeting on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Statement by SEC Commissioner Hester M. Peirce)

Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Statement by SEC Commissioner Elad L. Roisman)

Statement on the Amendments to Rule 14a-8 (Statement by SEC Commissioner Allison Herren Lee)

Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (SEC Commissioner Caroline A. Crenshaw)

[A]fter Kelly retired from Aceto in March 2018, the company formally retained him as a consultant to assist in closing Aceto's books for the quarter ending March 31, 2018. While working as a consultant, Kelly allegedly obtained non-public information about Aceto's poor sales and earnings results and a pending impairment charge. The complaint alleges that while in possession of this information, Kelly sold all of his Aceto shares and exercised and sold his in-the-money stock options in advance of the information being released, profiting and avoiding losses of more than $85,000 in the aggregate.

The Securities and Exchange Commission today voted to adopt amendments to modernize its shareholder proposal rule, which governs the process for a shareholder to have its proposal included in a company's proxy statement for consideration by all of the company's shareholders.  The principal requirements for: (1) initial inclusion in the proxy statement - the amount and length of ownership of the proposing shareholder - and (2) for subsequent resubmission if the proposal is not approved - the amount of support from other shareholders - have not been substantively amended since 1998 and 1954, respectively.     

The amendments will facilitate engagement among shareholder-proponents, companies and other shareholders, including preserving the ability of smaller shareholders to access the proxy statements of the companies in which they have demonstrated a continuing interest.  Under the rules, any shareholder may submit an initial proposal after having held $2,000 of company stock for at least three years, or higher amounts for shorter periods of time.  The rules also provide for a transition period so that shareholders who are currently eligible at the $2,000 threshold will remain eligible to submit a proposal for inclusion in the company's proxy statement so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting). 

The final amendments will, among other things:

• amend Rule 14a-8(b) by:

• replacing the current ownership threshold, which requires holding at least $2,000 or 1% of a company's securities for at least one year, with three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:
• $2,000 of the company's securities for at least three years;
• $15,000 of the company's securities for at least two years; or
• $25,000 of the company's securities for at least one year.
• prohibiting the aggregation of holdings for purposes of satisfying the amended ownership thresholds;
• requiring that a shareholder who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder's behalf and to provide a meaningful degree of assurance as to the shareholder's identity, role and interest in a proposal that is submitted for inclusion in a company's proxy statement; and
• requiring that each shareholder state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as specific business days and times that the shareholder is available to discuss the proposal with the company.
   
• amend Rule 14a-8(c) by:

• applying the one-proposal rule to "each person" rather than "each shareholder" who submits a proposal, such that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder's behalf for consideration at the same meeting.  Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
   
• amend Rule 14a-8(i)(12) by:
  
  
• revising the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company's future shareholder meetings from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5%, 15% and 25%, respectively.  For example, a proposal would need to achieve support by at least 5% of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15% and 25% support, respectively, in order to be eligible for resubmission in the following three years.

Turning to the initial submission threshold, I will start by noting an important transition matter.  Any investor who today is eligible to submit a proposal - by having held at least $2,000 worth of company securities for one year - will continue to be able to submit a proposal without increasing the dollar amount of their holdings.  All that will be required is that they continue to hold those securities.  For all other shareholder-proponents, there will be three, tiered thresholds: the first retains the $2,000 dollar threshold for those who have maintained at least that level of holdings for at least three years.  We are also adding two additional ownership thresholds of at least $15,000, for holdings of at least two years, and at least $25,000 for holdings of at least one year.  This tiered approach, with its combination of ownership amounts and length of holding periods, will more effectively implement the Commission's long-standing framework in today's marketplace.

. . .

Turning now to the resubmission thresholds, or in other words, the voting support threshold for determining when a company can omit a resubmitted proposal because it did not garner sufficient shareholder support when previously voted on.  In the era of mail and limited avenues for shareholder communications with each other and with registrants, the current 3, 6 and 10 percent thresholds, adopted in 1954 - yes, over 65 years ago - may have been reasonable, but they are not reasonable today.  A shareholder-proponent should not be able to command the time and attention of the company and other shareholders to review, consider and vote on a proposal if nine out of ten votes cast by their fellow shareholders have been against the proposal after it's been submitted for a vote three or more times in five years.  This is worth reiterating: Yes, 90 percent or more of fellow shareholders could oppose a proposal year in and year out and yet still be required to consider it again, year in and year out. 

Under today's amendments, generally speaking, a proponent submitting a proposal for the first time will only need to garner the support of 1 out of 20 of the votes cast by fellow shareholders in order to avoid taking a time out before submitting again.  If a proposal has been submitted three or more times, the amendments to the resubmission thresholds will do nothing to prevent the proposal from being submitted again as long as the most recent submission received the support of at least 1 out of every 4 votes cast.  If that doesn't happen - that is, if 3 or more out of every 4 votes cast votes against the proposal, the proposal can still can be submitted again, but just after a brief  time out.  Considering the aggregate time and attention required of non-proponent shareholders to review, consider and vote on each proposal, these modest amendments to the resubmission thresholds make common sense. 

[W]ould we all be better off without Rule 14a-8 because it draws the SEC and its staff into places we do not belong? Why should the Commission be in the business of adjudicating which shareholder proposals are allowed in proxies? As noted by one commenter, there are legitimate questions as to whether Rule 14a-8 exceeds the statutory authority provided by Congress under Section 14 of the Exchange Act and improperly interjects the Commission into matters of state corporate law. As I have emphasized elsewhere, the securities laws are focused on getting investors the information they need to understand the long-term financial value of companies, not on determining how corporations and their shareholders interact with one another.

Despite the questionable foundation upon which Rule 14a-8 exists, I recognize that wholesale repeal of a rule that has existed since the 1940s is unlikely. One reason that the current system persists is that the relevant parties are generally satisfied with the SEC staff's involvement in the process. Why wouldn't they be? The SEC effectively provides them with an efficient and cheap arbitration mechanism. Every year, a dozen or so SEC staff dedicate themselves full-time, and often after business hours, during proxy season to determine whether proposals may be properly excluded under Rule 14a-8. The process does not cost shareholder-proponents much. The companies pay significant fees for legal representation throughout the process, but those fees pale in comparison to costs they would face if these matters were resolved through litigation in the courts.

Nevertheless, the relevant parties complain every year to the SEC staff about a lack of consistency and transparency in their decision making. Those complaints bring me to my second question about Rule 14a-8: many of the issues that we consider under the rule are-as commenters explained-at core about stakeholders. Why should we-or more precisely our staff-be in the business of sorting through these weighty issues? For example, the Chief Mindfulness Officer and founder of an asset manager wrote to explain that the shareholder proposal process is a way for companies to learn of "shareholder priorities and concerns [which] are not limited to the profit of issuers; rather, they are issues that impact all stakeholders, including employees, customers, shareholders, and society." Many other commenters similarly were focused on constituencies other than shareholders. Stakeholder issues typically come into play under the "ordinary business" exclusion of Rule 14a-8. That provision permits exclusion of a proposal that deals with the company's ordinary business operations, unless it focuses on a "sufficiently significant social policy issue . . . because the proposal[] would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." A peculiar feature of Rule 14a-8 is that it requires a company to submit its reasons for excluding a proposal with the Commission, only hints at the informal staff no-action letter process, and allocates no clear role for the Commission's involvement in the consideration of the exclusion of a proposal. So essentially the rule drops a whole host of very divisive issues on the desks of Commission staffers to sort through. Our staff have better ways to spend their days and evenings, and, frankly, we do too. Stockholder-corporate relations are outside of our jurisdiction, but stakeholder-corporate relations are even farther outside our purview.

However, if the Commission insists on adjudicating the excludability of shareholder proposals, it should relieve the staff of the unreasonable task of making the final determination of which matters rise to the level of a "sufficiently significant social policy issue." At the very least, the Commission should provide fresh interpretive guidance to the staff and the markets on how this exclusion should be analyzed.

[T]he ability for a single shareholder-and even, as some advocate for, a non-shareholder-to require a company to include his or her own proposal in the company's proxy statement is not a fundamental right. 

I'll repeat the statement made by former Commissioner McCormick in 1950 that I quoted at the proposing stage because there are many who, at best, are not aware of the history of this rule, and, at worst, choose to ignore it:

When our proxy rules were amended to permit stockholders to make and justify proposals within the sphere of proper stockholder action a bomb exploded.  We were branded as wild-eyed radicals, a Congressional investigation was touched off, and it was confidently predicted that the proxy solicitation would be converted into a forum for crackpots, and hare-brained reformers.

That dire prediction never came true, but only because this rule, from its inception, placed limits on shareholders' ability to wield company resources.  And, thus, this rule has been amended many times since its initial adoption for the same reasons we are considering amending it today-to curb potential misuse or abuse by some at the expense of the majority of shareholders.

The final rules represent the capstone in a series of policies that will dial back shareholder oversight of management at the companies they own. Last year, the Commission adopted guidance on proxy advisors and proxy solicitation that made it more difficult and costly for investment advisers to vote shares on behalf of their clients in reliance on independent proxy voting advice. Then, earlier this year, the Commission adopted new rules and additional guidance related to proxy advisors that injected further cost and complexity into the voting process and mandated greater issuer involvement in proxy voting decisions. Having made it more difficult for shareholders to exercise their voting rights, the Commission now adopts amendments that will narrow access to another important mechanism for shareholder oversight: the shareholder proposal process. These actions collectively put a thumb on the scale for management in the balance of power between companies and their owners.

. . .

Letters in opposition to these changes vastly outnumber those in support and evidence a stark division of views between shareholders and management. Today's rules do not take a balanced approach to this division of interests, but rather almost universally reject the comments and data submitted by shareholders, failing in the process to reckon with very real costs of reducing shareholder oversight.

Today's amendments do not serve shareholders or the capital markets more broadly. They will have pronounced effects in two important respects. First, in connection with environmental, social, and governance (ESG) issues at a time when such issues-climate change, worker safety, racial injustice-have never been more important to long-term value. Second, in connection with smaller shareholders, Main Street investors, who will be dramatically disadvantaged by the changes we adopt today.

First, I cannot support shifting the costs of the shareholder proposal process to investors. For the wealthy, $25,000 may not be a significant stake in a single equity. But a recent survey revealed that the mean value of stock ownership for 90% of Americans is less than $150,000. For the average American's retirement account, $25,000 is an outsized concentration at odds with modern portfolio theory.

Today's rules, of course, contemplate this and allow smaller investors to submit proposals if they hold $2,000 worth of securities for at least three years. But it is unreasonable to expect an investor who identifies an existing problem, but cannot afford to invest $25,000, to wait three years to suggest a solution. In addition to charging more up front, by more than doubling the resubmission thresholds we make it harder for those ideas to be heard. It hardly seems worth the investment, even if you can make it. The rule thus puts the great majority of investors to a harsh choice: maintain a diversified and well-balanced portfolio as experts recommend but be shut out from corporate discourse, or participate in the conversation but take on the greater risk that investing $25,000 of retirement savings in a single stock will pay off.

And for what? The release claims that the changes will save nearly $70 million per year across the companies in the Russell 3000 index. That is, on average, about $23,000 per company - less than the individual has to invest. But the data shows that in most years, companies do not receive even one proposal. We are raising the bar for retail shareholder proposals to save corporate costs that the Commission's own analysis acknowledges are minimal.

Second, I do not agree with the decision to eliminate the nearly 40 year practice of allowing shareholders to take collective action to express a shared position. Now, not only are we requiring retail investors to increase their investments by over 1000% to help improve those companies, we are mandating they take on greater relative risk to do so. Who benefits from this misalignment of incentives? Per the staff's analysis, a limited number of S&P 500 companies will receive some marginal cost savings. But this comes at a significant cost to investors. The staff's analysis suggests that after today's rule, roughly three quarters of retail accounts for most S&P 500 companies could not file a proposal. The release attempts to justify this policy choice by stating, without support, that the investment interests of individuals and shareholder groups are not equivalent. I cannot agree. . . .

• Securities Industry Commentator
• Bill Singer