The SEC’s Proposed Amendments to Rule 14a-8: Implementing Substantial Changes to the Shareholder Proposal Exclusion Framework


Key Takeaways:

  • Over the better part of two decades, the SEC has been narrowing the bases for excluding shareholder proposals, resulting in greater access to proxy statements for shareholders to force a vote on a wide array of topics, including executive compensation, governance and other matters. Continuing this trend, on July 13, 2022, the SEC proposed amendments to update three of the substantive bases for exclusion of shareholder proposals contained in Exchange Act Rule 14a-8: the substantial implementation exclusion; the duplication exclusion; and the resubmission exclusion. Of note—these three bases for exclusion represented roughly 45% of no-action relief requests received by the SEC under Rule 14a-8 during the 2018 through 2021 proxy seasons.
  • If adopted as proposed, companies should expect a restricted ability to rely on these bases for exclusion.
  • The proposed rules are subject to a comment period through at least September 12, 2022, which could be longer if publication in the Federal Register is significantly delayed.

Referred to as “the shareholder proposal rule,” Rule 14a-8 requires companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. Companies often request assurance that the SEC will not recommend enforcement action if they omit a shareholder proposal based on one of the substantive bases for exclusions provided by Rule 14a-8 through a process referred to as “no-action relief.” The SEC believes the proposed amendments will improve the shareholder proposal process, assist the SEC in more efficiently reviewing and responding to “no-action relief” requests, and promote more consistent and predictable exclusion determinations.

Rule 14a-8(i)(10) – Proposed Amendments to the Substantial Implementation Exclusion

This rule permits exclusion of proposals that have already been substantially implemented. The underlying rationale is to avoid shareholders having to consider proposals for matters that have already been favorably acted upon by a company.

Historically, the substantial implementation analysis has focused on various frameworks, including whether a company has adopted “policies, practices and procedures” that “compare favorably with the guidelines” described in a proposal, whether a company has addressed the “underlying concerns” of a proposal, and whether the “essential objectives” of a proposal have been met. Under the existing framework, the SEC argues, “a proposal may be viewed as substantially implemented even if a company has not implemented all of the proposal’s elements.”

The SEC has proposed a new “essential elements” standard for assessing substantial implementation, to permit exclusion only if all “essential elements” of a proposal have been implemented. The specificity and stated primary objectives of a proposal would guide its “essential element” analysis. This new approach would shift focus away from whether company policies, practices or procedures generally address the guidelines, concerns and objectives of a stockholder proposal. Instead, the new approach will focus on whether, and to what degree, such policies, practices or procedures match up to the specific “essential elements” of a proposal. For example, the proposing release states that if a proposal requests a subject matter report from the board, the staff may determine a company has not implemented an “essential element” of the proposal if the subject matter report comes from management (instead of the board), assuming the proposal demonstrates a clear emphasis on reporting directly from the board.

If adopted, companies should expect shareholder proponents to identify “essential elements” of proposals carefully and explicitly, likely restricting a company’s ability to claim substantial implementation.

Rule 14a-8(i)(11) – Proposed Amendments to the Duplication Exclusion

This rule permits exclusion of proposals that are substantial duplicates of those received for the same meeting (favoring the earliest submitted proposal). The SEC has proposed a new framework to assess duplication: analyzing if a proposal “addresses the same subject matter and seeks the same objective by the same means,” instead of the existing “principal thrust” or “principal focus” framework.

The SEC believes the proposed framework will encourage consideration at the same meeting of multiple proposals that present different means to address a particular issue. Accordingly, if adopted, proposals that “seek different objectives or offer different means of addressing the same matter will no longer be excludable under the duplication exclusion, regardless of subject matter similarity.

Rule 14a-8(i)(12) – Proposed Amendments to the Resubmission Exclusion

This rule permits exclusion of proposals if the same subject matter was substantially addressed in a company’s proxy materials within the preceding five calendar years and voted on at least once in the preceding three years without receiving sufficient support. The SEC believes its existing resubmission proposal analysis discourages “experimentation with new ideas,” limits shareholders’ “ability to modify their proposals to address a similar subject matter in subsequent years,” and “restricts other shareholders from presenting different or newer approaches to addressing the same issue.”

The amendments would adopt the same subject matter seeking same objective by the same means framework proposed for the duplication exclusion described above. The SEC anticipates this will result in more consistent outcomes when comparing a given proposal against proposals submitted for the same meeting (for purposes of the duplication exclusion) and against proposals considered at prior meetings (for purposes of the resubmission exclusion).

If adopted, companies should expect a restricted ability to avoid revisiting defeated shareholder proposals year over year, so long as the resubmissions are tailored to seek different objectives or offer different means of addressing the same matter.