Yesterday, as noted in this press release, the SEC proposed to rescind Rule 14a-8 (at the same time as proposing to modernize the proxy solicitation process). Wow. Here’s the 228-page proposing release – and here’s the fact sheet. In that proposal, the SEC also proposed to amend Rule 14a-4(c) to provide companies with greater flexibility – and shareholders with greater control – regarding proposals for which a company may seek discretionary proxy voting authority. There’s a 60-day comment period.
Here are ten things to know:
1. Rescind Rule 14a-8 Entirely: The proposal would eliminate Rule 14a-8 entirely. Rather than revise particular eligibility thresholds or exclusion grounds, the SEC proposes to remove the rule altogether. Whoa.
2. Return Shareholder Proposal Rights to State Law: Following the rule’s rescission, whether shareholders have rights concerning the presentation of proposals – and whether companies must include those proposals in company proxy materials – would be determined by applicable state corporate law and, where state law permits, the company’s charter, bylaws or other governing documents. In other words, Rule 14a-8 would no longer supply a federal right to use the company’s proxy materials for qualifying shareholder proposals.
3. SEC’s Principal Rationale is that Rule 14a-8 Exceeds Section 14(a): The SEC’s central legal position is that Section 14(a) authorizes it to regulate the proxy solicitation process – including disclosure, the form of proxies and how voting authority is solicited -but doesn’t authorize it to determine the substantive scope of shareholder voting or proposal rights traditionally governed by state corporate law. The SEC’s proposal characterizes Rule 14a-8 as a federal overlay that has moved beyond facilitating state-law rights and instead determines when shareholder proposals must – or may not – reach shareholders through proxy materials.
4. The SEC Says Rule 14a-8 Drifted From Its Original Purpose: The proposing release traces the rule from its 1942 predecessor through decades of amendments, providing me fond memories of writing the history chapter of the rule when I wrote a treatise about shareholder proposals over twenty years ago. The SEC argues that what began largely as a mechanism for facilitating proposals that were proper subjects under state law gradually became a detailed federal regime containing eligibility requirements, procedural conditions and 13 substantive exclusions. According to the proposing release, many of those standards either reflect the SEC’s own interpretation of state-law concepts or have no identified state-law foundation.
5. Independent Policy Case for Rescission: The SEC also says it would favor rescission even apart from its statutory authority conclusion. The proposing release examines whether the original rationales for Rule 14a-8 remain persuasive, identifies what the SEC views as unintended consequences of the current system – and questions whether retaining a modified version of Rule 14a-8 would adequately address those concerns. The SEC nevertheless requests comment on alternatives to complete rescission of Rule 14a-8.
6. Shareholder Proposals Wouldn’t Necessarily Disappear: Note that the rule’s rescission would eliminate the federal Rule 14a-8 mechanism, not shareholder meetings nor state-law shareholder rights themselves. A shareholder could still have rights to present proposals under the law of a company’s jurisdiction and its governing documents. The result therefore could vary by jurisdiction and by company – which is a practical consideration for boards considering the future of their company’s charter and bylaw provisions.
7. Amend Rule 14a-4(c) to Expand Discretionary Voting for Companies: Recognizing that proponent proposals presented at meetings – but omitted from proxy materials – could become more common, the SEC proposes corresponding amendments to Rule 14a-4(c), which would expand the circumstances in which a company may exercise discretionary authority under proxies it receives to vote on proposals that will be presented at the meeting but are not included in proxy materials.
8. Provides Individual Shareholders an Opt-Out From Discretionary Authority: The expanded company discretion under Rule 14a-4(c) would be paired with a shareholder-control mechanism as shareholders would be given a means – through a check-box framework – to elect to prevent the company from exercising that discretionary authority with respect to their own shares. Thus, the SEC’s proposal attempts to combine broader management proxy authority with an individual shareholder’s ability to withhold that authority.
9. Rule 14a-4 Changes Can Stand Independently from Future of Rule 14a-8: The SEC says the Rule 14a-4(c) amendments aren’t purely contingent on rescinding Rule 14a-8. Although designed in part to accommodate a post-14a-8 environment, the SEC states that it believes there are independent justifications for adopting the Rule 14a-4 amendments even if Rule 14a-8 ultimately survives.
10. Conforming Changes Across the Proxy Regime: The proposal also would make implementation and conforming amendments affecting a host of other rules and regulations.
Authored by
Broc Romanek