Securities Regulation Daily U.S. Chamber urges reform of shareholder proposal process
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Tuesday, August 1, 2017

U.S. Chamber urges reform of shareholder proposal process

By Mark S. Nelson, J.D.

The U.S. Chamber of Commerce urged reform of the SEC’s shareholder proposal process, which it said has been gradually eroded by gaps in the agency’s rules and guidance and the concentration of proponents’ power in a small number of investors who increasingly advocate social or political issues. The Chamber said the current shareholder proposal process may even inhibit some companies from going public under U.S. laws. The Chamber’s Center for Capital Markets (CCMC) offered a seven point reform proposal in a brief white paper.

Reform proposal. According to the CCMC, the SEC’s rules for shareholder proposals are need of repair, in part, to encourage more companies to go public in U.S. markets. "The broken Rule 14a-8 system is yet another burden on companies and their shareholders that only serves to make the public company model less attractive."

To this end, the CCMC proposed seven reforms that it believes would improve the shareholder proposal process:

  • Increase the resubmission threshold.
  • Clarify the rule regarding personal claims or grievances.
  • Limit use of graphics and other images in proposals (but do allow hyperlinks).
  • Strengthen "relevance rule" (exclude a proposal with impact to under 5 percent of total assets and 5 percent of net earnings).
  • Require detailed proponent disclosures (seeks parity between corporate and proponent information).
  • Withdraw Staff Legal Bulletin 14H ("conflicts with company’s proposal" and the reconsideration of Whole Foods).
  • Exclude materially false or misleading statements (CCMC said the SEC often backs proponents out of caution).

The CCMC’s Tom Quaadman said the proposal, if followed by the SEC, would bring "incremental"changes in how shareholder proposals are considered. "The good news is there are steps we can take and reforms we can make so that going public and staying public are more appealing. It’s time to take a fresh look at SEC rules that, regrettably, tilt the scales in favor of a small subset of activists at the expense of investors as a whole."

Resubmission thresholds. The CCMC devoted a significant portion of its white paper to the question of what to do about resubmission thresholds. This is a topic that has previously grabbed the SEC’s attention and, more recently, House GOP lawmakers, who have proposed significant changes via the Financial CHOICE Act of 2017 (H.R. 10), which also would alter the eligibility requirement to eliminate the dollar amount threshold, increase the holding period from one year to three years, and bar shareholder proposals submitted by proxy on behalf of a shareholder.

As for specific resubmission thresholds, here is how the current SEC rule, 1997 SEC proposal, the CHOICE Act, and the CCMC line up:

  • Existing Rule 14a-8(i)(12)—3 percent; 6 percent; 10 percent.
  • SEC’s 1997 proposal—6 percent; 15 percent; 30 percent.
  • CHOICE Act Section 844—6 percent; 15 percent; 30 percent.
  • CCMC Recommendation—6 percent; 15 percent; 30 percent (at minimum, follow SEC 1997 proposal).

Notably, the CHOICE Act and the CCMC would follow the SEC’s 1997 proposal with respect to resubmission thresholds. At the time of the SEC’s proposal, then-Commissioner Steven Wallman submitted concurring remarks in which he critiqued the proposed increase in the resubmission thresholds for lacking a broader benefit to all proponents.

Companies: U.S. Chamber of Commerce

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