On September 23, 2020 the Securities and Exchange Commission (“SEC”) adopted amendments to 17 C.F.R. § 240.14a-8 (“Rule 14a-8”), raising the bar for shareholders seeking to force votes on proposals. The rule comes on the heels of persistent and repeat shareholder proposals in various areas including, notably, pay gap data reporting.
Amendments to Rule 14a-8
Although the change does not take effect until January 01, 2022, amended Rule 14a-8(b) will, among other provisions, increase the ownership threshold for shareholders to submit shareholder proposals. The current threshold, in place since 1998, allows shareholders who have held at least $2,000 or 1% of a company’s securities for at least one year to submit a proposal for inclusion in a company’s annual proxy statement. As amended, the Rule introduces new thresholds based on both the quantity of securities held and the length of continuous ownership in such securities, requiring submitting shareholders to demonstrate that they have held 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.
Other changes affecting initial shareholder proposal submissions preclude aggregation of holdings to meet the ownership thresholds, require documentation demonstrating a representative’s authorization to act on a shareholder’s behalf, and require that each shareholder state that he or she is able to meet with the company between 10 and 30 days after submitting a shareholder proposal.
The amendments also address other dimensions of Rule 14a-8 related to repeat submissions. Under the current Rule 14a-8(i)(12), an unsuccessful proposal is eligible for resubmission if it obtains a threshold level of support from voting shareholders in a preceding year. Presently, the Rule requires a shareholder proposal to obtain 3%, 6%, and 10% of voting shareholders’ support for resubmission in each of the three years after the initial submission, respectively. These thresholds will increase to 5%, 15%, and 25% in 2022, significantly increasing the support a proposal must achieve to maintain viability over time.
Additionally, the amendments revise Rule 14a-8(c), which prohibits shareholders from submitting more than one proposal annually. The amended Rule 14a-8(c) applies the “one-proposal rule” to “each person” rather than “each shareholder.” In its amended form, the Rule therefore prevents shareholders from circumventing the rule by submitting one proposal in their name and another as a representative acting on another shareholder’s behalf. Representatives are similarly prohibited from submitting more than one proposal at a given shareholder meeting.
In total, the amended Rule 14a-8 provisions limit the capacity of groups and individuals to file nuisance shareholder proposals by increasing the economic interest and support required to advance a proposal.
Pay Gap Shareholder Proposals
As Orrick previously reported, over the past six years, pay equity shareholder proposals have evolved into a significant annual consideration for financial and technology companies from both a business and public relations perspective. While activist shareholder groups initially requested disclosure of mean pay gap figures representing the average delta between what female and male employees earn within a given organization, these proposals continue to seek increasingly granular pay gap data. Recent pay gap shareholder proposals have demanded disclosure of global unadjusted median pay gap data for both women and minorities. Activist shareholder groups have disproportionately targeted companies in the financial and technology industries in seeking such disclosures.
Companies have varied in their responses to pay gap shareholder proposals, often stating their objections in annual proxy statements on the basis that unadjusted pay gap statistics do not tell a complete story about internal compensation. Shareholders have uniformly rejected pay gap proposals that have been put to a vote at annual shareholder meetings. Nevertheless, certain activist shareholder groups continue to renew the proposals on an annual basis, requiring companies to revisit the business case for disclosure or non-disclosure each year.
Implications of the Amended Rule 14a-8 on Pay Gap Shareholder Proposals
The amendments to Rule 14a-8 may impact future pay gap shareholder proposals in several ways. First, beginning in 2022, activist shareholders will be unable to reintroduce proposals that fail to attain the requisite support at a previous shareholder meeting. Critically, shareholder proposals have received less than 10% of voters’ support at several companies’ annual shareholder meetings, including Alphabet, Facebook, J.P. Morgan, and Wells Fargo. The amended Rule 14a-8(i)(12) may have less impact at companies where such proposals have failed by a narrower margin.
Relatedly, activist shareholders may shift their calculus given the preclusive impact of multiple failed pay gap proposals in successive years. They may, for example, shift their focus to different industries, or to other companies in the financial and technology industries that have not yet received a pay gap shareholder proposal. Smaller activist shareholder groups may be dissuaded from filing pay gap shareholder proposals altogether given the increased ownership thresholds under Rule 14a-8(b).
Finally, given the rule restricting shareholder proposals to one per “each person,” activist shareholders will soon be prohibited from filing multiple proposals with the same company in a single year. What this means for the future of pay gap shareholder proposals is unclear, although some activist shareholders may find such proposals less attractive than other proposals in light of their extremely low success rate to date.
Orrick will continue to monitor for developments in this area. See Orrick’s new Pay Equity Hub for more on past pay gap shareholder proposals.