Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, 66458-66515 [2019-24476]

Download as PDF 66458 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34–87458; File No. S7–23–19] RIN 3235–AM49 Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8 Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: We are proposing to amend certain procedural requirements and the provision relating to resubmitted proposals under the shareholderproposal rule. The proposed amendments to the procedural requirements would replace the current ownership requirements with a tiered approach that would provide three options for demonstrating an ownership stake through a combination of amount of securities owned and length of time held; require certain documentation to be provided when a proposal is submitted on behalf of a shareholderproponent; require shareholderproponents to state when they would be able to meet with the company in person or via teleconference to engage with the company with respect to the proposal; and provide that a person may submit no more than one proposal, directly or indirectly, for the same shareholders’ meeting. The proposed amendments to the resubmission thresholds would raise the current resubmission thresholds of 3, 6, and 10 percent to 5, 15, and 25 percent, respectively; and add a new provision that would allow companies to exclude proposals under certain circumstances where shareholder support for the matter has declined. DATES: Comments should be received on or before February 3, 2020. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: khammond on DSKJM1Z7X2PROD with PROPOSALS2 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/concept.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 23–19 on the subject line. Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 All submissions should refer to File Number S7–23–19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. We will post all comments on our website (https://www.sec.gov/rules/ proposed.shtml). Comments also are available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available. We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Matt McNair, Senior Special Counsel in the Office of Chief Counsel, at (202) 551– 3500, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR 240.14a–8 (‘‘Rule 14a–8’’) under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (‘‘Exchange Act’’). Table of Contents I. Introduction A. Background B. Roundtable on the Proxy Process II. Discussion of Proposed Amendments A. Rule 14a–8(b)—Eligibility Requirements 1. Relevant History and Background of Rule 14a–8(b) 2. Public Views on Rule 14a–8(b) 3. Need for Proposed Amendments 4. Proposed Amendments B. Proposals Submitted on Behalf of Shareholders 1. Background 2. Proposed Amendments C. The Role of the Shareholder-Proposal Process in Shareholder Engagement 1. Background 2. Proposed Amendment D. One-Proposal Limit 1. Background 2. Proposed Amendment E. Rule 14a–8(i)(12)—Resubmissions 1. Relevant History and Background of Rule 14a–8(i)(12) PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 2. Public Views on Rule 14a–8(i)(12) 3. Need for Proposed Amendments 4. Proposed Amendments III. General Request for Comment IV. Economic Analysis A. Introduction B. Economic Baseline 1. Current Regulatory Framework 2. Affected Entities 3. Current Practices C. Benefits and Costs and Effects on Efficiency, Competition, and Capital Formation of Proposed Rule Amendments 1. General Economic Considerations Relevant to Shareholder Proposals 2. General Economic Effects of the Proposed Amendments 3. Benefits and Costs of the Proposed Amendments 4. Effects of Proposed Amendments on Efficiency, Competition, and Capital Formation D. Reasonable Alternatives 1. Shareholder Ownership Thresholds 2. Shareholder Resubmission Thresholds E. Request for Comment V. Paperwork Reduction Act A. Summary of the Collections of Information B. Summary of the Proposed Amendments’ Effects on the Collections of Information C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments VI. Initial Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Proposed Action B. Legal Basis C. Small Entities Subject to the Proposed Rules D. Projected Reporting, Recordkeeping and Other Compliance Requirements E. Duplicative, Overlapping or Conflicting Federal Rules F. Significant Alternatives G. Request for Comment VII. Small Business Regulatory Enforcement Fairness Act VIII. Statutory Authority I. Introduction A. Background Under state corporate law, shareholders have the right to vote their shares to elect directors and to approve or reject major corporate transactions at shareholder meetings, and shareholders may appoint proxies to vote on their behalf at such meetings.1 Because most shareholders do not attend public company shareholder meetings in person and, instead, vote their shares by the use of proxies that are solicited before the shareholder meeting takes place, the proxy solicitation process rather than the shareholder meeting 1 See Concept Release on the U.S. Proxy System, Release No. 34–62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)], at 42984 (‘‘Proxy Plumbing Release’’). E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 itself has become the ‘‘forum for shareholder suffrage.’’ 2 Issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and issuers that are registered under the Investment Company Act of 1940 (‘‘Investment Company Act’’) are generally required to comply with the federal proxy rules in Regulation 14A when soliciting proxies from shareholders.3 These rules include the requirement that issuers publicly file and provide shareholders with a proxy statement containing certain information. Individual shareholders and other persons may also solicit proxies in support of proposals that a shareholder wishes to present for a vote at a shareholder meeting. Such solicitations must also generally comply with the federal proxy rules. Rule 14a–8 requires companies that are subject to the federal proxy rules to include shareholder proposals in their own proxy statements to shareholders, subject to certain procedural and substantive requirements.4 By giving shareholder-proponents the ability to have their proposals included alongside management’s in the company’s proxy statement, Rule 14a–8 enables shareholder-proponents to easily present their proposals to all other shareholders, and to have proxies solicited for their proposals, at little or no expense to themselves. The rule, the concept of which was first adopted by the Commission in 1942, thus facilitates shareholders’ traditional ability under state law to present their own proposals for consideration at a company’s annual or special meeting, and it facilitates the ability of all shareholders to consider and vote on such proposals.5 2 See Proposed Amendments to Rule 14a–8, Release No. 34–19135 (Oct. 14, 1982) [47 FR 47420 (Oct. 26, 1982)], at 47420–21 (‘‘1982 Proposing Release’’); Proxy Plumbing Release, supra note 1, at 42984; Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992) (quoting 1982 Proposing Release). 3 Foreign private issuers are exempt from the federal proxy rules. See 17 CFR 240.3a12–3(b). In addition, debt securities registered under Section 12(b) are exempt from the federal proxy rules, with some exceptions. See 17 CFR 240.3a12–11(b). 4 Unless otherwise noted, references to ‘‘shareholder proposal,’’ ‘‘shareholder proposals,’’ ‘‘proposal,’’ or ‘‘proposals’’ refer to submissions made in reliance on Rule 14a–8. 5 See, e.g., Securit[ies] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 17– 19 (1943) (Statement of the Honorable Ganson Purcell, Chairman, Securities and Exchange Commission) (explaining the initial Commission rules requiring the inclusion of shareholder proposals in company proxy materials: ‘‘We give [a stockholder] the right in the rules to put his proposal before all of his fellow stockholders along with all other proposals . . . so that they can see VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 However, this mechanism for shareholders to require inclusion of their proposals in companies’ proxy materials is not without limits. Rule 14a–8 permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several specified substantive requirements, or if the shareholderproponent does not satisfy certain eligibility or procedural requirements. All of these requirements are generally designed to ensure that the ability under Rule 14a–8 for a shareholder to have a proposal included alongside management’s in the company’s proxy materials—and thus to draw upon company resources and to command the time and attention of other shareholders—is not excessively or inappropriately used.6 A proposal may be excluded if the rule’s procedural requirements are not satisfied. These rules set forth the level of share ownership necessary to be eligible to submit a proposal, the number of proposals that a shareholder may submit for a particular shareholders’ meeting, the proposal’s then what they are and vote accordingly. . . . The rights that we are endeavoring to assure to the stockholders are those rights that he has traditionally had under State law, to appear at the meeting; to make a proposal; to speak on that proposal at appropriate length; and to have his proposal voted on.’’). 6 The Commission has expressed recurring concern over the years that Rule 14a–8 is susceptible to misuse. In 1948, the Commission adopted three new bases for exclusion to ‘‘relieve the management of harassment in cases where [shareholder] proposals are submitted for the purpose of achieving personal ends rather than for the common good of the issuer and its security holders.’’ See Notice of Proposal to Amend Proxy Rules, Release No. 34–4114 (July 6, 1948) [13 FR 3973 (Jul. 14, 1948)], at 3974 (‘‘1948 Proposing Release’’). In 1953, the Commission amended the shareholder-proposal rule to allow companies to omit the name and address of the shareholderproponent to ‘‘discourage the use of this rule by persons who are motivated by a desire for publicity rather than the interests of the company and its security holders.’’ See Notice of Proposed Amendments to Proxy Rules, Release No. 34–4950 (Oct. 9, 1953) [18 FR 6646 (Oct. 20, 1953)], at 6647. In amending the resubmission basis for exclusion in 1983, the Commission noted that commenters ‘‘felt that it was an appropriate response to counter the abuse of the security holder proposal process by certain proponents who make minor changes in proposals each year so that they can keep raising the same issue despite the fact that other shareholders have indicated by their votes that they are not interested in that issue.’’ See Amendments to Rule 14a–8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34–20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)], at 38221 (‘‘1983 Adopting Release’’). In addressing the personal-grievance basis for exclusion in 1982, the Commission noted that ‘‘[t]here has been an increase in the number of proposals used to harass issuers into giving the proponent some particular benefit or to accomplish objectives particular to the proponent.’’ See 1982 Proposing Release, supra note 2, at 47427. PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 66459 permitted length and the deadline for submitting proposals. The substantive requirements permit a company to exclude a proposal if the proposal would violate applicable law; would violate the proxy rules; relates to a proponent’s personal grievance or personal interest; is not significantly related to the company’s business; is not capable of being implemented by the company; deals with matters relating to the company’s ordinary business operations; or has already been substantially implemented, among other grounds. Proponents and companies do not always agree on the application of these exclusions. Accordingly, if a company intends to exclude a shareholder proposal from its proxy materials on these grounds or any other ground, it is required under Rule 14a– 8(j) to ‘‘file its reasons’’ for doing so with the Commission. These notifications are generally submitted in the form of a no-action request seeking the staff’s concurrence that they may exclude a shareholder proposal under one or more of the procedural or substantive bases under Rule 14a–8. The staff of the Divisions of Corporation Finance and Investment Management, as a convenience to both companies and shareholder-proponents, has for many years engaged in the informal practice of expressing whether the staff would recommend enforcement action to the Commission if a company excludes a proposal from its proxy materials. This is done to provide guidance as to the staff’s views and to assist both companies and shareholder-proponents in complying with the federal proxy rules. We are proposing modifications to, and seeking public comment on, two of the rule’s procedural requirements and one of its substantive requirements. The first proposed amendment is to Rule 14a–8(b), which establishes the eligibility requirements a shareholderproponent must satisfy to have a proposal included in a company’s proxy statement. Under the current rule, to be eligible to submit a proposal, a shareholder-proponent must have continuously held at least $2,000 in market value or 1 percent of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the date the proposal is submitted.7 The $2,000 ownership threshold was last substantively reviewed and updated by the Commission in 1998.8 7 17 CFR 240.14a–8(b)(1). Amendments To Rules On Shareholder Proposals, Release No. 34–40018 (May 21, 1998) [63 8 See E:\FR\FM\04DEP2.SGM Continued 04DEP2 66460 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules The second proposed amendment is to Rule 14a–8(c), which provides that each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.9 The third proposed amendment is to Rule 14a–8(i)(12), which allows companies to exclude a shareholder proposal that ‘‘deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years’’ if the matter was voted on at least once in the last three years and did not receive at least: (i) 3 percent of the vote if previously voted on once; (ii) 6 percent of the vote if previously voted on twice; or (iii) 10 percent of the vote if previously voted on three or more times.10 These resubmission thresholds have been in place since 1954 11 and, like the ownership thresholds in Rule 14a–8(b), were last substantively reviewed by the Commission in 1998.12 khammond on DSKJM1Z7X2PROD with PROPOSALS2 B. Roundtable on the Proxy Process On November 15, 2018, the Commission’s staff held a roundtable on the proxy process (‘‘Proxy Process Roundtable’’), which included a panel discussion on Rule 14a–8 and the shareholder-proposal process. The shareholder-proposal panelists expressed their views on the application of Rule 14a–8 and shared their experiences with shareholder proposals and the related benefits and costs involved for companies and shareholders. Among the topics addressed were ownership and resubmission thresholds under Rule 14a–8(b) and Rule 14a–8(i)(12), respectively, and the extent to which these thresholds are in need of updating. Panelists from the issuer community recommended revising the ownership and/or resubmission thresholds,13 while FR 29106 (May 28, 1998)] (‘‘1998 Adopting Release’’). 9 17 CFR 240.14a–8(c). 10 17 CFR 240.14a–8(i)(12). 11 See Adoption of Amendments to Proxy Rules, Release No. 34–4979 (Jan. 6, 1954) [19 FR 246 (Jan. 14, 1954)] (‘‘1954 Adopting Release’’). 12 See 1998 Adopting Release, supra note 8. The Commission sought public comment on the ownership and resubmission requirements in 2007 in connection with a proposed rule on proxy access, but these requirements have not been substantively revisited since 1998. See Shareholder Proposals, Release No. 34–56160 (Jul. 27, 2007) [72 FR 43488 (Aug. 3, 2007)] (‘‘2007 Proxy Access Proposing Release’’). 13 See Transcript of the Roundtable on the Proxy Process (Nov. 15, 2018) (‘‘Roundtable Transcript’’), VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 the panelists who have submitted shareholder proposals generally opposed revisions to these rules.14 Among those favoring changes to these thresholds, several cited the costs to companies and their shareholders as a primary basis for raising ownership and/or resubmission thresholds.15 Among those who support the current thresholds, one panelist stated that Rule 14a–8 already appropriately balances the costs and benefits of the shareholder-proposal process,16 and another panelist suggested that Rule 14a–8 is currently a cost-effective mechanism that facilitates private ordering.17 In connection with the Proxy Process Roundtable, the staff invited members of the public to provide their views on the proxy process via written comments.18 We received many comment letters addressing Rule 14a–8. Some of these commenters recommended raising the ownership and/or resubmission thresholds,19 while others were available at https://www.sec.gov/files/proxy-roundtable-transcript-111518.pdf, comments of Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP; Maria Ghazal, Senior Vice President, Business Roundtable; Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness; and Dannette Smith, Secretary to the Board of Directors and Senior Deputy General Counsel, UnitedHealth Group. 14 See Roundtable Transcript, supra note 13, comments of Michael Garland, Assistant Comptroller, Corporate Governance and Responsible Investment, Office of the Comptroller, New York City; Jonas Kron, Senior Vice President and Director of Shareholder Advocacy, Trillium Asset Management; Aeisha Mastagni, Portfolio Manager, Corporate Governance Unit, California State Teachers’ Retirement System; James McRitchie, Publisher, CorpGov.net; and Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations. 15 See Roundtable Transcript, supra note 13, comments of Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP, at 127; Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness, at 136; and Dannette Smith, Secretary to the Board of Directors and Senior Deputy General Counsel, UnitedHealth Group, at 148–49. 16 See Roundtable Transcript, supra note 13, comments of Aeisha Mastagni, Portfolio Manager, Corporate Governance Unit, California State Teachers’ Retirement System, at 134. 17 See Roundtable Transcript, supra note 13, comments of Jonas Kron, Senior Vice President and Director of Shareholder Advocacy, Trillium Asset Management, at 124. 18 Comment letters related to the Proxy Process Roundtable are available at https://www.sec.gov/ comments/4-725/4-725.htm. 19 See letters in response to the Proxy Process Roundtable from Advent Capital Management, LLC dated July 29, 2019; American Securities Association dated June 7, 2019; Braemar Hotels & Resorts Inc. dated January 4, 2019; Business Roundtable dated June 3, 2019; U.S. Chamber of Commerce Center for Capital Markets Competitiveness dated November 12, 2018 and PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 supportive of the current thresholds.20 Several commenters expressed concern about the costs associated with December 20, 2018; Center on Executive Compensation dated August 1, 2018; Chevron Corporation dated August 20, 2019; Exxon Mobil Corporation dated July 26, 2019; Group 1 Automotive, Inc. dated January 11, 2019; Institute for Policy Innovation dated October 11, 2018; Investment Company Institute dated March 15, 2019; National Association of Manufacturers dated October 30, 2018; Nareit dated November 12, 2018; Nasdaq, Inc. dated November 14, 2018; Nasdaq, Inc. et al. dated February 4, 2019; Society for Corporate Governance dated November 9, 2018; The Capital Group Companies, Inc. dated November 14, 2018; The Vanguard Group dated September 20, 2019; Tyler Technologies, Inc. dated September 20, 2019. 20 See letters in response to the Proxy Process Roundtable from Addenda Capital et al. dated November 13, 2018; Adrian Dominican Sisters dated December 11, 2018; American Federation of Labor and Congress of Industrial Organizations dated November 9, 2018; Anonymous (19 commenters); California Public Employees’ Retirement System dated December 11, 2018; California State Teachers’ Retirement System dated November 30, 2018; City of New York Office of the Comptroller dated January 2, 2019; Conference for Corporate Responsibility Indiana and Michigan dated December 4, 2018; Council of Institutional Investors dated January 31, 2019; Theodore S. Cochrane dated January 2, 2019; Congregation of Sisters of St. Agnes dated December 4, 2018; Congregation of St. Basil dated December 3, 2018; CtW Investment Group dated January 16, 2019; Dana Investment Advisors dated November 30, 2018; Decatur Capital Management Inc. dated August 13, 2019; Dominican Sisters Grand Rapids dated December 2, 2018; Dominican Sisters of Springfield Illinois dated December 3, 2018; The Episcopal Church received December 11, 2018; Everence Financial dated December 6, 2018; FAIRR Initiative dated December 4, 2018; Franciscan Sisters of Perpetual Adoration dated December 5, 2018; Glass Lewis dated November 14, 2018; Green Century Capital Management, Inc. dated December 5, 2018; Interfaith Center on Corporate Responsibility dated November 6, 2018; Investor Voice, SPC dated November 14, 2018; Jantz Management LLC dated October 7, 2019; Jesuit Committee on Investment Responsibility dated December 10, 2018; Loring, Wolcott & Coolidge dated December 4, 2018; James McRitchie received November 27, 2018 and August 22, 2019; Mercy Investment Services, Inc. dated December 3, 2018; MFS Investment Management dated November 14, 2018; Midwest Coalition for Responsible Investment dated December 6, 2018; Missionary Oblates of Mary Immaculate dated December 12, 2018; Morningstar, Inc. dated December 17, 2018; NorthStar Asset Management, Inc. dated December 4, 2018; Pax World Funds dated November 9, 2018; Pension Investment Association of Canada dated April 17, 2019; Praxis Mutual Funds dated December 6, 2018; Presbyterian Church U.S.A. dated November 13, 2018; Priests of the Sacred Heart dated December 3, 2018; Province of St. Joseph of the Capuchin Order dated December 3, 2018; Racine Dominicans dated December 5, 2018; Robert E. Rutkowski dated November 15, 2018; Shareholder Rights Group dated September 17, 2018; Sisters of Charity—Halifax dated December 5, 2018; Sisters of St. Joseph of Orange dated December 18, 2018; Sisters of the Holy Cross dated December 10, 2018; Sisters of the Presentation of the Blessed Virgin Mary dated December 3, 2018; State of New York Office of the State Comptroller dated November 13, 2018; Trinity Health dated November 9, 2018; US SIF dated November 9, 2018; ValueEdge Advisors dated July 17, 2019; Washington State Investment Board dated November 14, 2018; Kyle Wright dated December 4, 2018. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 management’s consideration of a proposal and/or its inclusion in the proxy statement.21 Two commenters cited an estimate indicating an average cost to companies of $87,000 per shareholder proposal,22 another commenter estimated its cost at more than $100,000 per proposal,23 and another commenter cited a cost of approximately $150,000 per proposal.24 Other commenters suggested the costs to companies are low and noted that most companies receive few, if any, shareholder proposals.25 Some commenters expressed concern that a large number of proposals are submitted by a small number of individuals who own nominal stakes in the companies to which they submit proposals.26 One commenter disagreed with this concern because proposals submitted by these individuals between 2004 and 2017 received an average level of support of 40 percent and, in the commenter’s opinion, this level of support ‘‘indicates these filers provide a valuable service to fellow shareholders by promoting good corporate governance.’’ 27 Below we discuss the proposed amendments to Rule 14a–8, which have been informed by the public input we have received, including in response to the Proxy Process Roundtable. We 21 See, e.g., letters in response to the Proxy Process Roundtable from American Securities Association dated June 7, 2019; Blackrock, Inc. dated November 16, 2018; Business Roundtable dated November 9, 2018; Exxon Mobil Corporation dated July 26, 2019; Nasdaq, Inc. dated November 14, 2018; Society for Corporate Governance dated November 9, 2018. 22 See letters in response to the Proxy Process Roundtable from Blackrock, Inc. dated November 16, 2018; Society for Corporate Governance dated November 9, 2018. 23 See letter in response to the Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 2019. 24 See letter in response to the Proxy Process Roundtable from the American Securities Association dated June 7, 2019 (citing H.R. Rep No. 115–904, at 2 (2018)). 25 See, e.g., letters in response to the Proxy Process Roundtable from Council of Institutional Investors dated November 8, 2018 (citing Ceres et al., The Business Case for the Current SEC Shareholder Proposal Process 11–12 (2017), available at https://www.ussif.org/files/Public_ Policy/Comment_Letters/ Business%20Case%20for%2014a-8.pdf (‘‘Ceres Business Case’’)); Addenda Capital et al. dated November 13, 2018 (citing Adam M. Kanzer, The Dangerous ‘‘Promise of Market Reform’’: No Shareholder Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Jun. 15, 2017), available at https:// corpgov.law.harvard.edu/2017/06/15/thedangerous-promise-of-market-reform-noshareholder-proposals/). 26 See, e.g., letters in response to the Proxy Process Roundtable from Business Roundtable dated November 9, 2018; Center on Executive Compensation dated August 1, 2018. 27 See letter in response to the Proxy Process Roundtable from Mercy Investment Services, Inc. dated December 3, 2018. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation. II. Discussion of Proposed Amendments A. Rule 14a–8(b)—Eligibility Requirements 1. Relevant History and Background of Rule 14a–8(b) At the time the shareholder-proposal rule was initially adopted, a shareholder-proponent’s eligibility to submit a proposal was not conditioned on owning a minimum amount of a company’s securities, or holding the securities for a specified period of time. Instead, the rule enabled ‘‘a qualified security holder’’ to submit a proposal for inclusion in the company’s proxy materials.28 In 1947, the rule text was revised to specify that ‘‘any security holder entitled to vote at a meeting of security holders of the issuer’’ could submit a proposal.29 In 1976, the Commission considered, but decided not to adopt, minimum ownership requirements, believing that there was not ‘‘sufficient justification’’ at that time for such requirements because the existing eligibility requirements ‘‘have not been abused.’’ 30 However, the Commission later reconsidered the matter in response to ‘‘criticisms of the current rule that have increased with the pressure placed upon the existing mechanism by the large number of proposals submitted each year and the increasing complexity of the issues involved in those proposals, as well as the susceptibility of certain provisions of the rule and the staff’s interpretations thereunder to abuse by a few proponents and issuers.’’ 31 The 28 See Release No. 34–3347 (Dec. 18, 1942) [7 FR 10655 (Dec. 22, 1942)]. 29 See Adoption of Revised Proxy Rules, Release No. 34–4037 (Dec. 17, 1947) [12 FR 8768 (Dec. 24, 1947)]. 30 See Adoption of Amendments Relating to Proposals by Security Holders, Release No. 34– 12999 (Nov. 22, 1976) [41 FR 52994 (Dec. 3, 1976)] (‘‘1976 Adopting Release’’). 31 1982 Proposing Release, supra note 2. at 47421. The Commission further explained: ‘‘It has been suggested that under current construction of the rule, a few proponents have been able to use the rule as a publicity mechanism to further personal interests that are unrelated to the interests of security holders as security holders and that certain sophisticated proponents, who submit proposals annually to a variety of issuers, are able to require the inclusion of a proposal which has generated little security holder interest by simply changing its form or minimally varying its coverage. The rule was not designed to burden the proxy solicitation process by requiring the inclusion of such proposals.’’ Id. at 47422 n.8. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 66461 Commission found merit in the views of many commenters that ‘‘abuse of the security holder proposal rule could be curtailed by requiring shareholders who put the company and other shareholders to the expense of including a proposal in a proxy statement to have some measured economic stake or investment interest in the corporation.’’ 32 The Commission accordingly amended the rule in 1983 to require shareholderproponents to own ‘‘at least 1% or $1,000 in market value of securities entitled to be voted at the meeting’’ and to ‘‘have held such securities for at least one year.’’ 33 Co-proponents, however, were permitted to aggregate their holdings for purposes of meeting the ownership requirements.34 In 1998, the Commission raised the $1,000 threshold to $2,000.35 When it proposed this increase, the Commission explained that the revision was partly to adjust for inflation.36 Upon adoption of the $2,000 threshold, the Commission noted that ‘‘[t]here was little opposition to the proposed increase among commenters.’’ 37 While the Commission had elected not to propose an amount higher than $2,000 ‘‘out of concern that a more significant increase could restrict access to companies’ proxy materials by smaller shareholders,’’ 38 the Commission noted upon adopting the $2,000 threshold that several commenters ‘‘do not believe the increase is great enough to be meaningful, especially in light of the overall increase in stock prices over the last few years.’’ 39 The Commission accordingly indicated that it had ‘‘decided to limit the increase to $2,000 for now.’’ 40 The Commission also sought comment on whether to shorten or lengthen the one-year holding period,41 but it was not revised because, at that time, ‘‘there was no significant support for any modifications’’ to that 32 See 1983 Adopting Release, supra note 6. In addition, the Commission noted in 2007 that the one-year holding period ensures that shareholder proposals are submitted ‘‘by shareholders with a significant long-term stake in the company.’’ See 2007 Proxy Access Proposing Release, supra note 12. 34 See 1983 Adopting Release, supra note 6. 35 See 1998 Adopting Release, supra note 8. 36 The Commission explained that the actual inflation adjustment would have been $600, which would have set the new threshold at $1,600. A new threshold of $2,000 was proposed, however, to account for future inflation and to simplify the calculation process. See Amendments to Rules on Shareholder Proposals, Release No. 34–39093 (Sep. 18, 1997) [62 FR 50682 (Sep. 26, 1997)] (‘‘1997 Proposing Release’’). 37 See 1998 Adopting Release, supra note 8. 38 See 1997 Proposing Release, supra note 36. 39 See 1998 Adopting Release, supra note 8. 40 Id. (emphasis added). 41 See 1997 Proposing Release, supra note 36. 33 Id. E:\FR\FM\04DEP2.SGM 04DEP2 66462 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules aspect of the rule.42 The Commission has not revised the share ownership requirements since 1998. 2. Public Views on Rule 14a–8(b) In recent years, some observers have advocated increasing the amount of securities a shareholder must own to be eligible to submit a shareholder proposal.43 These groups have suggested alternative ownership requirements, such as eliminating the flat dollar threshold in favor of relying solely on a percentage-of-shares-owned test,44 or raising the ownership threshold to $50,000, indexed annually for inflation.45 Some observers have suggested raising the ownership requirements to lessen the burden on companies,46 or to ensure that shareholder-proponents have a meaningful stake in the companies to which they submit proposals.47 Others have suggested keeping the existing $2,000 requirement, or limiting any increase, to avoid excluding smaller investors,48 and some have suggested 42 See 1998 Adopting Release, supra note 8. e.g., Business Roundtable, Responsible Shareholder Engagement and Long-Term Value Creation (Oct. 31, 2016), available at https:// s3.amazonaws.com/brt.org/archive/reports/ BRT%20Shareholder%20proposal%20paperfinal.pdf (‘‘BRT Report’’); Nasdaq, The Promise of Market Reform: Reigniting America’s Economic Engine (last updated Feb. 2018), available at https://www.nasdaq.com/docs/Nasdaq_Blueprint_ to_Revitalize_Capital_Markets_April_2018_ tcm5044-43175.pdf (‘‘Nasdaq Report’’); U.S. Dep’t of Treasury, A Financial System That Creates Economic Opportunities 32 (Oct. 2017), available at https://www.treasury.gov/press-center/pressreleases/Documents/A-Financial-System-CapitalMarkets-FINAL-FINAL.pdf (‘‘Treasury Report’’); see also letters in response to the Proxy Process Roundtable from Advent Capital Management, Inc. dated July 29, 2019; Braemar Hotels & Resorts Inc. dated January 4, 2019; Business Roundtable dated November 9, 2018 and June 3, 2019; Center on Executive Compensation dated August 1, 2018; Group 1 Automotive, Inc. dated January 11, 2019; National Association of Manufacturers dated October 30, 2018; Nasdaq, Inc. dated November 14, 2018; Nasdaq, Inc. et al. dated February 4, 2019; Society for Corporate Governance dated November 9, 2018; The Capital Group Companies dated November 14, 2018. At the Commission’s 38th Annual Government-Business Forum on Small Business Capital Formation held on August 14, 2019, one of the forum participant recommendations was to amend the submission thresholds. 44 See BRT Report, supra note 43; Nasdaq Report, supra note 43. 45 See letter in response to the Proxy Process Roundtable from Society for Corporate Governance dated November 9, 2018. 46 See id. 47 See, e.g., Nasdaq Report, supra note 43. 48 See Ceres et al., An Investor Response to the U.S. Chamber’s Proposal to Revise SEC Rule 14a– khammond on DSKJM1Z7X2PROD with PROPOSALS2 43 See, VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 that dropping the flat dollar threshold in favor of a percentage-only test would significantly limit shareholders’ ability to submit shareholder proposals for inclusion in companies’ proxy materials.49 Several observers also have suggested lengthening the current oneyear holding period requirement,50 8, (Nov. 9, 2017), available at https://www.iccr.org/ sites/default/files/resources_attachments/investor_ response_to_chamber_14a-8_nov_9_final_2.pdf; see also letters in response to the Proxy Process Roundtable from Addenda Capital et al. dated November 13, 2018; Dominican Sisters of Adrian, Michigan dated December 11, 2018; American Federation of Labor and Congress of Industrial Organizations dated November 9, 2018; Anonymous (19 commenters); California Public Employees’ Retirement System dated December 11, 2018; California State Teachers’ Retirement System dated December 3, 2018; Conference for Corporate Responsibility Indiana and Michigan dated December 3, 2018; Congregation of Sisters of St. Agnes dated December 4, 2018; Council of Institutional Investors dated January 31, 2019; Theodore S. Cochrane dated January 2, 2019; Congregation of St. Basil dated December 3, 2018; CtW Investment Group dated January 16, 2019; Dominican Sisters—Grand Rapids dated December 2, 2018; Dominican Sisters of Springfield Illinois dated December 3, 2018; The Episcopal Church received December 11, 2018; Everence Financial dated December 6, 2018; FAIRR Initiative dated December 4, 2018; Form Letter A (18,614 letters); Franciscan Sisters of Perpetual Adoration dated December 5, 2018; Glass Lewis dated November 14, 2018; Interfaith Center on Corporate Responsibility dated November 6, 2018; Investor Voice, SPC dated November 14, 2018; Jesuit Committee on Investment Responsibility dated December 10, 2018; Loring, Wolcott & Coolidge dated December 4, 2018; James McRitchie received November 27, 2018; Mercy Investment Services, Inc. dated December 3, 2018; MFS Investment Management dated November 14, 2018; NorthStar Asset Management, Inc. dated December 4, 2018; Pax World Funds dated November 9, 2018; Pension Investment Association of Canada dated April 17, 2019; Praxis Mutual Funds dated December 6, 2018; Presbyterian Church (U.S.A.) dated November 13, 2018; Priests of the Sacred Heart dated December 3, 2018; Province of St. Joseph of the Capuchin Order dated December 3, 2018; Racine Dominicans dated December 5, 2018; Robert E. Rutkowski dated November 15, 2018; Shareholder Rights Group dated December 4, 2018; Sisters of Charity—Halifax dated December 5, 2018; Sisters of the Presentation of the Blessed Virgin Mary dated December 3, 2018; Sisters of St. Joseph of Orange dated December 18, 2018; Sisters of the Holy Cross dated December 10, 2018; State of New York Office of the State Comptroller dated November 13, 2018; Trinity Health dated November 9, 2018; Washington State Investment Board dated November 14, 2018. 49 See Letter to Jeb Hensarling, Chairman and Maxine Waters, Ranking Member, House Financial Services Committee from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors, dated April 24, 2017, available at https:// democrats-financialservices.house.gov/ uploadedfiles/letter_-_cii_04.27.2017.pdf. 50 See BRT Report, supra note 43; see also letters in response to the Proxy Process Roundtable from Advent Capital Management, LLC dated July 29, 2019; Business Roundtable dated November 9, PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 while at least one observer has suggested shortening it.51 3. Need for Proposed Amendments The shareholder-proposal process established by Rule 14a–8 facilitates engagement between shareholders and the companies they own. The rule also enables individual shareholders to shift to the company, and ultimately other shareholders, the cost of soliciting proxies for their proposals. Because it shifts burdens from proponents to companies, it is susceptible to overuse.52 As the Commission has previously recognized, the ownership threshold and holding period in Rule 14a–8(b) aim to strike an appropriate balance such that a shareholder has some meaningful ‘‘economic stake or investment interest’’ in a company before the shareholder may draw upon company resources to require the inclusion of a proposal in the company’s proxy statement, and before the shareholder may use the company’s proxy statement to command the attention of other shareholders to consider and vote upon the proposal.53 Much has changed since the Commission last considered amendments to Rule 14a–8, including the level and ease of engagement between companies and their shareholders. For instance, shareholders now have alternative ways, such as through social media, to communicate their preferences to companies and effect change.54 2018; Nasdaq, Inc. dated November 14, 2018; The Vanguard Group, Inc. dated September 20, 2019. 51 See Roundtable Transcript, supra note 13, at 150, comments of Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations. 52 See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 85 (1991) (Under Rule 14a–8, ‘‘the majority must subsidize the activities of the minority who are allowed to make proposals without incurring the costs.’’). 53 See 1982 Proposing Release, supra note 2; 1983 Adopting Release, supra note 6. 54 See, e.g., Donna Fuscaldo, Say Gives Retail Investors A Voice And Tesla Listens, Forbes (Feb. 19, 2019), https://www.forbes.com/sites/ donnafuscaldo/2019/02/19/say-gives-retailinvestors-a-voice-and-tesla-listens/; Vanessa Fuhrmans, Some U.S. Companies Bow to SocialMedia Pressure, Sever NRA Ties, Wall Street Journal (Feb. 24, 2018), https://www.wsj.com/ articles/some-u-s-companies-bow-to-social-mediapressure-sever-nra-ties-1519431715. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules We are concerned that the $2,000/ one-year threshold established in 1998 does not strike the appropriate balance today. We believe that holding $2,000 worth of stock for a single year does not demonstrate enough of a meaningful economic stake or investment interest in a company to warrant the inclusion of a shareholder’s proposal in the company’s proxy statement. As the table below demonstrates, the $2,000 threshold, adjusted for inflation, would be equal to $3,152 in 2019 dollars.55 Moreover, using the cumulative growth of the Russell 3000 Index as a proxy for the average increase in companies’ 66463 values, a $2,000 investment in a company in 1998 would be worth approximately $8,379 today.56 We believe that the increase in price of shares and changes in inflation have contributed, in part, to the need to revisit the one-year holding period associated with the $2,000 threshold. OWNERSHIP THRESHOLD COMPARISON Threshold established in 1998 1998 threshold adjusted for inflation Change in Russell 3000 Index $2,000 $3,152 $8,379 We recognize that the amount of stock owned is not the only way to demonstrate an interest in a company, particularly for small investors. In many cases, the length of time owning the company’s securities may be a more meaningful indicator that a shareholder has a sufficient interest that warrants use of the company’s proxy statement. A shareholder’s demonstrated long-term investment interest in a company may make it more likely that the shareholder’s proposal will reflect a greater interest in the company and its shareholders, rather than an intention to use the company and the proxy process to promote a personal interest or publicize a general cause. A shareholder’s demonstrated long-term investment interest may also make it more likely that a shareholder will continue to hold the shares after the shareholder’s proposal is voted upon, and thus more likely that any costs of implementing the shareholder’s proposal will be borne in part by the shareholder responsible for the proposal. We believe having a longer holding period is particularly important if the dollar value of the ownership interest is minimal because a person seeking to misuse the shareholderproposal process could more easily purchase the smallest possible stake in a company to take advantage of the process. We are proposing to establish enhanced ownership requirements under Rule 14a–8(b) that take into account both the amount of securities owned and the length of time held, in determining a shareholder’s eligibility to submit a shareholder proposal. Under the proposed ownership requirements, the shareholder-proposal process would remain available to a wide range of shareholders, including those with smaller investments, but would require those with smaller investments to hold their shares for a longer period of time. We believe these new thresholds would more appropriately balance the interests of shareholders who seek to use the company’s proxy statement to advance their own proposals, on the one hand, with the interests of companies and other shareholders who bear the burdens associated with the inclusion of such proposals, on the other hand. We also believe the new thresholds would be a better indicator of a shareholder’s investment interest in the company. Under the proposed rule, a shareholder would be eligible to submit a Rule 14a–8 proposal for inclusion in a company’s proxy materials if the shareholder satisfies one of three ownership requirements, each of which is designed to show that the shareholder-proponent has a demonstrated economic stake or investment interest in the company to which the proposal is submitted. Specifically, a shareholder would be eligible to submit a Rule 14a–8 proposal if the shareholder has continuously held at least: • $2,000 of the company’s securities entitled to vote on the proposal for at least three years; • $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or • $25,000 of the company’s securities entitled to vote on the proposal for at least one year.57 The proposed rule would retain the key elements of a minimum amount of securities owned and minimum time period held, including retaining the current $2,000 threshold for shares held continuously for at least three years. The tiered approach under the proposed revision would provide multiple options for demonstrating an ownership stake through a combination of amount of securities owned and length of time held. We believe this approach takes into account the varying situations of shareholders and would be preferable to a one-size-fits-all approach. Under the proposed rule, shareholders owning a smaller amount of securities could utilize the rule, provided that ownership was continuous over a longer period of time. The tiered approach would enable other shareholders to demonstrate an economic stake or investment interest through larger ownership interests and shorter holding periods. Under the proposed rule, the current $2,000 threshold would remain the same to preserve the ability of long-term shareholders owning a relatively small amount of shares to continue to utilize Rule 14a–8, but these investors would be required to hold the securities for at least three years to be eligible to submit a proposal. In light of the small investment amount required under this ownership tier, we believe that a longer holding period is warranted to demonstrate a shareholder’s sufficient investment interest in the company and, in turn, to justify requiring the company to include such a shareholder’s proposal in its proxy statement. We are proposing two additional eligibility options for shareholders, reflecting differences in amount of securities held and length of time held. We believe that the proposed thresholds 55 $3,152 = $2,000 × 1.576 (cumulative rate of inflation between May 1998 and August 2019 using the CPI inflation calculator, available at https:// data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C 600.00&year1=201011&year2=201906). 56 $8,379 = $2,000 × 4.190 (cumulative rate of growth of the Russell 3000 index between May 1998 and August 2019 assuming dividends are reinvested). Data is retrieved from Compustat Daily Updates—Index Prices. 57 Due to market fluctuations, the value of a shareholder’s investment in a company may vary throughout the applicable holding period before the shareholder submits the proposal. In order to determine whether the shareholder satisfies the relevant ownership threshold, the shareholder should look at whether, on any date within the 60 calendar days before the date the shareholder submits the proposal, the shareholder’s investment is valued at the relevant threshold or greater, based on the average of the bid and ask prices. See 1983 Adopting Release, supra note 6. khammond on DSKJM1Z7X2PROD with PROPOSALS2 4. Proposed Amendments VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 66464 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules of $15,000 for at least two years and $25,000 for at least one year are each indicative of a shareholder having an economic stake or investment interest in the company that would justify requiring the company to include such a shareholder’s proposal in its proxy statement. We also propose to eliminate the current 1 percent ownership threshold, which historically has not been utilized. The vast majority of investors that submit shareholder proposals do not meet a 1 percent ownership threshold.58 In addition, we understand that the types of investors that hold 1 percent or more of a company’s shares generally do $2,000 Threshold as a percentage of market value Registrant Largest Registrant in the S&P 500 Index .................................................................................... 500th Registrant in the S&P 500 Index ....................................................................................... 3,000th Registrant in the Russell Index ...................................................................................... khammond on DSKJM1Z7X2PROD with PROPOSALS2 not use Rule 14a–8 as a tool for communicating with boards and management.59 The following table compares the proposed dollar thresholds as a percentage of market value as of December 2018 for the S&P 500 Index constituents and May 2019 for the Russell 3000 Index constituents: 60 0.0000003 0.0001 0.0013 $15,000 Threshold as a percentage of market value 0.0000019 0.0005 0.0098 $25,000 Threshold as a percentage of market value 0.0000032 0.0009 0.0164 The proposed rule would not allow shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership thresholds to submit a Rule 14a–8 proposal. Although the Commission allowed shareholders to aggregate their holdings when it first adopted ownership thresholds in 1983, it did not provide reasons for doing so. We believe that allowing shareholders to aggregate their securities to meet the new proposed thresholds would undermine the goal of ensuring that every shareholder who wishes to use a company’s proxy statement to advance a proposal has a sufficient economic stake or investment interest in the company. Shareholders, however, would continue to be permitted to co-file or cosponsor shareholder proposals as a group if each shareholder-proponent in the group meets an eligibility requirement. Shareholder-proponents often co-file or co-sponsor a shareholder proposal for a variety of reasons, such as conveying to the company’s management, board, and other shareholders that the proposal has support from other shareholders. A lead filer is sometimes designated as the primary point of contact for the proposal, and each co-filer authorizes the lead filer to negotiate with the company and/or withdraw the proposal on the co-filer’s behalf. Currently the rules do not require shareholderproponents to designate a lead filer or make explicit other arrangements, but we believe this practice could facilitate engagement and reduce administrative burdens on companies, co-filers, and the staff. We believe that, as a best practice, shareholder-proponents should clearly state in their initial submittal letter to the company that they are co-filing the proposal with other proponents and identify the lead filer, specifying whether such lead filer is authorized to negotiate with the company and withdraw the proposal on the co-filer’s behalf. Although we are not proposing to require this practice in our rules, we request comment as to whether we should revise the rules to require that co-filers identify a lead filer.61 We believe the proposed tiered thresholds would appropriately balance shareholders’ ability to submit proposals with the attendant burdens. We are mindful of concerns that any revisions to the ownership requirements may have a greater effect on shareholders with smaller investments. We believe that the amendments we are proposing today adequately preserve the ability of smaller shareholders to submit proposals. Importantly, the proposed thresholds allow small and large shareholders to continue to participate in the shareholder-proposal process. We are, however, seeking comment on whether we should use other thresholds and/or criteria for determining eligibility to submit shareholder proposals and, if so, what thresholds or criteria should be considered. We request and encourage any interested person to submit comments regarding the proposed amendments, specific issues discussed in this release, and other matters that may have an effect on the proposals. We note that comments are of the greatest assistance if accompanied by supporting data and analysis of the issues addressed in those comments. 58 See letter to Bill Huizenga, Chairman and Carolyn B. Maloney, Ranking Member, Subcommittee on Capital Markets, Securities, and Investment Committee on Financial Services from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors, dated May 22, 2018 (explaining that ‘‘[e]ven [the Council of Institutional Investors’] largest public pension fund members rarely hold 1% of a public company’’), available at https://www.cii.org/files/May%2022,%202018%20 Letter%20to%20Capital%20Markets%20 Subcommittee%20(final).pdf; letter to The Honorable Maxine Waters, Ranking Member, Committee on Financial Services from Jack Ehnes, Chief Executive Officer, CalSTRS, (June 5, 2017), at 1 (‘‘While one percent may sound like a small amount, even a large investor like the $200 billion CalSTRS fund does not own one percent of publicly traded companies.’’), available at https:// www.calstrs.com/sites/main/files/fileattachments/ 06-05-2017_maxine_financial_choice_act.pdf; Statement of New York City Comptroller Scott M. Stringer on the April 19th Discussion Draft of the Financial CHOICE Act of 2017 (Apr. 25, 2017), at 1 (‘‘Despite being among the largest pension investors in the world, we rarely hold more than 0.5% of any individual company, and most often hold less.’’), available at https:// comptroller.nyc.gov/newsroom/testimonies/ statement-of-new-york-city-comptrollerscott-mstringer-on-the-april-19th-discussion-draft-of-thefinancial-choice-act-of-2017-act/. 59 See, e.g., Roundtable Transcript, supra note 13, at 150, comments of Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations. 60 Data for the S&P 500 constituents is retrieved from CRSP and data for the Russell 3000 constituents is retrieved from Market Capitalization Ranges, FTSE Russell Market, https:// www.ftserussell.com/research-insights/russellreconstitution/market-capitalization-ranges (last visited Oct. 31, 2019). 61 We note that ambiguities in the nature of coordination on a proposal’s submission could prompt companies to seek exclusion under Rule 14a–8(i)(11). Specifically, if two or more shareholder-proponents submit substantially duplicative proposals but fail to clearly indicate that they intend to co-file or co-sponsor the proposal, the later-received proposal may be susceptible to exclusion under Rule 14a–8(i)(11). VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 Request for Comment 1. We are proposing to amend Rule 14a–8(b) to establish new ownership requirements for establishing an investor’s eligibility to submit a shareholder proposal to be included in a company’s proxy statement. Should we amend Rule 14a–8(b) as proposed? E:\FR\FM\04DEP2.SGM 04DEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules 2. The proposed amendments seek to strike a balance between maintaining an avenue of communication for shareholders, including long-term shareholders, while also recognizing the costs incurred by companies and their shareholders in addressing shareholder proposals. Are there other considerations we should take into account? 3. Should we adopt a tiered approach, providing multiple eligibility options, as proposed? Are there other approaches that would be preferable instead? 4. How is a sufficient economic stake or investment interest best demonstrated? Is it by a combination of amount invested and length of time held, as proposed, or should another approach to eligibility be used? 5. Are the proposed dollar amounts and holding periods that we propose for each of the three tiers appropriate? Are there other dollar amounts and/or holding periods that would better balance shareholders’ ability to submit proposals and the related costs? Should any dollar amounts be indexed for inflation or stock-market performance? 6. We are proposing to maintain the $2,000 ownership level, but increase the corresponding holding period to three years. Should we also increase the $2,000 threshold? If so, what would be an appropriate increase? For example, should we adjust for inflation (e.g., $3,000) or otherwise establish a higher amount? 7. Are there potential drawbacks with the tiered approach? If so, what are they? 8. Instead of adopting a tiered approach, should we simply increase the $2,000/one-year requirement? If so, what would be an appropriate threshold? 9. Should the current 1 percent test be eliminated, as proposed? Should the 1 percent threshold instead be replaced with a different percentage threshold? Are there ways in which retaining a percentage-based test would be useful in conjunction with the proposed tiered thresholds? 10. Should we instead use only a percentage-based test? If so, at what percentage level? Are there practical difficulties associated with a percentage-based test such as calculation difficulties that we should take into consideration? 11. Should we prohibit the aggregation of holdings to meet the thresholds, as proposed? Would allowing aggregation of holdings be consistent with a shareholder having a sufficient economic stake or investment interest in the company to justify the VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 costs associated with shareholder proposals? 12. If we were to allow shareholders to aggregate their holdings to meet the thresholds, should there be a limit on the number of shareholders that could aggregate their shares for purposes of satisfying the proposed ownership requirements? If so, what should the limit be? For example, should the number of shareholders that are permitted to aggregate be limited to five so as to reduce the administrative burden on companies associated with processing co-filed submissions? 13. Should we require shareholderproponents to designate a lead filer when co-filing or co-sponsoring a proposal? Would doing so facilitate engagement and reduce administrative burdens on companies and co-filers? If we required shareholder-proponents to designate a lead filer, should we require that the lead filer be authorized to negotiate the withdrawal of the proposal on behalf of the other co-filers? Would such a requirement encourage shareholders to file their own proposals rather than co-file? Would the number of shareholder proposal submissions increase as a result? 14. What other avenues can or do shareholders use to communicate with companies besides the Rule 14a–8 process? Has the availability and effectiveness of these other channels changed over time? 15. Unlike other issuers, open-end investment companies generally do not hold shareholder meetings each year. As a result, several years may pass between the submission of a shareholder proposal and the next shareholder meeting. In these cases, the submission may no longer reflect the interest of the proponent or may be in need of updating, or the shareholder may no longer own shares or may otherwise be unable to present the proposal at the meeting. Should any special provisions be considered, after some passage of time (e.g., two years, three years, five years, etc.), to require shareholders to reaffirm submission of shareholder proposals for open-end investment companies or, absent reaffirmation, for the proposals to expire? 16. Does the Rule 14a–8 process work well? Should the Commission staff continue to review proposals companies wish to exclude? Should the Commission instead review these proposals? Is there a different structure that might serve the interests of companies and shareholders better? Are states better suited to establish a framework governing the submission and consideration of shareholder proposals? PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 66465 B. Proposals Submitted on Behalf of Shareholders 1. Background Companies receive proposals under Rule 14a–8 from individuals and entities that may not qualify to submit proposals at a particular company in their own name, but have arrangements to serve as a representative to submit a proposal on behalf of individuals or entities that have held a sufficient number of shares for the requisite period. We also understand that shareholders may wish to use a representative for a number of reasons, including to obtain assistance from someone who has more experience with the shareholder-proposal process or as a matter of administrative convenience. Often, the shareholder has an established relationship with the representative (e.g., the shareholder has previously used the representative to submit proposals on his or her behalf, or the representative serves as the shareholder’s investment adviser). In practice, the representative typically submits the proposal to the company on the shareholder’s behalf along with necessary documentation, including evidence of ownership (typically in the form of a broker letter) and the shareholder’s written authorization for the representative to submit the proposal and act on the shareholder’s behalf. After the initial submission, the representative acts on the shareholder’s behalf in connection with the matter, and communications between the shareholder and company related to the shareholder proposal are generally handled by the representative. Rule 14a–8 does not address a shareholder’s ability to submit a proposal for inclusion in a company’s proxy materials through a representative; absent Commission regulation, this practice has been governed by state agency law.62 Nevertheless, proposals are submitted by representatives who may or may not themselves have an economic stake in the relevant company. Some commenters have raised concerns about the use of a representative in the shareholder-proposal process.63 For 62 Although Rule 14a–8 does not address a shareholder’s ability to submit a proposal through a representative, it contemplates a representative presenting a proposal on the shareholder’s behalf at a shareholders’ meeting. Specifically, Rule 14a–8(h) states that the shareholder, or a ‘‘representative who is qualified under state law to present the proposal on [the shareholder’s] behalf, must attend the meeting and present the proposal.’’ 17 CFR 240.14a–8(h). 63 See, e.g., BRT Report, supra note 43; Statement of Darla C. Stuckey, President and CEO, Society for E:\FR\FM\04DEP2.SGM Continued 04DEP2 66466 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules example, some observers have suggested that it may be difficult in some cases to ascertain whether the shareholder in fact supports the proposal that has been submitted on their behalf.64 When a representative speaks and acts for a shareholder, there may be a question as to whether the shareholder has a genuine and meaningful interest in the proposal, or whether the proposal is instead primarily of interest to the representative, with only an acquiescent interest by the shareholder. This uncertainty may also raise questions about whether the eligibility requirements of Rule 14a–8(b) have been satisfied.65 We also note that it can be burdensome for companies to verify the purported agency relationship where the documentation provided by the person or entity submitting the proposal does not clearly establish that relationship. 2. Proposed Amendments khammond on DSKJM1Z7X2PROD with PROPOSALS2 To help address these challenges and concerns, we are proposing to amend the eligibility requirements of Rule 14a– 8 to require shareholders that use a representative to submit a proposal for inclusion in a company’s proxy statement to provide documentation attesting that the shareholder supports the proposal and authorizes the representative to submit the proposal on the shareholder’s behalf. Specifically, the proposed rule would require documentation that: • Identifies the company to which the proposal is directed; Corporate Governance, Before the H. Comm. on Financial Services Subcomm. on Capital Markets and Government Sponsored Enterprises, Sept. 21, 2016; see also letter in response to the Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 2019. 64 See, e.g., Statement of Darla C. Stuckey, President and CEO, Society for Corporate Governance, Before the H. Comm. on Financial Services Subcomm. on Capital Markets and Government Sponsored Enterprises, Sept. 21, 2016. 65 In 2017, the staff of the Division of Corporation Finance (the ‘‘Division’’) issued Staff Legal Bulletin No. 14I (‘‘SLB 14I’’) to address some of the challenges and concerns stemming from a shareholder’s use of an agent in the shareholderproposal process. In SLB 14I, the Division explained that, in evaluating whether the eligibility requirements of Rule 14a–8(b) have been satisfied, it would look to whether a shareholder who uses an agent in the shareholder-proposal process provides documentation describing the shareholder’s delegation of authority to the agent. SLB 14I also explained that, where this information is not provided, there may be a basis to exclude the proposal under Rule 14a–8(b). SLB 14I represents the views of the staff of the Division. It is not a rule, regulation, or statement of the Commission. Furthermore, the Commission has neither approved nor disapproved its content. SLB 14I, like all staff guidance, has no legal force or effect, it does not alter or amend applicable law, and it creates no new or additional obligations for any person. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 • Identifies the annual or special meeting for which the proposal is submitted; • Identifies the shareholderproponent and the designated representative; • Includes the shareholder’s statement authorizing the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf; • Identifies the specific proposal to be submitted; • Includes the shareholder’s statement supporting the proposal; and • Is signed and dated by the shareholder. We believe an affirmative statement that the shareholder authorizes the designated representative to submit the proposal and/or otherwise act on the shareholder’s behalf would help to make clear that the representative has been so authorized. In addition, we believe that a shareholder’s affirmative statement that it supports the proposal would help to ensure that the interest being advanced by the proposal is the shareholder’s own. We believe that these proposed amendments would help safeguard the integrity of the shareholder-proposal process and the eligibility restrictions by making clear that representatives are authorized to so act, and by providing a meaningful degree of assurance as to the shareholder-proponent’s identity, role, and interest in a proposal that is submitted for inclusion in a company’s proxy statement. We also believe that the burden on shareholders of providing this information would be minimal, and we note that much of it is often already provided by shareholders. We also believe that these requirements would reduce some of the administrative burdens on companies associated with confirming the principal-agent relationship. Request for Comment 17. We are proposing to amend Rule 14a–8’s eligibility requirements to require certain additional information when a shareholder uses a representative to act on its behalf in the shareholder-proposal process. Should we amend the rule as proposed? 18. Are the informational requirements we are proposing appropriate? Should we require any additional information or action? If so, what additional information or action should we require? For example, should there be a notarization requirement? How would these measures affect the burden on shareholders? 19. Is any of the proposed information unnecessary to demonstrate the PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 existence of a principal-agent relationship and/or the shareholderproponent’s role in the shareholderproposal process? If so, what information is unnecessary? 20. Are there legal implications outside of the federal securities laws that we should be aware of or consider in allowing a principal-agent relationship in the context of the shareholder-proposal rule? 21. As part of the shareholderproposal submission process, representatives generally deliver to companies the shareholder’s evidence of ownership for purposes of satisfying the requirements of Rule 14a–8(b). Where the shareholder’s shares are held in street name, this evidence comes in the form of a broker letter from the shareholder’s broker. Since a broker letter from the shareholder’s broker generally cannot be obtained without the shareholder’s authorization, does the fact that the representative is able to provide this documentation sufficiently demonstrate the principal-agent relationship and/or the shareholder’s role in the shareholder-proposal process? Is the answer different if the representative is the shareholder’s investment adviser that owes a fiduciary duty to the shareholder? C. The Role of the Shareholder-Proposal Process in Shareholder Engagement 1. Background While Rule 14a–8 provides a means for shareholder-proponents to advance proposals and solicit proxies from other shareholders, the rule is only one of many mechanisms for shareholders to engage with companies and to advocate for the measures they propose. Other forms of engagement, including dialogue between a shareholder and management, may sometimes accomplish a shareholder’s goals without the burdens associated with including a proposal in a company’s proxy statement. Company-shareholder engagement can thus be an important aspect of the shareholder-proposal process, which we encourage both before and after the submission of a shareholder proposal. Proactive company engagement with shareholders has increased in recent years,66 and shareholders frequently withdraw their proposals as a result of companyshareholder engagement.67 We believe 66 See letters in response to the Proxy Process Roundtable from Business Roundtable dated June 3, 2019; Chevron Corporation dated August 20, 2019; Society for Corporate Governance dated November 9, 2018. 67 Company-shareholder engagement with respect to shareholder proposals has led to an increase in E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules that encouraging this trend would be beneficial both to companies and to shareholders. We understand that shareholder proposals are at times used as the sole method of engaging with companies despite a company’s willingness to discuss, and possibly resolve, the matter with the shareholder.68 In those cases, Rule 14a–8 may cause a shareholder to burden a company and other shareholders with a proxy vote that may have been avoided had meaningful engagement taken place. While we recognize that engagement may not always obviate the need for a proposal to be put to a vote, we believe that shareholders should be required to state when they are available to engage with a company when they submit a proposal for inclusion in the company’s proxy statement. We believe that such a statement of availability would encourage greater dialogue between shareholders and companies in the shareholder-proposal process, and may lead to more efficient and less costly resolution of these matters. 2. Proposed Amendment khammond on DSKJM1Z7X2PROD with PROPOSALS2 We are proposing to amend Rule 14a– 8(b) to add a shareholder engagement component to the current eligibility criteria. Specifically, the proposed amendment would require a statement from each shareholder-proponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal.69 The shareholder would be required to include contact information as well as business days and specific times that he the number of withdrawn proposals in recent years. See, e.g., letters in response to the Proxy Process Roundtable from Everence Financial dated December 6, 2018 (‘‘an increasing number of resolutions end up being withdrawn by the proponent because of conversations between [the proponent] and the company’’); Praxis Mutual Funds dated December 6, 2018 (same); Principles for Responsible Investment dated November 14, 2018 (‘‘a growing number of shareholder proposals are withdrawn due to corporate management developing workable solutions with investors’’). 68 We recognize that some shareholderproponents use a shareholder proposal as a way to open a dialogue with management and not with the objective of having the matter go to a vote. See Roundtable Transcript, supra note 13, comments of Michael Garland, Assistant Comptroller, Corporate Governance and Responsible Investment, Office of the Comptroller, New York City. 69 The proposal’s date of submission is the date the proposal is postmarked or transmitted electronically. In the event the proposal is hand delivered, the submission date would be the date of hand delivery. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 or she is available to discuss the proposal with the company.70 We believe that this proposed eligibility requirement would encourage shareholders to engage with companies, and could facilitate useful dialogue between the parties by enabling the company to reach out directly to a shareholder-proponent to understand his or her concerns, potentially leading to a more mutually satisfactory and less burdensome resolution of the matter. Request for Comment 22. We are proposing to amend Rule 14a–8(b) to add a shareholder engagement component to the current eligibility criteria that would require a statement from the shareholderproponent that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. Should we adopt the amendment as proposed? Could the shareholder engagement component be unduly burdensome or subject to abuse rather than facilitating engagement between the shareholder-proponent and the registrant? If so, how could we address such undue burden or abuse? 23. We are also proposing to require that the shareholder-proponent include contact information as well as business days and specific times that he or she is available to discuss the proposal with the company. Should we adopt this amendment as proposed? Should we specify any additional requirements for the contact information or availability? For example, should we require a telephone number or email address to be included? Should we require a minimum number of days or hours that the shareholder-proponent be available? 24. Would companies be more likely to engage with shareholders if the proposed amendment was adopted? Are there other ways to encourage such engagement that we should consider? Are there potential negative consequences of encouraging such engagement between individual shareholders and a company, or are there other potential negative consequences of this proposal? 25. As proposed, a shareholder would have to provide a statement that he or she is able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 70 The contact information and availability would have to be the shareholder’s, and not that of the shareholder’s representative (if the shareholder uses a representative). A shareholder’s representative could, however, participate in any discussions between the company and the shareholder. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 66467 calendar days, after submission of the shareholder proposal. Is this timeframe appropriate? If not, what would be an appropriate timeframe? 26. If the shareholder uses a representative, should we also require that the representative provide a similar statement as to his or her ability to meet to discuss the proposal with the company? 27. Should companies be required to represent that they are able to meet with shareholder-proponents? 28. What are ways that companies engage with shareholders outside of the shareholder-proposal process? D. One-Proposal Limit 1. Background Rule 14a–8(c) provides that ‘‘each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting.’’ As the Commission explained when it adopted this restriction in 1976, the submission of multiple proposals by a single shareholder-proponent ‘‘constitute[s] an unreasonable exercise of the right to submit proposals at the expense of other shareholders’’ and also may ‘‘tend to obscure other material matters in the proxy statement of issuers, thereby reducing the effectiveness of such documents.’’ 71 At the time the one-proposal limitation was adopted, the Commission explained that it was ‘‘aware of the possibility that some proponents may attempt to evade the new limitations through various maneuvers, such as having other persons whose securities they control submit . . . proposals each in their own names.’’ 72 To combat this type of abuse, the Commission clarified that the limitation ‘‘will apply collectively to all persons having an interest in the same securities (e.g., the record owner and the beneficial owner, and joint tenants).’’ 73 We continue to believe that this oneproposal limit is appropriate. In our view, the Commission’s stated reasoning for the one-proposal limit applies equally to representatives who submit proposals on behalf of shareholders they represent. We believe permitting representatives to submit multiple proposals for the same shareholders’ meeting would undermine the purpose of the one-proposal limit. 71 See 1976 Adopting Release, supra note 30. 72 Id. 73 Id. This limitation would continue to apply under the proposed amendments. E:\FR\FM\04DEP2.SGM 04DEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 66468 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules 2. Proposed Amendment We propose an amendment to Rule 14a–8(c) to apply the one-proposal rule to ‘‘each person’’ rather than ‘‘each shareholder’’ who submits a proposal. The amended rule would state, ‘‘Each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders’ meeting.’’ Under the proposed rule, a shareholder-proponent may not submit one proposal in its own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Similarly, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative would be submitting each proposal on behalf of different shareholders. In our view, a shareholder submitting one proposal personally and additional proposals as a representative for consideration at the same meeting, or submitting multiple proposals as a representative at the same meeting, would constitute an unreasonable exercise of the right to submit proposals at the expense of other shareholders and also may tend to obscure other material matters in the proxy statement. We believe this amendment to the rule text would more consistently apply the oneproposal limit to shareholders and representatives of shareholders. The amendment is not intended to prevent shareholders from seeking assistance and advice from lawyers, investment advisers, or others to help them draft shareholder proposals and navigate the shareholder-proposal process. Providing such assistance to more than one shareholder would still be permissible. However, to the extent that the provider of such services submits a proposal, either as a proponent or as a representative, it would be subject to the one-proposal limit and would not be permitted to submit more than one proposal in total. We seek comment, however, on whether the proposed amendment would have unintended consequences on the practice of shareholders using representatives to submit shareholder proposals. We also are seeking comments on whether we should eliminate the practice of allowing natural-person shareholders to use a representative to submit a proposal. We request comment VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 on whether the concerns raised by a shareholder’s use of a representative would be better addressed with an amendment to the rule text, as proposed, or by prohibiting such use of a representative for the purpose of Rule 14a–8. Request for Comment 29. We are proposing to amend Rule 14a–8(c) to explicitly state, ‘‘Each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders’ meeting.’’ Should we amend the rule as proposed? 30. Would the proposed amendment have unintended consequences on shareholders’ use of representatives or other types of advisers, such as lawyers or investment advisers, and, if so, what are those consequences? 31. Alternatively, should we amend Rule 14a–8 to explicitly state that a proposal must be submitted by a natural-person shareholder who meets the eligibility requirements and not by a representative? If so, should we clarify that although a shareholder may hire someone to draft the proposal and advise on the process, the shareholder must be the one to submit the proposal? 32. Alternatively, should we require the shareholder-proponent to disclose to the company how many proposals it has submitted in the past to that company? For example, should we require disclosure of the number of proposals the shareholder has submitted directly, through a representative, or as a representative to the company in the last five years? Should companies be required to disclose this information in the proxy statement? Would this information be material to other shareholders when considering how to vote on the proposal? 33. If adopted, would the proposed informational requirements discussed in Section II.B alleviate the concerns addressed in this section such that the proposed amendments to Rule 14a–8(c) would be unnecessary? 34. In lieu of, or in addition to, limiting the number of proposals a shareholder would be able to submit directly or as a representative for other shareholders, should we adopt a total limit on the number of proposals allowed to be submitted per company per meeting? If so, what numerical limit would be appropriate, and how should such a limit be imposed? PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 35. As an alternative or in addition to limiting the number of proposals a shareholder would be able to submit directly or as a representative for other shareholders, should we adopt a limit on the aggregate number of shareholder proposals a person could submit in a particular calendar year to all companies? If so, what would be an appropriate limit, and how would such a limit be imposed? 36. Should we require companies to disclose how many proposals were withdrawn and therefore not included in the proxy statement, and how many were excluded pursuant to a no-action request? E. Rule 14a–8(i)(12)—Resubmissions 1. Relevant History and Background of Rule 14a–8(i)(12) Since 1948, the Commission has not required a company to include a proposal in its proxy statement ‘‘if substantially the same proposal was submitted to the security holders for action at the last annual meeting of security holders or at any special meeting held subsequent thereto and received less than three percent of the total number of votes cast in regard to the proposal.’’ 74 The Commission explained that the purpose of the provision was ‘‘to relieve the management of the necessity of including proposals which have been previously submitted to security holders without evoking any substantial security holder interest therein.’’ 75 In 1954, the Commission observed that the ability to resubmit proposals that received 3 percent or more of the vote ‘‘resulted in the repetition year after year of proposals which have evoked very modest stockholder interest,’’ and amended the provision to add two additional resubmission thresholds; 6 percent if the matter had been previously voted on twice and 10 percent if the matter had been previously voted on three or more times.76 As a result from 1954 to until today, a shareholder proposal was excludable if substantially the same proposal, or substantially the same subject matter, had previously been submitted during the relevant lookback period and received less than 3, 6, or 10 percent of the vote the last time it was voted on if voted on once, twice, or three or more times, respectively.77 74 See Adoption of Amendments to Proxy Rules, Release No. 34–4185 (Nov. 5, 1948) [13 FR 6678 (Nov. 13, 1948)]. 75 See id. 76 See 1954 Adopting Release, supra note 11. 77 See id. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules In 1983, the Commission raised the 3 and 6 percent thresholds to 5 and 8 percent, respectively, but these new thresholds subsequently were vacated because a court found that the Commission had not provided adequate notice of its proposal to raise the thresholds. The Commission accordingly reinstated the 3 and 6 percent thresholds in 1985, and it elected not to propose new thresholds at that time.78 In 1997, the Commission proposed increasing the resubmission thresholds to 6, 15, and 30 percent and, in doing so, stated that ‘‘a proposal that has not achieved these levels of support has been fairly tested and stands no significant chance of obtaining the level of voting support required for approval.’’ 79 The Commission also explained that it ‘‘propose[d] to increase the second and third thresholds by relatively larger amounts because the proposal will have had two or three years to generate support.’’ 80 While the Commission adopted other amendments (including increasing the share ownership threshold), it chose not to adopt this proposed amendment to the resubmission thresholds because ‘‘many commenters from the shareholder community [had] expressed serious concerns.’’ 81 The resubmission thresholds have remained 3, 6, and 10 percent since 1954. khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. Public Views on Rule 14a–8(i)(12) Over the last several years, public interest in revisiting the resubmission thresholds has grown. For example, in April 2014, the Commission received a 78 See Proposals of Security Holders, Release No. 34–22625 (Nov. 14, 1985) [50 FR 48180 (Nov. 22, 1985)]. The U.S. District Court for the District of Columbia held that there was inadequate notice of the proposed rulemaking under the Administrative Procedure Act, explaining that the Commission had requested comment on ‘‘the appropriate levels for the percentage tests,’’ but ‘‘did not propose new percentage thresholds,’’ did not ‘‘reveal the theories that prompted the SEC to propose the change,’’ and did not indicate ‘‘whether the agency proposed the percentages to be raised, lowered, or maintained.’’ See United Church Bd. for World Ministries v. SEC, 617 F. Supp. 837, 839 (D.D.C. 1985). 79 See 1997 Proposing Release, supra note 36. 80 See id. These new thresholds were introduced as part of a broader rulemaking that included other proposed revisions to Rule 14a–8 that, if adopted, were expected to result in fewer excludable proposals under the rule, and one of the reasons the Commission gave for proposing these revised resubmission thresholds was that higher thresholds would ‘‘counter-balance’’ the effect the other revisions would have had on the excludability of proposals. 81 See 1998 Adopting Release, supra note 8. Some commenters had expressed concern that the increases ‘‘would operate to exclude too great a percentage of proposals—particularly those focusing on social policy issues which tend to receive lower percentages of the shareholder vote.’’ Id. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 rulemaking petition in support of revising the thresholds (the ‘‘Rulemaking Petition’’).82 In response to the Rulemaking Petition, the Commission received twenty-three comment letters, expressing a range of views on possible changes to the thresholds.83 There have also been other calls for reform in this area,84 as well as congressional interest.85 Some groups have expressed support for raising the resubmission thresholds because they believe the current thresholds no longer serve their intended purpose.86 These observers suggest that resubmitted proposals distract shareholders and their fiduciaries from potentially more important matters by requiring them to spend additional time and resources reconsidering issues that have already been rejected by a majority of shareholders.87 In contrast, other groups suggest that, while the process may take time, resubmitted proposals can increase interest in, and shareholder support for, issues that at least some shareholders consider important.88 In response to the 82 See Rulemaking Petition from the U.S. Chamber of Commerce, National Association of Corporate Directors, National Black Chamber of Commerce, American Petroleum Institute, American Insurance Association, The Latino Coalition, Financial Services Roundtable, Center on Executive Compensation, and Financial Services Forum, April 9, 2014, available at https:// www.sec.gov/rules/petitions/2014/petn4-675.pdf. 83 Comment letters received in response to the Rulemaking Petition are available at https:// www.sec.gov/comments/4-675/4-675.shtml. 84 See, e.g., BRT Report, supra note 43; Center for Capital Markets Competitiveness, Shareholder Proposal Reform: The Need to Protect Investors and Promote the Long-Term Value of Public Companies (2017), available at https:// www.centerforcapitalmarkets.com/wp-content/ uploads/2013/08/023270_CCMC-SEC-ShareholderProposal-Reform-Report_Online_Report.pdf (‘‘CCMC Report’’); Nasdaq Report, supra note 43; Treasury Report, supra note 43. At the Commission’s 38th Annual Government—Business Forum on Small Business Capital Formation held on August 14, 2019, one of the forum participant recommendations was to amend the resubmission thresholds. 85 See, e.g., Corporate Governance: Fostering a System That Promotes Capital Formation and Maximizes Shareholder Value: Hearing Before U.S. H.R. Subcomm. on Capital Markets and Government Sponsored Enterprises of the Committee on Financial Services, 114th Cong. (2016); Proxy Process and Rules: Examining Current Practices and Potential Changes: Hearing Before U.S. S. Comm. on Banking, Housing, and Urban Affairs, 115th Cong. (2018); H.R. 5756, 115th Cong. (2018); Financial CHOICE Act of 2017, H.R. 10, 115th Cong. § 844 (2017). 86 See, e.g., CCMC Report, supra note 84; Rulemaking Petition, supra note 82. 87 See, e.g., Rulemaking Petition, supra note 82, at 8–9. 88 See Ceres Business Case, supra note 25; letter in response to the Proxy Process Roundtable from Dominican Sisters of Springfield Illinois dated December 3, 2018; letter in response to the PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 66469 Rulemaking Petition, one commenter cited as an example of an issue that took time to gain broader shareholder support, climate-change proposals, which averaged voting support of approximately 5 percent in 1999 and approximately 38 percent by 2017.89 Some groups have suggested that a significant number of shareholder proposals are resubmissions of previously-submitted proposals. For example, one study indicates that 1,063 of 3,392 proposals that were included in the proxy statements of Fortune 250 companies between 2007 and 2016 were resubmitted proposals.90 This report also states that 100 proposals were resubmitted three or more times between 2006 and 2013.91 A separate report states that one-third of proposals voted on between 2011 and 2018 were submitted two or more times at the same company.92 This report also finds that approximately 95 percent of proposals are eligible for resubmission after the first submission and 90 percent are eligible after the second and third submission, and that ‘‘nearly all proposals that clear those thresholds and are submitted again remain eligible in subsequent submissions.’’ 93 In addition, the report indicates that the overwhelming majority of proposals that win majority support do so the first time they are submitted, and less than 9 percent of proposals that fail to win majority support the first time go on to pass in a subsequent attempt.94 It further notes that ‘‘[w]hen the SEC first adopted the [resubmission] thresholds, between one-half and three-quarters of proposals failed to win sufficient support for resubmission,’’ and that ‘‘the 3%, 6% and 10% resubmission thresholds preclude a much smaller proportion of shareholder proposals today than in the past.’’ 95 Members of other groups have indicated that ‘‘[r]esubmissions for a Rulemaking Petition from The Nathan Cummings Foundation dated April 30, 2018. 89 See letter in response to the Rulemaking Petition from The Nathan Cummings Foundation dated April 30, 2018. 90 See James R. Copland & Margaret M. O’Keefe, An Annual Report on Corporate Governance and Shareholder Activism, Manhattan Institute for Policy Research (2016), available at https:// media4.manhattan-institute.org/sites/default/files/ pmr_2016.pdf. 91 Id. 92 See Brandon Whitehill, Clearing the Bar, Shareholder Proposals and Resubmission Thresholds, Council of Institutional Investors (Nov. 2018), available at https://docs.wixstatic.com/ugd/ 72d47f_092014c240614a1b9454629039d1c649.pdf (‘‘CII Report’’). For a discussion of our findings with respect to this data, see infra note 197. 93 Id. 94 Id. at 8. 95 Id. E:\FR\FM\04DEP2.SGM 04DEP2 66470 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 third or fourth time are very rare,’’ stating that since 2010 (and presumably through the report’s publication date in 2017), a total of 35 environmental and social proposals that received less than 20 percent of the shareholder vote for two or more years were resubmitted.96 According to this report, these 35 proposals were resubmitted to 26 companies.97 Some observers argue that the resubmission thresholds should be raised because companies incur significant expense as a result of receiving shareholder proposals, including resubmitted proposals, that are unlikely to win majority support.98 In response to the Proxy Process Roundtable, some commenters expressed views that: Resubmitted shareholder proposals often take a disproportionate amount of time compared to annual management proposals; 99 resubmitted proposals exacerbate the costs of shareholder proposals; 100 the cost in terms of corporate resources spent to deal with resubmitted proposals is significant; 101 resubmitted proposals divert management time and resources; 102 and all shareholders bear the costs associated with resubmitted shareholder 96 See Jonas Kron, Trillium Asset Management & Brandon Rees, AFL–CIO Office of Investment and co-chair CII Shareholder Advocacy Committee, Frequently Asked Questions about Shareholder Proposals, Council of Institutional Investors (last visited Oct. 30, 2019), available at https:// www.cii.org/files/10_10_Shareholder_Proposal_ FAQ(2).pdf. 97 Id. 98 See, e.g., Rulemaking Petition, supra note 82, at 16; Statements of James R. Copland, Senior Fellow and Director, Legal Policy, Manhattan Institute for Policy Research and Darla C. Stuckey, President and CEO, Society for Corporate Governance, Before the H. Comm. on Financial Services Subcomm. on Capital Markets and Government Sponsored Enterprises, Sept. 21, 2016; see also letters in response to the Proxy Process Roundtable from American Securities Associations dated June 7, 2019; Exxon Mobil Corporation dated July 26, 2019 (stating that the company’s cost per shareholder proposal, including resubmitted proposals, is more than $100,000). 99 See letter in response to the Proxy Process Roundtable from Investment Company Institute dated March 15, 2019. 100 See letter in response to the Proxy Process Roundtable from Business Roundtable dated June 3, 2019. 101 See letter in response to the Proxy Process Roundtable from U.S. Chamber of Commerce Center for Capital Markets Competitiveness dated December 20, 2018. 102 See letter in response to the Proxy Process Roundtable from National Association of Manufacturers dated October 30, 2018. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 proposals.103 Others contend that the costs are much lower.104 It has also been suggested that the inability to resubmit shareholder proposals may drive shareholders to pursue alternative strategies that would be more costly and time-consuming for companies.105 We are interested in obtaining, and request comment on, additional data about the costs incurred as a result of receiving shareholder proposals, including resubmitted proposals. Various alternatives have been suggested for addressing the concerns with resubmitted proposals. A number of those who support raising the resubmission thresholds have suggested that raising them to 6, 15, and 30 percent would be appropriate.106 One commenter suggested thresholds of 10, 25, and 50 percent, where failure to achieve the thresholds would render a proposal excludable for an amount of time equal to the number of years the proposal had previously been included in the company’s proxy statement.107 3. Need for Proposed Amendments We continue to believe, as the Commission stated when it first proposed a resubmission threshold for shareholder proposals in 1948, that resubmission thresholds are appropriate to ‘‘relieve the management of the necessity of including proposals that 103 See letter in response to the Proxy Process Roundtable from Society for Corporate Governance dated November 9, 2018. 104 See Adam M. Kanzer, The Dangerous ‘‘Promise of Market Reform’’: No Shareholder Proposals, Harvard Law School Forum on Corporate Governance and Financial Regulation (Jun. 15, 2017), available at https://corpgov.law.harvard.edu/ 2017/06/15/the-dangerous-promise-of-marketreform-no-shareholder-proposals/ (‘‘Kanzer 2017’’); letter in response to the Rulemaking Petition from the Shareholder Rights Group dated October 5, 2017, at 11. 105 See, e.g., letters in response to the Rulemaking Petition from The McKnight Foundation dated June 11, 2018; Nathan Cummings Foundation dated April 30, 2018. 106 See, e.g., BRT Report, supra note 43; CCMC Report, supra note 84; letters in response to the Proxy Process Roundtable from American Securities Association dated June 7, 2019; Braemer Hotels & Resorts dated January 4, 2019; U.S. Chamber of Commerce Center for Capital Markets Competitiveness dated November 12, 2018; Center on Executive Compensation dated November 12, 2018; Group 1 Automotive, Inc. dated January 11, 2019; Nareit dated November 12, 2018; Nasdaq, Inc. et al. dated February 4, 2019; Society for Corporate Governance dated November 9, 2018; Tyler Technologies, Inc. dated September 20, 2019. 107 See letter in response to the Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 2019. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 have been previously submitted to security holders without evoking any substantial security holder interest therein.’’ 108 Having considered the feedback discussed above, and recognizing the range of views expressed, we are concerned that the current resubmission thresholds may allow proposals that have not received widespread support from a company’s shareholders to be resubmitted—in some cases, year after year—with little or no indication that support for the proposal will meaningfully increase or that the proposal ultimately will obtain majority support. Companies and their shareholders bear the burdens associated with management’s and shareholders’ repeated consideration of these proposals and/or their recurrent inclusion in the proxy statement. While we recognize that some proposals may necessitate resubmission to obtain majority support, we do not believe shareholders whose proposals are unlikely ever to obtain or at least without a significant change in circumstances obtain such support— and thus to reflect the interests of a majority of shareholders—should be permitted to require companies and other shareholders to bear the costs associated with their proposals. If a proposal fails to generate meaningful support on its first submission, and is unable to generate significantly increased support upon resubmission, it is doubtful that the proposal will earn the support of a majority of shareholders in the near term or without a significant change in circumstances.109 In light of these concerns, we are proposing to increase the resubmission thresholds to allow companies to exclude resubmitted proposals that have not received broad support and appear less likely to be on a sustainable path toward achieving majority shareholder support. In these circumstances, we believe a ‘‘coolingoff’’ period may be warranted to help ensure that the inclusion of such proposals does not result in unjustified burdens on companies and shareholders. 108 See 1948 Proposing Release, supra note 6. on our review of shareholder proposals that received a majority of the votes cast between 2011 and 2018, approximately 90% received such support on the first submission. Of the remaining 10%, 60% received 40% or more of the votes cast on the initial submission. See discussion infra Section IV.B.3.iv. 109 Based E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Under the current rule, proposals that are not supported by up to approximately 97 percent of votes cast on the first submission, 94 percent on the second submission, and 90 percent on the third or subsequent submissions remain eligible for resubmission. We recognize that initially lower levels of shareholder support do not always indicate how shareholders will vote on an issue in the future. Nevertheless, we are concerned that thresholds of 3, 6, and 10 percent may not demonstrate sufficient shareholder support to warrant resubmission, or adequately distinguish between proposals that ultimately are more likely to obtain majority support upon resubmission and those that are not. As one commenter has noted, ‘‘the current thresholds leave no less than 90% of proposals eligible for resubmission.’’ 110 These resubmitted proposals are permitted despite the fact that, according to the commenter, less than 9 percent of proposals that fail to win majority support the first time go on to pass in a subsequent attempt.111 Thus, it appears that under the current thresholds the vast majority of shareholder proposals are eligible for resubmission regardless of their likelihood of gaining broader shareholder support or, ultimately, garnering a majority of the votes cast, at least in the near term. In addition, the current resubmission thresholds may not have the same effect today on resubmissions as they did when they were initially adopted. According to one commenter, the percentage of shareholder proposals eligible for resubmission today is considerably higher than at the time the thresholds were first introduced, when ‘‘between one-half and three-quarters of proposals failed to win sufficient support for resubmission.’’ 112 It has 110 See CII Report, supra note 92, at 16. Based on our analysis, approximately 94% of proposals remain eligible for resubmission after the initial submission, 90% after the second submission, and 94% after the third or subsequent submission under the current resubmission thresholds. In total, approximately 93% of proposals remain eligible for resubmission under the current resubmission thresholds. Of these eligible proposals that were submitted from 2011 to 2018, approximately 6.5% garnered majority support at some point during that period following initial submission. See discussion infra Section IV.B.3.iv. 111 See CII Report, supra note 92, at 8. Based on our analysis of proposals submitted between 2011 and 2018, 6.5% of resubmitted proposals that failed to win majority support on the first submission went on to pass in a subsequent attempt. 112 See CII Report, supra note 92, at 6 (citing Lewis D. Gilbert, Dividends and Democracy 108 (1956) (noting that ‘‘[b]etween half and three quarters of the proposals being submitted would be banned’’ by the Commission’s proposed thresholds of 3%, 7%, and 10%)). We note that the VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 been suggested that this difference may be due to a number of factors, including the role proxy advisory firms now play in the shareholder voting process,113 and greater participation by institutional investors in that process.114 Consequently, we are concerned that the current thresholds may not be functioning effectively to alleviate companies and their shareholders of the obligation to consider, and spend resources on, matters that have previously been voted on and rejected by shareholders without sufficient indication that a proposal will gain traction among the broader shareholder base in the near future. 4. Proposed Amendments To address these concerns, we are proposing revisions to Rule 14a–8(i)(12) that would replace the current resubmission thresholds of 3, 6, and 10 percent with new thresholds of 5, 15, and 25 percent, respectively, and add an additional provision to the rule that would allow companies to exclude proposals that have been submitted three or more times in the preceding five years if they received more than 25 percent, but less than 50 percent, of the vote and support declined by more than 10% the last time substantially the same subject matter was voted on compared to the immediately preceding vote. We believe these proposed amendments would allow proposals to receive due consideration without imposing on companies and their shareholders the burden of having to repeatedly consider matters on which they have already indicated a lack of interest, or where interest has waned. (i) Proposed Resubmission Thresholds Under proposed Rule 14a–8(i)(12), a shareholder proposal may be excluded from a company’s proxy materials if it deals with substantially the same subject matter as a proposal,115 or Commission ultimately adopted thresholds of 3%, 6%, and 10%. 113 Cf. Rulemaking Petition, supra note 82, at 6– 7. 114 See CII Report, supra note 92, at 6. 115 The condition in Rule 14a–8(i)(12) that the shareholder proposals deal with ‘‘substantially the same subject matter’’ does not mean that the previous proposal(s) and the current proposal must be identical. In 1983, the Commission amended the language in the exclusion from ‘‘substantially the same proposal’’ to ‘‘substantially the same subject matter.’’ See 1983 Adopting Release, supra note 6. In doing so, the Commission explained that the purpose of amending the exclusion was to ‘‘counter the abuse of the security holder proposal process by certain proponents who make minor changes in proposals each year so that they can keep raising the same issue despite the fact that other shareholders have indicated by their votes that they are not interested in that issue.’’ Id. When considering whether proposals deal with PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 66471 proposals, previously included in a company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and that vote was: • Less than 5 percent of the votes cast if previously voted on once; • Less than 15 percent of the votes cast if previously voted on twice; or • Less than 25 percent of the votes cast if previously voted on three times or more.116 We are proposing a modest increase to the initial resubmission threshold of 2 percent, and more significant increases to the second and third thresholds of 9 and 15 percent, respectively. As a result, there will be a 10 percent spread between the first and second threshold and the second and third threshold. We believe that more significant revisions to the second and third thresholds are appropriate due to the fact that a proposal will have already been considered by shareholders two or three times before becoming subject to these thresholds. Currently, 90 percent or more of all proposals are eligible for resubmission at each threshold.117 Under the current thresholds, many of these proposals fail to obtain meaningful, or majority, support upon resubmission. From 2011 to 2018, there were 864 unique proposals that were resubmitted.118 Of these, only 54 (6.5%) ultimately garnered majority support (as noted in Table 9 in Section IV.C.2.iii below, only one of these would have been excludable under the proposed resubmission thresholds). The proposed increases in the resubmission thresholds to 5, 15, and 25 percent reflect our experience with shareholder proposals and are intended to reduce the number of proposals eligible for resubmission that have little or no chance of gaining meaningful, or majority, shareholder support while still providing substantially the same subject matter, the staff has focused on whether the proposals share the same ‘‘substantive concerns’’ rather than the ‘‘specific language or actions proposed to deal with those concerns.’’ Id. We are not proposing changes to the ‘‘substantially the same subject matter’’ standard, but seek comment on whether such a change would be appropriate or necessary in light of the proposed amendments. 116 Only votes for and against a proposal would be included in the calculation of the shareholder vote. Abstentions and broker non-votes would not be included in the calculation. 117 See supra note 110. 118 The number of unique proposals that were resubmitted refers to the count of proposals that were resubmitted and voted on at least once during the sample period 2011 to 2018. The number of proposals (864) differs from the number referred to in the tables in Section IV.B.3.iv (1,442) because the latter is not limited to unique proposals. E:\FR\FM\04DEP2.SGM 04DEP2 66472 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 shareholders with the opportunity to build support for their proposals. In particular, our proposed increase for the initial resubmission threshold from 3 to 5 percent would exclude proposals that are very unlikely to earn majority support upon resubmission, but would still permit a very large percentage of proposals to be resubmitted.119 We believe that a cooling-off period is warranted if a matter is unable to garner the support of at least 1 in 20 shareholders upon its initial submission. Based on our analysis of the proposals that ultimately garnered majority support from 2011 to 2018, 90 percent did so on the first submission, and more than half of the proposals that were resubmitted garnered more than 40 percent on the first submission.120 Of the remaining proposals, nearly all garnered support of at least 5 percent on the first submission.121 While we recognize that there have been a few instances in which proposals that have failed to receive at least 5 percent of the votes cast have gone on to garner significantly greater shareholder support, these instances appear to be infrequent and may be the result of factors other than or in addition to the resubmission.122 The proposed increase for the second and third resubmission thresholds to 15 and 25 percent are also intended to provide a better indicator of proposals that are more likely to ultimately obtain majority support than the current thresholds. We believe that proposals receiving these levels of support will have better demonstrated a sustained level of shareholder interest to warrant management and shareholder consideration upon resubmission, subject to the discussion in Section II.E.4.ii below. As indicated in Section IV.B.3.iv below, these thresholds are below the average and median support for initial submissions of 34 and 30 percent, respectively. Of the resubmitted proposals that ultimately obtain majority support, the overwhelming majority garner more than 15 percent on their second try and more than 25 percent on their third 119 Of the proposals resubmitted between 2011 and 2018, we estimate that approximately 85% would have been eligible for resubmission under the proposed resubmission thresholds. See infra Table 9 in Section IV.C.2.iii. 120 See infra Section IV.B.3.iv. 121 Id. 122 Based on our review of shareholder proposals that received a majority of the votes cast on a second or subsequent submission between 2011 and 2018, only 2% of the proposals that have failed to receive at least 5% of the votes cast have gone on to garner majority support. See infra Section IV.B.3.iv. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 submission.123 As with the initial resubmission threshold, these thresholds would exclude proposals that are unlikely to earn majority support, but would still permit a significant number of proposals to be resubmitted.124 We believe that a cooling-off period also is warranted if, after three or more submissions, more than 75 percent of the votes cast have not supported the matter. We recognize, as discussed in Section IV below, that raising the resubmission thresholds would be expected to result in the exclusion of more proposals than currently. Our analysis in Table 9 in Section IV.C.2.iii indicates that under the proposed 15%/25% thresholds, there would be 14%/27% more proposals that would be excludable than under the current rules. While these are increases in the overall number of excludable proposals, we believe these thresholds would better distinguish those excludable proposals that are on a path toward more meaningful shareholder support from those that are not. In other words, we believe that, under the proposed resubmission thresholds, any increase in the number of excludable proposals that would have been on a path toward more meaningful shareholder support would be small. We also believe that the proposed resubmission thresholds would reduce the costs associated with management’s and shareholders’ repeated consideration of these proposals and their recurrent inclusion in the proxy statement while still maintaining shareholders’ ability to submit proposals, and engage with companies, on matters of interest to shareholders. We believe that the proposed resubmission thresholds may lead to the submission of proposals that will evoke greater shareholder interest in, and foster more meaningful engagement between, management and shareholders, as the proposed thresholds would incentivize shareholders to submit proposals on matters that resonate with the broader shareholder base to avoid exclusion under Rule 14a–8(i)(12). We believe that the proposed resubmission thresholds strike an 123 Based on our review of shareholder proposals that received a majority of the votes cast on a second or subsequent submission between 2011 and 2018, 95% received support greater than 15% on the second submission, and 100% received support greater than 25% on the third or subsequent submission. In addition, of the 22 proposals that obtained majority support on their third or subsequent submissions, approximately 95% received support of over 15% on their second submission, and 100% received support of over 25% on their third or subsequent submission. See infra Section IV.B.3.iv. 124 See infra Section IV.B.3.iv. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 appropriate balance between reducing the costs to companies of responding to proposals that do not garner significant shareholder support and may be unlikely to do so in the future, with preserving shareholders’ ability to engage with a company and other shareholders through the shareholderproposal process. In addition, as is currently the case, the resubmission thresholds would not act as a permanent bar and, thus, shareholders would be able to resubmit substantially similar proposals after a three-year cooling-off period. We recognize, however, that there may be alternative thresholds that could also achieve this balance, and we seek public comment on whether the proposed thresholds strike the correct balance. We also considered whether to propose any changes to the votecounting methodology. For example, we considered whether votes by insiders should be excluded from the calculation of votes cast for purposes of determining whether the resubmission thresholds have been satisfied. In addition, we considered whether to apply a different vote-counting methodology for companies with dual-class voting structures.125 We elected not to propose alternative vote-counting methodologies, however, because we believe that including these votes in the voting calculation more accurately captures the sentiment of all shareholders, including insiders and controlling shareholders. Nevertheless, we seek comment on whether changes to the current vote-counting methodology are necessary. We also considered whether to adopt an exception to the rule that would allow an otherwise excludable proposal to be resubmitted if there are material developments that suggest a resubmitted proposal may garner significantly more votes than when previously voted on. We elected not to propose such an exception, however, because we believe it would be difficult in many cases to determine how the intervening developments would affect shareholders’ voting decisions. We seek 125 Cf. letter in response to the Proxy Process Roundtable from CtW Investment Group dated January 16, 2019 (noting that increasing the resubmission thresholds will make it more difficult to satisfy the resubmission thresholds at companies with dual-class voting structures); letter in response to the Rulemaking Petition from the Shareholder Rights Group dated October 5, 2017 (‘‘When one considers dual class share ownership, insider ownership and the non-involvement of passive investors, the percent of support for a proposal reflected by the Rule’s counting methods may reflect a sharp underestimate of the support by those investors known to actively consider shareholder proposals.’’). E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 comment on whether such an exception should be added to the rule. Request for Comment 37. Should we maintain the current approach of three tiers of resubmission thresholds but increase the thresholds to 5, 15, and 25 percent, as proposed? Would alternative thresholds such as 5, 10, and 15 percent, or 10, 25, and 50 percent, be preferable? If so, what should the thresholds be? Should we instead adopt the thresholds that were proposed by the Commission in the 1997 Proposing Release (i.e., 6, 15, and 30 percent)? Do the proposed resubmission thresholds better distinguish those proposals that are on a path to meaningful shareholder support from those that are not? 38. Alternatively, should we remove resubmission thresholds for the first two submissions and, instead, allow for exclusion if a matter fails to receive majority support by the third submission within a certain number of years? Under such an approach, what would be an appropriate lookback period and how long should the cooling-off period be (e.g., three years, five years, or some other period of time)? 39. What are the estimated costs companies incur as a result of receiving resubmitted proposals? Are the costs different for resubmitted proposals than for initial submissions? In particular, which specific costs incurred (e.g., printing costs, staff time, fees paid to external parties such as legal advisors or proxy solicitors, management time, board time, etc.) may differ between resubmitted proposals and initial submissions? 40. Is there a voting threshold that, if not achieved initially, a proposal is unlikely to surpass in subsequent years? Conversely, is there a voting threshold that, if achieved, a proposal is unlikely to fall below in subsequent years? 41. Should we shorten or lengthen the relevant five-year and three-year lookback periods? If so, what should the lookback periods be? 42. Should the vote-counting methodology under Rule 14a–8(i)(12) be revised? For example, should shares held by insiders be excluded from the voting calculation, or should broker non-votes and/or abstentions count as votes ‘‘against’’? Should there be a different vote-counting methodology for companies with dual-class voting structures? If so, what should that methodology be? 43. Would the proposed changes in resubmission thresholds meaningfully affect the ability of shareholders to pursue initiatives for which support VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 may build gradually over time? Do legal or logistical impediments to shareholder communications affect the ability of shareholders to otherwise pursue such longer horizon initiatives? If so, how? Are there ways to mitigate any potential adverse effects of the proposed resubmission thresholds while limiting costs to companies and shareholders? 44. When considering whether proposals deal with substantially the same subject matter, the staff has focused on whether the proposals share the same ‘‘substantive concerns’’ rather than the ‘‘specific language or actions proposed to deal with those concerns.’’ Should we consider adopting this standard, or its application? Should we consider changing this standard, or its application? For example, should we adopt a ‘‘substantially the same proposal’’ standard? (ii) Momentum Requirement for Proposals Addressing Substantially the Same Subject Matter as Those Previously Voted on Three or More Times in the Preceding Five Calendar Years In addition to raising the resubmission thresholds to 5, 15, and 25 percent, we are proposing to amend Rule 14a–8(i)(12) to allow companies to exclude proposals dealing with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that would not otherwise be excludable under the 25 percent threshold if (i) the most recently voted on proposal received less than a majority of the votes cast and (ii) support declined by 10 percent or more compared to the immediately preceding shareholder vote on the matter (the ‘‘Momentum Requirement’’). For example, under such a requirement, a proposal would be excludable where proposals dealing with substantially the same subject matter had previously been voted on three times in the preceding five calendar years and received 26 percent of the votes cast on the third submission compared to 30 percent on the second submission. In this case, the percentage of votes cast on the third submission (26 percent) declined by more than 10 percent compared to the percentage of votes cast on the second submission (30 percent) and, thus, proposals dealing with substantially the same subject matter would be excludable during the relevant lookback period. The purpose of this requirement would be to relieve management and shareholders from having to repeatedly consider, and bear the costs related to, matters for which shareholder interest PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 66473 has declined. We note that it would apply only to matters that have been previously voted on three or more times in the preceding five years, giving shareholder-proponents a number of years to advocate for, and the broader shareholder base ample opportunity to consider, the matters raised. We further believe that a 10 percent decline in the percentage of votes cast may demonstrate a sufficiently significant decline in shareholder interest to warrant a cooling-off period. Nevertheless, we seek comment on whether 10 percent is an appropriate figure, or whether some other method or figure would be more appropriate, to gauge shareholder interest. The Momentum Requirement would not apply where the previously voted on proposal(s) received a majority of the votes cast at the time of the most recent shareholder vote, even if shareholder support had declined by 10 percent or more compared to the immediately preceding vote.126 We believe proposals that receive a majority of the votes cast have demonstrated a sufficient level of shareholder interest to qualify for resubmission. In addition, it is our understanding that companies frequently act on proposals, including non-binding proposals, that receive a majority of the votes cast, which can reduce the likelihood of resubmitted proposals. Request for Comment 45. Should we adopt the Momentum Requirement, as proposed? If so, should we adopt this requirement instead of, rather than in addition to, the proposed resubmission thresholds? Would this requirement be difficult to apply in practice? 46. As proposed, a proposal that receives a majority of the votes cast at the time of the most recent shareholder vote would not be subject to the Momentum Requirement. Is there a voting threshold below a majority of the votes cast that demonstrates a sufficient level of shareholder interest in the matter to warrant resubmission regardless of whether future proposals addressing substantially the same subject matter gain additional shareholder support? If so, what is an appropriate threshold? 47. As proposed, a proposal that receives a majority of the votes cast at 126 If, after receiving a majority of the votes cast, a matter receives less than a majority of the votes cast upon a subsequent submission, the Momentum Requirement would apply. We believe that the same rationale underlying the Momentum Requirement applies where shareholder support declines below a majority of the votes cast, but we seek comment on this point. E:\FR\FM\04DEP2.SGM 04DEP2 66474 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules the time of the most recent vote would not be excludable under the Momentum Requirement. Should this exception to the Momentum Requirement be limited to the most recent shareholder vote, or should it apply to a different lookback period such as three years or five years? 48. Should the Momentum Requirement apply to all resubmitted proposals, not just those that have been resubmitted three or more times? For example, assuming adoption of the proposed resubmission thresholds, should a proposal be excludable if proposals addressing substantially the same subject matter received 19 percent on the first submission and 16 percent on the second submission, even though 16 percent exceeds the relevant proposed threshold of 15 percent for a second submission? 49. Does a 10 percent decline in the percentage of votes cast demonstrate a sufficiently significant decline in shareholder interest to warrant a cooling-off period for any proposal receiving less than majority support? Would a different percentage—such as 20, 30, or 50 percent—or an alternative threshold, be more appropriate? 50. Should the cooling-off period for proposals that fail the Momentum Requirement be shorter than the cooling-off period for proposals that fail to satisfy the existing resubmission thresholds? If so, what would be an appropriate cooling-off period? 51. Are there other mechanisms we should consider that would demonstrate that a proposal has lost momentum? For example, should there be a separate basis for exclusion if the level of support has not increased by more than 10 percent in the last two votes in the previous five years? Or, should there be a separate basis for exclusion if the level of support does not reach 50 percent within 10 years of first being proposed? If so, what would be an appropriate cooling-off period? khammond on DSKJM1Z7X2PROD with PROPOSALS2 III. General Request for Comment We request and encourage any interested person to submit comments on any aspect of our proposals, other matters that might have an impact on the proposed amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 practices for shareholder proposal submissions. IV. Economic Analysis A. Introduction We are proposing to amend certain procedural requirements and the provision relating to resubmitted proposals under the shareholderproposal rule. We are sensitive to the economic effects that may result from the proposed rule amendments, including the benefits, costs, and the effects on efficiency, competition, and capital formation. Section 3(f) of the Exchange Act, Section 2(b) of the Securities Act of 1933, and Section 2(c) of the Investment Company Act require us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in (or, with respect to the Investment Company Act, consistent with) the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. Additionally, Section 23(a)(2) of the Exchange Act requires us, when making rules or regulations under the Exchange Act, to consider, among other matters, the impact that any such rule or regulation would have on competition and states that the Commission shall not adopt any such rule or regulation which would impose a burden on competition that is not necessary or appropriate in furtherance of the Exchange Act. We discuss the potential effects of the proposed rule amendments as well as possible alternatives to the proposed amendments below. Where possible, we have attempted to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from the proposed rule amendments. In some cases, however, we are unable to quantify the economic effects because we lack the information necessary to provide a reasonable and reliable estimate. Where we are unable to quantify the economic effects of the proposed rule, we provide a qualitative assessment of the potential effects and encourage commenters to provide data and information that would help quantify the benefits, costs, and the potential impacts of the proposed rule amendments on efficiency, competition, and capital formation. B. Economic Baseline The baseline against which the costs, benefits, and the impact on efficiency, competition, and capital formation of the proposed rule amendments are measured consists of the current regulatory framework and the current PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 1. Current Regulatory Framework State laws, corporate bylaws, and federal securities laws jointly govern the shareholder-proposal process. Under state law, a shareholder generally has the right to appear in person at an annual or special meeting and put forth a resolution to be voted on by the shareholders. Such resolutions can include, for example, proposals to adopt, amend, or repeal bylaws or to request the board to take certain actions. State law also governs shareholders’ ability to submit a proposal through a representative.127 Company bylaws can limit shareholders’ ability to attend or present at shareholder meetings. Federal securities law governs communications in advance of shareholder meetings, including solicitation of proxies for items to be voted on at the meeting. Federal securities law also requires companies to allow shareholders to vote by proxy at shareholder meetings and requires companies to include a shareholder’s proposal in the company’s proxy statement unless a ground for exclusion is met. Most shareholders currently vote in advance of shareholder meetings through the proxy process. Rule 14a–8 addresses when a company must include a shareholder proposal in its proxy statement at an annual or special meeting of shareholders.128 Rule 14a–8 also sets forth procedural and substantive bases upon which a company can exclude a shareholder proposal from its proxy statement. Under Rule 14a–8(b), to be eligible to submit a proposal, a proponent ‘‘must have continuously held at least $2,000 in market value, or 1%, of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the date [the proponent] submit[s] the proposal.’’ The Commission currently allows investors to aggregate their securities with other investors to meet the applicable minimum ownership thresholds to submit a Rule 14a–8 proposal. The rule does not currently require a shareholder-proponent to provide information specific to the use of a representative in the shareholderproposal process, or state when he or she is able to meet with the company to discuss the proposal. Rule 14a–8(c) provides that a shareholder may submit no more than 127 See supra Section II.B. shareholder may alternatively solicit proxies by filing its own proxy statement that complies with the federal proxy rules. 128 A E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules one proposal to a company for a particular shareholders’ meeting. Rule 14a–8(i)(12) allows companies to exclude a shareholder proposal that ‘‘deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years’’ if the matter was voted on at least once in the last three years and did not receive: (i) 3 percent of the vote if previously voted on once; (ii) 6 percent of the vote if previously voted on twice; or (iii) 10 percent of the vote if previously voted on three or more times. 2. Affected Entities The proposed amendments to Rule 14a–8(b), Rule 14a–8(c), and Rule 14a– 8(i)(12) could affect all companies subject to the federal proxy rules that receive shareholder proposals, the proponents of these proposals, and other non-proponent shareholders of these companies.129 Companies that have a class of equity securities registered under Section 12 of the Exchange Act are subject to the federal proxy rules, including Rule 14a–8.130 In addition, there are certain registered companies that voluntarily file proxy materials. Finally, Rule 20a–1 under the Investment Company Act subjects all management companies to the federal proxy rules.131 khammond on DSKJM1Z7X2PROD with PROPOSALS2 129 The proposed amendments could also have second-order effects on providers of administrative and advisory services related to proxy solicitation and shareholder voting. 130 We are not aware of any asset-backed issuers that have a class of equity securities registered under Section 12 of the Exchange Act. Most assetbacked issuers report pursuant to under Section 15(d) of the Exchange Act and thus are not subject to the federal proxy rules. Nine asset-backed issuers had a class of debt securities registered under Section 12 of the Exchange Act as of December 2018. As a result, these asset-backed issuers are not subject to the federal proxy rules. Foreign private issuers are exempt from the federal proxy rules under Rule 3a12–3(b) of the Exchange Act. 17 CFR 240.3a12–3(b). 131 Rule 20a–1 of the Investment Company Act requires management companies to comply with regulations adopted pursuant to Section 14(a) of the Exchange Act that would be applicable to a proxy solicitation if it were made in respect of a security registered pursuant to Section 12 of the Exchange Act. See 17 CFR 270.20a–1. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 As of December 31, 2018, there were 5,746 companies that had a class of securities registered under Section 12 of the Exchange Act (including 98 Business Development Companies (‘‘BDCs’’)).132 As of the same date, there were 120 companies that did not have a class of securities registered under Section 12 of the Exchange Act that voluntarily filed proxy materials.133 As of August 31, 2019, there were 12,718 management companies that were subject to the federal proxy rules: (i) 12,040 open-end funds, out of which 1,910 were Exchange Traded Funds (‘‘ETFs’’) registered as open-end funds or open-end funds that had an ETF share class; (ii) 664 closed-end funds; ‘‘Management company’’ means any investment company other than a face-amount certificate company or a unit investment trust. See 15 U.S.C. 80a–4. 132 We estimate the number of companies with a class of securities registered under Section 12 of the Exchange Act by reviewing all Forms 10–K filed during calendar year 2018 with the Commission and counting the number of unique companies that identify themselves as having a class of securities registered under Section 12(b) or Section 12(g) of the Exchange Act. Foreign private issuers that filed Forms 20–F and 40–F and asset-backed issuers that filed Forms 10–D and 10–D/A during calendar year 2018 with the Commission are excluded from this estimate. See supra note 130. BDCs are all entities that have been issued an 814-reporting number. Our estimate includes BDCs that may be delinquent or have filed extensions for their filings, and it excludes 6 wholly owned subsidiaries of other BDCs. 133 We identify registered companies that voluntarily file proxy materials as companies reporting pursuant to Section 15(d) of the Exchange Act but not registered under Section 12(b) or Section 12(g) of the Exchange Act that filed any proxy materials during calendar year 2018 with the Commission. The proxy materials we consider in our analysis are Forms DEF14A, DEF14C, DEFA14A, DEFC14A, DEFM14A, DEFM14C, DEFR14A, DEFR14C, DFAN14A, N–14, PRE 14A, PRE 14C, PREC14A, PREM14A, PREM14C, PRER14A and PRER14C. Form N–14 can be a registration statement and/or proxy statement. We manually review all Forms N–14 filed during calendar year 2018 with the Commission and we exclude from our estimates Forms N–14 that are exclusively registration statements. To identify companies reporting pursuant to Section 15(d) but not registered under Section 12(b) or Section 12(g) of the Exchange Act, we review all Forms 10–K filed in calendar year 2018 with the Commission and count the number of unique companies that identify themselves as reporting pursuant to Section 15(d) of the Exchange Act and not registered under Section 12(b) or Section 12(g) of the Exchange Act. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 66475 and (iii) 14 variable annuity separate accounts registered as management investment companies.134 The summation of these estimates yields 18,584 companies where there is a possibility of being affected by the proposed rule amendments.135 The above mentioned estimates are an upper bound of the number of potentially affected entities because a substantial portion of these entities would not be expected to file proxy materials or receive a shareholder proposal in a given year. Out of the 18,584 potentially affected entities mentioned above, 5,690 filed proxy materials with the Commission during calendar year 2018.136 Out of the 5,690 companies, 4,758 (84%) were Section 12 or Section 15(d) reporting companies and the remaining 932 (16%) were management companies.137 134 We estimate the number of unique management companies by reviewing all Forms N– CEN filed between June 2018 and August 2019 with the Commission. Open-end funds are series of trusts registered on Form N–1A. Closed-end funds are trusts registered on Form N–2. Variable annuity separate accounts registered as management companies are trusts registered on Form N–3. The number of potentially affected Section 12 and Section 15(d) reporting companies is estimated over a different time period (i.e., January 2018 to December 2018) than the number of potentially affected management companies (i.e., June 2018 to August 2019) because there is no complete N–CEN data for the most recent full calendar year (i.e., 2018). Management companies started submitting Form N–CEN in September 2018 for the period ended on June 30, 2018 with the Commission. 135 18,584 = 5,746 companies with a class of securities registered under Section 12 of the Exchange Act + 120 companies without a class of securities registered under Section 12 of the Exchange Act that voluntarily filed proxy materials + 12,718 management companies. 136 See supra note 133 for details on the estimation of companies that filed proxy materials with the Commission during calendar year 2018. 137 According to data from Forms N–CEN filed with the Commission between June 2018 and August 2019, there were 965 management companies that submitted matters for its security holders’ vote during the reporting period: (i) 729 open-end funds, out of which 86 were ETFs registered as open-end funds or open-end funds that had an ETF share class; (ii) 235 closed-end funds; and (iii) one variable annuity separate account (see Form N–CEN Item B.10). The discrepancy in the estimated number of management companies using proxy filings (i.e., 932) and Form N–CEN data (i.e., 965) likely is attributable to the different time periods over which the two statistics are estimated. E:\FR\FM\04DEP2.SGM 04DEP2 66476 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Proponents of shareholder proposals also could be affected by the proposed rule amendments. We estimate that there were 170 proponents—38 individual proponents and 132 institutional proponents—that submitted a shareholder proposal that was included in a proxy statement and was subsequently voted on as lead proponent or co-proponent during calendar year 2018.138 Non-proponent shareholders of companies also could be affected by the proposed rule amendments. As broad context, we note that the ratio of the number of estimated proponents whose proposals appeared in proxy statements during 2018 (170) to the number of direct and indirect investors in companies subject to the proxy rules is extremely small. According to a recent study based on the 2016 Survey of Consumer Finances, approximately 65 million households owned stocks directly or indirectly (through other investment instruments).139 Our analysis of institutional investor data also shows that there were 4,558 unique institutional investors during 2018.140 The ratio is roughly three proponent shareholders per million investors. 138 Data is retrieved from proxy statements (see infra note 182). See infra Section IV.C.2.i for a discussion of limitations of the proxy statement data. We also estimate that there were 278 proponents that submitted a voted, omitted, or withdrawn proposal as lead proponent or co-proponent during calendar year 2018. Data is retrieved from ISS Analytics. See infra Section IV.B.3.i for a discussion of limitations of the ISS Analytics data. 139 See Jesse Bricker et al., Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances, 103 Fed. Res. Bull., Sept. 2017, at 20, 39, available at https:// www.federalreserve.gov/publications/files/scf17.pdf (51.9% of the 126.0 million families represented owned stocks). This is a triennial survey, and the latest data available as of this time is from the 2016 survey. Based on industry data provided by a proxy services provider, we estimate that there were 22.2 million retail accounts that directly held shares of U.S. public companies during calendar year 2017. The number of retail accounts is an approximation of the number of retail investors because each retail investor can hold multiple accounts and multiple retail investors can hold a single account. Further, the data covers a subset of all retail accounts (i.e., approximately 80% of all retail accounts). 140 Data is retrieved from the Thomson Reuters Institutional (13f) Holdings dataset. Unique institutional investors are the unique Manager Numbers that filed a Form 13F at least for one quarter during calendar year 2018 with the Commission. The estimated number of institutional investors is a lower bound of the actual number of institutional investors because only institutional investors that exercise discretion over $100 million or more in Section 13(f) securities must file Form 13F with the Commission. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 3. Current Practices i. General Discussion In this section, we provide descriptive statistics on shareholder proposals to understand the baseline against which we compare the effects of the proposed amendments, informing the analysis of the potential effects of the proposed amendments to Rule 14a–8 in later sections. In particular, we provide descriptive statistics on all proposals and descriptive statistics by proposal outcome over time (i.e., voted, omitted, and withdrawn proposals). We provide these statistics to understand how the number of proposals has changed over time, including because, from the perspective of a company, the costs and benefits of a shareholder proposal may vary with the outcome of the proposal. Similarly, we provide descriptive statistics by the type of company that receives the proposal (i.e., large versus small companies), by proposal topic (i.e., governance, environmental, and social proposals), and by proponent type (i.e., institutions versus individuals). These factors are relevant to our analysis of the proposed amendments to the ownership and resubmission thresholds because the economic effects of the proposed amendments may depend on company size, proposal topic, and proponent type.141 Further, we provide descriptive statistics on the concentration of proposals to better understand how the proposal submission is distributed across the various proponents.142 Finally, we provide descriptive statistics on the voting support and the probability of obtaining majority support for all proposals, by proposal topic, and by proponent type. This analysis allows us to provide some evidence on the effects of the proposed amendments on proposals that may garner high and/or majority shareholder support, and to examine whether the proposed amendments to the resubmission thresholds may have larger effects for some types of proposals and proponents than for others. To understand current and historical practices for shareholder proposals, we study a sample of submitted shareholder proposals to Russell 3000 companies that were either (i) included in companies’ proxy statements; (ii) 141 These statistics are also relevant in light of commenters’ concerns that the proposed amendments may affect certain proposals and proponents differently. See, e.g., letter in response to the Proxy Process Roundtable from Shareholder Rights Group dated October 25, 2019. 142 These statistics are also relevant in light of commenters’ concerns that a few shareholders submit the majority of the proposals. See infra note 166. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 identified by companies for exclusion through the SEC staff no-action process (whether ultimately voted on by shareholders, excluded by the company, or withdrawn by the proponent); or (iii) submitted by the proponents (based on information provided by the proponents) but never appeared on the company’s proxy statement.143 The study of a sample of submitted shareholder proposals allows us to establish a baseline against which we will compare effects of the proposed amendments. Figure 1 shows the number of shareholder proposals submitted to Russell 3000 companies between 1997 and 2018. The dashed line in Figure 1 shows the number of submitted shareholder proposals between 1997 and 2003, and the solid line shows the number of submitted proposals from 2004 to 2018. Data on submitted proposals prior to 2004 is incomplete. Hence, our economic analysis focuses on shareholder proposals submitted between 2004 and 2018. Nevertheless, to provide an understanding of longer term trends in the number of submitted proposals, we use data prior to 2004 for the purposes of Figure 1 only. Between 1997 and 2018, shareholders submitted a total of 20,804 proposals to Russell 3000 companies. Out of the 20,804 proposals, 14,860 were submitted in the 2004 to 2018 period. Shareholders submitted 831 proposals to Russell 3000 companies in 2018, representing a 4 percent decrease relative to the number of shareholder proposals submitted in 2017. As Figure 1 shows, the number of submitted shareholder proposals has fluctuated from a low of 745 in 2001 to a high of 1,136 in 2008, with an average of 946 submitted shareholder proposals between 1997 and 2018. Our analysis shows no discernible trend in the number of submitted shareholder proposals in the 1997 to 2018 period.144 143 Unless stated otherwise, all data in this section is retrieved from ISS Analytics. ISS Analytics identifies proposals that were withdrawn based on whether the proponent had submitted a withdrawal letter to the company as part of the noaction process, or whether the proponent had informed ISS or otherwise made known (for example, through its website) that it had withdrawn the proposal. To the extent that a proponent did not submit a withdrawal letter to the company or did not inform ISS Analytics or otherwise make known that it had withdrawn the proposal, our sample may not include all withdrawn proposals. We exclude from our analysis shareholder proposals related to proxy contests for the election of directors because these proposals are usually included in shareholders’ (as opposed to companies’) proxy statements and thus are not subject to Rule 14a-8. 144 In this and all subsequent analyses, to examine if there is a statistically significant time trend in the data, we regress the variable of interest E:\FR\FM\04DEP2.SGM 04DEP2 66477 Figure 2 shows the percentage of voted, omitted, and withdrawn shareholder proposals for Russell 3000 companies between 2004 and 2018. We study the percentage of voted, omitted, and withdrawn proposals separately because each of these categories of proposals may impose different burdens on—and also provide different benefits to—companies and their shareholders. Voted proposals are those that went to a shareholder vote. Omitted proposals are those that were omitted following an issuance of a no-action letter by Commission staff.145 Withdrawn proposals are primarily those that the proponent voluntarily withdrew after reaching an agreement with management or without reaching an agreement.146 As Figure 2 shows, out of all proposals submitted to Russell 3000 companies between 2004 and 2018, 56 percent went to a shareholder vote, 15 percent were omitted following a noaction letter issued by Commission staff, and 29 percent were withdrawn. The percentage of voted, omitted, and withdrawn proposals has largely remained stable during our sample period.147 to a year trend variable, and we test whether the coefficient on the trend variable is statistically different from zero. We use a two-tailed t-test and a 90% confidence interval. See, e.g., William H. Greene, Econometric Analysis (6th ed. 2007) (‘‘Greene (2007)’’). The p-value on the trend variable is equal to 0.35. 145 A proposal may be omitted without a noaction letter from the Commission staff. In particular, a company may give notice to the Commission that it will exclude the proposal or give notice to the Commission that it plans to exclude the proposal and seek relief from a court. Those proposals likely are captured in the withdrawn proposals category in our ISS Analytics dataset because ISS Analytics only classifies proposals for which the Commission staff has issued a no-action letter as omitted proposals. 146 We classify as ‘‘withdrawn’’ proposals that: (i) Were withdrawn by the proponent (3,292 or 76.8% of all withdrawn proposals); (ii) were not found in the company’s proxy materials and for which it is yet to be determined whether they were withdrawn or omitted (802 or 18.7% of all withdrawn proposals); (iii) were on the ballot but never came to a vote because the proponent did not appear at the meeting to present the proposal (120 or 2.8% of all withdrawn proposals); (iv) the proponent indicated it intended to submit but that were never actually submitted (52 or 1.2% of all withdrawn proposals); (v) were not voted on because the meeting was cancelled, usually due to a merger, acquisition, bankruptcy, or calling of a special meeting (18 or 0.4% of all withdrawn proposals); and (vi) were not voted on because the meeting was postponed, usually due to a merger, acquisition, bankruptcy, or calling of a special meeting (4 or 0.1% of all withdrawn proposals). The above mentioned proposal categories are available through ISS Analytics. 147 Untabulated analysis shows no statistically significant trend in the number of voted, omitted, and withdrawn proposals over time (p-values are equal to 0.93, 0.37, and 0.34, respectively). VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.006</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules Out of the 831 proposals submitted in 2018, 447 were voted, 123 were omitted, and 261 were withdrawn.148 The proposed rule amendments would enhance disclosure requirements for proposals submitted through a representative. To understand how frequently proposals are submitted through a representative, we manually collect information on the identity of the proponents and representatives from the proxy statements, and we estimate that from the 447 voted proposals submitted for inclusion in a company’s proxy materials for 2018 shareholder meetings, 363 provided some information related to the identity of the proponents, out of which 67 (or 18% = 67/363) were submitted by a representative.149 In all subsequent analysis in this section (except for the analysis that relates to voting support), we examine all submitted proposals (rather than focusing on just one of voted, omitted, or withdrawn proposals) to determine the potential impact of the proposed khammond on DSKJM1Z7X2PROD with PROPOSALS2 148 A few proposals were submitted to companies outside of the Russell 3000 index. Using FactSet’s corporate governance database, SharkRepellent (available at https://sharkrepellent.net), we estimate that in 2018, there were 19 voted shareholder proposals at 11 companies outside of the Russel 3000 index. Our analysis focuses on proposals submitted to companies within the Russell 3000 index because this sample represents the vast majority of submitted shareholder proposals. 149 We potentially underestimate the percentage of proposals submitted by a representative because companies might provide information on the identity of the proponent but might not mention that the proposal was submitted via a representative in the proxy statement. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 amendments because Rule 14a–8 applies to all submitted proposals. Next, we compare the average number of proposals submitted to large and small companies because the frequency of submitted proposals, and thus the effects of the proposed amendments, may vary with company size. In particular, Figure 3 compares the average number of proposals submitted to large companies relative to our universe of companies (i.e., Russell 3000 companies). Large companies are represented by the S&P 500 constituents.150 As Figure 3 shows, S&P 500 companies (i.e., solid line in Figure 3) received on average 1.56 proposals each year, and Russell 3000 companies (i.e., dashed line in Figure 3) received on average 0.33 proposals each year during our sample period. The average number of proposals submitted to S&P 500 companies is statistically significantly higher than the average 150 The median market capitalization of Russell 3000 constituents was $1.7 billion as of May 10, 2019 and the median market capitalization of S&P 500 constituents was $22 billion as of August 30, 2019. See Market Capitalization Ranges, FTSE Russell Market, https://www.ftserussell.com/ research-insights/russell-reconstitution/marketcapitalization-ranges (last visited Sept. 23, 2019); S&P 500, S&P Dow Jones Indices, https:// us.spindices.com/indices/equity/sp-500 (last visited Sept. 23, 2019). We retrieve data on whether a proposal was submitted to an S&P 500 and/or a Russell 3000 company from ISS Analytics. The ISS Analytics data only covers Russell 3000 companies. S&P 500 companies usually are a subset of the Russell 3000 companies. To the extent that some S&P 500 companies are not part of the Russell 3000 index, our analysis underestimates the average number of proposals submitted to S&P 500 companies, because those proposals are missing from our data. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 number of proposals submitted to Russell 3000 companies during our sample period.151 The average number of proposals submitted to S&P 500 companies has decreased from 1.85 in 2004 to 1.24 in 2018, representing a 33 percent decrease during our sample period, and the average number of proposals submitted to Russell 3000 companies has decreased from 0.38 in 2004 to 0.28 in 2018, representing a 26 percent decrease during our sample period.152 Results are qualitatively similar when we compare voted rather than all submitted shareholder proposals for S&P 500 and Russell 3000 companies.153 Overall, our analysis shows that larger companies receive more proposals than smaller companies, and the number of proposals received by both large and small companies has decreased over time. 151 In this and all subsequent analysis, we use a two-tailed t-test and a 90% confidence interval to compare differences in means across groups. The p-value is equal to zero. 152 Untabulated analysis shows a statistically significant downward trend in the average number of proposals submitted to S&P 500 and Russell 3000 companies during our sample period (p-values are equal to zero). 153 Untabulated analysis shows that the average number of voted proposals for S&P 500 companies has decreased from 0.99 in 2004 to 0.70 in 2018, representing a 29% decrease during our sample period, and the average number of voted proposals for Russell 3000 companies has decreased from 0.20 in 2004 to 0.15 in 2018, representing a 26% decrease during our sample period. E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.007</GPH> 66478 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules 154 We retrieve data on the topic of the shareholder proposal from ISS Analytics. In this dataset, proposals are classified in three categories: Governance, environmental, and social. Governance proposals include, among others, proposals related to audits, board issues, compensation, voting, proxy VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 any analysis that involves classification of proposals into various categories should be interpreted with caution for various reasons, including because there is a level of subjectivity involved in the classification of the proposals to the various categories. For example, proposals on board diversity could be considered either governance or social proposals. In addition, each proposal category includes a wide range of proposals. For example, governance proposals can include proposals related to executive compensation as well as proposals related to the sale of company assets. Our analysis shows that, during our sample period, 59 percent of the submitted shareholder proposals (i.e., matters, and shareholder meetings. Environmental proposals include, among others, proposals related to sustainability, greenhouse gas emissions, climate change, community/environmental impact, and renewable energy. Social proposals include, among others, proposals related to political contributions, sexual orientation, political lobbying disclosure, human rights, and board diversity. We manually classify 250 proposals with missing shareholder proposal topics into one of the three abovementioned topics by reviewing the description of the shareholder proposal in the ISS Analytics dataset. We do not reclassify other proposals in the ISS Analytics dataset to ensure the replicability of our analysis. We exclude from this analysis 33 proposals with missing shareholder proposal topics and missing descriptions of the shareholder proposal because we lack the necessary information to classify these proposals into one of the three above-mentioned categories. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 8,829 proposals) regarded governance issues, 11 percent (i.e., 1,601 proposals) regarded environmental issues, and 30 percent (i.e., 4,397 proposals) regarded social issues. The percentage of governance proposals relative to all submitted proposals has decreased from 70 percent in 2004 to 44 percent in 2018, with a corresponding increase in the percentage of environmental proposals from 5 percent in 2004 to 16 percent in 2018 and an increase in the percentage of social proposals from 25 percent in 2004 to 39 percent in 2018.155 Results are qualitatively similar when we examine voted (rather than submitted) shareholder proposals by topic.156 Overall, our analysis shows an increase in the frequency of social and environmental proposals and a decrease in the frequency of governance proposals during our sample period. 155 Untabulated analysis shows a statistically significant downward trend in the percentage of governance proposals (p-value is equal to zero) and a statistically significant upward trend in the percentage of environmental and social proposals over time (p-values are equal to zero). 156 Untabulated analysis shows that the percentage of voted governance proposals relative to all voted proposals has decreased from 69% in 2004 to 62% in 2018, with a corresponding increase in the percentage of voted environmental proposals from 3% in 2004 to 11% in 2018, and a small decrease in the percentage of voted social proposals from 28% in 2004 to 27% in 2018. E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.008</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 We also examine the frequency of submitted proposals by proposal topic because the effects of the proposed amendments may vary by proposal topic. More specifically, the effects of the proposed amendments to the resubmission thresholds may vary by proposal topic because the topic of a proposal may be related to the voting support of a proposal as well as the time it may take for a proposal to garner majority support. However, we also recognize that the garnering of support over time may be the result of a variety of factors other than or in addition to the continued inclusion of the proposal in the proxy. In addition, the effects of the proposed amendments to the ownership thresholds may vary by proposal topic to the extent that the proposed amendments have a disproportionate effect on different types of proponents and the type of proposal varies by proponent type. Figure 4 shows the percentage of all submitted shareholder proposals by proposal topic over time. ISS Analytics classifies proposals into three categories: Governance, environmental, and social proposals.154 The results of 66479 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules Next, we analyze the frequency of submitted proposals by proponent type because the effects of the proposed amendments may vary with the type of proponent. This is because the level and duration of holdings, as well as chosen proposal topics, may vary with proponent type. Figure 5 shows the percentage of submitted shareholder proposals by proponent type over time. We classify proponents into three categories: Individuals, institutions, and unknown.157 As Figure 5 shows, the khammond on DSKJM1Z7X2PROD with PROPOSALS2 157 We retrieve data on proponent types from ISS Analytics. Whenever there are multiple proponents submitting a proposal, the proponent type corresponds to the type of the lead proponent. Whenever the proponent type is missing, we manually classify the proponent into one of the three categories (i.e., individual, institution, or unknown) using the proponent name. Individual proponents are all retail investors. Institutional proponents comprise: (i) Asset managers (25% of all institutional proposals); (ii) unions (25% of all institutional proposals); (iii) pension funds (20% of all institutional proposals); (iv) religious organizations (12% of all institutional proposals); (v) nonprofit organizations (11% of all institutional proposals); and (vi) others (8% of all institutional proposals). An institutional proponent is classified as ‘‘other’’ whenever the proponent does not fall into any of the other institutional proponent categories. ‘‘Unknown’’ proponents are those with VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 average percentage of proposals submitted by individuals (i.e., grayshaded area in Figure 5) was 31 percent during our sample period, and it ranged from a low of 26 percent in 2011 to a high of 39 percent in 2018. Further, as Figure 5 shows, the average percentage of proposals submitted by institutions (i.e., line-patterned area in Figure 5) was 67 percent during our sample period, and it ranged from a low of 59 percent in 2018 to a high of 71 percent in 2011. Our analysis shows no significant timeseries trends in the percentage of proposals submitted by individuals and institutions.158 Institutions submitted approximately twice the number of proposals submitted by individuals, and the difference in the number of proposals submitted by institutions and individuals was statistically significant.159 The percentage of missing identities. The identity of the proponent presumably is missing in the ISS Analytics dataset because companies are not required to disclose the identity of the proponent in the proxy statements. See 17 CFR 240.14a–8(l) (Rule 14a–8(l)). 158 The p-values are equal to 0.19 and 0.64, respectively. 159 The p-value is equal to zero. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 proposals with missing proponent information (i.e., black-shaded area in Figure 5) has decreased from 6 percent in 2004 to 2 percent in 2018, but this decrease is statistically insignificant.160 Our results are qualitatively similar when we examine the percentage of voted rather than submitted shareholder proposals by proponent type over time.161 Overall, our analysis shows that institutions submitted proposals more frequently than individuals, and the percentage of proposals submitted by institutions and individuals has not changed significantly during our sample period. 160 Untabulated analysis shows a statistically significant downward trend in the percentage of proposals submitted by proponents with missing identity over time (the p-value is equal to 0.17). 161 The average percentage of voted proposals that were submitted by individuals was 32% during our sample period, and it ranged from a low of 25% in 2011 to a high of 49% in 2018. The average percentage of voted proposals that were submitted by institutions was 64% during our sample period, and it ranged from a low of 48% in 2018 to a high of 71% in 2011. E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.009</GPH> 66480 We also study the number of unique proponents and average number of proposals submitted by each proponent to shed some light on the concentration of shareholder proposals across proponents. Figures 6A, 6B, and 6C show the number of unique proponents (i.e., gray bars) and the average number of proposals submitted by each proponent over time (i.e., black line) for all proponents, for proponents that are individuals, and for proponents that are institutions, respectively. For this analysis, we count separately proposals submitted by proponents and proposals submitted by co-proponents. We exclude proposals with missing proponent identity. To avoid overcounting the number of unique proponents and undercounting the average number of proposals submitted by each proponent, we review and manually correct the proponent names whenever ISS Analytics uses variations of the same name for a proponent (e.g., ‘‘CalPERS’’ and ‘‘California Public Employees’ Retirement System’’). Nevertheless, to the extent that the same proponent appears with a slightly different name in our dataset, our analysis potentially overestimates the number of unique proponents and underestimates the average number of proposals submitted by each proponent. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 As Figure 6A shows, the average number of unique proponents was 228 during our sample period, and it ranged from a low of 181 in 2011 to a high of 286 in 2004. The average number of proposals submitted by each proponent was 4.9 during our sample period, and it ranged from a low of 3.9 in 2004 to a high of 6.7 in 2015. Untabulated analysis shows no time-series trends in the number of unique proponents and the average number of proposals submitted by each proponent during our sample period.162 A different picture emerges when splitting the observations into proposals submitted by individuals (Figure 6B) and institutions (Figure 6C).163 As Figure 6B shows, the average number of unique proponents that were individuals was 90 during our sample period, and it ranged from a low of 64 in 2012 to a high of 155 in 2004. The average number of proposals submitted by each individual proponent was 3.9 during our sample period, and it ranged 162 The p-values are equal to 0.84 and 0.45, respectively. 163 For proposals that are submitted through a representative, when classifying proponents into institutions and individuals, ISS takes into account the identity of the shareholder rather than the identity of the representative that submitted the proposal. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 66481 from a low of 2.3 in 2004 to a high of 5.2 in 2017. Untabulated analysis shows a statistically significant downward trend in the number of unique individual proponents and a statistically significant upward trend in the average number of proposals submitted by each individual proponent.164 As Figure 6C shows, the average number of unique proponents that were institutions was 143 during our sample period, and it ranged from a low of 107 in 2006 to a high of 207 in 2017. The average number of proposals submitted by each institutional proponent was 5.7 during our sample period, and it ranged from a low of 3.7 in 2017 to a high of 7.6 in 2007. Untabulated analysis shows a statistically significant upward trend in the number of unique institutional proponents and a statistically significant downward trend in the average number of proposals submitted by each institutional proponent.165 Overall, the results of our analysis suggest that there has been an increase (decrease) in the concentration of proposals submitted by individuals (institutions) during our sample period. BILLING CODE 8011–01–P 164 The p-values are equal to zero. p-values are equal to zero and 0.04, respectively. 165 The E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.010</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules EP04DE19.012</GPH> Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4725 E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.011</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 66482 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Relatedly, an academic study, using a sample of shareholder proposals submitted to S&P 1500 companies between 2003 and 2014, shows that five individual proponents submitted 78 percent of all proposals submitted by individuals and 27 percent of all proposals submitted by all proponents.166 Finally, we examine voting outcomes for all proposals, by proposal topic, and by proponent type to inform analysis of the effects of the proposed amendments on proposals that may garner high shareholder support. In addition, the level of voting support may determine which shareholder proposals would be affected by the proposed amendments to Rule 14a–8(i)(12). Figures 7A, 7B, and 7C show the average voting support for all proposals, by proposal topic, and by type of proponent, respectively. Voting support is defined as the ratio of ‘‘for’’ votes divided by the sum of ‘‘for’’ and 166 Nickolay Gantchev & Mariassunta Giannetti, The Costs and Benefits of Shareholder Democracy 8–9, 37 (European Corporate Governance Institute, Working Paper No. 586/2018, 2018) (‘‘Gantchev & Giannetti (2018)’’). 27% = (290 + 222 + 157 + 133 + 125)/3,384. These statistics are estimated using the identity of the proponents rather than the identity of the representatives, in cases where a representative submitted a proposal on behalf of a proponent. For related statistics, see letters in response to the Proxy Process Roundtable from U.S. Chamber of Commerce Center for Capital Markets Competitiveness dated November 12, 2018, at 11 (‘‘[D]uring 2017, just three individuals . . . sponsored 25% of proposals submitted at the Fortune 250.’’); Ceres dated November 13, 2018, at 6 (‘‘From 2004–2017, the Chevedden, Steiner, and McRitchie families submitted 14.5% of the 11,706 proposals filed.’’); Mercy Investment Services, Inc. dated December 3, 2018, at 2 (same); Investment Company Institute dated November 14, 2018, at 1– 3 of attachment. VerDate Sep<11>2014 22:10 Dec 03, 2019 Jkt 250001 ‘‘against’’ votes.167 As Figure 7A shows, the average voting support was 33 percent in 2018, and it ranged from a low of 27.8 percent in 2004 to a high of 37.5 percent in 2009, with an average of 33.4 percent during our sample period.168 As Figure 7B shows, the average voting support for governance proposals (i.e., solid line in Figure 7B) has remained stable during our sample period at an average of 42.1 percent, while there has been an upward trend in the average voting support for environmental and social proposals (i.e., dotted and dashed lines in Figure 7B).169 In particular, the average voting support for environmental proposals increased from a low of 11.8 percent in 2004 to a high of 28.9 percent in 2018, with an average of 21.9 percent during our sample period. The average voting support for social proposals increased from a low of 9.3 percent in 2005 to a high of 24.6 percent in 2018, with an average of 17.4 percent during our sample period. Untabulated analysis also shows that the average voting 167 We define voting support as the ratio of ‘‘for’’ divided by the sum of ‘‘for’’ and ‘‘against’’ votes because this is how voting support is defined for the purposes of Rule 14a–8(i)(12). See supra note 116. Abstentions and broker non-votes are excluded from the calculation of voting support for the purposes of Rule 14a–8(i)(12). See supra note 116. 168 Untabulated analysis shows no statistically significant trend in the average voting support for all proposals during our sample period (the p-value is equal to 0.40). 169 Untabulated analysis shows a statistically significant upward trend in the average voting support for environmental and social proposals (pvalues are equal to zero) and no statistically significant trend in the average voting support for governance proposals during our sample period (the p-value is equal to 0.83). PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 support for governance proposals is statistically significantly higher than the average voting support for environmental and social proposals, and the average voting support for environmental proposals is statistically significantly higher than the average voting support for social proposals.170 Finally, as Figure 7C shows, the average voting support for proposals submitted by institutions (i.e., solid line) has remained stable during our sample period at an average of 35.4 percent during our sample period, and the average voting support submitted by individuals (i.e., dashed line) has remained stable during our sample period at an average of 32.2 percent.171 Untabulated analysis also shows that the average voting support for proposals submitted by institutions is statistically significantly higher than the average voting support for proposals submitted by individuals.172 In sum, our analysis shows that the average voting support of all proposals has remained stable during our sample period, but there is an increase in the average voting support for environmental and social proposals over the sample period. BILLING CODE 8011–01–P 170 The p-values are equal to zero. analysis shows no statistically significant trend in the average voting support for proposals submitted by institutions and individuals during our sample period. The p-values are equal to zero 0.22 and 0.97 respectively. 172 The p-value is equal to 0.01. 171 Untabulated E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.013</GPH> BILLING CODE 8011–01–C 66483 EP04DE19.015</GPH> Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4725 E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.014</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 66484 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules Figures 8A, 8B, and 8C show the percentage of proposals that received majority support for all proposals, by proposal topic, and by proponent type, respectively. Majority support is defined as more than 50 percent of the ‘‘for’’ votes divided by the sum of ‘‘for’’ and ‘‘against’’ votes.173 We examine the percentage of proposals that received majority support as opposed to some other voting threshold because studies show that the probability of implementation of a shareholder proposal increases significantly once the proposal receives majority support.174 As Figure 8A shows, there is a statistically significant downward trend in the percentage of proposals that received majority support during our 173 See supra note 167. example, a 2010 study by Ertimur et al. shows that ‘‘proposals that won at least one majority vote in the past are more likely to be implemented (34.2% versus 22.9%).’’ See Yonca Ertimur, Fabrizio Ferri, & Stephen R. Stubben, Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals, 16 J. Corp. Fin. 53 (2010) (‘‘Ertimur et al. (2010)’’). Similarly, a 2017 study by Bach and Metzger showed that ‘‘when the 50%-threshold is passed, there is a very sizeable jump of about 20% of the implementation likelihood.’’ See Laurent Bach & Daniel Metzger, How Do Shareholder Proposals Create Value? (Working Paper, Mar. 2017) (‘‘Bach & Metzger (2017)’’). However, only crossing the managementdefined majority threshold (as opposed to the simple majority threshold defined as the ratio of ‘‘for’’ votes divided by the sum of ‘‘for’’ and ‘‘against’’ votes) has an effect of the probability that the proposal is implemented. Id. The managementdefined majority threshold may differ from a simple majority threshold. Id. In 43% of their sample, the management threshold is the same as the simple majority threshold. See id. In our analysis, we define majority support as the simple majority threshold because we lack data on the managementdefined majority threshold. khammond on DSKJM1Z7X2PROD with PROPOSALS2 174 For VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 sample period.175 In particular, the percentage of proposals that received majority support ranged from a high of 27.7 percent in 2009 to a low of 11.9 percent in 2018, with an average of 20.6 percent during our sample period. As Figure 8B shows, few environmental and social proposals received majority support during our sample period, while one out of three governance proposals received majority support.176 More specifically, the percentage of governance proposals that received majority support (i.e., solid line in Figure 8B) ranged from a high of 37.7 percent in 2009 to a low of 14.9 percent in 2018, with an average of 30.6 percent during our sample period. The percentage of environmental proposals that received majority support (i.e., dotted line in Figure 8B) ranged from a low of 0 percent in 2004 to a high of 16.3 percent in 2018, with an average of 2.6 percent during our sample period. The percentage of social proposals that received majority support (i.e., dashed line in Figure 8B) ranged from a low of zero percent in 2010 to a high of 4.5 percent in 2016, with an average of 1.8 percent during our sample period. Untabulated analysis shows that there is a statistically significant downward 175 The p-value is equal to zero. analysis shows that the percentage of governance proposals that received majority support is statistically significantly higher than the percentage of environmental and social proposals that received majority support (the pvalues are equal to zero), and the percentage of environmental proposals that received majority support is not statistically significantly different than the percentage of social proposals that received majority support (the p-value is equal to 0.23). 176 Untabulated PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 trend in the percentage of governance proposals that received majority support, and a statistically significant upward trend in the percentage of environmental and social proposals that received majority support during our sample period.177 Interpretation of these results should be undertaken with caution due to various factors, including the uncertainties inherent in categorization and the evolution of voting support for proposals over time. As Figure 8C shows, there is a statistically significant downward trend in the percentage of proposals submitted by individuals that received majority support, while the percentage of proposals submitted by institutions that received majority support has not changed significantly during our sample period.178 In particular, the percentage of proposals submitted by individuals that received majority support (i.e., dashed line in Figure 8C) ranged from a high of 35 percent in 2009 to a low of 12.3 percent in 2014, with an average of 23.7 percent during our sample period. In addition, the percentage of proposals submitted by institutions that received majority support (i.e., solid line in Figure 8C) ranged from a high of 24.3 percent in 2013 to a low of 11.1 percent in 2018, with an average of 18.7 percent during our sample period. The percentage of proposals submitted by individuals that received majority support is statistically significantly higher than the percentage of proposals 177 The p-values are equal to 0.01, 0.02, and 0.05, respectively. 178 The p-values are equal to zero and 0.48, respectively. E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.016</GPH> BILLING CODE 8011–01–C 66485 66486 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules proposals and proposals submitted by individuals. BILLING CODE 8011–01–P EP04DE19.018</GPH> that received majority support during our sample period and this decrease is primarily attributable to governance 179 The p-value is equal to 0.02. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4725 E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.017</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 submitted by institutions that received majority support.179 In sum, our analysis shows that there is a decrease in the number of proposals Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Because many proposals are nonbinding, not all proposals that garner majority support are implemented. Using a sample of governance-related proposals for S&P 1500 companies between 1997 and 2011, previous studies have shown that between 31 percent and 56 percent of the shareholder proposals that received majority support were implemented by management, and this percentage has increased over time.180 These studies have also shown that the probability of a proposal being implemented depends on the influence of the proponent, the type of proposal, the past performance of the company, and whether voting 180 Bach and Metzger use a sample of governancerelated proposals for S&P 1500 companies between 1997 and 2011 and find that 56% of the proposals that received majority support were implemented by management, and this percentage increased from 29% in 1997 to 70% in 2011. Bach & Metzger (2017), supra note 174. Ertimur et al. use a sample of governance-related proposals for S&P 1500 companies between 1997 and 2004 and find that 31% of the proposals that received majority support were implemented by management, and this percentage increased from 16% in 1997 to 40% in 2004. Ertimur et al. (2010), supra note 174. The differences in the statistics of the two cited papers is likely due to the different definition of implemented proposals. Bach and Metzger consider a proposal to be implemented ‘‘if management adopts the content of the proposal within two years after the shareholder meeting,’’ while Ertimur et al. consider a proposal to be implemented if ‘‘the board takes a significant step toward a partial or full implementation within one year from the majority vote.’’ See Bach & Metzger (2017), supra note 174; Ertimur et al. (2010), supra note 174. A 2007 study by Thomas and Cotter provide similar rates of implementation of shareholder proposals that received majority support as Ertimur et al. (2010). See Randall S. Thomas & James F. Cotter, Shareholder Proposals in the New Millennium: Shareholder Support, Board Response, and Market Reaction, 13 J. Corp. Fin. 368 (‘‘Thomas & Cotter (2007)’’). VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 support exceeds majority support as defined by a company’s governing documents.181 ii. Discussion Specific to Proposed Amendments to Rule 14a–8(b) and Rule 14a–8(c) To provide insight into the distribution of ownership across proponents, we perform two sets of analysis. First, we review proponents’ ownership information as disclosed in companies’ proxy statements for proposals to be considered at shareholder meetings held in 2018.182 Companies have discretion in the type of information they must include in the proxy statements regarding proponents.183 In particular, the company’s proxy statement must either include the name and address of the proponents as well as the number of the voting securities that the proponent holds, or alternatively, a statement that this information will be provided to shareholders upon request. Whenever the company discloses the identity of the proponents, the company may disclose the identity of all or a subset of the proponents. Whenever the company discloses proponents’ ownership information, the company may disclose the actual dollar value, the actual number of shares, a minimum dollar value, or a minimum number of shares held by the proponent. In addition, whenever the company discloses 181 See Thomas & Cotter (2007), supra note 180; Ertimur et al. (2010), supra note 174; Bach & Metzger (2017), supra note 174. 182 Proxy statements filed with the Commission are available at https://www.sec.gov/edgar/ searchedgar/companysearch.html. 183 See Rule 14a–8(l). PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 proponents’ ownership information, the company may disclose ownership information for a subset of the proponents submitting a proposal, and the company may disclose actual holdings information for some of the proponents and minimum holdings information for the rest of the proponents submitting the same proposal. The type of ownership information the company discloses (i.e., actual holdings versus minimum holdings and dollar value versus number of shares) frequently depends on the type of information provided in the proof-of-ownership letter furnished by the proponent. In particular, proponents also have discretion in the type of information they must provide in the proof-of-ownership letters.184 Proponents may disclose the exact duration and level of their holdings or they may confirm that they meet the minimum ownership thresholds. For these reasons, data on proponent ownership from proxy statements may not be representative of the overall distribution of proponent ownership. Table 1 summarizes the distribution of proponents’ ownership in our sample of proposals.185 There were 447 unique voted proposals for shareholder meetings held in 2018. Out of the 447 proposals, 287, or 64 percent, contained information on proponents’ actual and/or minimum holdings, whereas the remaining 160, or 36 percent, did not 184 See Rule 14a–8(b). is some information on proponents’ duration of ownership in only 5 out of the 447 reviewed proposals. Because the sample is small, we do not provide descriptive statistics on proponents’ duration of ownership using information from the proxy statements. 185 There E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.019</GPH> BILLING CODE 8011–01–C 66487 66488 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules contain information on proponents’ ownership. In our sample of proxy statements, there were 198 proponents that submitted 150 unique proposals for which the proxy statements mentioned the proponents’ actual holdings, and 159 proponents that submitted 139 unique proposals for which the proxy statements mentioned the proponents’ minimum holdings.186 From the 198 proponents with actual holdings information, (i) 3 proponents, or 2 percent, held less than $2,000 worth of shares, and those proponents submitted 2 unique proposals; (ii) 85 proponents, or 43 percent, held more than or equal to $2,000 but less than $15,000 worth of shares, and those proponents submitted 75 unique proposals; (iii) 16 proponents, or 8 percent, held more than or equal to $15,000 but less than $25,000 worth of shares, and those proponents submitted 16 unique proposals; and (iv) 94 proponents, or 47 percent, held more than or equal to $25,000 worth of shares, and those proponents submitted 65 unique proposals.187 The median ownership for proponents with actual holdings information was $16,758 and the average ownership was $17.4 million.188 From the 159 proponents with minimum holdings information, (i) all of the proponents held at least $2,000 worth of shares, and those proponents submitted 139 unique proposals; (ii) 23 proponents, or 14 percent, held at least $15,000 worth of shares, and those proponents submitted 23 unique proposals; and (iv) 16 proponents, or 10 percent, held at least $25,000 worth of shares, and those proponents submitted 16 unique proposals. As mentioned above, in our sample, there were three proponents (i.e., one percent of all proponents with ownership information), whose individual holdings were below the current $2,000 ownership threshold, and those proponents submitted two unique proposals (i.e., one percent of all proposals submitted by proponents with ownership information in the proxy statements). For one of the two proposals, there were two coproponents, whose both aggregate and individual holdings did not meet the $2,000 current ownership threshold.189 For the other of the two proposals, there were four co-proponents, whose aggregate holdings met the $2,000 current threshold and the individual holdings of one of the co-proponents did not meet the $2,000 current ownership threshold. Further, in our sample, two entities submitted more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. In particular, one entity submitted two proposals to one company and another entity submitted two proposals to each one of six different companies, resulting in a total of 14 submitted proposals. TABLE 1—PROPONENTS’ OWNERSHIP (FROM PROXY STATEMENTS) Number of proponents Actual Holdings ........................................................................................................................................................ Holdings <$2,000 ............................................................................................................................................. Holdings ≥$2,000, but <$15,000 ...................................................................................................................... Holdings ≥$15,000, but <$25,000 .................................................................................................................... Holdings ≥$25,000 ............................................................................................................................................ Minimum Holdings ................................................................................................................................................... Holdings >$0 .................................................................................................................................................... Holdings ≥$2,000 .............................................................................................................................................. Holdings ≥$15,000 ............................................................................................................................................ Holdings ≥$25,000 ............................................................................................................................................ No Holdings Information .......................................................................................................................................... Number of proposals 198 3 85 16 94 159 159 159 23 16 156 150 2 75 16 65 139 139 139 23 16 160 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Sources: CRSP, ISS Analytics, Proxy Statements from EDGAR. Second, we review proponents’ ownership information from the proofof-ownership letters submitted in connection with the proposal that can be found as an attachment to the Commission staff’s no-action letters issued under Rule 14a–8 during calendar year 2018.190 Our sample comprises 254 unique shareholder 186 Multiple proponents may submit a single proposal. Hence, the number of proponents in Table 1 can be higher than the number of proposals. Also, for the same reason, within each panel, the sum of proposals for the various ownership ranges can be higher than the total number of proposals. For example, in the Actual Holdings panel, the sum of proposals for the various ownership ranges (i.e., 158 = 2 + 75 + 16 + 65) is higher than the total number of proposals in the panel (i.e., 150). Further, companies may disclose information on actual holdings for some proponents and information on minimum holdings for other proponents submitting the same proposal. Hence, in Table 1, the sum of the proposals with (i) information on proponents’ actual holdings (i.e., 150 proposals); (ii) information on proponents’ minimum holdings (i.e., 139 proposals); and (iii) no information on proponents’ holdings (i.e., 160 proposals) is higher than the number of unique proposals in our sample (i.e., 447). The proxy statements provide information on the identity of the proponents for a subset of the proposals with no holdings information. 187 In cases where the company reports the number of shares rather than the dollar amount of the proponent’s holdings, we convert the number of shares to dollars using the average of the bid and ask prices during a 60-day period before the filing date of the proxy statement. We use the filing date of the proxy statement rather than the date that the proponent submitted the proposal (see supra note 57) because proxy statements do not report the date of the shareholder proposal submission. Stock prices are retrieved from CRSP. 188 In untabulated analysis, we examine whether the probability that a proposal would receive majority support depends on the proponents’ ownership level. To measure voting support, we use the ISS Analytics data for the sample of proposals that were voted on in 2018 shareholder meetings. We only use data on proponents with information on their exact holdings. We compare the probability that the proposal would receive majority support for proposals submitted by proponents with above and below median dollar ownership levels and we find a negative and statistically significant relation between the probability that a proposal would receive majority support and the level of proponents’ ownership (p-value equal to 0.06), but we find no relation between the level of the voting support and the level of proponents’ ownership (pvalue equal to 0.14). The results of this analysis should be interpreted with caution because of the small sample used for this analysis. 189 The dollar value of proponents’ ownership may be measured with error in cases where we use the filing date of the proxy statement to estimate the dollar value of proponents’ ownership (see supra note 187). Hence, the aggregate holdings of the proponents that submitted the abovementioned proposal may be higher than or equal to $2,000. 190 The no-action letters that include the proof-ofownership letters are available at https:// www.sec.gov/divisions/corpfin/cf-noaction/2019_ 14a-8.shtml and https://www.sec.gov/investment/ investment-management-no-action-letters#P87_900. We analyze a sample (rather than the universe) of all proof-of-ownership letters attached to no-action letters available on the Commission’s website because ownership data in proof-of-ownership letters are unstructured, and thus information must be manually collected. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules proposals submitted by 242 unique proponents, yielding 485 proponentproposal pairs. For 433, or 89 percent of all proponents that submitted a proposal for which the company submitted a noaction request, there is information on proponents’ actual and/or minimum holdings. For the remaining 52 proponents, or 11 percent, there is no information on proponents’ actual or minimum holdings. Further, there are 284 proponents that submitted 155 unique proposals, for whom there is information on their actual holdings, and 149 proponents that submitted 99 unique proposals, for whom there is only information on proponents’ minimum holdings.191 From the 284 proponents with actual holdings information, (i) eight proponents, or three percent, held less than $2,000 worth of shares, and those proponents submitted six unique proposals; (ii) 140 proponents, or 49 percent, held more than or equal to $2,000 but less than $15,000 worth of shares, and those proponents submitted 98 unique proposals; (iii) 19 proponents, or seven percent, held more than or equal to $15,000 but less than $25,000 worth of shares, and those proponents submitted 16 unique proposals; and (iv) 117 proponents, or 41 percent, held more than or equal to $25,000 worth of shares, and those proponents submitted 79 unique proposals.192 The median ownership for proponents with actual holdings information is $13,076, and the average ownership is $11.8 million. From the 149 proponents with minimum holdings information, (i) 148 proponents, or 99 percent, hold at least $2,000 worth of shares, and those proponents submitted 98 unique proposals; (ii) 18 proponents, or 12 percent, hold at least $15,000 worth of shares, and those proponents submitted 18 unique proposals; and (iii) 12 proponents, or eight percent, hold at 66489 least $25,000 worth of shares, and those proponents submitted 12 unique proposals. As Table 2 shows, in our sample, there are nine proponents with individual holdings below the current $2,000 ownership threshold (i.e., eight proponents with exact holdings information and one proponent with minimum holdings information below the $2,000 threshold) and those proponents submitted seven unique proposals. For one of the seven proposals, there were two coproponents, whose aggregate holdings met the $2,000 current ownership threshold. For another one of the seven proposals, there was only one proponent whose holdings did not meet the $2,000 threshold.193 For the remaining five proposals, there was at least one other co-proponent whose share ownership met the current $2,000 threshold. TABLE 2—PROPONENTS’ OWNERSHIP (FROM PROOF-OF-OWNERSHIP LETTERS) Number of proponents Actual Holdings ........................................................................................................................................................ Holdings <$2,000 ............................................................................................................................................. Holdings ≥$2,000, but <$15,000 ...................................................................................................................... Holdings ≥$15,000, but <$25,000 .................................................................................................................... Holdings ≥$25,000 ................................................................................................................................................... Minimum Holdings ................................................................................................................................................... Holdings <$2,000 ............................................................................................................................................. Holdings ≥$2,000 .............................................................................................................................................. Holdings ≥$15,000 ............................................................................................................................................ Holdings ≥$25,000 ............................................................................................................................................ No Holdings Information .......................................................................................................................................... 284 8 140 19 117 149 149 148 18 12 52 Number of proposals 155 6 98 16 79 99 99 98 18 12 34 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Sources: CRSP, Proof-of-Ownership Letters attached to no-action letters found on Commission’s website. Data on proponent ownership from proxy statements and proof-ofownership letters cannot inform the analysis of shareholder-proponents’ duration of holdings in excess of one year.194 One commenter has provided an estimate of average holding period of four to eight months across all types of 191 Multiple proponents may submit a single proposal. Hence, the number of proponents in Table 2 can be higher than the number of proposals. Also, for the same reason, within each panel, the sum of proposals for the various ownership ranges can be higher than the total number of proposals in the corresponding panel. For example, in the Actual Holdings panel, the sum of proposals for the various ownership ranges (i.e., 199 = 6 + 98 + 16 + 79) is higher than the total number of proposals in the panel (i.e., 155). In Table 2, the sum of the proposals with (i) information on proponents’ actual holdings (i.e., 155 proposals); (ii) information on proponents’ minimum holdings (i.e., 99 proposals); and (iii) no information on proponents’ holdings (i.e., 34 proposals) is higher than the number of unique proposals in our sample (i.e., 254) because for the same proposal, the proof-of-ownership letters submitted by the proponents can provide information on proponents’ actual and/or minimum holdings. 192 Data on proponent ownership from proof-ofownership letters may not be representative of the overall distribution of proponent ownership because companies do not seek to omit every shareholder proposal. Companies sought to omit proposals by requesting a no-action letter from the Commission staff for 31% of shareholder proposals during the calendar year 2018. The percentage of proposals that companies sought to omit in 2018 is estimated as the number of unique proposals for which the Commission received a no-action request in 2018—see supra note 190—divided by the number of all unique proposals (i.e., voted, omitted, and withdrawn proposals) to be considered in 2018 shareholder meetings from ISS Analytics. Hence, this percentage is an approximation of the actual percentage of proposals that companies sought to omit in 2018 because some of the no-action requests received by the Commission in 2018 regarded 2019 shareholder meetings. In addition, data on proponent ownership from proof-of-ownership letters is limited because proponents are not required to disclose in the proofof-ownership letter their exact stock ownership but only to confirm that they meet the minimum ownership thresholds. See Rule 14a–8(b). In cases where the proponent reports the number of shares rather than the dollar amount of his/her holdings, we convert the number of shares to dollars using the average of the bid and ask prices during the 60 calendar days before the date the shareholder submitted the proposal. See supra note 57. In cases where the no-action letter does not contain the date that the proposal was mailed or emailed, we use the date that the company received the proposal to estimate the highest of the average of the bid and ask prices during a 60-day period. In cases where the no-action letter does not contain the date that the proposal was mailed or emailed or the date that the company received the proposal, we use the date that the proposal was signed by the proponent. Stock prices are retrieved from CRSP. 193 Commission staff issued a no-action letter for this proposal following the company’s request because the proponent did not satisfy the minimum ownership requirement under Rule 14a–8(b). 194 See supra note 185 and accompanying text. Because under current eligibility requirements, shareholder-proponents are required to have held shares for at least one year, we can reasonably assume a minimum of one year ownership duration for proponents’ reported holdings unless the proposal was challenged on the basis of not satisfying the ownership eligibility requirements. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 66490 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 shareholders.195 We solicit public 195 See letter in response to the Proxy Process Roundtable from the Shareholder Rights Group dated December 4, 2018, at 9 (noting ‘‘[t]he average time an investor held a share holding a stock [sic] in the 1960s when the rule was passed was eight years, today it is between four and eight months’’). There is limited academic research on share ownership duration, primarily due to data limitations. Some studies infer average duration of holdings for all shareholders (rather than just proponents) from data on aggregate share trading volumes. In particular, one white paper has looked at share turnover for NYSE listed securities to estimate an average duration of holdings of less than two years in 2014. See Michael W. Roberge et al., Lengthening the Investment Time Horizon (2016), available at https://www.pionline.com/ article/20161101/WHITE_PAPERS/161109903. Any such analysis inferring average duration of holdings across all investors masks potential heterogeneity of holding periods across different types of investors. In particular, because some of the trading volume may come from high-frequency traders, these average statistics may underestimate the holding duration of institutional and individual investors likely to submit shareholder proposals. Other academic research has relied on information on holdings for specific types of shareholders. In particular, one strand of literature has looked at daily trading records of 78,000 households from January 1991 to December 1996 from a U.S. discount brokerage house. A survey article notes that the estimated average holding period for individuals in this sample is 16 months. See Brad M. Barber & Terrance Odean, The Behavior of Individual Investors, 2 Handbook of the Economics of Finance, 1533, 1539 (2013). Another paper finds that the median holding period of individual investors in this dataset is 207 trading days. See Deniz Anginer, Snow Xue Han, & Celim Yildizhan, Do Individual Investors Ignore Transaction Costs? 6 (Working Paper, 2018), available at https://ssrn.com/abstract=2972845. Another strand of literature uses information from 13F filings with the Commission to estimate statistics of duration of holdings for a subset of institutional investors. For example, one paper documents that the value-weighted composition of long-term institutional investors with securities holdings in public U.S. companies has nearly doubled from approximately 35 percent since the early 2000s to 65 percent in 2017. Long-term institutional investors are defined as those with an implied average holding period of longer than three years. See Wei Jiang, Who Are the Short-Termists?, J. Applied Corp. Fin., Fall 2018, at 19 (2018). A second paper documents a median duration of holdings of approximately two years in 2015 among this set of investors. See K.J. Martijn Cremers & Simone M. Sepe, Institutional Investors, Corporate Governance, and Firm Value, 41 Seattle U.L. Rev. 387, 403 (2018). Lastly, we provide some evidence on holding periods using data on reported sales of corporate stocks retrieved from individual tax returns. See Janette Wilson & Pearson Liddell, Sales of Capital Assets Data Reported on Individual Tax Returns, 2007–2012, IRS Statistics of Income Bull., Winter 20167, at 58, available at https://www.irs.gov/pub/ irs-soi/soi-a-inca-id1604.pdf (Table 4B). In 2012 (the last year with available data), we estimate that among all transactions with reported holding duration, 46% were for corporate stocks held for a period longer than one year, 27% were for stocks held longer than 2 years, and 18% were for stocks held longer than 3 years. Estimates of holdings duration from reported sales may not be representative of the overall distribution of duration of stockholdings because the propensity to sell a stock may be dependent on the amount of time the stock has been held. See Zoran Ivkovic´, James VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 comment on the duration of ownership for all shareholders, and specifically for shareholders likely to submit shareholder proposals, in Section IV.E below. iii. Discussion Specific to Proposals Submitted on Behalf of Shareholders As mentioned in Section IV.B.3.i above, from the 447 proposals submitted for a vote at a shareholder meeting in 2018, 363 provided information related to the identity of the proponents. Out of those 363 proposals, 67 (or 18 percent) were submitted by a representative. The documentation that would be mandated by the proposed amendments is generally non-public. We are able to verify if the proponent provided the documentation that would be mandated by the proposed amendments only in cases where the company submitted a no-action request for the proposal at issue, and thus submitted to the Commission the necessary supporting documentation, including the shareholder proposal and related disclosures. Companies submitted a noaction request for 12 out of the 67 proposals submitted by a representative.196 In eight out of the 12 requests, the proponent provided all documentation that would be mandated by the proposed amendments. In the remaining four cases, the shareholder proposal attached to the no-action letter posted on the Commission’s website was signed by the representative rather than the proponent. iv. Discussion Specific to Rule 14a– 8(i)(12) To understand current practices for shareholder proposal resubmissions, we study a sample of shareholder proposal resubmissions for Russell 3000 companies from 2011 to 2018.197 Out of the 3,620 proposals that went to a vote between 2011 and 2018, 2,168 (60 percent) were a first submission, 678 (19 percent) were a second submission, and the remaining 774 (21 percent) were a third or higher submission (see Table 3 below).198 During the same time period, Poterba, & Scott Weisbenner, Tax-Motivated Trading by Individual Investors, 95 Amer. Econ. Rev. 1605 (2005). 196 See supra note 190 (providing links to noaction letters). 197 See CII Report, supra note 92. Because the CII Report does not use data on shareholder proposal submissions prior to 2011, the analysis in the report is conducted under the assumption that all proposals submitted in the earlier years are firsttime submissions. Nevertheless, some proposals in the earlier years are actually resubmissions from previous years. As a result, the CII Report underestimates the number of resubmitted proposals in the sample and overestimates the number of proposals eligible for resubmission in the PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 the average support for first time proposals was 34 percent and the median support was 30 percent. The average support for second and third or higher submissions was slightly lower than first-time proposals, each receiving approximately 30 percent and 32 percent, on average.199 following year. To correct for these biases, we supplement data in the CII Report with data on voted shareholder proposals from ISS Analytics during the years 2006 to 2010. We apply the CII Report’s methodology to identify resubmitted proposals for years 2011 to 2013 using the description of the shareholder proposal in the ISS data. As a result, we identify 1,442 shareholder proposals as resubmissions compared to 1,314 in the CII Report. Therefore, some of the statistics on resubmitted proposals in our analysis differ from those presented in the CII Report. When considering eligibility for resubmission, we only consider whether the proposal is eligible for resubmission in the following year, and not whether the proposal is eligible for resubmission at some other point in the future. This distinction is important because, under the current resubmission thresholds, all proposals are eligible for resubmission following a three-year cooling-off period. Of all the proposals resubmitted during 2011 to 2018, 84% were voted on in the previous year and 12% (5%) were not voted in the previous year, but were voted on two (three) years prior. Statistics on resubmitted shareholder proposals are subject to measurement error because ISS Analytics’ classification of resubmitted shareholder proposals is not always the same as what the Commission’s staff or courts might deem to be a proposal on ‘‘substantially the same subject matter.’’ Lastly, the total number of voted shareholder proposals in the CII Report is slightly lower than the counts in the ISS Analytics data. For example, there are 423 shareholder proposals that appear as first-time submissions or resubmissions in the CII Report during 2018, while we estimate that 447 shareholder proposals were voted on during the same period using the ISS Analytics data. See supra Section IV.B.3.i. 198 A proposal is categorized as first submission if it has not been voted on in the preceding three calendar years. A proposal is categorized as second (third or greater) submission if it has been voted on within the preceding three calendar years and it has been voted on once (two or more times) in the past five calendar years. 199 Throughout the analysis in this section, when comparing estimates across subsamples of the data (e.g., average support for first time and second time proposals, or the propensity to resubmit proposals across proposal types, etc.), we verify that the estimates are statistically different from one another. In particular, we test whether the difference in a particular pair of estimates is statistically significant using hypothesis tests for continuous and discrete random variables and a pvalue of 10%. See, e.g., Greene (2007), supra note 144. The median support for second-time submissions, 29 percent, was slightly lower than first-time submissions, while the median support for thirdtime or subsequent submissions, 31 percent, was slightly higher. While the difference in median voting support between first-time and second-time submissions is statistically significant, the difference in the median voting support between first-time and third or subsequent submissions is not. E:\FR\FM\04DEP2.SGM 04DEP2 66491 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules TABLE 3—SHAREHOLDER PROPOSALS BY NUMBER OF SUBMISSIONS, 2011–2018 Number of proposals % of proposals Average % support % of proposals eligible for resubmission next year Median % support First ...................................................................................... Second ................................................................................. Third or subsequent ............................................................. 2,168 678 774 60 19 21 34 30 32 30 29 31 94 90 94 Total .............................................................................. 3,620 100 32 30 93 Sources: CII Report, ISS Analytics. Some types of proposals are more likely to be resubmitted than others and thus, the effect of proposed amendments to the resubmission thresholds may vary with proposal type. Therefore, what follows is a discussion of how the likelihood of shareholder proposal resubmission is related to: (i) Prior voting support; (ii) proposal topic; (iii) firm size; (iv) dual-class structure of shares; and (v) proponent type. Shareholders’ propensity to resubmit previously voted proposals depends on the voting support a proposal has previously received. Using a sample of voted shareholder proposals from 2011 to 2018, we find that a shareholder proposal was more likely to be resubmitted in the following year if it has garnered greater than 10 percent, but less than majority, support (see Table 4 below).200 In particular, among proposals that were eligible to be resubmitted in the following year under the current resubmission thresholds, 32 percent of proposals that received less than 10 percent of votes in favor were actually resubmitted in the following year, as compared to 44 percent of proposals that received between 10 percent and 50 percent of votes in favor. We assume that because shareholder proposals garnering majority support are more likely to be implemented than those receiving lower levels of support, these proposals are less likely to be resubmitted.201 TABLE 4—SHAREHOLDER PROPOSALS SUPPORT AND RESUBMISSIONS BY PROPOSAL TOPIC, 2011–2017 % Vote for <10% All Proposals: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Governance Proposals: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Environmental Proposals: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Social Proposals: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... 10%–50% >=50% Total 648 418 (65%) 133 (32%) 1,997 1,997 (100%) 878 (44%) 552 552 (100%) 65 (12%) 3,197 2,967 (93%) 1,076 (36%) 176 117 (66%) 28 (24%) 1,196 1,196 (100%) 453 (38%) 522 522 (100%) 62 (12%) 1,894 1,835 (97%) 543 (30%) 152 105 (69%) 36 (34%) 301 301 (100%) 132 (44%) 9 9 (100%) 2 (22%) 462 415 (90%) 170 (41%) 320 196 (61%) 69 (35%) 500 500 (100%) 293 (59%) 21 21 (100%) 1 (5%) 841 717 (85%) 363 (51%) khammond on DSKJM1Z7X2PROD with PROPOSALS2 Sources: CII Report, ISS Analytics. The tendency to resubmit shareholder proposals differs by proposal topic (see Table 4 above). Because governancerelated shareholder proposals received greater voting support than environmental and social shareholder proposals, on average, governancerelated proposals were more likely to be 200 For this analysis, we look at proposals submitted during the calendar years 2011 to 2017 and whether they were resubmitted in the following year using data from 2012 to 2018. Because we do not have data on whether these proposals were resubmitted in 2019, we exclude proposals submitted in 2018. The analysis shows that, in our sample, 10 shareholder proposals submitted to nine companies were resubmitted and voted on despite being eligible for exclusion under the current resubmission thresholds. Five of these proposals were resubmitted in the year following a previous vote during 2011 to 2017. Thus, these five proposals are included in the results presented in Table 4. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 eligible for resubmission in the following year.202 Despite more proposals being eligible for resubmission, governance-related 201 See supra note 180 and accompanying text. Section IV.B.3.i for an analysis of voting support by shareholder proposal topic. We rely on the proposal categorization from the CII Report, supra note 92, to group proposals into governance, environmental, and social categories. 202 See E:\FR\FM\04DEP2.SGM 04DEP2 66492 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules proposals were less likely to be resubmitted than environmental and social proposals. In particular, among proposals that received less than 10 percent support, 24 percent of governance-related shareholder proposals eligible for resubmission in the following year were actually resubmitted, as compared to 34 percent of environmental and 35 percent of social shareholder proposals eligible for resubmission. Among proposals that received between 10 percent and 50 percent support, 38 percent of governance-related shareholder proposals eligible for resubmission in the following year were actually resubmitted, as compared to 44 percent of environmental and 59 percent of social shareholder proposals eligible for resubmission. The tendency to resubmit shareholder proposals also differs by the type of company. In particular shareholder proposals received by S&P 500 companies were more likely to be resubmitted in the following year than shareholder proposals received by those companies not in the S&P 500 (see Table 5 below). For example, among shareholder proposals receiving less than 10 percent support, 33 percent of eligible shareholder proposals were resubmitted at S&P 500 companies, as compared to 22 percent at non-S&P 500 companies. Among shareholder proposals receiving between 10 percent and 50 percent support, 47 percent of eligible shareholder proposals were resubmitted at S&P 500 companies, as compared to 31 percent at non-S&P 500 companies. TABLE 5—SHAREHOLDER PROPOSALS SUPPORT AND RESUBMISSIONS BY COMPANY SIZE, 2011–2017 % Vote for <10% S&P 500: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Non S&P 500: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... 10%–50% ≥50% Total 556 359 (65%) 120 (33%) 1,663 1,663 (100%) 774 (47%) 337 337 (100%) 47 (14%) 2,556 2,359 (92%) 941 (40%) 92 59 (64%) 13 (22%) 334 334 (100%) 104 (31%) 215 215 (100%) 18 (8%) 641 608 (95%) 135 (22%) Sources: CII Report, ISS Analytics. Fewer shareholder proposals were eligible for resubmission in the following year in companies with dualclass shares as compared to those without such shares (see Table 6 below).203 Among shareholder proposals that received less than 10 percent in voting support, only 50 percent were eligible for resubmission the following year for companies with dual-class shares, as compared to 66 percent for companies without dualclass shares. However, eligible shareholder proposals at dual-class companies were more likely to be resubmitted in the following year. Among proposals eligible for resubmission in the following year, 71 percent were resubmitted at dual-class companies, while only 29 percent were resubmitted at non-dual class companies. TABLE 6—SHAREHOLDER PROPOSALS SUPPORT AND RESUBMISSIONS BY TYPE OF COMPANY SHARES, 2011–2017 % Vote for <10% Companies with dual-class shares: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Companies without dual-class shares: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... 10%–50% ≥50% Total 48 24 (50%) 17 (71%) 116 116 (100%) 69 (59%) 4 4 (100%) 0 (0%) 168 144 (86%) 86 (60%) 600 394 (66%) 116 (29%) 1,881 1,881 (100%) 809 (43%) 548 548 (100%) 65 (12%) 3,029 2,823 (93%) 990 (35%) khammond on DSKJM1Z7X2PROD with PROPOSALS2 Sources: CII Report, ISS Analytics. The tendency to resubmit shareholder proposals also differs by the type of proponent (see Table 7 below). In particular shareholder proposals submitted by individual proponents receiving between 10 percent and 50 percent of the votes in support were less likely to be resubmitted than proposals submitted by other proponent types.204 203 To identify firms with two or more classes of common shares, we use the classification of dualclass firms in the ISS Governance dataset. 204 Shareholder proposals with individual proponents were less likely to be resubmitted than proposals with non-individual proponents for all three proposal types: Governance-related, environmental, and social. However, the difference is most pronounced for social proposals, for which individuals were five times less likely to resubmit eligible proposals. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules 66493 TABLE 7—SHAREHOLDER PROPOSALS SUPPORT AND RESUBMISSIONS BY TYPE OF PROPONENT, 2011–2017 % Vote for <10% Individual proponents: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... Non-individual proponents: Number of proposals ................................................................................ Eligible for resubmission ........................................................................... (% of proposals) ................................................................................ Resubmitted .............................................................................................. (% of eligible proposals) .................................................................... 10%–50% ≥50% Total 171 97 (57%) 29 (30%) 725 725 (100%) 266 (37%) 182 182 (100%) 11 (6%) 1,078 1,004 (93%) 306 (30%) 477 321 (67%) 104 (32%) 1,272 1,272 (100%) 612 (48%) 370 370 (100%) 54 (15%) 2,119 1,963 (93%) 770 (39%) Sources: CII Report, ISS Analytics. We also analyze how voting support changes with the number of times a particular proposal is submitted. Fiftytwo percent of resubmitted shareholder proposals saw an increase in voting support relative to the last time they were voted on (see Table 8 below). Shareholder proposals that got less than 10 percent voting support in the past were more likely to see increases in voting support as compared to proposals receiving between 10 percent and 50 percent of votes in favor. For those proposals for which voting support increased, the average increase in voting support is approximately six percent for all proposals, six percent for governance-related proposals, and five percent for environmental and social proposals. TABLE 8—CHANGE IN VOTING SUPPORT FOR RESUBMITTED PROPOSALS, 2011–2018 % Vote for <10% All Proposals: Number of proposals ................................................................................ % Proposals with increase in voting ........................................................ Average increase in voting support .......................................................... Governance Proposals: Number of proposals ................................................................................ % Proposals with increase in voting ........................................................ Average increase in voting support .......................................................... Environmental Proposals: Number of proposals ................................................................................ % Proposals with increase in voting ........................................................ Average increase in voting support .......................................................... Social Proposals: Number of proposals ................................................................................ % Proposals with increase in voting ........................................................ Average increase in voting support .......................................................... 10%–50% ≥50% Total 178 55% 7% 1,165 52% 5% 109 47% 6% 205 1,452 42 52% 17% 657 50% 6% 106 48% 6% 805 50% 6% 47 62% 4% 157 55% 5% 2 0% N/A 206 56% 5% 89 53% 5% 351 54% 5% 1 0% N/A 441 53% 5% 52% 6% Sources: CII Report, ISS Analytics. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Lastly, we analyze the extent to which initial support for shareholder proposals is related to the likelihood of the shareholder proposal ultimately obtaining majority support.206 During 205 The total number of proposals in Table 8 represents the total number of proposals that were resubmitted (not first time submissions) in the years 2011 to 2018, which differs from the total number of proposals in Tables 4, 5, 6, and 7 (i.e., 3,197 proposals). This is because the analysis on the propensity to resubmit shareholder proposals excludes proposals resubmitted in 2011 and those that were resubmitted after a period longer than one year. See supra note 200. 206 Note that in this analysis, we may be underestimating the likelihood of proposals ultimately obtaining majority support, especially for proposals toward the end of our sample that could get majority support following a future resubmission. For example, if a new proposal fails to garner majority support in 2018, but is resubmitted in 2019, our data does not allow us to see whether such a proposal would garner majority VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 2011 to 2018, 533 unique shareholder proposals have garnered majority support, of which 479 (90 percent) obtained majority support on their initial submission.207 Of the remaining 54 shareholder proposals that received majority support following a resubmission, 32 (60 percent) obtained majority support on their second submission and 22 (40 percent) obtained majority support on their third or support following a resubmission in a year after 2018. See supra note 200. 207 Note that this number is lower than 552 proposals receiving majority support in Table 4. This is because the former measure counts unique proposals while the latter counts each time a proposal is submitted and receives over 50% support. Therefore, in some instances, the latter measure will count twice a proposal that receives majority support, is resubmitted, and receives majority support again. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 subsequent submissions. Figure 9 below shows the distribution of first submission voting support for the 54 shareholder proposals that garnered majority support following a resubmission. Of these, approximately 60 percent started with support of over 40 percent in their first submission, and 98 percent started with support of over 5 percent in their first submission. Of the 22 proposals that obtained majority support on their third or subsequent submissions, approximately 95 percent received support of over 15 percent on their second submission, and 100 percent received support of over 25 percent on their third or subsequent submission. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 The results of the analyses in Tables 3–8, Figure 9, and accompanying text should be interpreted with caution—our analysis of shareholder proposal resubmissions is subject to selection bias because the data only includes resubmissions that appeared in proxy materials. The data does not capture resubmissions that were withdrawn because proponents reached an agreement with management or because proponents decided to withdraw the resubmission for other reasons, and it does not capture resubmissions that were excluded pursuant to one of the substantive bases under Rule 14a–8.208 C. Benefits and Costs and Effects on Efficiency, Competition, and Capital Formation of Proposed Rule Amendments Below we discuss the anticipated economic effects of the proposed rule amendments. Section IV.C.1 discusses economic considerations relevant to shareholder proposals generally, Section IV.C.2 discusses the general economic effects of the proposed rule amendments, Section IV.C.3 discusses the specific benefits and costs of each proposed amendment, and Section IV.C.4 discusses the effects of the proposed amendments on efficiency, competition, and capital formation. 1. General Economic Considerations Relevant to Shareholder Proposals As mentioned in Section IV.B above, Rule 14a–8 was designed to facilitate 208 For a similar discussion, see the letter in response to the Proxy Process Roundtable from the Shareholder Rights Group dated December 4, 2018, at 13. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 shareholders’ ability under state law to appear in person at an annual or special meeting and, subject to certain requirements governed by state law and the company’s governing documents, present their own proposals for a vote by shareholders at that meeting. By giving proponents the ability to have their proposals included alongside management’s in the company’s proxy statement, Rule 14a–8 allows shareholders to consider and vote on matters raised by other shareholders for consideration at an annual or special meeting of shareholders. A shareholder proposal could be value enhancing not only because it could motivate a value-enhancing change,209 but also because it could limit insiders’ entrenchment 210 and provide management with information about the views of shareholders.211 On the other hand, a shareholder proposal may not be value enhancing, and companies may bear direct costs associated with the consideration of a proposal and/or its inclusion in the proxy statement and these costs may be passed down to shareholders. A shareholder proposal may not be value enhancing if it serves the interests of a minority rather than the majority of 209 See, e.g., Vicente Cun ˜ at, Mireia Gine, & Maria Guadalupe, The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value, 67 J. Fin. 1943 (2012) (‘‘Cun˜at et al. (2012)’’). 210 See, e.g., Bach & Metzger (2017), supra note 174. 211 See, e.g., J. Robert Brown, Jr., Corporate Governance, Shareholder Proposals, and Engagement Between Managers and Owners (University of Denver Sturm College of Law, Legal Research Paper Series, Working Paper No. 17–15, 2017) (‘‘Brown (2017)’’). PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 shareholders.212 Shareholders may also bear costs associated with their own consideration of a proposal. Our economic analysis does not speak to whether any particular shareholder proposal or type of proposals are value enhancing, whether the proposed amendments would exclude valueenhancing proposals, or whether the proposed amendments would have a disproportionate effect on proposals that are more or less value enhancing. In addition, companies and their shareholders may bear opportunity costs associated with considering proposals that are ultimately not supported by a majority of shareholders or implemented by a company instead of engaging in other value-enhancing activities.213 Therefore, the value of a shareholder proposal depends fundamentally on the tradeoff between the potential for value-creation and the cost borne by companies and their shareholders. Furthermore, the value of shareholder proposals is limited by the 212 For a related argument, see the letter in response to the Proxy Process Roundtable from Business Roundtable dated November 9, 2018. 213 See, e.g., CCMC Report, supra note 84; Rulemaking Petition, supra note 82, at 8–9; Roundtable Transcript, supra note 13, comments of Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP, at 127; Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness, at 136; Dannette Smith, Secretary to the Board of Directors and Senior Deputy General Counsel, UnitedHealth Group, at 148–49; letters in response to the Proxy Process Roundtable from Blackrock, Inc. dated November 16, 2018; Business Roundtable dated November 9, 2018; Society for Corporate Governance dated November 9, 2018 (discussing costs associated with shareholder proposals). E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.020</GPH> 66494 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 extent to which shareholders participate in the voting process and the extent to which management implements those proposals. Some empirical literature has examined whether proposals are value enhancing by studying the stock price reaction around announcements associated with shareholder proposals, and finds that shareholder proposals are, on average, associated with small or negligible changes in target companies’ market value.214 More specifically, a literature review of prior studies in this area shows that shareholder proposals are associated, with an average 0.06 percent short-window stock price reaction.215 These results, however, mask significant cross-sectional variation in the valuation effects of shareholder proposals. In particular, literature finds significant stock market reaction to shareholder proposals that pass by a small margin relative to proposals that fail by a small margin on the day of the vote. For example, one study found a 1.3 percent higher increase in stock price on the day of the vote for proposals that pass by a small margin compared to proposals that fail by a small margin.216 214 The majority of prior studies find no long-term effects of shareholder proposals on companies’ returns, earnings, operations, and corporate governance. See, e.g., Matthew R. Denes, Jonathan M. Karpoff, & Victoria B. McWilliams, Thirty Years of Shareholder Activism: A Survey of Empirical Research, 44 J. Corp. Fin. 405 (2017) (‘‘Denes et al. (2017)’’). We focus our discussion on short-term market reactions to shareholder proposals because findings on the long-term effects are less reliable than the findings on the short-term effects as it can be hard to attribute the long-term effects to the shareholder proposals. 215 See Denes et al. (2017), supra note 214. The results of these studies should be interpreted with caution because they do not identify a clean announcement date for proposals by which to gauge the market reaction. For example, companies frequently include multiple proposals in the same proxy statement and they announce other news, such as dividends, at shareholder meetings. For related arguments, see Thomas & Cotter (2007), supra note 180. 216 See Cun ˜ at et al. (2012), supra note 209. One reason why the market reaction is concentrated in proposals that pass by a small margin is that for proposals that pass or fail by a large margin, the stock price may already reflect the voting outcome because it is largely anticipated. For proposals that fail by a small margin, there is typically negligible or no stock price reaction because proposals that fail even by a small margin are significantly less likely to be implemented than proposals that pass by a small or large margin. See also Bach & Metzger (2017), supra note 174. Nevertheless, Bach & Metzger also argue that the estimates of stock price reaction around majority support thresholds likely are biased because of the ability of management to sway the outcome of the VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 The market reaction can differ with the topic of the shareholder proposal. For example, one study finds more positive market reaction for shareholder proposals related to eliminating poison pills and proposals seeking the adoption of cumulative voting relative to other types of governance proposals.217 Another study finds larger market reaction for shareholder proposals that reduce antitakeover protection than other types of governance-related proposals.218 Some literature provides evidence that environmental and social proposals that pass by a small margin elicit a positive stock market reaction on the day of the shareholder meeting.219 Market reaction to shareholder proposals also can depend on the type of the proponent. For example, Gillan and Starks (2000) find that market reaction is higher for proposals sponsored by individuals than institutions, whereas Cun˜at et al. (2012) show that market reaction is higher for proposals submitted by institutions than individuals.220 Gantchev and Giannetti (2018) show that market reaction is higher for proposals submitted by individuals that submit proposals infrequently.221 Matsusaka et al. (2019) find a negative market reaction to shareholder proposals submitted by labor unions in years that a new labor contract must be negotiated.222 vote, although the direction of this bias is difficult to estimate. Laurent Bach & Daniel Metzger, How Close Are Close Shareholder Votes?, 32 Rev. Fin. Stud. 3183 (2019) (‘‘Bach & Metzger (2019)’’). 217 Stuart L. Gillan & Laura T. Starks, Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors, 57 J. Fin. Econ. 275 (2000) (‘‘Gillan & Starks (2000)’’). This study examines a sample of proposals submitted between 1987 and 1994. Hence, the generalizability of some of the findings of this study could be limited. 218 See Cun ˜ at et al. (2012), supra note 209. 219 Caroline Flammer, Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach, 61 Mgmt. Sci. 2549 (2015). Nevertheless, the study also notes that ‘‘although [the] results imply that adopting close call [environmental and social] proposals is beneficial to companies, they do not necessarily imply that [environmental and social] proposals are beneficial in general.’’ Id. In particular, the study finds that shareholder proposals on social and environmental issues receive low shareholder support, on average, and only a small and unrepresentative sample of shareholder proposals on social and environmental issues is associated with positive stock market reactions. Id. 220 The different findings of the cited papers likely are attributable to different samples and methodologies used. 221 Gantchev & Giannetti (2018), supra note 166. 222 John G. Matsusaka, Oguzhan Ozbas, & Irene Yi, Opportunistic Proposals by Union Shareholders, PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 66495 Finally, the market reaction to shareholder proposals typically is higher for firms that would benefit the most from the changes sought by the shareholder proposal. For example, Renneboog and Szilagyi (2011) find that the market reaction around the dates the proposals were first announced is higher for firms with poor governance quality,223 and Cun˜at et al. (2012) show that market reaction to governancerelated proposals on the day of the shareholder meeting is higher for firms with a large number of antitakeover provisions in place.224 As mentioned above, companies may bear both direct and opportunity costs associated with the consideration of a proposal, and these costs may be passed down to shareholders.225 In particular, to the extent applicable, companies incur costs to: (i) Review the proposal and address issues raised in the proposal; (ii) engage in discussions with the proponent(s); (iii) print and distribute proxy materials, and tabulate votes on the proposal; (iv) communicate with proxy advisory firms and shareholders (e.g., proxy solicitation costs); (v) if they intend to exclude the proposal, file a notice with the Commission; and (vi) prepare a rebuttal to the submission. 32 Rev. Fin. Stud. 3215 (2019). For similar evidence of stock market reaction to union-sponsored proposals, see Jie Cai & Ralph A. Walkling, Shareholders’ Say on Pay: Does it Create Value?, 46 J. Fin. & Quantitative Analysis 299 (2011) and Andrew K. Prevost, Ramesh P. Rao, & Melissa A. Williams, Labor Unions as Shareholder Activists: Champions or Detractors?, 47 Fin. Rev. 327 (2012). 223 Luc Renneboog & Peter G. Szilagyi, The Role of Shareholder Proposals in Corporate Governance, 17 J. Corp. Fin. 167 (2011). The dates the proposals were first announced were (i) the mailing dates of the definitive proxy statements; (ii) the dates of a preliminary statement released by the target firm; or (iii) the dates that the proxy materials were filed by the proponent in the event of a proxy contest. Governance quality is measured using two separate indices: (i) An index that tracks 24 antitakeover provisions and (ii) an index that tracks the following six provisions: Staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. 224 Cun ˜ at et al. (2012), supra note 209, use a sample of shareholder proposals that Riskmetrics classifies as governance-related. These proposals are broadly classified into the following six categories: (i) Antitakeover proposals, (ii) compensation, (iii) voting, (iv) auditors, (v) board structure, and (vi) other. 225 Costs would not be passed down to shareholders if managers absorbed some of these costs by decreasing their compensation or by offsetting the cost increases by decreasing other types of costs. E:\FR\FM\04DEP2.SGM 04DEP2 66496 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules There is disagreement among commenters regarding the costs associated with processing shareholder proposals.226 Based on data from a 1996 SEC questionnaire, the average cost for a company to determine whether to place a proposal on a ballot was $58,309 and the average cost to print and distribute proxy materials, and tabulate votes on the proposal was $78,795.227 Commenters, however, have expressed concerns that these cost estimates likely are unreliable because: (i) They likely cover the cost of all proposals received by a company in a year, not the cost of a single proposal; (ii) they are averages, based on a wide range of responses from companies; (iii) printing and mailing costs have decreased in recent years due to the increased use of electronic dissemination of proxy materials; 228 and (iv) they capture the overall cost of printing and distributing proxy materials, not the cost of an additional shareholder proposal.229 More recently, 226 See supra notes 21–25 and accompanying text. cumulative rate of inflation between May 1998 and August 2019 is 157.6%. See Consumer Price Index (CPI) Inflation Calculator, U.S. Dep’t of Labor, Bureau of Labor Statistics (last visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/ cpicalc.pl?cost1=11%2C600.00&year1 =201011&year2=201906. The average costs to companies were $37,000 and $50,000, respectively. See 1998 Adopting Release, supra note 8. $58,309 = $37,000 × 1.576. $78,795 = $50,000 × 1.576. 228 The processing fee for the electronic dissemination of proxy materials cannot exceed 50 cents per set of proxy materials. See NYSE Rule 451.90. Automatic Data Processing Inc. estimated that ‘‘the average cost of printing and mailing a paper copy of a set of proxy materials during the 2006 proxy season was $5.64.’’ See Shareholder Choice Regarding Proxy Materials, Release No. 34– 56135, (Jul. 26, 2007) [72 FR 42221 (Aug. 1, 2007)]. There is also a processing fee for the dissemination of proxy materials via mail. The processing fee for the dissemination of proxy materials via mail can be lower than the processing fee for the dissemination of proxy materials via email. See letter from the Investment Company Institute (Jan. 17, 2019), at 3, available at https://www.ici.org/pdf/ 18_ici_nysefees_ltr.pdf (noting that ‘‘[e]very beneficial account pays the NYSE schedule maximum fee of 15 cents in processing fees to receive a paper shareholder report in the mail. . . . Every beneficial account pays the NYSE schedule maximum fee of 25 cents (15 cents plus 10 cents) to receive a shareholder report by email.’’). The letter from the Investment Company Institute refers to processing fees to disseminate a shareholder report, but we expect that the processing fees to disseminate proxy materials would be comparable. Nevertheless, the cost of printing and mailing the proxy materials would offset any cost savings arising from lower processing fees for proxy materials disseminated via mail compared to proxy materials disseminated via email. See, e.g., Broadridge, 2019 Proxy Season Key Statistics and Performance Rating (2019), available at https:// www.thecorporatecounsel.net/member/Memos/ Broadridge/09_19_2019.pdf (estimate of cost savings as a result of the increased electronic dissemination of proxy materials). 229 See, e.g., letter in response to the Proxy Process Roundtable from the Shareholder Rights khammond on DSKJM1Z7X2PROD with PROPOSALS2 227 The VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 a representative from an industry group estimated a cost of $50,000 per proposal.230 In response to the Proxy Process Roundtable, one commenter also stated that the company’s cost per shareholder proposal, including resubmitted proposals, is more than $100,000,231 while another commenter cited to a House Report that estimated the cost associated with shareholder proposals to be $150,000.232 In addition, the Commission has previously estimated that companies spend, on average, $11,600 to file with the Commission a notice that they intend to exclude a shareholder proposal, which is equivalent to $13,602 today.233 We lack data to estimate the dollar cost of the remaining activities associated with shareholder proposal submissions, but we request comment and data on these costs in Section IV.E below. We note that the cost of processing a resubmission may be lower than the cost of processing a first-time proposal.234 Further, some of the above mentioned costs, such as the expenses to draft a no-action request or campaigning to increase retail voters’ participation, involve a degree of management discretion as to the level of Group dated December 4, 2018; Kanzer (2017), supra note 104, at 2–3; Brown (2017), supra note 211. 230 See Statement of Darla C. Stuckey, President and CEO, Society for Corporate Governance, Before the H. Comm. on Financial Services Subcomm. on Capital Markets and Government Sponsored Enterprises, Sept. 21, 2016, at 8 (noting ‘‘a lower legal cost estimate based on anecdotal discussions with [the Society for Corporate Governance] members of $50,000 per proposal’’). 231 See letter in response to the Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 2019. 232 See letter in response to the Proxy Process Roundtable from the American Securities Association dated June 7, 2019, at 4. 233 See Facilitating Shareholder Director Nominations, Release No. 34–62764 (Aug. 25, 2010) [75 FR 56668 (Sept. 16, 2010)], at 56742 n. 797. $11,600 = 116 hours/notice × 0.25 time of outside professionals × $400 hourly wage of outside professionals; $13,602 = $11,600 × 1.173 cumulative rate of inflation between November 2010 and August 2019. See Consumer Price Index (CPI) Inflation Calculator, U.S. Dep’t of Labor, Bureau of Labor Statistics (last visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/ cpicalc.pl?cost1=11%2C600.00&year1 =201011&year2=201906. 234 See, e.g., letter in response to the Proxy Process Roundtable from the Shareholder Rights Group dated December 4, 2018, at 14 (noting ‘‘[o]ur experience as proponents of proposals leads us to believe that companies expend less resources on proposals that are resubmitted. If resources are expended in opposition to proposals, the lion’s share of those resources and board attention to a proposal are most likely expended in the first effort to oppose the proposal’’). In certain instances, however, resubmissions could be costlier than initial submissions. For example, companies might decide to challenge a resubmission and incur the associated costs following low support for the initial submission. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 expenses incurred, and there is disagreement about the level of such expenses that is value-enhancing.235 Shareholder proposals also impose opportunity costs on companies and their shareholders because management, the board, and the voting shareholders could spend the time spent on processing a shareholder proposal and voting on the proposal to engage in other value-enhancing activities. We are unable to estimate the dollar amount of some of the direct administrative costs and opportunity costs associated with shareholder proposals because we lack the necessary data. Thus, we seek comment on these costs, and any corresponding cost savings of the proposed amendments, in Section IV.E below. As mentioned above, in addition to the costs to companies that may be passed down to shareholders, individual shareholders may bear costs associated with their own consideration and voting on a proposal. Although these costs may be difficult to quantify, many investment advisers (among others) retain proxy advisory firms to perform a variety of services to reduce the burdens associated with proxy voting determinations, including determinations on shareholder proposals. 2. General Economic Effects of the Proposed Amendments i. Discussion Specific to Proposed Amendments to Rule 14a–8(b) and Rule 14a–8(c) The proposed amendments to the ownership thresholds in Rule 14a–8(b) would allow companies to exclude the following additional proposals relative to the proposals that can be excluded under the current ownership thresholds: 236 (i) Proposals submitted by shareholders that hold at least $2,000 and less than $15,000 worth of shares for a period between one and three years and (ii) proposals submitted by shareholders that hold at least $15,000 and less than $25,000 worth of shares for a period between one and two 235 See, e.g., Brown (2017), supra note 211, at 21; Kanzer (2017), supra note 104, at 2; James McRitchie, SRI Funds & Advisors Send Open Letters on Lawsuits Against Shareholders, CorpGov.net (Mar. 24, 2014), https:// www.corpgov.net/2014/03/sri-funds-advisors-sendopen-letters-on-lawsuits-against-shareholders/; see also letter in response to the Proxy Process Roundtable from Investor Voice, SPC dated November 14, 2018, at 3. 236 As of August 2019, the $2,000 threshold as adopted in May 1998 would be equal to $3,152 after adjusting for inflation, see supra note 55, and it would be equal to $8,379 after adjusting for the growth in Russell 3000 index, see supra note 56. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 years.237 The proposed amendments to Rule 14a–8(b) would not allow shareholders to aggregate their holdings, and, therefore, companies would be able to exclude proposals submitted by shareholders that do not individually meet the minimum ownership thresholds under Rule 14a–8. In addition, the proposed amendments to Rule 14a–8(b) would require a shareholder-proponent to provide contact information as well as availability to discuss the proposal with the company, and, where a representative is used, documentation authorizing the representative to submit the proposal on the shareholderproponent’s behalf. Lastly, the proposed amendments to 14a–8(c) would allow companies to exclude proposals where the proponent, either individually or serving as a representative, has submitted more than one proposal for the same meeting. As a result, the proposed amendments could increase the number of excludable shareholder proposals because they could discourage proponents from submitting proposals that would not satisfy the requirements of the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c) and they could allow issuers to exclude proposals that do not satisfy the requirements of the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c).238 To estimate the number of proponents and proposals that could be excludable as a result of the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c), we analyze proponents’ ownership information using data from proxy statements (see Table 1 above). With respect to any dollar ownership category, the data does not indicate whether the proponents in that category held their shares for more than one year. Assuming all proponents held the shares for at least three years, the proposed amendments to the ownership 237 Proposals submitted by shareholders that hold less than $2,000 worth of shares or hold the shares for less than one year are excludable under the current rule, and thus are not listed as additional excludable proposals under the proposed amendments to the ownership thresholds. 238 The effect of the proposed rule amendments on proponents’ willingness to submit proposals is distinct from the effect of the proposed rule amendments on company’s ability to exclude certain proposals because companies occasionally allow proposals that do not meet the current eligibility thresholds to be voted on. At the same time, companies may expend additional time and resources to exclude proposals that are submitted despite not being eligible for submission. Hence, to the extent that the proposed rule amendments would discourage proponents from submitting certain proposals, the proposed rule amendments would have an effect that may be different than and incremental to the effect of companies’ ability to exclude certain proposals. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 thresholds would not result in the exclusion of any additional proponents or proposals to be considered in shareholder meetings held in 2018 relative to the current threshold.239 On the other hand, if one were to assume (again, without any data to support the assumption) that all proponents bought the shares one year in advance of the shareholder submission and plan to hold those shares only through the date of the meeting, we find that the increase in the ownership threshold from $2,000 with a one-year holding period to $25,000 with a one-year holding period could result in the exclusion of 51 percent of the proponents and 56 percent of the proposals that were submitted to be considered at shareholder meetings held in 2018, assuming also that none of those proponents would increase their holdings to meet the new thresholds in order to be able to file a proposal.240 The proposed rule amendments also would prohibit shareholders from aggregating their holdings to meet the applicable minimum ownership thresholds to submit a Rule 14a–8 proposal. As shown in Table 1 above, there are three proponents that 239 We have data that shows which shareholderproponents held varying minimum holdings, based on information the companies provided in the proxy statements. However, we have not prepared estimates of excludable proposals under the proposed amendments based on that data since it is not clear how much each shareholder-proponent actually holds and why the company selected the specific minimum that they decided to report. 240 51% = 43% + 8%. We estimate that the total number of excludable proponents is 101. Eightyfive proponents, or 43 percent, held between $2,000 and $15,000, while 16 proponents, or 8 percent, held between $15,000 and $25,000 worth of shares. 56% = (84 excludable proposals)/(150 proposals with exact information on proponents’ ownership). Note that the number of proposals that would be excludable is different from the summation of the proposals from the ‘‘# of proposals’’ column in Table 1 above because the latter double-counts proposals that were submitted by multiple proponents. In estimating the number of excludable proposals, we make the following assumptions about proposals that are submitted by multiple proponents. First, we assume that a proposal would still be submitted if at least one of the coproponents met the proposed dollar ownership threshold. Assuming that a proposal with multiple proponents would be excludable if at least one proponent does not meet the proposed eligibility requirements, the number of excludable proposals would be 90 or 60 percent. Second, in cases where we have data on exact ownership for some proponents and minimum ownership for the remaining proponents submitting a joint proposal (there are two such proposals), we assume proponents reporting minimum holdings would continue to be eligible to submit the proposal under proposed amendments. Assuming that a proposal would be submitted only in cases where the proponents reporting minimum holdings have reported minimum holdings in excess of $25,000, the number of excludable proposals would be 84 or 56 percent. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 66497 submitted two unique proposals, whose individual holdings were below the $2,000 threshold. One of the two proposals was submitted by two coproponents, whose both aggregate and individual holdings did not meet the $2,000 current ownership threshold, and this proposal is excludable under the current rules. For the other of the two proposals, there were four coproponents, whose aggregate holdings met the $2,000 threshold, but the individual holdings of one of the coproponents did not meet the $2,000 threshold. Assuming that a proposal would be submitted if at least one of the co-proponents met the ownership threshold and assuming no change in the ownership threshold, the proposed amendments to proponents’ ability to aggregate their holdings would not result in the exclusion of any proposals relative to the current requirements. Finally, our analysis of proxy statements suggests that 7, or 2 percent of, additional proposals would be excludable under the proposed amendments to Rule 14a–8(c) (i.e., oneproposal limit).241 We also analyze proponents’ ownership information using data from proof-of-ownership letters that have been made available as part of no-action requests submitted to the staff during calendar year 2018 (see Table 2 above). With respect to any dollar ownership category, the data does not indicate whether the proponents in that category held their shares for more than one year. Assuming proponents held the shares for three years, the proposed amendments to the ownership thresholds would not result in the exclusion of any additional proponents or proposals to be considered in shareholder meetings held in 2018 relative to the current threshold.242 On the other hand, if one were to assume (again, without any data to support that assumption) that all proponents bought the shares one year in advance of the shareholder submission and plan to hold those shares only through the date of the meeting, we find that the increase in the ownership threshold from $2,000 with a one-year holding period to $25,000 with a one-year holding period could result in the exclusion of 56 percent of the proponents and 40 percent of the proposals, for which the 241 2% = (7 excludable proposals)/(363 proposals with proponents’ identity information in the proxy statements submitted to be considered in 2018 shareholder meetings). Our analysis assumes that persons that submitted multiple proposals to the same company and for the same shareholder meeting, either directly or indirectly, would withdraw all but one proposal. 242 See supra note 239. E:\FR\FM\04DEP2.SGM 04DEP2 66498 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 company submitted a no-action request to Commission staff, assuming also that none of those proponents would increase their holdings to meet the new thresholds in order to be able to file a proposal.243 The proposed rule amendments also would prohibit shareholders from aggregating their holdings to meet the applicable minimum ownership thresholds to submit a Rule 14a–8 proposal. As shown in Table 2, there are nine proponents that submitted seven unique proposals, whose individual holdings were below the $2,000 threshold. For one of the seven proposals, there were two coproponents, whose aggregate holdings met the $2,000 current ownership threshold. For another one of the seven proposals, there was only one proponent whose holdings did not meet the $2,000 threshold, and this proposal is excludable under the current threshold. For the remaining five proposals, there was at least one other co-proponent, whose share ownership met the current $2,000 threshold. Hence, assuming that a proposal would be submitted if at least one of the coproponents met the ownership threshold and assuming no change in the ownership thresholds, the proposed amendments could result in the exclusion of one unique proposal, or 0.4 percent of the proposals with ownership information for which the company 243 56% = 49% + 7%. We estimate that the total number of excludable proponents is 159. One hundred and forty proponents, or 49 percent, held between $2,000 and $15,000, while 19 proponents, or 7 percent, held between $15,000 and $25,000. 40% = (62 excludable proposals)/(155 proposals for which the proof-of-ownership letters provided exact information on proponents’ ownership). Note that the number of proposals that would be excludable is different from the summation of the proposals from the ‘‘# of proposals’’ column in Table 2 above because the latter double-counts proposals that were submitted by multiple proponents. In estimating the number of excludable proposals, we make the following assumptions about proposals that are submitted by more than one proponent. First, we assume that a proposal would still be submitted if at least one of the coproponents met the proposed dollar ownership threshold. Assuming that a proposal with multiple proponents would be excludable if at least one proponent does not meet the proposed eligibility requirements, the number of excludable proposals would be 102 or 66 percent. Second, in cases where we have data on exact ownership for some proponents and minimum ownership for the remaining proponents submitting a joint proposal (there are 27 such proposals), we assume proponents reporting minimum holdings would continue to be eligible to submit the proposal under proposed amendments. Assuming that a proposal would be submitted only in cases where the proponents reporting minimum holdings have reported minimum holdings in excess of $25,000, the number of excludable proposals would be 72 or 46 percent. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 submitted a no-action request to the Commission staff.244 The results of the analysis of the proponents’ ownership information using data from proxy statements and proof-of-ownership letters should be interpreted with caution for several reasons. First, we are unable to estimate the number of excludable proponents taking into account the proposed amendments to both the dollar and the duration thresholds because we lack data on proponents’ duration of ownership, but, as noted above, there would be no impact to long-term shareholders who have held their shares for three years or more.245 While we have limited data on duration of ownership from proxy statements or proof-of-ownership letters, we recognize that there may be a relation between duration of ownership and the propensity of a shareholder to submit a proposal. In particular, longer ownership duration could be an indicator that a shareholder has sufficient interest in engaging with the company and is therefore more likely to submit a shareholder proposal. On the other hand, we may observe shareholders buying and holding on to their shares for long periods of time because they are following a passive investment strategy and are therefore less likely to engage with management or other shareholders. We hypothesize that these types of shareholders would be less likely to submit shareholder proposals. Depending on whether the former or the latter effect is more prevalent, the effect of the proposed amendments to the ownership thresholds could be closer to the lower or higher end of the range of excludable proposals discussed above, respectively. Second, our analysis is subject to sample selection bias because the ownership data in the proof-ofownership letters only concerns 244 0.4% = (1 excludable proposal under the proposed prohibition to aggregation of holdings)/ (227 proposals with proponents’ ownership information attached to the no-action letters). 245 Staff received some non-public retail share ownership data from a market participant who requested confidential treatment for the data. Those data provide some information about level and duration of ownership but do not allow us to identify those shareholders that have submitted or are likely to submit shareholder proposals. Additional challenges posed by the data include that the sample spans a limited time period and information about holdings cannot be aggregated to the shareholder level. We would welcome empirical data to assist in estimating the number of excludable proponents under the proposed thresholds, and we encourage commenters to submit data to the public comment file that allow us to aggregate holdings to the shareholder level, identify shareholders likely to submit shareholder proposals, and that span a sufficiently long time period. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 proponents whose proposals were the subject of a no-action request, and the ownership data in the proxy statements only concerns proposals that ultimately were included in the proxy statement and went to a vote.246 Third, our analysis is subject to selfreporting bias because the proof-ofownership letters are not required to disclose the proponents’ exact holdings but only need to affirm that proponents meet the minimum ownership requirements.247 Relatedly, companies are not required to disclose the holdings of the proponents in their proxy statements. In fact, 34 percent of the proof-of-ownership letters only state that the proponents meet the minimum ownership requirements rather than report the proponents’ exact holdings.248 In addition, there is information on ownership for only 70 percent of the proponents found in proxy statements and there is information on minimum ownership for 45 percent of the proponents with ownership information in the proxy statements.249 Hence, the 246 In particular, it is difficult to draw inferences about the total effect of proposed amendments to the eligibility requirements on precluding shareholders from submitting proposals or on the number of excludable submitted proposals using ownership data from proxy statements or proof-ofownership letters included with no-action requests. For example to the extent that companies may be more likely to choose to request no-action relief for proposals of certain types of proponents or topics, our results may not be generalizable for the full set of submitted proposals. We estimate that of the proposals for which companies have requested noaction relief, 51% were submitted by individual proponents. Therefore, compared to the number of total submissions by individual proponents in 2018 (39% estimated in Section IV.B.3.i above), our analysis may be over-representative of the proposals submitted by individuals. 247 In particular, of the 433 proposal-proponent pairs for which we collected information on ownership from proof-of-ownership letters, these letters disclosed exact, as opposed to minimum, holdings information for 53 percent of individual proponents and 72 percent of non-individual proponents, and this difference is statistically significant at the 1 percent level. Hence, our results using only information on exact holdings may under-represent individual proponents relative to non-individual ones. 248 34% = 149/(149 + 284) from Table 2 above. 249 70% = (198 + 159)/(198 + 159 + 156) from Table 1 above. 45% = 159/(198 + 159) from Table 1 above. In particular, of the 348 proposal-proponent pairs for which companies reported proponent identity and ownership information, the proxy statements disclosed exact, as opposed to minimum, holdings information for 41 percent of individual proponents and 69 percent of non-individual proponents, and this difference is statistically significant at the 1 percent level. Hence, our results using only information on exact holdings may under-represent individual proponents relative to non-individual ones. The number of proposal-proponent pairs (i.e., 348) for which companies reported proponent identity and ownership information is lower than the sum of proponents with ownership information E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 generalizability of the results of our analysis to all proponents that potentially could be affected by the proposed rule amendments is limited. We expect that more proposals would be excludable with increases in share turnover. Literature documents a general upward trend in share turnover over time.250 As share turnover increases and thus investors hold shares for a shorter period of time, it becomes less likely that investors would meet the ownership duration thresholds of the proposed rule amendments.251 Further, the proposed increase in the ownership requirements would become more difficult to satisfy with decreases in the issuers’ stock prices to the extent investors’ holdings are at or near the ownership thresholds. The reason is that proponents’ holdings are more likely to fall below the ownership dollar thresholds as the market value of the company decreases. We do not expect the proposed amendments to the ownership thresholds to affect all types of shareholders and companies in the same way. First, the proposed amendments could have a greater effect on retail investors compared to institutional investors because the average holdings of retail investors are typically lower than the average holdings of institutional investors. Second, to the extent that investors with smaller holdings are more likely to submit proposals on certain topics, by reducing the number of such investors who are eligible to submit proposals, the proposed rule amendments could decrease the number of proposals on those topics more than other types of proposals. For example, individual investors are more likely to submit governance proposals than institutional investors. Untabulated analysis shows that 86 percent of the proposals submitted by individual investors are governance proposals, whereas 47 percent of the proposals submitted by institutional investors are governance proposals.252 Hence, the proposed rule in Table 1 above (i.e., 357 = 198 + 159) because companies occasionally provide the count and ownership of the proponents but do not provide information on the identity of the proponents. 250 See, e.g., Tarun Chordia, Richard Roll, & Avanidhar Subrahmanyam, Recent Trends in Trading Activity and Market Quality, 101 J. Fin. Econ. 243 (2011). 251 Proponents have discretion in how frequently they trade shares, and thus they may decide to hold shares for a longer period of time to satisfy the proposed ownership duration thresholds. See supra note 198 for a discussion of changes in investors’ holding period over time. 252 Data is retrieved from ISS Analytics for Russell 3000 companies between 2004 and 2018. See CII Report, supra note 92 (showing that retail investors largely focus on governance proposals). VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 amendments could decrease the number of governance proposals more than environmental and social proposals, but this effect may be mitigated to the extent that institutional proponents submit a larger fraction of shareholder proposals.253 Third, the proposed rule amendments could affect companies with smaller market capitalization more than those with larger market capitalization. The reason is that, for firms with smaller market capitalization, proponents’ holdings are more likely to be below the proposed ownership thresholds, assuming that investors hold stocks proportionately to the companies’ market capitalization (i.e., investors hold the market portfolio).254 Fourth, the proposed amendments could decrease the number of proposals received by companies that have been public for fewer than three years more than the number of proposals received by seasoned companies because the average duration of investors’ holdings would be, by their nature, shorter for those firms.255 The proposed rule amendment would also eliminate the alternative onepercent ownership threshold. The onepercent ownership threshold currently is rarely utilized in light of the $2,000/ one-year threshold. In particular, none of the proxy statements and proof-ofownership letters we reviewed refer to the one-percent ownership threshold as evidence that the proponents met the current ownership thresholds (see Section IV.B.3.ii above). Further, as of December 2018, there were no companies for which the one-percent ownership threshold would be relevant (i.e., the one-percent threshold would result in an ownership requirement of 253 See supra Section IV.B.3.i. e.g., John Y. Campbell, Household Finance, 61 J. Fin. 1553 (2006) (discussing households’ stock holdings). We note that smaller companies currently receive proposals less frequently than larger companies, and thus, while there may be a greater reduction in eligible proponents under the proposed amendments at smaller companies, the overall impact of the proposed increase in the ownership thresholds might be less pronounced for smaller companies. 255 We note that newly-listed companies currently receive proposals less frequently than seasoned companies, and thus the overall impact of the proposed increase in the ownership thresholds might be less pronounced for newly-listed companies. See Kron & Rees, supra note 96, at 1; see also Roundtable Transcript, supra note 13, comments of Jonas Kron, Senior Vice President and Director of Shareholder Advocacy, Trillium Asset Management, at 142 (‘‘Less than 9 percent of Russell 3000 companies that have had an IPO since 2004 have received a shareholder proposal.’’); Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP, at 147 (acknowledging that ‘‘IPO companies don’t always get a lot of proposals’’). 254 See, PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 66499 less than $2,000).256 Hence, we believe that the proposed elimination of the one-percent ownership threshold would not have a significant economic effect. ii. Discussion Specific to Proposed Amendments for Proposals Submitted on Behalf of Shareholders The majority of shareholders that submit a proposal through a representative already provide the documentation that would be mandated by the proposed amendments, consistent with existing staff guidance.257 In particular, as discussed in Section IV.B.3.iii above, 67 percent of the proposals that were submitted through a representative (67% = 8⁄12) included the documentation that would be mandated by the proposed amendments. For the remaining 33 percent of the proposals that were submitted through a representative and provide only some of the documentation mandated by the proposed amendments, we expect that the cost of providing the proposed additional documentation would be small because the information that would be required is readily available to the proponents and the proposed disclosure is not lengthy. Hence, we expect that the economic effects of this aspect of the proposed amendments likely would be minimal. iii. Discussion Specific to Proposed Amendments to Rule 14a–8(i)(12) The proposed amendments to Rule 14a–8(i)(12) comprise (i) the proposed amendments to the resubmission thresholds and (ii) the proposed Momentum Requirement. Relative to the current thresholds, the proposed amendments to the resubmission thresholds would allow companies to exclude the following additional resubmitted proposals: (i) Those that received shareholder support between 3 and 5 percent on a first submission; (ii) those that received shareholder support between 6 and 15 percent on a second submission; and (iii) those that received shareholder support between 10 and 25 percent on a third or subsequent submission. In addition to the proposed amendments to the resubmission thresholds, the proposed Momentum Requirement would allow companies to exclude proposals previously voted on by shareholders three or more times in the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and, at the time of the most recent shareholder 256 We estimate the number of companies with market capitalization below $200,000 as of December 2018. Data is retrieved from CRSP. 257 See SLB 14I, supra note 65. E:\FR\FM\04DEP2.SGM 04DEP2 66500 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules vote, the proposal did not receive a majority of the votes cast and support declined by 10 percent or more compared to the immediately preceding shareholder vote on the same subject matter. As a result, the proposed amendments to Rule 14a–8(i)(12) could increase the number of excludable shareholder proposals because they could (i) decrease proponents’ willingness to submit proposals on matters for which it may be difficult to garner sufficient support in the future or matters that did not receive sufficient support to qualify for resubmission when previously voted on and (ii) allow companies to exclude such proposals. Using the 2011 to 2018 data on shareholder proposals for Russell 3000 companies, we estimate that the proposed amendments to the resubmission thresholds would result in an additional 212 resubmitted proposals being excludable (15 percent of the total resubmitted proposals in this timeframe) (see Table 9 below).258 The largest increase in the number of excludable proposals would result from the increase in the third submission threshold. In particular, raising that threshold from 10 percent to 25 percent would result in the excludability of 27 percent of proposals that have been submitted three or more times. Approximately 48 percent (i.e., 101 out of the 212) of the newly excludable proposals saw no increase in support from the previous time they were voted on. The other 52 percent (i.e., 111 out of 212) saw increases in support, averaging 5 percent more votes in favor of the proposal compared with the proposal’s prior submission. However, almost all of these newly excludable proposals (i.e., 211 of 212 proposals) ultimately failed to generate majority support. TABLE 9—RESUBMITTED SHAREHOLDER PROPOSALS INELIGIBLE FOR RESUBMISSION UNDER PROPOSED THRESHOLDS, 2011–2018 First submission Resubmitted after: All Proposals: Resubmitted proposals ............................................................................. Excludable proposals under proposed amendments: Number (%) ....................................................................................... Number (%) with support increase .................................................... Average increase in support ............................................................. Number (%) with majority support ..................................................... Governance Proposals: Resubmitted proposals ............................................................................. Excludable proposals under proposed amendments: Number (%) ....................................................................................... Number (%) with support increase .................................................... Average increase in support ............................................................. Number (%) with majority support ..................................................... Environmental Proposals: Resubmitted proposals ............................................................................. Excludable proposals under proposed amendments: Number (%) ....................................................................................... Number (%) with support increase .................................................... Average increase in support ............................................................. Number (%) with majority support ..................................................... Social Proposals: Resubmitted proposals ............................................................................. Excludable proposals under proposed amendments: Number (%) ....................................................................................... Number (%) with support increase .................................................... Average increase in support ............................................................. Number (%) with majority support ..................................................... Second submission Third or subsequent submission Total 677 322 443 1,442 47 (7%) 20 (3%) 7% 1 (0%) 45 (14%) 29 (9%) 4% 0 (0%) 120 (27%) 62 (14%) 5% 0 (0%) 212 (15%) 111 (8%) 5% 1 (0%) 355 191 255 801 14 (4%) 5 (1%) 21% 1 (0%) 12 (6%) 10 (5%) 7% 0 (0%) 60 (24%) 37 (15%) 5% 0 (0%) 86 (11%) 52 (6%) 7% 1 (0%) 118 43 42 203 10 (8%) 8 (7%) 3% 0 (0%) 15 (35%) 9 (21%) 1% 0 (0%) 12 (29%) 5 (12%) 3% 0 (0%) 37 (18%) 22 (11%) 2% 0 (0%) 204 88 146 438 23 (11%) 7 (3%) 1% 0 (0%) 18 (20%) 10 (11%) 4% 0 (0%) 48 (33%) 20 (14%) 5% 0 (0%) 89 (20%) 37 (8%) 4% 0 (0%) khammond on DSKJM1Z7X2PROD with PROPOSALS2 Sources: CII Report, ISS Analytics. Further, we estimate that the proposed Momentum Requirement would result in an additional 57 (4 percent) resubmitted proposals being excludable. Of these 57, 42 are governance proposals, 12 are social proposals and 3 are environmental and all would be excludable following a third or subsequent submission. Overall, the proposed amendments to rule 14a– 8(i)(12) could result in 269 (19 percent) additional excludable proposals relative to the current resubmission thresholds.259 We do not expect the proposed amendments to Rule 14a–8(i)(12) to affect all types of shareholder proposals in the same way. First, the proposed amendments to Rule 14a–8(i)(12) could have a greater impact on shareholder proposals relating to environmental and social issues compared to shareholder proposals on governance issues for the following reasons. Shareholder proposals on environmental and social issues tend to receive lower support than those on governance issues, on average. In particular, as Figure 7B above shows, the average voting support for governance proposals was 42.1 percent, the average voting support for environmental proposals was 21.9 percent, and the average voting support for social proposals was 17.4 percent during our sample period, and the difference in the voting support between 258 This analysis assumes that shareholders’ voting behavior and proponents’ proposal submission behavior would not change as a result of the proposed amendments to the resubmission thresholds. Also, we exclude from this analysis 10 shareholder proposals that were resubmitted but were eligible for exclusion under the old resubmission thresholds. See supra note 200. 259 The proposed amendments to rule 14a–8(i)(12) could result in 30 additional excludable proposals in 2018. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 66501 governance and environmental and social proposals is statistically significant.260 Further, proposals on environmental and social issues are more likely to be resubmitted compared to proposals on governance issues, and thus would be more likely to be affected by the changes in the resubmission thresholds. In particular, as Table 4 above shows, 30 percent of the governance proposals that were eligible for resubmission were actually resubmitted, while 41 percent of the environmental and 51 percent of social proposals that were eligible for resubmission were actually resubmitted. In addition, as shown by our analysis in Figure 10 (below), shareholder proposals on social and environmental issues generally take longer to gain support than proposals on governance issues.261 More specifically, we analyze all of the shareholder proposals submitted to Russell 3000 companies during 2011 to 2018 that received more than 25 percent of voting support at some point. Our analysis shows that while more than 97 percent of the governance-related proposals received more than 25 percent of the voting support in the first submission, only 83 percent of the social proposals and 90 percent of the environmental proposals received more than 25 percent of the voting support in the first submission. Almost all of the governance and environmental proposals had received more than 25 percent of the voting support by the third submission, whereas it took more than five submissions for the social proposals to receive more than 25 percent of the voting support.262 The results of the analysis in Figure 10 (below) suggest that environmental and social proposals take longer to gain support than proposals on governance issues. However, it is not clear how much of the increased support for certain resubmitted environmental and social proposals is attributable to proposals gaining traction through the resubmission process as opposed to other factors, such as changing opinions on environmental and social issues. In particular, various proposals in each proposal category evolve over time as a result of various factors, including shareholder engagement. For example, we would expect that proponents would be incentivized to adjust their proposals over time based on interactions with companies and other shareholders with an eye toward garnering more support. Our analysis above suggests that the increase in the resubmission thresholds could have a greater effect on shareholder proposals relating to environmental and social issues compared to shareholder proposals on governance issues. Out of the 269 additional excludable proposals under the proposed rule amendments, 128 were related to governance issues and 40 were related to environmental issues and 101 were related to social issues. Therefore, although environmental and social proposals made up 44 percent (= 641/1,442) of all resubmitted proposals in Russell 3000 firms during 2011 to 2018, these types of proposals made up 52 percent (= 141/269) of newly excludable proposals under the proposed amendments to the resubmission thresholds and the Momentum Requirement. Second and relatedly, the proposed amendments to Rule 14a–8(i)(12) could have a greater effect on shareholder proposals submitted by non-individual proponents because these proponents tend to submit environmental and social proposals at a higher frequency than do individual investors.263 In particular, the proposed increase in the resubmission thresholds could increase the number of excludable proposals 260 See supra note 154 for details on the classification of shareholder proposals into environmental, social, and governance proposals. Also see letters in response to the Proxy Process Roundtable from AEquo, et al. dated May 14, 2019; Canadian Coalition for Good Governance dated May 15, 2019; Shareholder Rights Group dated December 4, 2018. 261 See, e.g., letter in response to the Proxy Process Roundtable from CtW Investment Group dated January 16, 2019. 262 The conclusions are qualitatively similar if we analyze shareholder proposals that receive majority support at some point. Out of all governance-related shareholder proposals that garnered majority support, 91% did so in the first submission, while only 61% of the environmental proposals and 60% of the social proposals did so in the first submission. 263 See supra note 252 and accompanying text. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 EP04DE19.021</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules 66502 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 resubmitted by non-individual proponents by 186 (19 percent).264 In contrast, the proposed increase in the thresholds could increase the number of excludable proposals resubmitted by individual proponents by 92 (17 percent). Third, the proposed amendments to Rule 14a–8(i)(12) could have a greater effect on larger companies because larger companies are more likely to receive shareholder proposals.265 In particular, we find that 20 percent of resubmitted shareholder proposals at S&P 500 companies would be excludable under the proposed resubmission thresholds, as compared to 12 percent of proposals resubmitted to non-S&P 500 firms.266 Fourth, the proposed amendments to Rule 14a–8(i)(12) could have a greater effect on companies with dual-class voting shares for which insiders hold the majority of the voting shares.267 In particular, we find that 32 percent of resubmitted shareholder proposals at companies with dual-class shares would be newly excludable under the proposed resubmission thresholds, as compared to 18 percent in companies without dual-class shares.268 For these companies, shareholder proposals generally receive lower levels of support 264 Data is retrieved from the CII Report for shareholder proposals submitted to Russel 3000 companies between 2011 and 2018. See supra note 197. Numbers of newly excludable proposals under proposed resubmission thresholds are computed relative to the total resubmitted proposals during the sample period by each type of proponent. 265 See supra Figure 3. 266 Data is retrieved from ISS Analytics and the CII Report for shareholder proposals submitted to Russel 3000 companies between 2011 and 2018. See supra note 197. 267 Shareholder proposals are less likely to exceed the resubmission thresholds whenever insiders hold a large percentage of the voting stock. Nevertheless, commenters have expressed concerns particularly in cases in which insiders hold a large percentage of the voting stock through dual-class shares. See letters in response to the Proxy Process Roundtable from the City of New York Office of the Comptroller dated January 2, 2019; CtW Investment Group dated January 16, 2019; see also letter in response to the Rulemaking Petition from the Shareholder Rights Group dated October 5, 2017. This is because dual-class shares result in the separation of voting and cash flow rights, giving insiders disproportionate voting power relative to their cash flow rights. 268 Data is retrieved from ISS Analytics and the CII Report for shareholder proposals submitted to Russell 3000 companies between 2011 and 2018. See supra note 197. Our analysis of proposals submitted to companies with dual-class shares should be interpreted with caution because our data does not allow us to identify companies for which insiders hold the majority of dual-class shares. Our data also does not allows us to distinguish companies for which the dual-class shares provide differential voting rights as opposed to other types of rights, such as dividend payments, to shareholders. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 than in other companies, because insiders usually oppose shareholder proposals.269 3. Benefits and Costs of the Proposed Amendments i. Benefits a. General Discussion of Benefits As a result of the proposed amendments, companies could exclude more proposals and shareholders could be discouraged from submitting proposals that likely would be excluded based on the proposed amendments. Consequently, companies could experience cost savings because they would be required to process fewer proposals (see Section IV.B.3.i above for a detailed discussion of the costs associated with shareholder proposals).270 Shareholders of these companies also could benefit from the potential decrease in proposals to the extent that any potential costs savings would be passed down to them in the form of higher returns on their investment. Shareholders also could benefit from the decrease in the number of proposals because they could spend fewer resources reviewing and voting on shareholder proposals. Relatedly, the decrease in the number of proposals could result in more efficient use of shareholder resources.271 More 269 Literature provides some evidence that insider holdings of voting rights are larger in firms with dual-class voting shares, and that in companies for which insiders hold the majority of the voting shares, insiders are more likely to vote against shareholder proposals. See Rob Bauer, Robin Braun, & Michael Viehs, Industry Competition, Ownership Structure and Shareholder Activism (Working Paper, Sept. 2010), available at https://ssrn.com/ abstract=1633536. 270 To the extent that proponents would continue submitting proposals that would be excludable under the proposed rule amendments, companies would incur costs to exclude those proposals (e.g., issuers would need to file a notice with the Commission that they intend to exclude the proposal). These costs would partially offset any cost savings arising from the proposed rule amendments. Any potential cost savings arising from the proposed rule amendments could be limited by the extent to which proponents change their behavior. For example, proponents could (i) alter their portfolio allocation to meet the ownership thresholds; (ii) rotate proposals on similar topics among different companies; or (iii) submit proposals to the same company but on a different topic. 271 See letter in response to the Proxy Process Roundtable from Business Roundtable dated June 3, 2019, at 5 (noting ‘‘shareholders can lose sight of matters of true economic significance to the company if they are spending time considering one, or even numerous, immaterial proposals. The resources and attention expended in addressing shareholder proposals cost the company and its shareholders in absolute dollars and management time and, perhaps worse, divert capital resources to removal of an immediate distraction and away from PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 specifically, the decrease in the number of proposals could allow shareholders to focus on the processing of proposals that are more likely to garner majority support and be implemented by management, which ultimately could benefit shareholders because it would result in more efficient use of their resources. b. Discussion Specific to Proposed Amendments to Rule 14a–8(b) and Rule 14a–8(c) As discussed in Section IV.C.3.i.a above, the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c) could decrease the number of proposals that companies must process, and thus could decrease the costs associated with processing shareholder proposals. We estimate that, as a result of the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c), all Russell 3000 companies together could experience annual cost savings associated with a decrease in the number of voted proposals of up to $70.6 million per year.272 In addition, investment in value-adding allocations, such as research and development and corporate strategy.’’). 272 $70.6 million = $150,000 (i.e., cost estimate provided by the American Securities Association in their letter in response to the Proxy Process Roundtable dated June 7, 2019 (see supra note 232)) × 471 (i.e., maximum number of excludable proposals as a result of the proposed amendments to Rule 14a–8(b) and Rule 14a–8(c)). 471 = [84 (i.e., maximum number of excludable proposals as a result of the proposed amendments in Rule 14a– 8(b) using only data for proposals with exact information on proponents’ ownership in proxy statements, see supra note 240) + 1 (i.e., incremental number of excludable proposals as a result of the proposed amendments to 14a–8(c) using only data for proposals with exact information on proponents’ ownership)] × 831 (i.e., all proposals submitted to be considered in 2018 shareholders’ meetings)/150 (i.e., proposals with exact information on proponents’ ownership in proxy statements). The following caveats apply to our cost savings estimates. Our analysis assumes that the distribution of ownership for proponents with exact ownership information in the proxy statements is the same as the distribution of ownership for proponents with minimum or no ownership information in the proxy statements and the distribution of ownership for proponents that submitted proposals that were ultimately withdrawn or omitted. Our analysis also applies the same per-proposal cost estimate (i.e., $150,000) to voted, omitted, and withdrawn proposals and it applies the same per-proposal cost estimate to operating companies and management companies. Lastly, our analysis assumes that companies will not reallocate the time and resources that would free up as a result of the reduction in proposals to process the remaining proposals. On the other hand, the lower bound of cost savings would be $1.4 million. $1.4 million = $50,000 (i.e., cost estimate provided by Darla Stuckey in her 2016 testimony before the House Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, see supra note 230) × 28 (i.e., minimum number of excludable proposals as a result of the proposed amendments to 14a–8(b) and 14a–8(c)). 28 = [0 (i.e., minimum number of excludable proposals E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules the decrease in the number of proposals could free up resources so that companies and their shareholders could pursue other value-enhancing activities. As a result of the proposed increase in the ownership thresholds, proponents could bear a larger percentage of the total cost that companies and their shareholders incur to process a shareholder proposal. For example, a shareholder that owns $25,000 worth of stock in a company would bear a larger percentage of the costs associated with processing a shareholder proposal relative to a proponent that owns $2,000 worth of stock in a company. As a result of bearing a larger percentage of the total costs, proponents could be less willing to submit proposals that are less likely to garner majority support and be implemented by management. In addition, by eliminating shareholders’ ability to aggregate their holdings with those of other shareholders, the proposed amendments would require each proponent to have a sufficient economic stake or investment interest in the company to justify the costs associated with a shareholder proposal. Further, by providing that a person, directly or indirectly, may submit only one proposal for a shareholder’s meeting, the proposed amendments would prohibit shareholders from imposing disproportionate costs on the company and other shareholders by submitting multiple proposals for the same meeting. Finally, by requiring a statement from the proponent that he or she is willing to meet with the company after submission of the shareholder proposal, the proposed amendments could encourage direct communication between the proponent and the company, which could promote more frequent resolution of the proposals outside the voting process. Such resolutions could decrease the costs that companies and their shareholders incur to process shareholder proposals. khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Discussion Specific to Proposed Amendments for Proposals Submitted on Behalf of Shareholders To the extent that the practices of certain proponents are not consistent as a result of the proposed amendments to 14a–8(b) using only proposals with exact information on proponents’ ownership in proxy statements, see supra Section IV.C.2.i) + 5 (i.e., incremental number of excludable proposals as a result of the proposed amendments to 14a–8(c) using only proposals with exact information on proponents’ ownership in proxy statements)] × 831 (i.e., all proposals submitted to be considered in 2018 shareholders’ meetings)/150 (i.e., proposals with exact information on proponents’ ownership). VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 with the proposed amendments related to proposals submitted through a representative, the proposed amendments could benefit companies and other shareholders because they could demonstrate the existence of a principal-agent relationship and could provide assurance that the shareholder supports the proposals. Further, the proposed amendments could result in cost savings to companies that would no longer be required to expend resources to obtain some of the information that is not provided by the proponents but would be required under the proposed amendments. d. Discussion Specific to Proposed Amendments to Rule 14a–8(i)(12) As discussed in Section IV.C.3.i.a above, the proposed increase in the resubmission thresholds and the proposed Momentum Requirement could benefit companies and their shareholders because it could decrease the number of proposals for companies and shareholders to consider. As a result of the proposed amendments, we estimate that all Russell 3000 companies together could experience annual cost savings associated with a decrease in the number of voted proposals of up to $8.9 million per year.273 In addition, the decrease in the number of proposals could free up resources so that companies and their shareholders could pursue other valueenhancing activities. Relatedly, the proposed amendments to the resubmission thresholds and the 273 $8.9 million = $150,000 (i.e., cost estimate provided by the American Securities Association in their letter in response to the Proxy Process Roundtable, see supra note 232) × 59 (i.e., number of excludable proposals as a result of the proposed amendments to 14a–8(i)(12)). 59 = 30 (i.e., number of excludable proposals as a result of the proposed amendments to 14a–8(i)(12) that were included in proxy statements to be considered in 2018 shareholder meetings) × 831 (i.e., proposals submitted to be considered in 2018 shareholders’ meetings)/423 (i.e., voted proposals in the CII Report in 2018). The following caveats apply to our cost savings estimates. Our analysis applies the same per-proposal cost estimate (i.e., $150,000) to voted, omitted, and withdrawn proposals and to operating companies and management companies. In addition, our analysis assumes that the proposed amendments to 14a–8(i)(12) will have the same effect on proposal eligibility of voted, withdrawn, and omitted proposals. Lastly, our analysis assumes that companies will not reallocate the time and resources that would free up as a result of the reduction in proposals to process the remaining proposals. On the other hand, the lower bound of cost savings would be $3.1 million. $3.1 million = $50,000 (i.e., cost estimate provided by Darla Stuckey in her 2016 testimony before the House Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, see supra note 230) × 63 (i.e., number of excludable proposals as a result of the proposed amendments to 14a–8(i)(12)). PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 66503 Momentum Requirement could exclude proposals that have historically garnered low levels of support and thus would allow shareholders to focus on the processing of proposals that may garner higher levels of voting support and may be more likely to be implemented by management. The proposed amendments to the resubmission thresholds could also benefit companies and their shareholders to the extent that they change proponents’ behavior. In particular, due to the higher thresholds, proponents may spend more resources to more carefully prepare proposals that are more likely to garner sufficient levels of shareholder support. In addition, proponents may spend more resources to market their proposal to other shareholders to increase support for their proposal. As a result, companies and their shareholders could benefit from the submission of shareholder proposals that are more likely to receive higher levels of support and thus are more likely to be implemented by management. Similarly, the proposed resubmission thresholds may discourage the submission of proposals that are less likely to garner majority voting support.274 Similarly, the Momentum Requirement may discourage the submission of proposals that garner significant but not majority support and recently have experienced a decrease in shareholder support, which may indicate waning shareholder interest in the proposal. ii. Costs a. General Discussion of Costs The proposed amendments could result in the exclusion of certain proposals that would have otherwise been included in the proxy statement and voted on. To the extent that such shareholder proposals would be value enhancing, the potential exclusion of value-enhancing proposals could be detrimental to companies and their shareholders.275 One way the exclusion of certain proposals could be 274 Proponents incur costs to submit proposals, which may already deter some proponents from resubmitting proposals that have a low likelihood of receiving sufficient levels of shareholder support. 275 See supra Section IV.C.I for a detailed discussion of literature that examines the value of shareholder proposals. The potential decrease in the number of shareholder proposals also could be costly to the various providers of administrative and advisory services related to shareholder voting because the demand for the services of these providers could decrease. Examples of these service providers include proxy advisory firms, tabulators of voting, and proxy solicitors. E:\FR\FM\04DEP2.SGM 04DEP2 66504 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 detrimental is by limiting or slowing the adoption of potential improvements. Shareholder proposals are one way for shareholders to communicate with management and other shareholders. The proposed amendments would alter the eligibility requirements in a manner that could increase companies’ ability to exclude certain proposals, which could restrict shareholders’ ability to use this avenue of communication with other shareholders. In addition to increasing companies’ ability to exclude certain proposals, the proposed amendments could decrease shareholders’ willingness to submit certain proposals, which could further inhibit communication between shareholders and also inhibit shareholders’ engagement with management.276 By limiting the shareholder proposals channel of communication, the proposed amendments could lead to proponents seeking alternative avenues of influence, such as public campaigns, litigation over the accuracy of proxy materials, or demands to inspect company documents. As a result, companies could confront greater uncertainty in their interaction with shareholders.277 Any negative effects of the proposed amendments would be more pronounced for shareholders that follow passive index strategies because those shareholders are more limited in their ability to sell shares of an underperforming stock and thus might be more likely to rely on the proxy proposal process to encourage valueenhancing changes.278 276 See supra note 48; see also letter in response to the Proxy Process Roundtable from American Federation of Labor & Congress of Industrial Organizations dated November 9, 2018. 277 See Brown (2017), supra note 211, at 24–25; see also letter to Jeb Hensarling, Chairman, and Maxine Waters, Ranking Member, House Financial Services Committee, from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors, dated April 24, 2017, available at https:// democrats-financialservices.house.gov/ uploadedfiles/letter_-_cii_04.27.2017.pdf (stating that the proposed rule amendments are ‘‘likely to have unintended consequences, including shareowners more often availing themselves of the blunt instrument of votes against directors, and increased reliance on hedge fund activists to push for needed corporate changes.’’); Ceres Business Case, supra note 25, at 11 (noting that ‘‘[a]lternatives to shareholder proposals include voting against directors, lawsuits, books and records requests, and requests for additional regulations. Each of these is more onerous and adversarial than including a 500-word proposal in the proxy statement for the consideration of shareholders’’); letters in response to the Proxy Process Roundtable from Council of Institutional Investors dated January 31, 2019; Los Angeles County Employees Retirement Association dated October 30, 2018; MFS Investment Management dated November 14, 2018; US SIF dated November 9, 2018. 278 See letter in response to the Proxy Process Roundtable from the City of New York Office of the VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 b. Discussion Specific to Proposed Amendments to Rule 14a–8(b) and Rule 14a–8(c) In addition to the costs discussed in Section IV.C.3.ii.a above, the proposed amendments to 14a–8(b) and 14a–8(c) could impose certain costs on shareholder-proponents. These costs could arise from: (i) Shareholderproponents’ efforts to reallocate shareholdings in their portfolio to satisfy the proposed dollar ownership thresholds; (ii) decreased diversification of shareholder-proponents’ portfolio because a larger portion of their wealth may be invested in a particular company; (iii) shareholder-proponents holding the shares for longer periods of time to satisfy the proposed duration thresholds; and (iv) shareholderproponents making themselves available to communicate with management after submitting a proposal. The latter costs to shareholder-proponents consist of the direct costs of meeting with management, and the opportunity costs associated with spending time to meet with management instead of engaging in other activities. There are also costs associated with disclosing the times the proponents would be available to communicate with management but we believe that any such costs likely are minimal. Further the proposed change from a single-tier to three-tiered ownership thresholds could increase compliance complexity because companies and proponents would be required to consider multiple thresholds to establish whether a proposal is eligible for exclusion. The proposed increase in the ownership thresholds and the prohibition of aggregation of shareholdings could disproportionately affect certain types of shareholderproponents. In particular, the proposed amendments could disproportionately affect individuals.279 This Comptroller dated January 2, 2019, at 1 (noting that ‘‘[b]ecause of our long-term investment horizon, and the fact that we allocate more than 80% of the funds’ investments in U.S. public equity through passive index strategies, we cannot readily sell shares in a company when we have concerns about the company’s performance, board composition and quality, management, executive compensation, workplace practices or management of risks, including those related to climate change’’); Ceres Business Case, supra note 25, at 10 (noting that ‘‘[w]hile active investors have the option of selling shares of companies whose management they do not trust to add value, passive investors’ options are more limited’’). At the same time, passive investors are more likely to hold shares for a long period of time than active investors, and thus are less likely to be affected by the proposed amendments to Rule 14a– 8(b). 279 See supra Section IV.C.2.i. PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 disproportionate effect would be more costly if individuals submit more valueenhancing proposals than institutions. Two academic papers suggest that proposals submitted by individual investors elicit a stronger market reaction than proposals submitted by institutional investors,280 while one suggests otherwise.281 The potentially negative consequences of this disproportionate effect on individuals could be amplified by the fact that (i) institutional investors generally may have more direct channels of communication with companies than individual investors who rely more on the shareholder-proposal process to communicate with management and other shareholders 282 and (ii) larger shareholders have, on average, greater success in seeing their contested proposals ultimately included in the proxy.283 As explained above, the proposed amendments could disproportionately affect smaller companies that receive 280 See, e.g., Gillan & Starks (2000), supra note 217; Gantchev & Giannetti (2018), supra note 166. Gillan and Starks (2000) interpret the more positive stock market reaction to proposals submitted by individuals compared to institutions as consistent with the idea that the market views shareholder proposals submitted by an institution as evidence of management’s unwillingness to negotiate with such investors. See Gillan & Starks (2000). 281 See Cun ˜ at et al. (2012), supra note 209. 282 See, e.g., letters in response to the Proxy Process Roundtable from MFS Investment Management dated November 14, 2018, at 2 (noting ‘‘[a]s a large institutional investor, we generally have access to management teams and directors that smaller shareholders may not have’’); Pax World Funds dated November 9, 2018, at 2 (noting ‘‘[w]hile some asset managers or owners with hundreds of billions in assets can often engage with management and boards as often as they wish, smaller investors’ inquiries to companies often die in investor relations departments.’’); and the Shareholders Right Group dated December 4, 2018, at 8–9 (noting ‘‘larger investors often do not need the shareholder proposal process in order to persuade companies to engage with them on their concerns. In contrast, the shareholder proposal process provides an appropriate avenue through which all shareholders, including Main Street’s shareholders, as well as their chosen representatives, can raise issues and elicit consideration and support from their fellow shareholders’’); see also Ceres Business Case, supra note 25, at 9 (noting that ‘‘[a] system that allows shareholders to file proposals is needed in part because individual investors and smaller shareholders nearly always lack large enough holdings to get the board and management’s attention in any other way’’); Eugene Soltes, Suraj Srinivasan, & Rajesh Vijayaraghavan, What Else do Shareholders Want? Shareholder Proposals Contested by Firm Management (Working Paper, July 2017) (‘‘Soltes et al. (2017)’’) (finding that the level of shareholder ownership is positively associated with the probability that a contested proposal is withdrawn, which is consistent with the idea that large shareholders ‘‘are more influential and are more likely to have dialogue with managers that would facilitate implementation of their proposal prior to a shareholder vote’’). 283 See Soltes et al. (2017), supra note 282. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules proposals.284 This is because investors’ holdings in smaller companies are more likely to be below the proposed ownership thresholds than investors’ holdings in larger companies, assuming investors hold the market portfolio.285 As a result, to the extent that the proposals excluded as a result of the proposed amendments would be value enhancing, any negative effects of the proposed amendments on smaller companies could be larger than the effects on larger companies. At the same time, however, smaller companies would enjoy larger cost savings as a result of the potentially larger increase in the number of excludable proposals. Hence, the net effect of the proposed rule amendments on smaller relative to larger companies is unclear. Any effects of the proposed amendments would be, at least partially, mitigated by the fact that companies can elect to include in their proxy materials proposals of proponents that do not meet the proposed eligibility requirements, if the companies believe that those proposals would benefit shareholders.286 c. Discussion Specific to Proposed Amendments for Proposals Submitted on Behalf of Shareholders Shareholders that submit a proposal through a representative could incur minimal costs to ensure that their practices are consistent with the proposed amendments. In addition, to the extent that the practices of certain proponents are not consistent with the proposed amendments, the proposed amendments could impose minimal costs on proponents to provide this additional documentation. We lack data to quantify these costs but we request comment on these costs in Section IV.E below. khammond on DSKJM1Z7X2PROD with PROPOSALS2 d. Discussion Specific to Proposed Amendments to Rule 14a–8(i)(12) The proposed amendment to the resubmission thresholds and the proposed Momentum Requirement could impose costs on proponents because they could spend more resources in preparing a proposal to seek to garner sufficient levels of support to satisfy the proposed requirements. 284 See supra Section IV.C.2.i. supra note 254. 286 Our analysis of proponents’ ownership information from proxy statements shows that there was one proposal submitted by two co-proponents whose aggregate holdings did not meet the $2,000 current ownership threshold. This proposal is excludable under the current ownership threshold, but nevertheless appeared in the company’s proxy statement. See supra note 189 for caveats related to this analysis. 285 See VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 The proposed amendments also could increase the complexity of the shareholder proposal eligibility requirements because the Momentum Requirement would be a new requirement. Literature also shows that management may spend resources to influence the success rate of shareholder proposals.287 The Momentum Requirement would allow companies to exclude proposals that do not meet but are close to the majority threshold. Hence, the Momentum Requirement could provide further incentives to management to expend resources to influence the voting outcome of a shareholder proposal because the benefit of influencing the voting outcome (i.e., three year exclusion of the proposal) could be greater than under current rules. As discussed in Section IV.C.2 above, the proposed amendments to the resubmission thresholds and the proposed Momentum Requirement could have a larger effect on certain types of proposals and companies. In particular, the proposed amendments could have a larger effect on larger companies because larger companies are more likely to receive shareholder proposals.288 To the extent that the proposals excluded as a result of the proposed amendments would be value enhancing, larger companies could be more negatively affected by the proposed amendments than smaller firms. The disproportionate effect on larger companies could be amplified by the fact that larger companies are less likely to be the target of hedge fund activism and thus experience improvements through alternative forms of activism,289 and larger companies are more likely to contest shareholder proposals.290 At the same time, any negative effects could be at least partially mitigated by the fact that larger companies would enjoy larger cost savings as a result of the decrease in the number of proposal resubmissions. The proposed amendments to the resubmission thresholds and the proposed Momentum Requirement also could have a larger effect on companies with dual-class voting shares for which insiders hold the majority of the voting 287 Management may influence the voting outcome either by encouraging shareholders that would favor them to vote or by encouraging shareholders to vote in line with management. See Bach & Metzger (2019), supra note 216. 288 See supra Section IV.B.3.i. 289 Alon Brav, Wei Jiang, Frank Partnoy, & Randall Thomas, Hedge Fund Activism, Corporate Governance, and Firm Performance, 63 J. Fin. 1729 (2008). 290 Soltes et al. 2017, supra note 282. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 66505 shares.291 At such controlled companies, it may be difficult to get support for a shareholder proposal above the proposed thresholds. While shareholder proposals may be less likely to gain majority support and be implemented at these companies,292 they may still provide a valuable communication mechanism between shareholders. We note that the nonvoting stock of companies for which the majority of voting stock is held by insiders could trade at a discount to compensate the owners of the nonvoting stock for the reduced ability of shareholder proposals to garner sufficient support for those companies. In addition, literature suggests that the probability of a proposal being implemented is negatively related to insider ownership. Hence, the decrease in the number of resubmitted proposals as a result of the proposed rule amendments for firms with dual-class voting stock for which insiders hold the majority of the voting shares likely would be limited because the probability of a proposal being implemented in those firms would be already low.293 291 See supra Section IV.B.3.iv. Roundtable Transcript, supra note 13, comments of Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations, at 167; CII Report, supra note 197, at 21; Ceres Business Case, supra note 25, at 14; letter in response to the Proxy Process Roundtable from the City of New York Office of the Comptroller dated January 2, 2019, at 11. 293 See, e.g., Ertimur et al. (2010), supra note 174. A commenter also suggested that an increase in the resubmission thresholds could provide stronger incentives to some proponents to submit proposals on certain topics with the intent of obtaining low levels of support for certain subject matters, and thus rendering proposals on the same subject matter excludable for three years. Nevertheless, we believe that any such activity is unlikely to be widespread. See letter in response to the Proxy Process Roundtable from the City of New York Office of the Comptroller dated January 2, 2019, at 11 (noting ‘‘we have seen efforts to pre-empt proposals in a given year urging stronger policies on climate change by a group submitting a proposal to go in the opposite direction. With high resubmission thresholds, that kind of mischief-making would be encouraged on a broader scale as long as the SEC policy refers to ‘the same subject matter’ rather than ‘the same proposal’ ’’). For related discussion, see also the letter in response to the Proxy Process Roundtable from Sustainable Investments Institute dated November 12, 2018, at 13 (noting ‘‘[n]ew this year were proposals from the free market activist group the National Center for Public Policy Research (NCPPR) that used precisely the same resolved clause as the one used in the main campaign on lobbying. In two instances, because they were filed first, these resolutions pre-empted proposals filed later from the disclosure advocates, on lobbying at Duke Energy and about election spending at General Electric, where the question turned on third-party spending groups. The NCPPR proposals went to votes in each case and while the presenters argued against disclosure in their 292 See E:\FR\FM\04DEP2.SGM Continued 04DEP2 66506 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules The potential costs of the proposed rule amendments would be more pronounced in instances where material developments could change shareholder support for the proposal but the proposal is otherwise ineligible for resubmission under the proposed rule for a period of time.294 Any negative effects of the proposed amendments would be, at least partially, mitigated by the fact that companies would be able to exclude only proposals for which there is an observable measure of low shareholder interest (i.e., low voting support among shareholders and lack of momentum toward achieving a more substantial level of shareholder support). In addition, any negative effects of the proposed rule amendments would be mitigated by the fact that companies could elect to include in their proxy materials resubmissions that would otherwise be excludable if they believed that those resubmissions would benefit shareholders.295 Also, companies’ ability to exclude certain resubmissions would be limited to a three-year cooling-off period regardless of the level of support the proposal last received. Finally, any potential effects of the proposed amendments would be moderated by changes in proponent behavior, such as submitting a proposal on a different topic when the initial proposal is ineligible for resubmission or submitting a proposal on the same topic but at a different company to continue investor conversations on that topic. khammond on DSKJM1Z7X2PROD with PROPOSALS2 4. Effects of Proposed Amendments on Efficiency, Competition, and Capital Formation To the extent that the proposed amendments could reduce the costs of processing shareholder proposals and could free up management resources for more valuable activities, the proposed amendments could result in efficiency improvements. Any improvements in efficiency could be offset by the costs associated with the exclusion of shareholder proposals that could have support statement, investors appeared to vote on the basis of what was in the resolved clause and support levels were comparable to those filed by disclosure proponents—34.6 percent at Duke (33.3 percent last year) and 21.2 percent at GE (no previous election proposals but 28.6 percent on a traditional lobbying resolution in 2017).’’). 294 See letter in response to the Proxy Process Roundtable from the City of New York Office of the Comptroller dated January 2, 2019. 295 Among shareholder proposals resubmitted to Russell 3000 companies during 2011 to 2018, 10 proposals appeared in company proxies and were voted on despite receiving low voting support in prior submissions and being eligible for exclusion under the current resubmission thresholds. See supra note 200. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 resulted in changes that would have enhanced efficiency. Further, to the extent that the proposed amendments would permit shareholders to focus on the processing of proposals that are more likely to receive majority support and be implemented, the proposed amendments could result in more efficient use of shareholder resources. In addition, to the extent that the proposed amendments could reduce costs to companies associated with the shareholder-proposal process, the proposed amendments could be a positive factor in the decision of firms to go public, which could positively affect capital formation on the margin.296 Nevertheless, we believe that any such effects likely would be minimal because most firms receive only few proposals each year and the costs of responding to proposals likely are a small percentage of the costs associated with being a public company.297 In addition, companies that have recently had an initial public offering infrequently receive shareholder proposals.298 To the extent that the proposed amendments would have disproportionate effects on U.S. relative to foreign firms because foreign firms are not subject to federal proxy rules,299 the proposed amendments could improve competition. Further, to the extent that the proposed amendments to the ownership (resubmission) thresholds would have disproportionate effects on smaller (larger) companies, the proposed amendments could harm competition. Nevertheless, we expect 296 See, e.g., letter in response to the Proxy Process Roundtable from Center for Capital Markets Competitiveness dated December 20, 2018, at 7 (noting ‘‘[t]he decline in public companies is a multifaceted issue with no single solution. . . . Those issues include proxy advisory firm reforms as discussed earlier as well as shareholder resubmission thresholds.’’). 297 Between 1997 and 2018 for Russell 3000 companies that received a proposal, the median number of proposals was one per year. See Roundtable Transcript, supra note 13, comments of Brandon Rees, Deputy Director of Corporations and Capital Markets, American Federation of Labor and Congress of Industrial Organizations, at 140, 142 (noting ‘‘the average publicly listed company in the United States can expect to receive a shareholder proposal once every 7.7 years, and the median number of proposals received is one. . . . [S]hareholder proposals make up less than 2 percent of the total number of ballot items. Less than 4 percent of shareholder proposals were filed at companies with under $1 billion in market capitalization. Less than 9 percent of Russell 3000 companies that have had an IPO since 2004.’’); see also letters in response to the Proxy Process Roundtable from Ceres dated November 13, 2019; Mercy Investment Services, Inc. dated December 3, 2018, at 3; Presbyterian Church U.S.A. dated November 13, 2018, at 3–4. 298 See supra note 297. 299 See supra note 130. PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 that any such effects likely would be minimal because the cost of processing shareholder proposals likely is a small percentage of companies’ total cost of operations. Finally we do not expect that the proposed amendments for proposals submitted by a representative would have a meaningful effect on efficiency, competition, and capital formation. D. Reasonable Alternatives 1. Shareholder Ownership Thresholds i. Alternative Ownership Thresholds We considered a number of alternative approaches to the ownership thresholds. First, we considered whether to simply increase the $2,000/ one-year threshold in the current requirement to a $50,000/one-year threshold without providing additional eligibility options. Using proponents’ exact ownership information from the proxy statements and assuming no change in proponents’ ability to aggregate their holdings to submit a joint proposal, such an increase would have resulted in the excludability of 96 proposals, or 65 percent of the proposals with exact proponents’ ownership information to be considered at 2018 shareholder meetings.300 The advantage of increasing only the dollar amount in the current threshold is that the rule would be easier to implement and monitor. The disadvantage of such an approach would be that shareholders would not have the flexibility to become eligible to submit shareholder proposals by either increasing their holdings or holding the shares of a company for a longer period of time as under the proposed approach. Alternatively, we considered using a tiered approach, as proposed, but with different combinations of minimum dollar amounts and holding periods. For example, we considered $2,000 for five years, $15,000 for three years and $25,000 for one year or $2,000 for three years, $10,000 for two years, and $50,000 for one year. We are unable to estimate the incremental effects of the former alternative (i.e., $2,000 for five years, $15,000 for three years, and $25,000 for one year) relative to the 300 65% = 97 (excludable proposals under a $50,000/one-year threshold)/150 (proposals with exact proponents’ ownership information in proxy statements). For proposals that are submitted by more than one proponent, these estimates assume that the proposals would still be submitted if the aggregate ownership of the co-proponents met the alternative dollar ownership threshold. For proposals that are submitted by multiple proponents, some of which provide exact and others provide minimum holdings information, we assume that the ownership of the proponents with minimum holdings information is equal to the lowest end of the ownership range. E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules effects of the proposed amendments discussed in Section IV.C.2.i above because we lack data on proponents’ ownership duration. Assuming all proponents held the shares for only one year, the increase in the dollar ownership thresholds from $2,000 to $50,000 (i.e., third tier of the alternative ownership threshold) could result in the exclusion of 97 proposals, or 65 percent of the proposals with exact proponents’ ownership information related to 2018 shareholder meetings.301 On the other hand, assuming all proponents held the shares for at least three years, the proposed ownership thresholds would not result in a change in the number of excludable proposals relative to the current thresholds. Different thresholds could result in the exclusion of more or fewer proposals, depending on the threshold. While we believe that the proposed tiers would appropriately balance the interests of shareholders who seek to use the company’s proxy statement to advance their own proposals, on the one hand, with the interests of companies and other shareholders who bear the burdens associated with the inclusion of such proposals, on the other hand, we solicit comment as to whether any refinements of those thresholds would strike a better balance. We also considered whether to index the proposed ownership thresholds for inflation. The benefit of such an approach would be that thresholds would adjust over time without the need for additional rulemaking. The disadvantage of such an approach would be that compliance with the rule could be more cumbersome as companies and proponents would have to monitor periodically evolving ownership thresholds. khammond on DSKJM1Z7X2PROD with PROPOSALS2 ii. Percent-of-Ownership Threshold We considered whether to propose an ownership requirement based solely on the percentage of shares owned. For example, we considered eliminating the dollar ownership threshold and retaining the one-percent ownership threshold. Using proponents’ exact ownership information from the proxy statements and assuming no change in proponents’ ability to aggregate their holdings to submit a joint proposal, we estimate that using a one-percent ownership threshold and removing the $2,000/one-year threshold would have resulted in 149 proposals, or 99 percent of the proposals to be considered in 2018 shareholder meetings that provide exact proponents’ ownership 301 See supra note 300. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 information, being excludable under the proposed amendments.302 The advantage of a percentage-ofownership threshold is that it would permit shareholders owning the same proportion of a larger company as of a smaller company to submit a proposal. The percentage-of-ownership threshold, however, would be marginally harder to implement because of changes in the stock price of the company over time. We also believe that a percentage-ofownership threshold of one percent would prevent the vast majority of shareholders from submitting proposals,303 which, in turn, could have a chilling effect on shareholder engagement. In addition, the types of investors that hold more than one percent of a company’s shares are more likely to be able to communicate directly with management, and thus do not typically use shareholder proposals.304 2. Shareholder Resubmission Thresholds i. Alternative Resubmission Thresholds We considered proposing different resubmission thresholds, including raising the thresholds to 5/10/15 percent, 6/15/30 percent, or 10/25/50 percent. All three alternatives threshold levels would increase the number of proposals eligible for exclusion relative to the baseline, with the first expected to have smaller effects relative to the proposed amendments and second and third expected to have larger effects relative to the proposed amendments. We estimate that 92 (6 percent), 328 (23 percent), and 668 (46 percent) additional proposals that were resubmitted between calendar years 2011 and 2018 would have fallen below the 5/10/15 percent, 6/15/30 percent, and 10/25/50 percent thresholds, respectively. In addition, we are requesting comment on whether the rule should remove resubmission thresholds for the first two submissions and, instead, allow for exclusion if a matter fails to receive majority support by the third submission. Under this alternative, 302 99% = 149 (number of excludable proposals under a 1% threshold)/150 (proposals with exact proponents’ ownership information in proxy statements). For proposals that are submitted by more than one proponent, these estimates assume that the proposals would still be submitted if the aggregate ownership of the co-proponents met the alternative percent-of-ownership threshold. For proposals that are submitted by multiple proponents, some of which provide exact and others provide minimum holdings information, we assume that the ownership of the proponents with minimum holdings information is equal to the lowest end of the ownership range. 303 See supra note 302. 304 See supra note 282. PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 66507 no proposal would be eligible for exclusion on its first two submissions, allowing shareholder proposals at least two years to gain traction. We estimate that 418 (29 percent) additional proposals that were resubmitted between calendar years 2011 and 2018 would have failed to garner majority support by third submission.305 We also are requesting comment on the appropriate cooling-off periods under this approach, such as three and five years. ii. Different Vote-Counting Methodologies We considered whether to propose changes to how votes are counted for purposes of applying the resubmission thresholds. For example, we considered whether votes by insiders should be excluded from the calculation of the fraction of votes that a proposal received. We also considered whether to apply a different vote-counting methodology for companies with dualclass voting structures. One commenter has highlighted how the presence of a subset of shareholders with special voting rights could make the voting threshold requirement difficult to satisfy.306 The advantage of applying different kind of vote-counting methodologies for votes by insiders and for companies with dual-class shares is that it would make it easier for shareholder proposals to meet the resubmission thresholds and thus potentially could mitigate management entrenchment for those firms.307 The disadvantage of such an approach is that companies and their shareholders would continue to incur costs associated with processing proposals that are less likely to garner majority support and be implemented by management. iii. Exception to the Rule if Circumstances Change We considered whether to propose an exception to the proposed rule amendments that would allow an otherwise excludable proposal to be resubmitted if there were material developments that suggest a resubmitted proposal may garner significantly more votes than when it was previously voted 305 This estimate is an upper bound of the number of excludable proposals under this alternative because it would allow all proposals following first and second submissions to be resubmitted. We cannot identify all proposals that would have been resubmitted but were not because they were eligible for exclusion under the current resubmission thresholds for first and second submissions. 306 See letter in response to the Proxy Process Roundtable from City of New York Office of the Comptroller dated January 2, 2019. 307 See supra note 267. E:\FR\FM\04DEP2.SGM 04DEP2 66508 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 on. Several commenters pointed out the possibility of an unpopular proposal gaining popularity in subsequent years following changes in company circumstances or other market developments.308 We expect that such an exception would lower the number of proposals eligible for exclusion under the proposed amendments, but the magnitude of the decrease would depend on what types of developments qualify for the exception and how many companies experience these particular types of developments. We expect the additional costs of such an exception would include those associated with determining whether changes in circumstances qualify for the exception. On the other hand, shareholders may benefit from being able to submit proposals on matters that would otherwise be excludable under Rule 14a–8(i)(12) and may have gained popularity among shareholders following a material development at the company. E. Request for Comment We request comment on all aspects of our economic analysis, including the potential costs and benefits of the proposed amendments and alternatives thereto, and whether the amendments, if adopted, would promote efficiency, competition, and capital formation. In addition, we request comments on our selection of data sources, empirical methodology, and the assumptions we have made throughout the analysis. Commenters are requested to provide empirical data, estimation methodologies, and other factual support for their views, in particular, on costs and benefits estimates. In addition, we request comment on the following: 1. Are there any entities affected by the proposed rule amendments that are not discussed in the economic analysis? In which ways are those entities affected by the proposed amendments? Please provide an estimate of the number of any additional affected entities. 2. Are there any costs or benefits of the proposed rule amendments that are not discussed in the economic analysis? If so, please describe the types of costs and benefits and provide a dollar estimate of these costs and benefits. 3. What would be the effects of the proposed rule amendments, including any effects on efficiency, competition, and capital formation? Would the proposed rule amendments be beneficial 308 See letters in response to the Proxy Process Roundtable from the Shareholder Rights Group dated December 4, 2018; Teachers Insurance and Annuity Association of America (TIAA) dated June 10, 2019; City of New York Office of the Comptroller dated January 2, 2019. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 or detrimental to proponents, companies, and the companies’ shareholders, and why in each case? 4. What is the dollar cost for companies to engage with proponents, process, and manage a shareholder proposal (including up to or after a vote on the proposal)? In particular, what is the dollar cost for companies to: (i) Review the proposal and address issues raised in the proposal; (ii) engage in discussion with the proponent; (iii) print and distribute proxy materials and tabulate votes on the proposal; (iv) communicate with proxy advisory firms and shareholders (e.g., proxy solicitation costs); (v) if they intend to exclude the proposal, file with the Commission a notice that they intend to exclude the proposal; and (vi) prepare a rebuttal to the proposal? Do these costs vary with the issue raised in the proposal? Do these costs vary with the type of shareholder-proponent (i.e., institutional versus retail investor)? Are these costs different for first-time submissions relative to resubmissions? Do these costs vary with the number of resubmissions? Do these costs vary with the number of proposals received by the company? Do these costs vary with company size? Do these costs differ in cases in which a no-action request is prepared and in other cases, such as where a proposal’s exclusion is challenged in court? Do managers have discretion with respect to these costs? 5. In response to a questionnaire the Commission made available in 1997, some respondents indicated that costs associated with determining whether to include or exclude a shareholder proposal averaged approximately $37,000 (which figure may have included estimates for considering multiple proposals). The Commission also sought information about the average printing cost and 67 respondent companies reported that the average cost was approximately $50,000. How do these costs compare with costs today? Has ‘‘notice and access’’ or other technological advancements had an effect on the costs associated with disseminating proxy materials? If so, what are those effects? 6. What are the differences in cost incurred by companies with respect to proposals for which a no-action request is prepared and submitted to the staff and those for which a no-action request is not prepared? What are the specific costs incurred? 7. In general, how do costs differ for proposals that are submitted during shareholder meetings and not presented in the proxy and those that are presented in the proxy? PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 8. What are the costs, if any, associated with shareholders’ consideration and voting on a shareholder proposal? Do these costs differ depending on the shareholder proposal topic? Do these costs differ depending on whether the shareholder proposal is a first-time submission or a resubmission? 9. How likely is it that market practices would change in response to the proposed rule amendments? What type of market practices that are not discussed in the economic analysis would change in response to the proposed rule amendments? For example, would larger shareholders become more likely to submit proposals in cases where smaller shareholders would no longer be eligible to submit proposals on their own? Are there frictions associated with this type of reallocation? To what extent would these changes in market practice or other effects mitigate the potential effects of the proposed amendments? 10. To what extent would the proposed amendments affect incentives for shareholders to engage with companies prior to and/or following the submission of a shareholder proposal? What are the costs to shareholders and companies associated with such engagement? To what extent would the proposed amendments affect the outcome of such engagement? Would the requirement that the proponent provide a statement that he or she is willing to meet with the company after submission of the shareholder proposal promote more frequent resolution of the proposals outside the voting process? What would be the cost savings, if any, to proponents and companies associated with such resolutions? Do answers to the above questions differ when considering individual or institutional shareholder-proponents? 11. Relatedly, would the proposed amendments affect shareholder engagement outside of the shareholderproposal process? Would the possible reduction in the number of shareholder proposals allow company resources to be directed towards alternative engagement efforts? What are the costs associated with alternative types of shareholder engagement to companies and shareholders? 12. What are the opportunity costs to companies and shareholders of shareholder proposal submissions? Please provide a dollar estimate per proposal for these opportunity costs. Do these opportunity costs vary with the type of proposal, the type of proponent, or the type of company? Please provide an estimate of the hours the board of directors and management spend to E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 review and process each shareholder proposal. 13. Is the distribution of the dollar value and the duration of firm-specific holdings different for institutional and individual investors? Are there distributional differences when comparing the subsets of individual and institutional shareholders likely to submit shareholder proposals? Please provide any relevant data or summary statistics of the holdings of retail and institutional investors recently and over time. 14. Does the majority of shareholders that submit a proposal through a representative already provide the documentation that would be mandated by the proposed rule amendments? To the extent that the practices of certain proponents are not consistent with the proposed amendments, would the costs to proponents to provide this additional documentation be minimal? Are there any costs and benefits of providing the additional disclosures that we haven’t identified in the economic analysis? If so, please provide a dollar estimate for these costs and benefits. Would the proposed amendments related to proposals submitted by a representative have any effect on efficiency, competition, or capital formation? 15. What is the relation, if any, between the level and duration of proponent’s ownership and the likelihood of submitting shareholder proposals? What is the relationship, if any, between the level and duration of proponents’ ownership and the likelihood of submitting shareholder proposals that are more likely to garner majority support and be implemented by management? Do answers to the VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 above questions vary based on the shareholder type or proposal topic? 16. What are the concerns, if any, associated with drawing inferences about the effects of the proposed amendments from analysis of data on proponents’ ownership from proxy statements and proof-of-ownership letters? 17. To what extent are there additional costs to companies and shareholders associated with applying a three-tiered ownership threshold instead of a single-tier threshold in determining a shareholder’s eligibility to submit shareholder proposals? 18. We have observed instances of shareholder proposals going to a vote despite being eligible for exclusion under Rule 14a–8. What are the costs and benefits to companies of including such proposals in the proxy statement? To what extent may these practices change if proposed amendments are adopted? V. Paperwork Reduction Act A. Summary of the Collections of Information Certain provisions of our rules and schedules that would be affected by the proposed amendments contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).309 We are submitting the proposed amendments to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.310 The hours and costs associated with 309 44 310 44 PO 00000 U.S.C. 3501 et seq. U.S.C. 3507(d); 5 CFR 1320.11. Frm 00053 Fmt 4701 Sfmt 4702 66509 preparing, filing, and sending the schedules, including preparing documentation required by the shareholder-proposal process, constitute paperwork burdens imposed by the collection of information. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid OMB control number. Compliance with the information collection is mandatory. Responses to the information collection are not kept confidential and there is no mandatory retention period for the information disclosed. The title for the affected collection of information is: ‘‘Regulation 14A (Commission Rules 14a–1 through 14a–21 and Schedule 14A)’’ (OMB Control No. 3235–0059). We adopted the existing regulations and schedule pursuant to the Exchange Act. The regulations and schedule set forth the disclosure and other requirements for proxy statements filed by issuers and other soliciting parties. A detailed description of the proposed amendments, including the need for the information and its proposed use, as well as a description of the likely respondents, can be found in Section II above, and a discussion of the expected economic effects of the proposed amendments can be found in Section IV above. B. Summary of the Proposed Amendments’ Effects on the Collections of Information The following table summarizes the estimated effects of the proposed amendments on the paperwork burdens associated with Regulation 14A. E:\FR\FM\04DEP2.SGM 04DEP2 66510 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS Proposed amendments Estimated effect Rule 14a–8(b)(1)(i): • Revise the ownership requirements that shareholders must satisfy to be eligible to submit proposals to be included in an issuer’s Schedule 14A proxy statement to the following levels: Æ ≥$2K to <$15K for at least 3 years; Æ ≥$15K to <$25K for at least 2 years; or Æ ≥$25K for at least 1 year. Rule 14a–8(b)(1)(iii): • Require shareholders to provide the company with a written statement that they are able to meet with the company in person or via teleconference no less than 10 calendar days nor more than 30 calendar days after submission of the shareholder proposal, and to provide contact information as well as business days and specific times that they are available to discuss the proposal with the company. Rule 14a–8(b)(1)(iv): • Require shareholders to provide certain written documentation to companies if the shareholder appoints a representative to act on its behalf in submitting a proposal under the rule. Rule 14a–8(b)(1)(v): • Disallow aggregation of holdings for purposes of satisfying the ownership requirements ........................ Rule 14a–8(c): • Provide that shareholders and other persons cannot submit, directly or indirectly, more than one proposal for the same shareholders’ meeting. Rule 14a–8(i)(12): • Increase the prior vote thresholds for resubmission of a proposal that addresses substantially the same subject matter as a proposal previously included in company’s proxy materials within the preceding 5 calendar years if the most recent vote occurred within the preceding 3 calendar years to: Æ Less than 5% of the votes cast if previously voted on once; Æ less than 15% of the votes cast if previously voted on twice; or Æ less than 25% of the votes cast if previously voted on three or more times. Permit exclusion of proposals that addresses substantially the same subject matter as proposals that have been previously voted on three or more times in the last five years, notwithstanding having received at least 25% of the votes cast on the most recent submission, if the most recently voted on proposal (i) received less than 50% of the votes cast and (ii) experienced a decline in shareholder support of 10% or more of the votes cast compared to the immediately preceding vote. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Total ......................................................................................................................................................... 311 See supra Section IV.C.2.i. We estimate that the decrease in the number of shareholder proposals could range from 0 to 56%, depending on shareholders’ holding periods. For purposes of the PRA, we assume an estimated decrease of 28%. 312 In response to the Proxy Process Roundtable, commenters provided several cost estimates associated with a company’s receipt of a shareholder proposal. These estimates are $87,000 (see letters in response to the Proxy Process Roundtable from Blackrock, Inc. dated November 16, 2018; Society for Corporate Governance dated November 9, 2018); more than $100,000 (see letter in response to the Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 2019); and approximately $150,000 (see letter in response to the Proxy Process Roundtable from the American Securities Association dated June 7, 2019). In addition, one observer estimated a cost of approximately $50,000 ‘‘based on anecdotal discussions with [members of the Society for Corporate Governance].’’ See Statement of Darla C. Stuckey, President and CEO, Society for Corporate Governance, Before the H. Comm. on Financial VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 Services Subcomm. on Capital Markets and Government Sponsored Enterprises, Sep. 21, 2016. At an estimated hourly cost of $400 per hour, these estimated costs would correspond to the following estimated burden hours: 125 hours ($50,000 / $400 = 125), 218 hours ($87,000 / $400 = 218), 250 hours ($100,000 / $400 = 250), and 375 hours ($150,000 / $400 = 375). A July 2009 survey of Business Roundtable companies, in which 67 companies responded, indicated that the average burden associated with preparing a no-action request related to a shareholder proposal is approximately 47 hours with associated costs of $47,784. The survey also indicated that the average burden for a company associated with printing and mailing a single shareholder proposal is 20 hours with associated costs of $18,982. See letter in response to Facilitating Shareholder Director Nominations, Release No. 34–60089 (Jun. 10, 2009) [74 FR 29024 (Jun. 18, 2009)] from Business Roundtable dated August 17, 2009, available at https://www.sec.gov/ comments/s7-10-09/s71009-267.pdf. Thus, based on the Business Roundtable’s survey, the combined PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 28% decrease in the number of shareholder proposal submissions,311 resulting in a reduction in the average burden per response of 5.08 hours.312 Increase in the average burden per response of 0.04 hours.313 Increase in the average burden per response of 0.01 hours.314 0.2% decrease in the number of shareholder proposal submissions,315 resulting in a reduction in the average burden per response of 0.04 hours.316 2% decrease in the number of shareholder proposal submissions,317 resulting in a reduction in the average burden per response of 0.36 hours.318 7% reduction in the number of shareholder proposals by reducing the number of resubmissions,319 resulting in a reduction in the average burden per response of 1.26 hours.320 Net decrease in the average burden per response of 6.69 hours.321 effect of these two aspects of processing a shareholder proposal was estimated at 67 hours with associated costs of $66,766. Informed by the range of estimates provided, we estimate that the burden hours for a company associated with considering and printing and mailing a shareholder proposal (not including burdens associated with the no-action process) would be 100 hours (80 hours associated with activities unrelated to printing and mailing, and 20 hours associated with printing and mailing). In addition, we estimate that the burden hours associated with seeking no-action relief would be 50 hours. We further estimate that 40% of proposals are included in the proxy statement without seeking no-action relief, 16% are included after seeking noaction relief, 15% are excluded after seeking noaction relief, and 29% are withdrawn. Thus, we estimate 107 burden hours associated with a company’s receipt of a shareholder proposal, calculated as follows: E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments The paperwork burden estimate for Regulation 14A includes the burdens khammond on DSKJM1Z7X2PROD with PROPOSALS2 • 100 hours for 40% of proposals (i.e., proposals that are included in the proxy statement without seeking no-action relief); • 150 hours for 16% of proposals (i.e., proposals that are included in the proxy statement after seeking no-action relief); • 130 hours for 15% of proposals (i.e., proposals that are excluded from the proxy statement after seeking no-action relief); and • 80 hours for 29% of proposals (i.e., proposals that are withdrawn). The reduction in the average burden per response of 5.08 hours is calculated by multiplying the expected reduction in proposals (28%) by the average number of proposals received between 1997 and 2018 (946) for a reduction in the total number of proposals of 265. This reduction in the number of proposals (265) is then multiplied by the estimated burden hours per proposal (107) for a total of 28,355 burden hours. This total number of burden hours (28,355) is then divided by the total number of responses (5,586) for a reduction in the average burden per response of 5.08 hours. 313 The increase in the average burden per response of 0.04 hours is calculated by multiplying the expected amount of time to provide this information (20 minutes) by the expected average number of expected proposals after taking account of the total reduction in proposals submitted as a result of the proposed amendments (615) for a total increase of 205 hours. This increase in burden hours (205 hours) is then divided by the total number of responses (5,586) for an increase in the average burden per response of 0.04 hours. 314 The increase in the average burden per response of 0.01 hours is calculated by multiplying the expected amount of time to provide this information (20 minutes) by the expected number of proposals submitted by a representative. We estimate that approximately 18% of proposals are submitted by a representative; thus, we multiply the average number of expected proposals after taking into account the reduction in proposals as a result VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 of the proposed amendments (615) by 18% for a total of 111 proposals submitted by a representative. The number of proposals (111) is multiplied by the estimated amount of time to provide this information (20 minutes) for a total of 37 hours. This increase in burden hours (37 hours) is then divided by the total number of responses (5,586) for an increase in the average burden per response of 0.01 hours. 315 See supra Section IV.C.2.i. We estimate that the decrease in the number of proposals could range from 0 to 0.4%. For purposes of the PRA, we assume an estimated decrease of 0.2%. 316 The reduction in the average burden per response of 0.04 hours is calculated by multiplying the expected reduction in proposals (0.2%) by the average number of proposals received between 1997 and 2018 (946) for a reduction in the total number of proposals of 2. This reduction in the number of proposals (2) is then multiplied by the estimated burden hours per proposal (107) for a total of 214 burden hours. This total number of burden hours (214) is then divided by the total number of responses (5,586) for a reduction in the average burden per response of 0.04 hours. 317 See supra Section IV.C.2.i. 318 The reduction in the average burden per response of 0.36 hours is calculated by multiplying the expected reduction in proposals (2%) by the average number of proposals received between 1997 and 2018 (946) for a reduction in the total number of proposals of 19. This reduction in the number of proposals (19) is then multiplied by the estimated burden hours per proposal (107) for a total of 2,033 burden hours. This total number of burden hours (2,033) is then divided by the total number of responses (5,586) for a reduction in the average burden per response of 0.36 hours. 319 See supra Section IV.C.2.iii, Table 9 for a discussion regarding the estimated decrease in resubmitted proposals. That discussion estimates that there would have been 269 additional excludable resubmitted proposals (212 attributable to the revised resubmission thresholds of 5%, 15%, and 25% and 57 attributable to the Momentum Requirement) between 2011 and 2018 out of a total of 1,442 resubmitted proposals under the proposed amendments. A total of 3,620 proposals were included in proxy statements during that period. Thus, the estimated reduction in the number of PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 66511 imposed by our rules that may be incurred by all parties involved in the proxy process leading up to and associated with the filing of a Schedule 14A. This would include both the time that a shareholder-proponent spends to prepare its proposals for inclusion in a company’s proxy statement, as well as the time that the company spends to respond to such proposals. Our incremental and aggregate reductions in paperwork burden as a result of the proposed amendments represent the average burden for all respondents, including shareholder-proponents and large and small registrants. In deriving our estimates, we recognize that the burdens would likely vary among individual proponents and registrants based on a number of factors, including the propensity of a particular shareholder-proponent to submit proposals, or the number of shareholder proposals received by a particular company, which may be related to its line of business or industry or other factors. shareholder proposals is estimated by dividing 269 by 3,620, which yields 7%. 320 The reduction in the average burden per response of 1.26 hours is calculated by multiplying the expected reduction in proposals (7%) by the average number of proposals received between 1997 and 2018 (946) for a reduction in the total number of proposals of 66. This reduction in the number of proposals (66) is then multiplied by the estimated burden hours per proposal (107) for a total of 7,062 burden hours. This total number of burden hours (7,062) is then divided by the total number of responses (5,586) for a reduction in the average burden per response of 1.26 hours. 321 (5.08 + 0.04 + 0.36 + 1.26)¥(0.04 + 0.01) = 6.69 hours decrease in average burden per response. E:\FR\FM\04DEP2.SGM 04DEP2 66512 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules As shown in PRA Table 1, the burden estimates were calculated by estimating the number of parties expected to expend time, effort, and/or financial resources to generate, maintain, retain, disclose or provide information required by the proposed amendments and then multiplying by the estimated amount of time, on average, each of these parties would devote in response to the proposed amendments. For purposes of the PRA, the burden is to be allocated between internal burden hours and outside professional costs. For Regulation 14A we estimate that 75% of the burden is carried by the company or the shareholder-proponent internally and that 25% of the burden of preparation is carried by outside professionals retained by the company or the shareholder-proponent at an average cost of $400 per hour.322 PRA TABLE 2—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES RESULTING FROM THE PROPOSED AMENDMENTS Number of estimated responses Burden hour reduction per response Reduction in burden hours for responses Reduction in internal hours for responses Reduction in professional hours for responses Reduction in professional costs for responses (A) 323 (B) (C) = (A) × (B) 324 (D) = (C) × 0.75 (E) = (C) × 0.25 (F) = (E) × $400 5,586 6.69 37,370 28,027 9,343 $3,737,200 The following table summarizes the requested paperwork burden, including the estimated total reporting burdens and costs, under the proposed amendments. PRA TABLE 3—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS Current burden Program change Current annual responses Current burden hours Current cost burden Number of affected responses Reduction in internal hours Reduction in professional costs Annual responses Burden hours Cost burden (A) (B) (C) (D) (E) 325 (F) 326 (G) = (A) (H) = (B)¥(E) (I) = (C)¥(F) 5,586 551,101 $73,480,012 5,586 28,027 $3,737,200 5,586 523,074 $69,742,812 Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order to: • Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; • Evaluate the accuracy and assumptions and estimates of the burden of the proposed collection of information; • Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; • Evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and • Evaluate whether the proposed amendments would have any effects on any other collection of information not previously identified in this section. Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons submitting comments on the collection of information requirements should direct their comments to the Office of Management and Budget, Attention: Desk Officer for the U.S. Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy to, Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File No. S7–23–19. Requests for materials submitted to OMB by the Commission with regard to the collection of information should be The Regulatory Flexibility Act (‘‘RFA’’) 327 requires the Commission, in promulgating rules under Section 553 of the Administrative Procedure Act, to consider the impact of those rules on small entities. The Commission has prepared this Initial Regulatory Flexibility Analysis (‘‘IRFA’’) in accordance with Section 603 of the 322 We recognize that the costs of retaining outside professionals may vary depending on the nature of the professional services, but for purposes of this PRA analysis, we estimate that such costs would be an average of $400 per hour. This estimate is based on consultations with several issuers, law firms, and other persons who regularly assist issuers in preparing and filing reports with the Commission. 323 The number of estimated affected responses is based on the number of responses in the Commission’s current OMB PRA filing inventory. The OMB PRA filing inventory represents a threeyear average. We do not expect that the proposed amendments will materially change the number of responses in the current OMB PRA filing inventory. 324 The estimated reductions in Columns (C), (D) and (E) are rounded to the nearest whole number. 325 From Column (D) in PRA Table 2. 326 From Column (F) in PRA Table 2. 327 5 U.S.C. 601 et seq. Request for Comment khammond on DSKJM1Z7X2PROD with PROPOSALS2 Requested change in burden VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 in writing, refer to File No. S7–23–19 and be submitted to the U.S. Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this proposed rule. Consequently, a comment to OMB is best assured of having its full effect if the OMB receives it within 30 days of publication. VI. Initial Regulatory Flexibility Act Analysis E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules RFA.328 This IRFA relates to proposed amendments to Rule 14a–8 of the Exchange Act. A. Reasons for, and Objectives of, the Proposed Action Rule 14a–8 facilitates the proxy process for shareholders seeking to have proposals considered at a company’s annual or special meeting; however, the burdens associated with this process are primarily borne by issuers. The proposed amendments are intended to balance shareholders’ ability to submit proposals with the attendant burdens for companies and other shareholders associated with the inclusion of such proposals in a company’s proxy statement. The reasons for, and objectives of, the proposed amendments are discussed in more detail in Sections I and II, above. B. Legal Basis We are proposing amendments to the rules under the authority set forth in Sections 3(b), 14 and 23(a) of the Securities Exchange Act of 1934, as amended. C. Small Entities Subject to the Proposed Rules The proposed amendments would affect some small entities that are either: (i) Shareholder-proponents that submit Rule 14a–8 proposals, or (ii) issuers subject to the federal proxy rules that receive Rule 14a–8 proposals. The RFA defines ‘‘small entity’’ to mean ‘‘small business,’’ ‘‘small organization’’ or ‘‘small governmental jurisdiction.’’ 329 The definition of ‘‘small entity’’ does not include individuals. For purposes of the RFA, under our rules, an issuer of securities or a person, other than an investment company, is a ‘‘small business’’ or ‘‘small organization’’ if it had total assets of $5 million or less on the last day of its most recent fiscal year.330 We estimate that there are approximately 881 issuers that are subject to the federal proxy rules, other than investment companies, that may be considered small entities. We are unable to estimate the number of potential shareholder-proponents that may be considered small entities; 331 therefore, khammond on DSKJM1Z7X2PROD with PROPOSALS2 328 5 U.S.C. 603. U.S.C. 601(6). 330 17 CFR 240.0–10(a). 331 For the purposes of our Economic Analysis, we have estimated that there were 22,162,828 retail accounts that held shares of U.S. public companies during calendar year 2017. There were 170 unique proponents that submitted proposals that were included in a company’s proxy statement as lead proponent or co-proponent during calendar year 2018. See supra Section IV.B.2. Out of these 170 unique proponents, 38 were individuals and 132 were non-individuals. Thus, no more than 132 of 329 5 VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 we request comment on the number of these small entities. D. Projected Reporting, Recordkeeping and Other Compliance Requirements As noted above, the primary purpose of the proposed amendments is to balance shareholders’ ability to submit proposals with the attendant burdens for companies and other shareholders associated with the inclusion of such proposals. If adopted, the proposed amendments would likely reduce the number of proposals required to be included in the proxy statements of issuers subject to the federal proxy rules, including small entities. In turn, the proposed amendments would likely reduce the costs to these issuers of complying with Rule 14a–8. If adopted, the proposed amendments may reduce the number of proposals that shareholder-proponents that are small entities would be permitted to submit to issuers for inclusion in their proxy statements. In turn, these small entities may experience an increase in shareholder-engagement costs to the extent these small entities elect to increase their investment to meet the eligibility criteria or pursue alternatives methods of engagement, such as conducting their own proxy solicitation. The proposed amendments that would require shareholder-proponents to provide written documentation regarding their ability to meet with the issuer and relating to the appointment of a representative would slightly increase the compliance burden for shareholder-proponents, including those that are small entities.332 Compliance with the proposed amendments may require the use of professional skills, including legal skills. The proposed amendments are discussed in detail in Section II, above. We discuss the economic impact, including the estimated costs and benefits, of the proposed rule to all affected entities, including small entities, in Section IV and Section V, above. E. Duplicative, Overlapping or Conflicting Federal Rules We believe that the proposed amendments would not duplicate, overlap or conflict with other federal rules. F. Significant Alternatives The Regulatory Flexibility Act directs us to consider alternatives that would accomplish our stated objectives, while these unique proponents would be considered small entities. 332 See supra Section V.B. PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 66513 minimizing any significant adverse impact on small entities. In connection with the proposed amendments, we considered the following alternatives: • Establishing different compliance or reporting requirements that take into account the resources available to small entities; • Clarifying, consolidating, or simplifying compliance and reporting requirements under the rules for small entities; • Using performance rather than design standards; and • Exempting small entities from all or part of the requirements. Rule 14a–8 generally does not impose different standards or requirements based on the size of the issuer or shareholder-proponent. We do not believe that establishing different compliance or reporting obligations in conjunction with the proposed amendments or exempting small entities from all or part of the requirements is necessary. We believe the proposed amendments are equally appropriate for shareholder-proponents of all sizes seeking to engage with issuers through the Rule 14a–8 process. While we do anticipate a moderate increase in burden for shareholder-proponents, we do not believe that imposing different standards or requirements based on the size of the shareholder-proponent will accomplish the purposes of the proposed amendments, and may result in additional costs associated with ascertaining whether a particular shareholder-proponent may avail itself of such different standards. For issuers, the proposed amendments would not impose any significant new compliance obligations. To the contrary, the proposed amendments would reduce the compliance costs of affected issuers, including small entities, by decreasing the number of shareholder proposals that may be submitted. For these reasons, we are not proposing differing compliance or reporting requirements or timetables for issuers that are small entities, or an exception for small entities. However, we seek comment on whether and how the proposed amendments could be modified to provide differing compliance or reporting requirements or timetables for small entities and whether such separate requirements would be appropriate. We believe that the proposed amendments do not need further clarification, consolidation or simplification for small entities, although we solicit comment on how the proposed amendments could be revised to reduce the burden on small entities. E:\FR\FM\04DEP2.SGM 04DEP2 66514 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules The proposed amendments generally use design standards rather than performance standards in order to promote uniform submission requirements for all shareholderproponents. We solicit comment as to whether there are aspects of the proposed amendments for which performance standards would be appropriate. khammond on DSKJM1Z7X2PROD with PROPOSALS2 G. Request for Comment We encourage the submission of comments with respect to any aspect of this IRFA. In particular, we request comments regarding: • How the proposed rule and form amendments can achieve their objective while lowering the burden on small entities; • The number of small entities, including shareholder-proponents, that may be affected by the proposed amendments; • The existence or nature of the potential impact of the proposed amendments on small entities discussed in the analysis; and • How to quantify the impact of the proposed amendments. Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. Comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if the proposed amendments are adopted, and will be placed in the same public file as comments on the proposed amendments themselves. VII. Small Business Regulatory Enforcement Fairness Act For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),333 the Commission must advise OMB as to whether the proposed amendments constitute a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results or is likely to result in: • An annual effect on the U.S. economy of $100 million or more (either in the form of an increase or a decrease); • A major increase in costs or prices for consumers or individual industries; or • Significant adverse effects on competition, investment, or innovation. We request comment on whether the proposed amendments would be a ‘‘major rule’’ for purposes of SBREFA. In particular, we request comment on the potential effect of the proposed amendments on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or 333 5 U.S.C. 801 et seq. VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 to continue to hold the requisite amount of securities, determined in accordance with § 240.14a–8(b)(1)(i)(A) through (C), through the date of the shareholders’ meeting for which the proposal is submitted; and (iii) You must provide the company VIII. Statutory Authority with a written statement that you are The amendments contained in this able to meet with the company in release are being proposed under the person or via teleconference no less authority set forth in Sections 3(b), 14 than 10 calendar days, nor more than 30 and 23(a) of the Exchange Act, as calendar days, after submission of the amended. shareholder proposal. You must include contact information as well as business List of Subjects in 17 CFR Part 240 days and specific times that you are Reporting and recordkeeping available to discuss the proposal with requirements, Securities. the company; and (iv) If you use a representative to Text of the Proposed Amendments submit a shareholder proposal and/or In accordance with the foregoing, the Commission is proposing to amend title otherwise act on your behalf in connection with the shareholder 17, chapter II of the Code of Federal proposal, you must provide the Regulations as follows: company with written documentation that: PART 240—GENERAL RULES AND (A) Identifies the company to which REGULATIONS, SECURITIES the proposal is directed; EXCHANGE ACT OF 1934 (B) Identifies the annual or special ■ 1. The general authority citation for meeting for which the proposal is part 240 continues to read as follows: submitted; (C) Identifies you as the proponent Authority: 15 U.S.C. 77c, 77d, 77g, 77j, and identifies the person acting on your 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, behalf as your representative; 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, (D) Includes your statement 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, authorizing the designated 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, representative to submit the proposal 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– and/or otherwise act on your behalf; 3, 80b–4, 80b–11, and 7201 et seq., and 8302; (E) Identifies the specific proposal to 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. be submitted; (F) Includes your statement 1376 (2010); and Pub. L. 112–106, sec. 503 supporting the proposal; and and 602, 126 Stat. 326 (2012), unless otherwise noted. (G) Is signed and dated by you. (v) For purposes of paragraph * * * * * (b)(1)(i)(A) through (C), you may not ■ 2. Amend § 240.14a–8 as follows: ■ a. Revise paragraphs (b)(1) and (2); aggregate your holdings with those of ■ b. Revise paragraph (c); and another shareholder to meet the ■ c. Revise paragraph (i)(12). requisite amount of securities. The revisions read as follows: (2) The following methods may be used to demonstrate eligibility to submit § 240.14a–8 Shareholder proposals. a proposal: * * * * * (i) If you are the registered holder of (b) * * * your securities, which means that your (1) To be eligible to submit a proposal, name appears in the company’s records you must satisfy the following as a shareholder, the company can requirements: verify your eligibility on its own, (i) You must have continuously held: although you will still have to provide (A) At least $2,000 in market value of the company’s securities entitled to vote the company with a written statement that you intend to continue to hold the on the proposal for at least three years; requisite amount of securities, or determined in accordance with (B) At least $15,000 in market value § 240.14a–8(b)(1)(i)(A) through (C), of the company’s securities entitled to through the date of the meeting of vote on the proposal for at least two shareholders. years; or (ii) If, like many shareholders, you are (C) At least $25,000 in market value not a registered holder, the company of the company’s securities entitled to likely does not know that you are a vote on the proposal for at least one shareholder, or how many shares you year; and own. In this case, at the time you submit (ii) You must provide the company with a written statement that you intend your proposal, you must prove your individual industries; and any potential effect on competition, investment or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 E:\FR\FM\04DEP2.SGM 04DEP2 Federal Register / Vol. 84, No. 233 / Wednesday, December 4, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 eligibility to the company in one of two ways: (A) The first way is to submit to the company a written statement from the ‘‘record’’ holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held at least $2,000, $15,000, or $25,000 in market value of the company’s securities entitled to vote on the proposal for at least three years, two years, or one year, respectively. You must also include your own written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with § 240.14a–8(b)(1)(i)(A) through (C), through the date of the meeting of shareholders; or (B) The second way to prove ownership applies only if you were required to file, and filed, a Schedule 13D (§ 240.13d–101), Schedule 13G (§ 240.13d–102), Form 3 (§ 249.103 of this chapter), Form 4 (§ 249.104 of this chapter), and/or Form 5 (§ 249.105 of this chapter), or amendments to those documents or updated forms, demonstrating that you meet at least one of the share ownership requirements under § 240.14a–8(b)(1)(i)(A) through (C). If you have filed one or more of these documents with the SEC, you may demonstrate your eligibility to submit a proposal by submitting to the company: VerDate Sep<11>2014 21:52 Dec 03, 2019 Jkt 250001 (1) A copy of the schedule(s) and/or form(s), and any subsequent amendments reporting a change in your ownership level; (2) Your written statement that you continuously held at least $2,000, $15,000, or $25,000 in market value of the company’s securities entitled to vote for at least three years, two years, or one year, respectively; and (3) Your written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with § 240.14a–8(b)(1)(i)(A) through (C), through the date of the company’s annual or special meeting. (c) Question 3: How many proposals may I submit? Each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders’ meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders’ meeting. * * * * * (i) * * * (12)(i) Resubmissions. If the proposal addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding PO 00000 Frm 00059 Fmt 4701 Sfmt 9990 66515 three calendar years and the most recent vote was: (A) Less than 5 percent of the votes cast if previously voted on once; (B) Less than 15 percent of the votes cast if previously voted on twice; or (C) Less than 25 percent of the votes cast if previously voted on three or more times. (ii) A proposal that is not excludable under § 240.14a–8(i)(12)(i)(C) may nevertheless be omitted if it deals with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years if, at the time of the most recent shareholder vote, the proposal: (A) Received less than 50 percent of the votes cast; and (B) The percentage of votes cast declined by 10 percent or more compared to the immediately preceding shareholder vote on substantially the same subject matter. * * * * * By the Commission. Dated: November 5, 2019. Vanessa A. Countryman, Secretary. [FR Doc. 2019–24476 Filed 12–3–19; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\04DEP2.SGM 04DEP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 233 (Wednesday, December 4, 2019)]
[Proposed Rules]
[Pages 66458-66515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24476]



[[Page 66457]]

Vol. 84

Wednesday,

No. 233

December 4, 2019

Part II





 Securities and Exchange Commission





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17 CFR Part 240





Procedural Requirements and Resubmission Thresholds Under Exchange Act 
Rule 14a-8; Proposed Rule

Federal Register / Vol. 84 , No. 233 / Wednesday, December 4, 2019 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-87458; File No. S7-23-19]
RIN 3235-AM49


Procedural Requirements and Resubmission Thresholds Under 
Exchange Act Rule 14a-8

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing to amend certain procedural requirements and 
the provision relating to resubmitted proposals under the shareholder-
proposal rule. The proposed amendments to the procedural requirements 
would replace the current ownership requirements with a tiered approach 
that would provide three options for demonstrating an ownership stake 
through a combination of amount of securities owned and length of time 
held; require certain documentation to be provided when a proposal is 
submitted on behalf of a shareholder-proponent; require shareholder-
proponents to state when they would be able to meet with the company in 
person or via teleconference to engage with the company with respect to 
the proposal; and provide that a person may submit no more than one 
proposal, directly or indirectly, for the same shareholders' meeting. 
The proposed amendments to the resubmission thresholds would raise the 
current resubmission thresholds of 3, 6, and 10 percent to 5, 15, and 
25 percent, respectively; and add a new provision that would allow 
companies to exclude proposals under certain circumstances where 
shareholder support for the matter has declined.

DATES: Comments should be received on or before February 3, 2020.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/concept.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-23-19 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-23-19. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on our website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing 
and printing in the Commission's Public Reference Room, 100 F Street 
NE, Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make publicly 
available.
    We or the staff may add studies, memoranda, or other substantive 
items to the comment file during this rulemaking. A notification of the 
inclusion in the comment file of any such materials will be made 
available on our website. To ensure direct electronic receipt of such 
notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Matt McNair, Senior Special Counsel in 
the Office of Chief Counsel, at (202) 551-3500, Division of Corporation 
Finance, U.S. Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR 
240.14a-8 (``Rule 14a-8'') under the Securities Exchange Act of 1934 
[15 U.S.C. 78a et seq.] (``Exchange Act'').

Table of Contents

I. Introduction
    A. Background
    B. Roundtable on the Proxy Process
II. Discussion of Proposed Amendments
    A. Rule 14a-8(b)--Eligibility Requirements
    1. Relevant History and Background of Rule 14a-8(b)
    2. Public Views on Rule 14a-8(b)
    3. Need for Proposed Amendments
    4. Proposed Amendments
    B. Proposals Submitted on Behalf of Shareholders
    1. Background
    2. Proposed Amendments
    C. The Role of the Shareholder-Proposal Process in Shareholder 
Engagement
    1. Background
    2. Proposed Amendment
    D. One-Proposal Limit
    1. Background
    2. Proposed Amendment
    E. Rule 14a-8(i)(12)--Resubmissions
    1. Relevant History and Background of Rule 14a-8(i)(12)
    2. Public Views on Rule 14a-8(i)(12)
    3. Need for Proposed Amendments
    4. Proposed Amendments
III. General Request for Comment
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Current Regulatory Framework
    2. Affected Entities
    3. Current Practices
    C. Benefits and Costs and Effects on Efficiency, Competition, 
and Capital Formation of Proposed Rule Amendments
    1. General Economic Considerations Relevant to Shareholder 
Proposals
    2. General Economic Effects of the Proposed Amendments
    3. Benefits and Costs of the Proposed Amendments
    4. Effects of Proposed Amendments on Efficiency, Competition, 
and Capital Formation
    D. Reasonable Alternatives
    1. Shareholder Ownership Thresholds
    2. Shareholder Resubmission Thresholds
    E. Request for Comment
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of the Proposed Amendments' Effects on the 
Collections of Information
    C. Incremental and Aggregate Burden and Cost Estimates for the 
Proposed Amendments
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority

I. Introduction

A. Background

    Under state corporate law, shareholders have the right to vote 
their shares to elect directors and to approve or reject major 
corporate transactions at shareholder meetings, and shareholders may 
appoint proxies to vote on their behalf at such meetings.\1\ Because 
most shareholders do not attend public company shareholder meetings in 
person and, instead, vote their shares by the use of proxies that are 
solicited before the shareholder meeting takes place, the proxy 
solicitation process rather than the shareholder meeting

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itself has become the ``forum for shareholder suffrage.'' \2\
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    \1\ See Concept Release on the U.S. Proxy System, Release No. 
34-62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)], at 42984 
(``Proxy Plumbing Release'').
    \2\ See Proposed Amendments to Rule 14a-8, Release No. 34-19135 
(Oct. 14, 1982) [47 FR 47420 (Oct. 26, 1982)], at 47420-21 (``1982 
Proposing Release''); Proxy Plumbing Release, supra note 1, at 
42984; Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F.2d 416, 
422 (D.C. Cir. 1992) (quoting 1982 Proposing Release).
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    Issuers with a class of securities registered under Section 12 of 
the Securities Exchange Act of 1934 (``Exchange Act'') and issuers that 
are registered under the Investment Company Act of 1940 (``Investment 
Company Act'') are generally required to comply with the federal proxy 
rules in Regulation 14A when soliciting proxies from shareholders.\3\ 
These rules include the requirement that issuers publicly file and 
provide shareholders with a proxy statement containing certain 
information. Individual shareholders and other persons may also solicit 
proxies in support of proposals that a shareholder wishes to present 
for a vote at a shareholder meeting. Such solicitations must also 
generally comply with the federal proxy rules.
---------------------------------------------------------------------------

    \3\ Foreign private issuers are exempt from the federal proxy 
rules. See 17 CFR 240.3a12-3(b). In addition, debt securities 
registered under Section 12(b) are exempt from the federal proxy 
rules, with some exceptions. See 17 CFR 240.3a12-11(b).
---------------------------------------------------------------------------

    Rule 14a-8 requires companies that are subject to the federal proxy 
rules to include shareholder proposals in their own proxy statements to 
shareholders, subject to certain procedural and substantive 
requirements.\4\ By giving shareholder-proponents the ability to have 
their proposals included alongside management's in the company's proxy 
statement, Rule 14a-8 enables shareholder-proponents to easily present 
their proposals to all other shareholders, and to have proxies 
solicited for their proposals, at little or no expense to themselves. 
The rule, the concept of which was first adopted by the Commission in 
1942, thus facilitates shareholders' traditional ability under state 
law to present their own proposals for consideration at a company's 
annual or special meeting, and it facilitates the ability of all 
shareholders to consider and vote on such proposals.\5\
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    \4\ Unless otherwise noted, references to ``shareholder 
proposal,'' ``shareholder proposals,'' ``proposal,'' or 
``proposals'' refer to submissions made in reliance on Rule 14a-8.
    \5\ See, e.g., Securit[ies] and Exchange Commission Proxy Rules: 
Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House 
Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 17-
19 (1943) (Statement of the Honorable Ganson Purcell, Chairman, 
Securities and Exchange Commission) (explaining the initial 
Commission rules requiring the inclusion of shareholder proposals in 
company proxy materials: ``We give [a stockholder] the right in the 
rules to put his proposal before all of his fellow stockholders 
along with all other proposals . . . so that they can see then what 
they are and vote accordingly. . . . The rights that we are 
endeavoring to assure to the stockholders are those rights that he 
has traditionally had under State law, to appear at the meeting; to 
make a proposal; to speak on that proposal at appropriate length; 
and to have his proposal voted on.'').
---------------------------------------------------------------------------

    However, this mechanism for shareholders to require inclusion of 
their proposals in companies' proxy materials is not without limits. 
Rule 14a-8 permits a company to exclude a shareholder proposal from its 
proxy statement if the proposal fails to meet any of several specified 
substantive requirements, or if the shareholder-proponent does not 
satisfy certain eligibility or procedural requirements. All of these 
requirements are generally designed to ensure that the ability under 
Rule 14a-8 for a shareholder to have a proposal included alongside 
management's in the company's proxy materials--and thus to draw upon 
company resources and to command the time and attention of other 
shareholders--is not excessively or inappropriately used.\6\
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    \6\ The Commission has expressed recurring concern over the 
years that Rule 14a-8 is susceptible to misuse. In 1948, the 
Commission adopted three new bases for exclusion to ``relieve the 
management of harassment in cases where [shareholder] proposals are 
submitted for the purpose of achieving personal ends rather than for 
the common good of the issuer and its security holders.'' See Notice 
of Proposal to Amend Proxy Rules, Release No. 34-4114 (July 6, 1948) 
[13 FR 3973 (Jul. 14, 1948)], at 3974 (``1948 Proposing Release''). 
In 1953, the Commission amended the shareholder-proposal rule to 
allow companies to omit the name and address of the shareholder-
proponent to ``discourage the use of this rule by persons who are 
motivated by a desire for publicity rather than the interests of the 
company and its security holders.'' See Notice of Proposed 
Amendments to Proxy Rules, Release No. 34-4950 (Oct. 9, 1953) [18 FR 
6646 (Oct. 20, 1953)], at 6647. In amending the resubmission basis 
for exclusion in 1983, the Commission noted that commenters ``felt 
that it was an appropriate response to counter the abuse of the 
security holder proposal process by certain proponents who make 
minor changes in proposals each year so that they can keep raising 
the same issue despite the fact that other shareholders have 
indicated by their votes that they are not interested in that 
issue.'' See Amendments to Rule 14a-8 Under the Securities Exchange 
Act of 1934 Relating to Proposals by Security Holders, Release No. 
34-20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)], at 38221 
(``1983 Adopting Release''). In addressing the personal-grievance 
basis for exclusion in 1982, the Commission noted that ``[t]here has 
been an increase in the number of proposals used to harass issuers 
into giving the proponent some particular benefit or to accomplish 
objectives particular to the proponent.'' See 1982 Proposing 
Release, supra note 2, at 47427.
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    A proposal may be excluded if the rule's procedural requirements 
are not satisfied. These rules set forth the level of share ownership 
necessary to be eligible to submit a proposal, the number of proposals 
that a shareholder may submit for a particular shareholders' meeting, 
the proposal's permitted length and the deadline for submitting 
proposals.
    The substantive requirements permit a company to exclude a proposal 
if the proposal would violate applicable law; would violate the proxy 
rules; relates to a proponent's personal grievance or personal 
interest; is not significantly related to the company's business; is 
not capable of being implemented by the company; deals with matters 
relating to the company's ordinary business operations; or has already 
been substantially implemented, among other grounds. Proponents and 
companies do not always agree on the application of these exclusions. 
Accordingly, if a company intends to exclude a shareholder proposal 
from its proxy materials on these grounds or any other ground, it is 
required under Rule 14a-8(j) to ``file its reasons'' for doing so with 
the Commission. These notifications are generally submitted in the form 
of a no-action request seeking the staff's concurrence that they may 
exclude a shareholder proposal under one or more of the procedural or 
substantive bases under Rule 14a-8. The staff of the Divisions of 
Corporation Finance and Investment Management, as a convenience to both 
companies and shareholder-proponents, has for many years engaged in the 
informal practice of expressing whether the staff would recommend 
enforcement action to the Commission if a company excludes a proposal 
from its proxy materials. This is done to provide guidance as to the 
staff's views and to assist both companies and shareholder-proponents 
in complying with the federal proxy rules.
    We are proposing modifications to, and seeking public comment on, 
two of the rule's procedural requirements and one of its substantive 
requirements.
    The first proposed amendment is to Rule 14a-8(b), which establishes 
the eligibility requirements a shareholder-proponent must satisfy to 
have a proposal included in a company's proxy statement. Under the 
current rule, to be eligible to submit a proposal, a shareholder-
proponent must have continuously held at least $2,000 in market value 
or 1 percent of the company's securities entitled to be voted on the 
proposal at the meeting for at least one year by the date the proposal 
is submitted.\7\ The $2,000 ownership threshold was last substantively 
reviewed and updated by the Commission in 1998.\8\
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    \7\ 17 CFR 240.14a-8(b)(1).
    \8\ See Amendments To Rules On Shareholder Proposals, Release 
No. 34-40018 (May 21, 1998) [63 FR 29106 (May 28, 1998)] (``1998 
Adopting Release'').

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[[Page 66460]]

    The second proposed amendment is to Rule 14a-8(c), which provides 
that each shareholder may submit no more than one proposal to a company 
for a particular shareholders' meeting.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.14a-8(c).
---------------------------------------------------------------------------

    The third proposed amendment is to Rule 14a-8(i)(12), which allows 
companies to exclude a shareholder proposal that ``deals with 
substantially the same subject matter as another proposal or proposals 
that has or have been previously included in the company's proxy 
materials within the preceding 5 calendar years'' if the matter was 
voted on at least once in the last three years and did not receive at 
least:
    (i) 3 percent of the vote if previously voted on once;
    (ii) 6 percent of the vote if previously voted on twice; or
    (iii) 10 percent of the vote if previously voted on three or more 
times.\10\
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    \10\ 17 CFR 240.14a-8(i)(12).
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    These resubmission thresholds have been in place since 1954 \11\ 
and, like the ownership thresholds in Rule 14a-8(b), were last 
substantively reviewed by the Commission in 1998.\12\
---------------------------------------------------------------------------

    \11\ See Adoption of Amendments to Proxy Rules, Release No. 34-
4979 (Jan. 6, 1954) [19 FR 246 (Jan. 14, 1954)] (``1954 Adopting 
Release'').
    \12\ See 1998 Adopting Release, supra note 8. The Commission 
sought public comment on the ownership and resubmission requirements 
in 2007 in connection with a proposed rule on proxy access, but 
these requirements have not been substantively revisited since 1998. 
See Shareholder Proposals, Release No. 34-56160 (Jul. 27, 2007) [72 
FR 43488 (Aug. 3, 2007)] (``2007 Proxy Access Proposing Release'').
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B. Roundtable on the Proxy Process

    On November 15, 2018, the Commission's staff held a roundtable on 
the proxy process (``Proxy Process Roundtable''), which included a 
panel discussion on Rule 14a-8 and the shareholder-proposal process. 
The shareholder-proposal panelists expressed their views on the 
application of Rule 14a-8 and shared their experiences with shareholder 
proposals and the related benefits and costs involved for companies and 
shareholders. Among the topics addressed were ownership and 
resubmission thresholds under Rule 14a-8(b) and Rule 14a-8(i)(12), 
respectively, and the extent to which these thresholds are in need of 
updating.
    Panelists from the issuer community recommended revising the 
ownership and/or resubmission thresholds,\13\ while the panelists who 
have submitted shareholder proposals generally opposed revisions to 
these rules.\14\ Among those favoring changes to these thresholds, 
several cited the costs to companies and their shareholders as a 
primary basis for raising ownership and/or resubmission thresholds.\15\ 
Among those who support the current thresholds, one panelist stated 
that Rule 14a-8 already appropriately balances the costs and benefits 
of the shareholder-proposal process,\16\ and another panelist suggested 
that Rule 14a-8 is currently a cost-effective mechanism that 
facilitates private ordering.\17\
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    \13\ See Transcript of the Roundtable on the Proxy Process (Nov. 
15, 2018) (``Roundtable Transcript''), available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf, comments 
of Ning Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell 
LLP; Maria Ghazal, Senior Vice President, Business Roundtable; Tom 
Quaadman, Executive Vice President, U.S. Chamber of Commerce Center 
for Capital Markets Competitiveness; and Dannette Smith, Secretary 
to the Board of Directors and Senior Deputy General Counsel, 
UnitedHealth Group.
    \14\ See Roundtable Transcript, supra note 13, comments of 
Michael Garland, Assistant Comptroller, Corporate Governance and 
Responsible Investment, Office of the Comptroller, New York City; 
Jonas Kron, Senior Vice President and Director of Shareholder 
Advocacy, Trillium Asset Management; Aeisha Mastagni, Portfolio 
Manager, Corporate Governance Unit, California State Teachers' 
Retirement System; James McRitchie, Publisher, CorpGov.net; and 
Brandon Rees, Deputy Director of Corporations and Capital Markets, 
American Federation of Labor and Congress of Industrial 
Organizations.
    \15\ See Roundtable Transcript, supra note 13, comments of Ning 
Chiu, Counsel, Capital Markets Group, Davis Polk & Wardwell LLP, at 
127; Tom Quaadman, Executive Vice President, U.S. Chamber of 
Commerce Center for Capital Markets Competitiveness, at 136; and 
Dannette Smith, Secretary to the Board of Directors and Senior 
Deputy General Counsel, UnitedHealth Group, at 148-49.
    \16\ See Roundtable Transcript, supra note 13, comments of 
Aeisha Mastagni, Portfolio Manager, Corporate Governance Unit, 
California State Teachers' Retirement System, at 134.
    \17\ See Roundtable Transcript, supra note 13, comments of Jonas 
Kron, Senior Vice President and Director of Shareholder Advocacy, 
Trillium Asset Management, at 124.
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    In connection with the Proxy Process Roundtable, the staff invited 
members of the public to provide their views on the proxy process via 
written comments.\18\ We received many comment letters addressing Rule 
14a-8. Some of these commenters recommended raising the ownership and/
or resubmission thresholds,\19\ while others were supportive of the 
current thresholds.\20\ Several commenters expressed concern about the 
costs associated with

[[Page 66461]]

management's consideration of a proposal and/or its inclusion in the 
proxy statement.\21\ Two commenters cited an estimate indicating an 
average cost to companies of $87,000 per shareholder proposal,\22\ 
another commenter estimated its cost at more than $100,000 per 
proposal,\23\ and another commenter cited a cost of approximately 
$150,000 per proposal.\24\ Other commenters suggested the costs to 
companies are low and noted that most companies receive few, if any, 
shareholder proposals.\25\ Some commenters expressed concern that a 
large number of proposals are submitted by a small number of 
individuals who own nominal stakes in the companies to which they 
submit proposals.\26\ One commenter disagreed with this concern because 
proposals submitted by these individuals between 2004 and 2017 received 
an average level of support of 40 percent and, in the commenter's 
opinion, this level of support ``indicates these filers provide a 
valuable service to fellow shareholders by promoting good corporate 
governance.'' \27\
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    \18\ Comment letters related to the Proxy Process Roundtable are 
available at https://www.sec.gov/comments/4-725/4-725.htm.
    \19\ See letters in response to the Proxy Process Roundtable 
from Advent Capital Management, LLC dated July 29, 2019; American 
Securities Association dated June 7, 2019; Braemar Hotels & Resorts 
Inc. dated January 4, 2019; Business Roundtable dated June 3, 2019; 
U.S. Chamber of Commerce Center for Capital Markets Competitiveness 
dated November 12, 2018 and December 20, 2018; Center on Executive 
Compensation dated August 1, 2018; Chevron Corporation dated August 
20, 2019; Exxon Mobil Corporation dated July 26, 2019; Group 1 
Automotive, Inc. dated January 11, 2019; Institute for Policy 
Innovation dated October 11, 2018; Investment Company Institute 
dated March 15, 2019; National Association of Manufacturers dated 
October 30, 2018; Nareit dated November 12, 2018; Nasdaq, Inc. dated 
November 14, 2018; Nasdaq, Inc. et al. dated February 4, 2019; 
Society for Corporate Governance dated November 9, 2018; The Capital 
Group Companies, Inc. dated November 14, 2018; The Vanguard Group 
dated September 20, 2019; Tyler Technologies, Inc. dated September 
20, 2019.
    \20\ See letters in response to the Proxy Process Roundtable 
from Addenda Capital et al. dated November 13, 2018; Adrian 
Dominican Sisters dated December 11, 2018; American Federation of 
Labor and Congress of Industrial Organizations dated November 9, 
2018; Anonymous (19 commenters); California Public Employees' 
Retirement System dated December 11, 2018; California State 
Teachers' Retirement System dated November 30, 2018; City of New 
York Office of the Comptroller dated January 2, 2019; Conference for 
Corporate Responsibility Indiana and Michigan dated December 4, 
2018; Council of Institutional Investors dated January 31, 2019; 
Theodore S. Cochrane dated January 2, 2019; Congregation of Sisters 
of St. Agnes dated December 4, 2018; Congregation of St. Basil dated 
December 3, 2018; CtW Investment Group dated January 16, 2019; Dana 
Investment Advisors dated November 30, 2018; Decatur Capital 
Management Inc. dated August 13, 2019; Dominican Sisters Grand 
Rapids dated December 2, 2018; Dominican Sisters of Springfield 
Illinois dated December 3, 2018; The Episcopal Church received 
December 11, 2018; Everence Financial dated December 6, 2018; FAIRR 
Initiative dated December 4, 2018; Franciscan Sisters of Perpetual 
Adoration dated December 5, 2018; Glass Lewis dated November 14, 
2018; Green Century Capital Management, Inc. dated December 5, 2018; 
Interfaith Center on Corporate Responsibility dated November 6, 
2018; Investor Voice, SPC dated November 14, 2018; Jantz Management 
LLC dated October 7, 2019; Jesuit Committee on Investment 
Responsibility dated December 10, 2018; Loring, Wolcott & Coolidge 
dated December 4, 2018; James McRitchie received November 27, 2018 
and August 22, 2019; Mercy Investment Services, Inc. dated December 
3, 2018; MFS Investment Management dated November 14, 2018; Midwest 
Coalition for Responsible Investment dated December 6, 2018; 
Missionary Oblates of Mary Immaculate dated December 12, 2018; 
Morningstar, Inc. dated December 17, 2018; NorthStar Asset 
Management, Inc. dated December 4, 2018; Pax World Funds dated 
November 9, 2018; Pension Investment Association of Canada dated 
April 17, 2019; Praxis Mutual Funds dated December 6, 2018; 
Presbyterian Church U.S.A. dated November 13, 2018; Priests of the 
Sacred Heart dated December 3, 2018; Province of St. Joseph of the 
Capuchin Order dated December 3, 2018; Racine Dominicans dated 
December 5, 2018; Robert E. Rutkowski dated November 15, 2018; 
Shareholder Rights Group dated September 17, 2018; Sisters of 
Charity--Halifax dated December 5, 2018; Sisters of St. Joseph of 
Orange dated December 18, 2018; Sisters of the Holy Cross dated 
December 10, 2018; Sisters of the Presentation of the Blessed Virgin 
Mary dated December 3, 2018; State of New York Office of the State 
Comptroller dated November 13, 2018; Trinity Health dated November 
9, 2018; US SIF dated November 9, 2018; ValueEdge Advisors dated 
July 17, 2019; Washington State Investment Board dated November 14, 
2018; Kyle Wright dated December 4, 2018.
    \21\ See, e.g., letters in response to the Proxy Process 
Roundtable from American Securities Association dated June 7, 2019; 
Blackrock, Inc. dated November 16, 2018; Business Roundtable dated 
November 9, 2018; Exxon Mobil Corporation dated July 26, 2019; 
Nasdaq, Inc. dated November 14, 2018; Society for Corporate 
Governance dated November 9, 2018.
    \22\ See letters in response to the Proxy Process Roundtable 
from Blackrock, Inc. dated November 16, 2018; Society for Corporate 
Governance dated November 9, 2018.
    \23\ See letter in response to the Proxy Process Roundtable from 
Exxon Mobil Corporation dated July 26, 2019.
    \24\ See letter in response to the Proxy Process Roundtable from 
the American Securities Association dated June 7, 2019 (citing H.R. 
Rep No. 115-904, at 2 (2018)).
    \25\ See, e.g., letters in response to the Proxy Process 
Roundtable from Council of Institutional Investors dated November 8, 
2018 (citing Ceres et al., The Business Case for the Current SEC 
Shareholder Proposal Process 11-12 (2017), available at https://www.ussif.org/files/Public_Policy/Comment_Letters/Business%20Case%20for%2014a-8.pdf (``Ceres Business Case'')); 
Addenda Capital et al. dated November 13, 2018 (citing Adam M. 
Kanzer, The Dangerous ``Promise of Market Reform'': No Shareholder 
Proposals, Harvard Law School Forum on Corporate Governance and 
Financial Regulation (Jun. 15, 2017), available at https://corpgov.law.harvard.edu/2017/06/15/the-dangerous-promise-of-market-reform-no-shareholder-proposals/).
    \26\ See, e.g., letters in response to the Proxy Process 
Roundtable from Business Roundtable dated November 9, 2018; Center 
on Executive Compensation dated August 1, 2018.
    \27\ See letter in response to the Proxy Process Roundtable from 
Mercy Investment Services, Inc. dated December 3, 2018.
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    Below we discuss the proposed amendments to Rule 14a-8, which have 
been informed by the public input we have received, including in 
response to the Proxy Process Roundtable. We welcome feedback and 
encourage interested parties to submit comments on any or all aspects 
of the proposed amendments. When commenting, it would be most helpful 
if you include the reasoning behind your position or recommendation.

II. Discussion of Proposed Amendments

A. Rule 14a-8(b)--Eligibility Requirements

1. Relevant History and Background of Rule 14a-8(b)
    At the time the shareholder-proposal rule was initially adopted, a 
shareholder-proponent's eligibility to submit a proposal was not 
conditioned on owning a minimum amount of a company's securities, or 
holding the securities for a specified period of time. Instead, the 
rule enabled ``a qualified security holder'' to submit a proposal for 
inclusion in the company's proxy materials.\28\ In 1947, the rule text 
was revised to specify that ``any security holder entitled to vote at a 
meeting of security holders of the issuer'' could submit a 
proposal.\29\ In 1976, the Commission considered, but decided not to 
adopt, minimum ownership requirements, believing that there was not 
``sufficient justification'' at that time for such requirements because 
the existing eligibility requirements ``have not been abused.'' \30\
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    \28\ See Release No. 34-3347 (Dec. 18, 1942) [7 FR 10655 (Dec. 
22, 1942)].
    \29\ See Adoption of Revised Proxy Rules, Release No. 34-4037 
(Dec. 17, 1947) [12 FR 8768 (Dec. 24, 1947)].
    \30\ See Adoption of Amendments Relating to Proposals by 
Security Holders, Release No. 34-12999 (Nov. 22, 1976) [41 FR 52994 
(Dec. 3, 1976)] (``1976 Adopting Release'').
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    However, the Commission later reconsidered the matter in response 
to ``criticisms of the current rule that have increased with the 
pressure placed upon the existing mechanism by the large number of 
proposals submitted each year and the increasing complexity of the 
issues involved in those proposals, as well as the susceptibility of 
certain provisions of the rule and the staff's interpretations 
thereunder to abuse by a few proponents and issuers.'' \31\ The 
Commission found merit in the views of many commenters that ``abuse of 
the security holder proposal rule could be curtailed by requiring 
shareholders who put the company and other shareholders to the expense 
of including a proposal in a proxy statement to have some measured 
economic stake or investment interest in the corporation.'' \32\ The 
Commission accordingly amended the rule in 1983 to require shareholder-
proponents to own ``at least 1% or $1,000 in market value of securities 
entitled to be voted at the meeting'' and to ``have held such 
securities for at least one year.'' \33\ Co-proponents, however, were 
permitted to aggregate their holdings for purposes of meeting the 
ownership requirements.\34\
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    \31\ 1982 Proposing Release, supra note 2. at 47421. The 
Commission further explained: ``It has been suggested that under 
current construction of the rule, a few proponents have been able to 
use the rule as a publicity mechanism to further personal interests 
that are unrelated to the interests of security holders as security 
holders and that certain sophisticated proponents, who submit 
proposals annually to a variety of issuers, are able to require the 
inclusion of a proposal which has generated little security holder 
interest by simply changing its form or minimally varying its 
coverage. The rule was not designed to burden the proxy solicitation 
process by requiring the inclusion of such proposals.'' Id. at 47422 
n.8.
    \32\ See 1983 Adopting Release, supra note 6.
    \33\ Id. In addition, the Commission noted in 2007 that the one-
year holding period ensures that shareholder proposals are submitted 
``by shareholders with a significant long-term stake in the 
company.'' See 2007 Proxy Access Proposing Release, supra note 12.
    \34\ See 1983 Adopting Release, supra note 6.
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    In 1998, the Commission raised the $1,000 threshold to $2,000.\35\ 
When it proposed this increase, the Commission explained that the 
revision was partly to adjust for inflation.\36\ Upon adoption of the 
$2,000 threshold, the Commission noted that ``[t]here was little 
opposition to the proposed increase among commenters.'' \37\ While the 
Commission had elected not to propose an amount higher than $2,000 
``out of concern that a more significant increase could restrict access 
to companies' proxy materials by smaller shareholders,'' \38\ the 
Commission noted upon adopting the $2,000 threshold that several 
commenters ``do not believe the increase is great enough to be 
meaningful, especially in light of the overall increase in stock prices 
over the last few years.'' \39\ The Commission accordingly indicated 
that it had ``decided to limit the increase to $2,000 for now.'' \40\ 
The Commission also sought comment on whether to shorten or lengthen 
the one-year holding period,\41\ but it was not revised because, at 
that time, ``there was no significant support for any modifications'' 
to that

[[Page 66462]]

aspect of the rule.\42\ The Commission has not revised the share 
ownership requirements since 1998.
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    \35\ See 1998 Adopting Release, supra note 8.
    \36\ The Commission explained that the actual inflation 
adjustment would have been $600, which would have set the new 
threshold at $1,600. A new threshold of $2,000 was proposed, 
however, to account for future inflation and to simplify the 
calculation process. See Amendments to Rules on Shareholder 
Proposals, Release No. 34-39093 (Sep. 18, 1997) [62 FR 50682 (Sep. 
26, 1997)] (``1997 Proposing Release'').
    \37\ See 1998 Adopting Release, supra note 8.
    \38\ See 1997 Proposing Release, supra note 36.
    \39\ See 1998 Adopting Release, supra note 8.
    \40\ Id. (emphasis added).
    \41\ See 1997 Proposing Release, supra note 36.
    \42\ See 1998 Adopting Release, supra note 8.
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2. Public Views on Rule 14a-8(b)
    In recent years, some observers have advocated increasing the 
amount of securities a shareholder must own to be eligible to submit a 
shareholder proposal.\43\ These groups have suggested alternative 
ownership requirements, such as eliminating the flat dollar threshold 
in favor of relying solely on a percentage-of-shares-owned test,\44\ or 
raising the ownership threshold to $50,000, indexed annually for 
inflation.\45\ Some observers have suggested raising the ownership 
requirements to lessen the burden on companies,\46\ or to ensure that 
shareholder-proponents have a meaningful stake in the companies to 
which they submit proposals.\47\ Others have suggested keeping the 
existing $2,000 requirement, or limiting any increase, to avoid 
excluding smaller investors,\48\ and some have suggested that dropping 
the flat dollar threshold in favor of a percentage-only test would 
significantly limit shareholders' ability to submit shareholder 
proposals for inclusion in companies' proxy materials.\49\ Several 
observers also have suggested lengthening the current one-year holding 
period requirement,\50\ while at least one observer has suggested 
shortening it.\51\
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    \43\ See, e.g., Business Roundtable, Responsible Shareholder 
Engagement and Long-Term Value Creation (Oct. 31, 2016), available 
at https://s3.amazonaws.com/brt.org/archive/reports/BRT%20Shareholder%20proposal%20paper-final.pdf (``BRT Report''); 
Nasdaq, The Promise of Market Reform: Reigniting America's Economic 
Engine (last updated Feb. 2018), available at https://www.nasdaq.com/docs/Nasdaq_Blueprint_to_Revitalize_Capital_Markets_April_2018_tcm5044-43175.pdf (``Nasdaq Report''); U.S. Dep't of Treasury, A Financial 
System That Creates Economic Opportunities 32 (Oct. 2017), available 
at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``Treasury 
Report''); see also letters in response to the Proxy Process 
Roundtable from Advent Capital Management, Inc. dated July 29, 2019; 
Braemar Hotels & Resorts Inc. dated January 4, 2019; Business 
Roundtable dated November 9, 2018 and June 3, 2019; Center on 
Executive Compensation dated August 1, 2018; Group 1 Automotive, 
Inc. dated January 11, 2019; National Association of Manufacturers 
dated October 30, 2018; Nasdaq, Inc. dated November 14, 2018; 
Nasdaq, Inc. et al. dated February 4, 2019; Society for Corporate 
Governance dated November 9, 2018; The Capital Group Companies dated 
November 14, 2018. At the Commission's 38th Annual Government-
Business Forum on Small Business Capital Formation held on August 
14, 2019, one of the forum participant recommendations was to amend 
the submission thresholds.
    \44\ See BRT Report, supra note 43; Nasdaq Report, supra note 
43.
    \45\ See letter in response to the Proxy Process Roundtable from 
Society for Corporate Governance dated November 9, 2018.
    \46\ See id.
    \47\ See, e.g., Nasdaq Report, supra note 43.
    \48\ See Ceres et al., An Investor Response to the U.S. 
Chamber's Proposal to Revise SEC Rule 14a-8, (Nov. 9, 2017), 
available at https://www.iccr.org/sites/default/files/resources_attachments/investor_response_to_chamber_14a-8_nov_9_final_2.pdf; see also letters in response to the Proxy 
Process Roundtable from Addenda Capital et al. dated November 13, 
2018; Dominican Sisters of Adrian, Michigan dated December 11, 2018; 
American Federation of Labor and Congress of Industrial 
Organizations dated November 9, 2018; Anonymous (19 commenters); 
California Public Employees' Retirement System dated December 11, 
2018; California State Teachers' Retirement System dated December 3, 
2018; Conference for Corporate Responsibility Indiana and Michigan 
dated December 3, 2018; Congregation of Sisters of St. Agnes dated 
December 4, 2018; Council of Institutional Investors dated January 
31, 2019; Theodore S. Cochrane dated January 2, 2019; Congregation 
of St. Basil dated December 3, 2018; CtW Investment Group dated 
January 16, 2019; Dominican Sisters--Grand Rapids dated December 2, 
2018; Dominican Sisters of Springfield Illinois dated December 3, 
2018; The Episcopal Church received December 11, 2018; Everence 
Financial dated December 6, 2018; FAIRR Initiative dated December 4, 
2018; Form Letter A (18,614 letters); Franciscan Sisters of 
Perpetual Adoration dated December 5, 2018; Glass Lewis dated 
November 14, 2018; Interfaith Center on Corporate Responsibility 
dated November 6, 2018; Investor Voice, SPC dated November 14, 2018; 
Jesuit Committee on Investment Responsibility dated December 10, 
2018; Loring, Wolcott & Coolidge dated December 4, 2018; James 
McRitchie received November 27, 2018; Mercy Investment Services, 
Inc. dated December 3, 2018; MFS Investment Management dated 
November 14, 2018; NorthStar Asset Management, Inc. dated December 
4, 2018; Pax World Funds dated November 9, 2018; Pension Investment 
Association of Canada dated April 17, 2019; Praxis Mutual Funds 
dated December 6, 2018; Presbyterian Church (U.S.A.) dated November 
13, 2018; Priests of the Sacred Heart dated December 3, 2018; 
Province of St. Joseph of the Capuchin Order dated December 3, 2018; 
Racine Dominicans dated December 5, 2018; Robert E. Rutkowski dated 
November 15, 2018; Shareholder Rights Group dated December 4, 2018; 
Sisters of Charity--Halifax dated December 5, 2018; Sisters of the 
Presentation of the Blessed Virgin Mary dated December 3, 2018; 
Sisters of St. Joseph of Orange dated December 18, 2018; Sisters of 
the Holy Cross dated December 10, 2018; State of New York Office of 
the State Comptroller dated November 13, 2018; Trinity Health dated 
November 9, 2018; Washington State Investment Board dated November 
14, 2018.
    \49\ See Letter to Jeb Hensarling, Chairman and Maxine Waters, 
Ranking Member, House Financial Services Committee from Jeffrey P. 
Mahoney, General Counsel, Council of Institutional Investors, dated 
April 24, 2017, available at https://democrats-financialservices.house.gov/uploadedfiles/letter_-_cii_04.27.2017.pdf.
    \50\ See BRT Report, supra note 43; see also letters in response 
to the Proxy Process Roundtable from Advent Capital Management, LLC 
dated July 29, 2019; Business Roundtable dated November 9, 2018; 
Nasdaq, Inc. dated November 14, 2018; The Vanguard Group, Inc. dated 
September 20, 2019.
    \51\ See Roundtable Transcript, supra note 13, at 150, comments 
of Brandon Rees, Deputy Director of Corporations and Capital 
Markets, American Federation of Labor and Congress of Industrial 
Organizations.
---------------------------------------------------------------------------

3. Need for Proposed Amendments
    The shareholder-proposal process established by Rule 14a-8 
facilitates engagement between shareholders and the companies they own. 
The rule also enables individual shareholders to shift to the company, 
and ultimately other shareholders, the cost of soliciting proxies for 
their proposals. Because it shifts burdens from proponents to 
companies, it is susceptible to overuse.\52\ As the Commission has 
previously recognized, the ownership threshold and holding period in 
Rule 14a-8(b) aim to strike an appropriate balance such that a 
shareholder has some meaningful ``economic stake or investment 
interest'' in a company before the shareholder may draw upon company 
resources to require the inclusion of a proposal in the company's proxy 
statement, and before the shareholder may use the company's proxy 
statement to command the attention of other shareholders to consider 
and vote upon the proposal.\53\
---------------------------------------------------------------------------

    \52\ See Frank H. Easterbrook & Daniel R. Fischel, The Economic 
Structure of Corporate Law 85 (1991) (Under Rule 14a-8, ``the 
majority must subsidize the activities of the minority who are 
allowed to make proposals without incurring the costs.'').
    \53\ See 1982 Proposing Release, supra note 2; 1983 Adopting 
Release, supra note 6.
---------------------------------------------------------------------------

    Much has changed since the Commission last considered amendments to 
Rule 14a-8, including the level and ease of engagement between 
companies and their shareholders. For instance, shareholders now have 
alternative ways, such as through social media, to communicate their 
preferences to companies and effect change.\54\
---------------------------------------------------------------------------

    \54\ See, e.g., Donna Fuscaldo, Say Gives Retail Investors A 
Voice And Tesla Listens, Forbes (Feb. 19, 2019), https://www.forbes.com/sites/donnafuscaldo/2019/02/19/say-gives-retail-investors-a-voice-and-tesla-listens/; Vanessa Fuhrmans, Some U.S. 
Companies Bow to Social-Media Pressure, Sever NRA Ties, Wall Street 
Journal (Feb. 24, 2018), https://www.wsj.com/articles/some-u-s-companies-bow-to-social-media-pressure-sever-nra-ties-1519431715.

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[[Page 66463]]

    We are concerned that the $2,000/one-year threshold established in 
1998 does not strike the appropriate balance today. We believe that 
holding $2,000 worth of stock for a single year does not demonstrate 
enough of a meaningful economic stake or investment interest in a 
company to warrant the inclusion of a shareholder's proposal in the 
company's proxy statement. As the table below demonstrates, the $2,000 
threshold, adjusted for inflation, would be equal to $3,152 in 2019 
dollars.\55\ Moreover, using the cumulative growth of the Russell 3000 
Index as a proxy for the average increase in companies' values, a 
$2,000 investment in a company in 1998 would be worth approximately 
$8,379 today.\56\ We believe that the increase in price of shares and 
changes in inflation have contributed, in part, to the need to revisit 
the one-year holding period associated with the $2,000 threshold.
---------------------------------------------------------------------------

    \55\ $3,152 = $2,000 x 1.576 (cumulative rate of inflation 
between May 1998 and August 2019 using the CPI inflation calculator, 
available at https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906).
    \56\ $8,379 = $2,000 x 4.190 (cumulative rate of growth of the 
Russell 3000 index between May 1998 and August 2019 assuming 
dividends are reinvested). Data is retrieved from Compustat Daily 
Updates--Index Prices.

                                         Ownership Threshold Comparison
----------------------------------------------------------------------------------------------------------------
                                           1998 threshold adjusted for
    Threshold established in 1998                   inflation                   Change in Russell 3000 Index
----------------------------------------------------------------------------------------------------------------
                       $2,000                                $3,152                                $8,379
----------------------------------------------------------------------------------------------------------------

    We recognize that the amount of stock owned is not the only way to 
demonstrate an interest in a company, particularly for small investors. 
In many cases, the length of time owning the company's securities may 
be a more meaningful indicator that a shareholder has a sufficient 
interest that warrants use of the company's proxy statement. A 
shareholder's demonstrated long-term investment interest in a company 
may make it more likely that the shareholder's proposal will reflect a 
greater interest in the company and its shareholders, rather than an 
intention to use the company and the proxy process to promote a 
personal interest or publicize a general cause. A shareholder's 
demonstrated long-term investment interest may also make it more likely 
that a shareholder will continue to hold the shares after the 
shareholder's proposal is voted upon, and thus more likely that any 
costs of implementing the shareholder's proposal will be borne in part 
by the shareholder responsible for the proposal. We believe having a 
longer holding period is particularly important if the dollar value of 
the ownership interest is minimal because a person seeking to misuse 
the shareholder-proposal process could more easily purchase the 
smallest possible stake in a company to take advantage of the process.
4. Proposed Amendments
    We are proposing to establish enhanced ownership requirements under 
Rule 14a-8(b) that take into account both the amount of securities 
owned and the length of time held, in determining a shareholder's 
eligibility to submit a shareholder proposal. Under the proposed 
ownership requirements, the shareholder-proposal process would remain 
available to a wide range of shareholders, including those with smaller 
investments, but would require those with smaller investments to hold 
their shares for a longer period of time. We believe these new 
thresholds would more appropriately balance the interests of 
shareholders who seek to use the company's proxy statement to advance 
their own proposals, on the one hand, with the interests of companies 
and other shareholders who bear the burdens associated with the 
inclusion of such proposals, on the other hand. We also believe the new 
thresholds would be a better indicator of a shareholder's investment 
interest in the company.
    Under the proposed rule, a shareholder would be eligible to submit 
a Rule 14a-8 proposal for inclusion in a company's proxy materials if 
the shareholder satisfies one of three ownership requirements, each of 
which is designed to show that the shareholder-proponent has a 
demonstrated economic stake or investment interest in the company to 
which the proposal is submitted. Specifically, a shareholder would be 
eligible to submit a Rule 14a-8 proposal if the shareholder has 
continuously held at least:
     $2,000 of the company's securities entitled to vote on the 
proposal for at least three years;
     $15,000 of the company's securities entitled to vote on 
the proposal for at least two years; or
     $25,000 of the company's securities entitled to vote on 
the proposal for at least one year.\57\
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    \57\ Due to market fluctuations, the value of a shareholder's 
investment in a company may vary throughout the applicable holding 
period before the shareholder submits the proposal. In order to 
determine whether the shareholder satisfies the relevant ownership 
threshold, the shareholder should look at whether, on any date 
within the 60 calendar days before the date the shareholder submits 
the proposal, the shareholder's investment is valued at the relevant 
threshold or greater, based on the average of the bid and ask 
prices. See 1983 Adopting Release, supra note 6.
---------------------------------------------------------------------------

    The proposed rule would retain the key elements of a minimum amount 
of securities owned and minimum time period held, including retaining 
the current $2,000 threshold for shares held continuously for at least 
three years. The tiered approach under the proposed revision would 
provide multiple options for demonstrating an ownership stake through a 
combination of amount of securities owned and length of time held. We 
believe this approach takes into account the varying situations of 
shareholders and would be preferable to a one-size-fits-all approach. 
Under the proposed rule, shareholders owning a smaller amount of 
securities could utilize the rule, provided that ownership was 
continuous over a longer period of time. The tiered approach would 
enable other shareholders to demonstrate an economic stake or 
investment interest through larger ownership interests and shorter 
holding periods.
    Under the proposed rule, the current $2,000 threshold would remain 
the same to preserve the ability of long-term shareholders owning a 
relatively small amount of shares to continue to utilize Rule 14a-8, 
but these investors would be required to hold the securities for at 
least three years to be eligible to submit a proposal. In light of the 
small investment amount required under this ownership tier, we believe 
that a longer holding period is warranted to demonstrate a 
shareholder's sufficient investment interest in the company and, in 
turn, to justify requiring the company to include such a shareholder's 
proposal in its proxy statement.
    We are proposing two additional eligibility options for 
shareholders, reflecting differences in amount of securities held and 
length of time held. We believe that the proposed thresholds

[[Page 66464]]

of $15,000 for at least two years and $25,000 for at least one year are 
each indicative of a shareholder having an economic stake or investment 
interest in the company that would justify requiring the company to 
include such a shareholder's proposal in its proxy statement.
    We also propose to eliminate the current 1 percent ownership 
threshold, which historically has not been utilized. The vast majority 
of investors that submit shareholder proposals do not meet a 1 percent 
ownership threshold.\58\ In addition, we understand that the types of 
investors that hold 1 percent or more of a company's shares generally 
do not use Rule 14a-8 as a tool for communicating with boards and 
management.\59\
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    \58\ See letter to Bill Huizenga, Chairman and Carolyn B. 
Maloney, Ranking Member, Subcommittee on Capital Markets, 
Securities, and Investment Committee on Financial Services from 
Jeffrey P. Mahoney, General Counsel, Council of Institutional 
Investors, dated May 22, 2018 (explaining that ``[e]ven [the Council 
of Institutional Investors'] largest public pension fund members 
rarely hold 1% of a public company''), available at https://www.cii.org/files/May%2022,%202018%20Letter%20to%20Capital%20Markets%20Subcommittee%20(
final).pdf; letter to The Honorable Maxine Waters, Ranking Member, 
Committee on Financial Services from Jack Ehnes, Chief Executive 
Officer, CalSTRS, (June 5, 2017), at 1 (``While one percent may 
sound like a small amount, even a large investor like the $200 
billion CalSTRS fund does not own one percent of publicly traded 
companies.''), available at https://www.calstrs.com/sites/main/files/fileattachments/06-05-2017_maxine_financial_choice_act.pdf; 
Statement of New York City Comptroller Scott M. Stringer on the 
April 19th Discussion Draft of the Financial CHOICE Act of 2017 
(Apr. 25, 2017), at 1 (``Despite being among the largest pension 
investors in the world, we rarely hold more than 0.5% of any 
individual company, and most often hold less.''), available at 
https://comptroller.nyc.gov/newsroom/testimonies/statement-of-new-york-city-comptrollerscott-m-stringer-on-the-april-19th-discussion-draft-of-the-financial-choice-act-of-2017-act/.
    \59\ See, e.g., Roundtable Transcript, supra note 13, at 150, 
comments of Brandon Rees, Deputy Director of Corporations and 
Capital Markets, American Federation of Labor and Congress of 
Industrial Organizations.
---------------------------------------------------------------------------

    The following table compares the proposed dollar thresholds as a 
percentage of market value as of December 2018 for the S&P 500 Index 
constituents and May 2019 for the Russell 3000 Index constituents: \60\
---------------------------------------------------------------------------

    \60\ Data for the S&P 500 constituents is retrieved from CRSP 
and data for the Russell 3000 constituents is retrieved from Market 
Capitalization Ranges, FTSE Russell Market, https://www.ftserussell.com/research-insights/russell-reconstitution/market-capitalization-ranges (last visited Oct. 31, 2019).

----------------------------------------------------------------------------------------------------------------
                                                                      $2,000          $15,000         $25,000
                                                                  Threshold as a  Threshold as a  Threshold as a
                           Registrant                              percentage of   percentage of   percentage of
                                                                   market value    market value    market value
----------------------------------------------------------------------------------------------------------------
Largest Registrant in the S&P 500 Index.........................       0.0000003       0.0000019       0.0000032
500th Registrant in the S&P 500 Index...........................          0.0001          0.0005          0.0009
3,000th Registrant in the Russell Index.........................          0.0013          0.0098          0.0164
----------------------------------------------------------------------------------------------------------------

    The proposed rule would not allow shareholders to aggregate their 
securities with other shareholders to meet the applicable minimum 
ownership thresholds to submit a Rule 14a-8 proposal. Although the 
Commission allowed shareholders to aggregate their holdings when it 
first adopted ownership thresholds in 1983, it did not provide reasons 
for doing so. We believe that allowing shareholders to aggregate their 
securities to meet the new proposed thresholds would undermine the goal 
of ensuring that every shareholder who wishes to use a company's proxy 
statement to advance a proposal has a sufficient economic stake or 
investment interest in the company.
    Shareholders, however, would continue to be permitted to co-file or 
co-sponsor shareholder proposals as a group if each shareholder-
proponent in the group meets an eligibility requirement. Shareholder-
proponents often co-file or co-sponsor a shareholder proposal for a 
variety of reasons, such as conveying to the company's management, 
board, and other shareholders that the proposal has support from other 
shareholders. A lead filer is sometimes designated as the primary point 
of contact for the proposal, and each co-filer authorizes the lead 
filer to negotiate with the company and/or withdraw the proposal on the 
co-filer's behalf. Currently the rules do not require shareholder-
proponents to designate a lead filer or make explicit other 
arrangements, but we believe this practice could facilitate engagement 
and reduce administrative burdens on companies, co-filers, and the 
staff. We believe that, as a best practice, shareholder-proponents 
should clearly state in their initial submittal letter to the company 
that they are co-filing the proposal with other proponents and identify 
the lead filer, specifying whether such lead filer is authorized to 
negotiate with the company and withdraw the proposal on the co-filer's 
behalf. Although we are not proposing to require this practice in our 
rules, we request comment as to whether we should revise the rules to 
require that co-filers identify a lead filer.\61\
---------------------------------------------------------------------------

    \61\ We note that ambiguities in the nature of coordination on a 
proposal's submission could prompt companies to seek exclusion under 
Rule 14a-8(i)(11). Specifically, if two or more shareholder-
proponents submit substantially duplicative proposals but fail to 
clearly indicate that they intend to co-file or co-sponsor the 
proposal, the later-received proposal may be susceptible to 
exclusion under Rule 14a-8(i)(11).
---------------------------------------------------------------------------

    We believe the proposed tiered thresholds would appropriately 
balance shareholders' ability to submit proposals with the attendant 
burdens. We are mindful of concerns that any revisions to the ownership 
requirements may have a greater effect on shareholders with smaller 
investments. We believe that the amendments we are proposing today 
adequately preserve the ability of smaller shareholders to submit 
proposals. Importantly, the proposed thresholds allow small and large 
shareholders to continue to participate in the shareholder-proposal 
process. We are, however, seeking comment on whether we should use 
other thresholds and/or criteria for determining eligibility to submit 
shareholder proposals and, if so, what thresholds or criteria should be 
considered.
    We request and encourage any interested person to submit comments 
regarding the proposed amendments, specific issues discussed in this 
release, and other matters that may have an effect on the proposals. We 
note that comments are of the greatest assistance if accompanied by 
supporting data and analysis of the issues addressed in those comments.
Request for Comment
    1. We are proposing to amend Rule 14a-8(b) to establish new 
ownership requirements for establishing an investor's eligibility to 
submit a shareholder proposal to be included in a company's proxy 
statement. Should we amend Rule 14a-8(b) as proposed?

[[Page 66465]]

    2. The proposed amendments seek to strike a balance between 
maintaining an avenue of communication for shareholders, including 
long-term shareholders, while also recognizing the costs incurred by 
companies and their shareholders in addressing shareholder proposals. 
Are there other considerations we should take into account?
    3. Should we adopt a tiered approach, providing multiple 
eligibility options, as proposed? Are there other approaches that would 
be preferable instead?
    4. How is a sufficient economic stake or investment interest best 
demonstrated? Is it by a combination of amount invested and length of 
time held, as proposed, or should another approach to eligibility be 
used?
    5. Are the proposed dollar amounts and holding periods that we 
propose for each of the three tiers appropriate? Are there other dollar 
amounts and/or holding periods that would better balance shareholders' 
ability to submit proposals and the related costs? Should any dollar 
amounts be indexed for inflation or stock-market performance?
    6. We are proposing to maintain the $2,000 ownership level, but 
increase the corresponding holding period to three years. Should we 
also increase the $2,000 threshold? If so, what would be an appropriate 
increase? For example, should we adjust for inflation (e.g., $3,000) or 
otherwise establish a higher amount?
    7. Are there potential drawbacks with the tiered approach? If so, 
what are they?
    8. Instead of adopting a tiered approach, should we simply increase 
the $2,000/one-year requirement? If so, what would be an appropriate 
threshold?
    9. Should the current 1 percent test be eliminated, as proposed? 
Should the 1 percent threshold instead be replaced with a different 
percentage threshold? Are there ways in which retaining a percentage-
based test would be useful in conjunction with the proposed tiered 
thresholds?
    10. Should we instead use only a percentage-based test? If so, at 
what percentage level? Are there practical difficulties associated with 
a percentage-based test such as calculation difficulties that we should 
take into consideration?
    11. Should we prohibit the aggregation of holdings to meet the 
thresholds, as proposed? Would allowing aggregation of holdings be 
consistent with a shareholder having a sufficient economic stake or 
investment interest in the company to justify the costs associated with 
shareholder proposals?
    12. If we were to allow shareholders to aggregate their holdings to 
meet the thresholds, should there be a limit on the number of 
shareholders that could aggregate their shares for purposes of 
satisfying the proposed ownership requirements? If so, what should the 
limit be? For example, should the number of shareholders that are 
permitted to aggregate be limited to five so as to reduce the 
administrative burden on companies associated with processing co-filed 
submissions?
    13. Should we require shareholder-proponents to designate a lead 
filer when co-filing or co-sponsoring a proposal? Would doing so 
facilitate engagement and reduce administrative burdens on companies 
and co-filers? If we required shareholder-proponents to designate a 
lead filer, should we require that the lead filer be authorized to 
negotiate the withdrawal of the proposal on behalf of the other co-
filers? Would such a requirement encourage shareholders to file their 
own proposals rather than co-file? Would the number of shareholder 
proposal submissions increase as a result?
    14. What other avenues can or do shareholders use to communicate 
with companies besides the Rule 14a-8 process? Has the availability and 
effectiveness of these other channels changed over time?
    15. Unlike other issuers, open-end investment companies generally 
do not hold shareholder meetings each year. As a result, several years 
may pass between the submission of a shareholder proposal and the next 
shareholder meeting. In these cases, the submission may no longer 
reflect the interest of the proponent or may be in need of updating, or 
the shareholder may no longer own shares or may otherwise be unable to 
present the proposal at the meeting. Should any special provisions be 
considered, after some passage of time (e.g., two years, three years, 
five years, etc.), to require shareholders to reaffirm submission of 
shareholder proposals for open-end investment companies or, absent 
reaffirmation, for the proposals to expire?
    16. Does the Rule 14a-8 process work well? Should the Commission 
staff continue to review proposals companies wish to exclude? Should 
the Commission instead review these proposals? Is there a different 
structure that might serve the interests of companies and shareholders 
better? Are states better suited to establish a framework governing the 
submission and consideration of shareholder proposals?

B. Proposals Submitted on Behalf of Shareholders

1. Background
    Companies receive proposals under Rule 14a-8 from individuals and 
entities that may not qualify to submit proposals at a particular 
company in their own name, but have arrangements to serve as a 
representative to submit a proposal on behalf of individuals or 
entities that have held a sufficient number of shares for the requisite 
period. We also understand that shareholders may wish to use a 
representative for a number of reasons, including to obtain assistance 
from someone who has more experience with the shareholder-proposal 
process or as a matter of administrative convenience. Often, the 
shareholder has an established relationship with the representative 
(e.g., the shareholder has previously used the representative to submit 
proposals on his or her behalf, or the representative serves as the 
shareholder's investment adviser). In practice, the representative 
typically submits the proposal to the company on the shareholder's 
behalf along with necessary documentation, including evidence of 
ownership (typically in the form of a broker letter) and the 
shareholder's written authorization for the representative to submit 
the proposal and act on the shareholder's behalf. After the initial 
submission, the representative acts on the shareholder's behalf in 
connection with the matter, and communications between the shareholder 
and company related to the shareholder proposal are generally handled 
by the representative.
    Rule 14a-8 does not address a shareholder's ability to submit a 
proposal for inclusion in a company's proxy materials through a 
representative; absent Commission regulation, this practice has been 
governed by state agency law.\62\ Nevertheless, proposals are submitted 
by representatives who may or may not themselves have an economic stake 
in the relevant company. Some commenters have raised concerns about the 
use of a representative in the shareholder-proposal process.\63\ For

[[Page 66466]]

example, some observers have suggested that it may be difficult in some 
cases to ascertain whether the shareholder in fact supports the 
proposal that has been submitted on their behalf.\64\ When a 
representative speaks and acts for a shareholder, there may be a 
question as to whether the shareholder has a genuine and meaningful 
interest in the proposal, or whether the proposal is instead primarily 
of interest to the representative, with only an acquiescent interest by 
the shareholder. This uncertainty may also raise questions about 
whether the eligibility requirements of Rule 14a-8(b) have been 
satisfied.\65\ We also note that it can be burdensome for companies to 
verify the purported agency relationship where the documentation 
provided by the person or entity submitting the proposal does not 
clearly establish that relationship.
---------------------------------------------------------------------------

    \62\ Although Rule 14a-8 does not address a shareholder's 
ability to submit a proposal through a representative, it 
contemplates a representative presenting a proposal on the 
shareholder's behalf at a shareholders' meeting. Specifically, Rule 
14a-8(h) states that the shareholder, or a ``representative who is 
qualified under state law to present the proposal on [the 
shareholder's] behalf, must attend the meeting and present the 
proposal.'' 17 CFR 240.14a-8(h).
    \63\ See, e.g., BRT Report, supra note 43; Statement of Darla C. 
Stuckey, President and CEO, Society for Corporate Governance, Before 
the H. Comm. on Financial Services Subcomm. on Capital Markets and 
Government Sponsored Enterprises, Sept. 21, 2016; see also letter in 
response to the Proxy Process Roundtable from Exxon Mobil 
Corporation dated July 26, 2019.
    \64\ See, e.g., Statement of Darla C. Stuckey, President and 
CEO, Society for Corporate Governance, Before the H. Comm. on 
Financial Services Subcomm. on Capital Markets and Government 
Sponsored Enterprises, Sept. 21, 2016.
    \65\ In 2017, the staff of the Division of Corporation Finance 
(the ``Division'') issued Staff Legal Bulletin No. 14I (``SLB 14I'') 
to address some of the challenges and concerns stemming from a 
shareholder's use of an agent in the shareholder-proposal process. 
In SLB 14I, the Division explained that, in evaluating whether the 
eligibility requirements of Rule 14a-8(b) have been satisfied, it 
would look to whether a shareholder who uses an agent in the 
shareholder-proposal process provides documentation describing the 
shareholder's delegation of authority to the agent. SLB 14I also 
explained that, where this information is not provided, there may be 
a basis to exclude the proposal under Rule 14a-8(b). SLB 14I 
represents the views of the staff of the Division. It is not a rule, 
regulation, or statement of the Commission. Furthermore, the 
Commission has neither approved nor disapproved its content. SLB 
14I, like all staff guidance, has no legal force or effect, it does 
not alter or amend applicable law, and it creates no new or 
additional obligations for any person.
---------------------------------------------------------------------------

2. Proposed Amendments
    To help address these challenges and concerns, we are proposing to 
amend the eligibility requirements of Rule 14a-8 to require 
shareholders that use a representative to submit a proposal for 
inclusion in a company's proxy statement to provide documentation 
attesting that the shareholder supports the proposal and authorizes the 
representative to submit the proposal on the shareholder's behalf. 
Specifically, the proposed rule would require documentation that:
     Identifies the company to which the proposal is directed;
     Identifies the annual or special meeting for which the 
proposal is submitted;
     Identifies the shareholder-proponent and the designated 
representative;
     Includes the shareholder's statement authorizing the 
designated representative to submit the proposal and/or otherwise act 
on the shareholder's behalf;
     Identifies the specific proposal to be submitted;
     Includes the shareholder's statement supporting the 
proposal; and
     Is signed and dated by the shareholder.
    We believe an affirmative statement that the shareholder authorizes 
the designated representative to submit the proposal and/or otherwise 
act on the shareholder's behalf would help to make clear that the 
representative has been so authorized. In addition, we believe that a 
shareholder's affirmative statement that it supports the proposal would 
help to ensure that the interest being advanced by the proposal is the 
shareholder's own.
    We believe that these proposed amendments would help safeguard the 
integrity of the shareholder-proposal process and the eligibility 
restrictions by making clear that representatives are authorized to so 
act, and by providing a meaningful degree of assurance as to the 
shareholder-proponent's identity, role, and interest in a proposal that 
is submitted for inclusion in a company's proxy statement. We also 
believe that the burden on shareholders of providing this information 
would be minimal, and we note that much of it is often already provided 
by shareholders. We also believe that these requirements would reduce 
some of the administrative burdens on companies associated with 
confirming the principal-agent relationship.
Request for Comment
    17. We are proposing to amend Rule 14a-8's eligibility requirements 
to require certain additional information when a shareholder uses a 
representative to act on its behalf in the shareholder-proposal 
process. Should we amend the rule as proposed?
    18. Are the informational requirements we are proposing 
appropriate? Should we require any additional information or action? If 
so, what additional information or action should we require? For 
example, should there be a notarization requirement? How would these 
measures affect the burden on shareholders?
    19. Is any of the proposed information unnecessary to demonstrate 
the existence of a principal-agent relationship and/or the shareholder-
proponent's role in the shareholder-proposal process? If so, what 
information is unnecessary?
    20. Are there legal implications outside of the federal securities 
laws that we should be aware of or consider in allowing a principal-
agent relationship in the context of the shareholder-proposal rule?
    21. As part of the shareholder-proposal submission process, 
representatives generally deliver to companies the shareholder's 
evidence of ownership for purposes of satisfying the requirements of 
Rule 14a-8(b). Where the shareholder's shares are held in street name, 
this evidence comes in the form of a broker letter from the 
shareholder's broker. Since a broker letter from the shareholder's 
broker generally cannot be obtained without the shareholder's 
authorization, does the fact that the representative is able to provide 
this documentation sufficiently demonstrate the principal-agent 
relationship and/or the shareholder's role in the shareholder-proposal 
process? Is the answer different if the representative is the 
shareholder's investment adviser that owes a fiduciary duty to the 
shareholder?

C. The Role of the Shareholder-Proposal Process in Shareholder 
Engagement

1. Background
    While Rule 14a-8 provides a means for shareholder-proponents to 
advance proposals and solicit proxies from other shareholders, the rule 
is only one of many mechanisms for shareholders to engage with 
companies and to advocate for the measures they propose. Other forms of 
engagement, including dialogue between a shareholder and management, 
may sometimes accomplish a shareholder's goals without the burdens 
associated with including a proposal in a company's proxy statement. 
Company-shareholder engagement can thus be an important aspect of the 
shareholder-proposal process, which we encourage both before and after 
the submission of a shareholder proposal. Proactive company engagement 
with shareholders has increased in recent years,\66\ and shareholders 
frequently withdraw their proposals as a result of company-shareholder 
engagement.\67\ We believe

[[Page 66467]]

that encouraging this trend would be beneficial both to companies and 
to shareholders.
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    \66\ See letters in response to the Proxy Process Roundtable 
from Business Roundtable dated June 3, 2019; Chevron Corporation 
dated August 20, 2019; Society for Corporate Governance dated 
November 9, 2018.
    \67\ Company-shareholder engagement with respect to shareholder 
proposals has led to an increase in the number of withdrawn 
proposals in recent years. See, e.g., letters in response to the 
Proxy Process Roundtable from Everence Financial dated December 6, 
2018 (``an increasing number of resolutions end up being withdrawn 
by the proponent because of conversations between [the proponent] 
and the company''); Praxis Mutual Funds dated December 6, 2018 
(same); Principles for Responsible Investment dated November 14, 
2018 (``a growing number of shareholder proposals are withdrawn due 
to corporate management developing workable solutions with 
investors'').
---------------------------------------------------------------------------

    We understand that shareholder proposals are at times used as the 
sole method of engaging with companies despite a company's willingness 
to discuss, and possibly resolve, the matter with the shareholder.\68\ 
In those cases, Rule 14a-8 may cause a shareholder to burden a company 
and other shareholders with a proxy vote that may have been avoided had 
meaningful engagement taken place. While we recognize that engagement 
may not always obviate the need for a proposal to be put to a vote, we 
believe that shareholders should be required to state when they are 
available to engage with a company when they submit a proposal for 
inclusion in the company's proxy statement. We believe that such a 
statement of availability would encourage greater dialogue between 
shareholders and companies in the shareholder-proposal process, and may 
lead to more efficient and less costly resolution of these matters.
---------------------------------------------------------------------------

    \68\ We recognize that some shareholder-proponents use a 
shareholder proposal as a way to open a dialogue with management and 
not with the objective of having the matter go to a vote. See 
Roundtable Transcript, supra note 13, comments of Michael Garland, 
Assistant Comptroller, Corporate Governance and Responsible 
Investment, Office of the Comptroller, New York City.
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2. Proposed Amendment
    We are proposing to amend Rule 14a-8(b) to add a shareholder 
engagement component to the current eligibility criteria. Specifically, 
the proposed amendment would require a statement from each shareholder-
proponent that he or she is able to meet with the company in person or 
via teleconference no less than 10 calendar days, nor more than 30 
calendar days, after submission of the shareholder proposal.\69\ The 
shareholder would be required to include contact information as well as 
business days and specific times that he or she is available to discuss 
the proposal with the company.\70\
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    \69\ The proposal's date of submission is the date the proposal 
is postmarked or transmitted electronically. In the event the 
proposal is hand delivered, the submission date would be the date of 
hand delivery.
    \70\ The contact information and availability would have to be 
the shareholder's, and not that of the shareholder's representative 
(if the shareholder uses a representative). A shareholder's 
representative could, however, participate in any discussions 
between the company and the shareholder.
---------------------------------------------------------------------------

    We believe that this proposed eligibility requirement would 
encourage shareholders to engage with companies, and could facilitate 
useful dialogue between the parties by enabling the company to reach 
out directly to a shareholder-proponent to understand his or her 
concerns, potentially leading to a more mutually satisfactory and less 
burdensome resolution of the matter.
Request for Comment
    22. We are proposing to amend Rule 14a-8(b) to add a shareholder 
engagement component to the current eligibility criteria that would 
require a statement from the shareholder-proponent that he or she is 
able to meet with the company in person or via teleconference no less 
than 10 calendar days, nor more than 30 calendar days, after submission 
of the shareholder proposal. Should we adopt the amendment as proposed? 
Could the shareholder engagement component be unduly burdensome or 
subject to abuse rather than facilitating engagement between the 
shareholder-proponent and the registrant? If so, how could we address 
such undue burden or abuse?
    23. We are also proposing to require that the shareholder-proponent 
include contact information as well as business days and specific times 
that he or she is available to discuss the proposal with the company. 
Should we adopt this amendment as proposed? Should we specify any 
additional requirements for the contact information or availability? 
For example, should we require a telephone number or email address to 
be included? Should we require a minimum number of days or hours that 
the shareholder-proponent be available?
    24. Would companies be more likely to engage with shareholders if 
the proposed amendment was adopted? Are there other ways to encourage 
such engagement that we should consider? Are there potential negative 
consequences of encouraging such engagement between individual 
shareholders and a company, or are there other potential negative 
consequences of this proposal?
    25. As proposed, a shareholder would have to provide a statement 
that he or she is able to meet with the company in person or via 
teleconference no less than 10 calendar days, nor more than 30 calendar 
days, after submission of the shareholder proposal. Is this timeframe 
appropriate? If not, what would be an appropriate timeframe?
    26. If the shareholder uses a representative, should we also 
require that the representative provide a similar statement as to his 
or her ability to meet to discuss the proposal with the company?
    27. Should companies be required to represent that they are able to 
meet with shareholder-proponents?
    28. What are ways that companies engage with shareholders outside 
of the shareholder-proposal process?

D. One-Proposal Limit

1. Background
    Rule 14a-8(c) provides that ``each shareholder may submit no more 
than one proposal to a company for a particular shareholders' 
meeting.'' As the Commission explained when it adopted this restriction 
in 1976, the submission of multiple proposals by a single shareholder-
proponent ``constitute[s] an unreasonable exercise of the right to 
submit proposals at the expense of other shareholders'' and also may 
``tend to obscure other material matters in the proxy statement of 
issuers, thereby reducing the effectiveness of such documents.'' \71\
---------------------------------------------------------------------------

    \71\ See 1976 Adopting Release, supra note 30.
---------------------------------------------------------------------------

    At the time the one-proposal limitation was adopted, the Commission 
explained that it was ``aware of the possibility that some proponents 
may attempt to evade the new limitations through various maneuvers, 
such as having other persons whose securities they control submit . . . 
proposals each in their own names.'' \72\ To combat this type of abuse, 
the Commission clarified that the limitation ``will apply collectively 
to all persons having an interest in the same securities (e.g., the 
record owner and the beneficial owner, and joint tenants).'' \73\
---------------------------------------------------------------------------

    \72\ Id.
    \73\ Id. This limitation would continue to apply under the 
proposed amendments.
---------------------------------------------------------------------------

    We continue to believe that this one-proposal limit is appropriate. 
In our view, the Commission's stated reasoning for the one-proposal 
limit applies equally to representatives who submit proposals on behalf 
of shareholders they represent. We believe permitting representatives 
to submit multiple proposals for the same shareholders' meeting would 
undermine the purpose of the one-proposal limit.

[[Page 66468]]

2. Proposed Amendment
    We propose an amendment to Rule 14a-8(c) to apply the one-proposal 
rule to ``each person'' rather than ``each shareholder'' who submits a 
proposal. The amended rule would state, ``Each person may submit no 
more than one proposal, directly or indirectly, to a company for a 
particular shareholders' meeting. A person may not rely on the 
securities holdings of another person for the purpose of meeting the 
eligibility requirements and submitting multiple proposals for a 
particular shareholders' meeting.'' Under the proposed rule, a 
shareholder-proponent may not submit one proposal in its own name and 
simultaneously serve as a representative to submit a different proposal 
on another shareholder's behalf for consideration at the same meeting. 
Similarly, a representative would not be permitted to submit more than 
one proposal to be considered at the same meeting, even if the 
representative would be submitting each proposal on behalf of different 
shareholders. In our view, a shareholder submitting one proposal 
personally and additional proposals as a representative for 
consideration at the same meeting, or submitting multiple proposals as 
a representative at the same meeting, would constitute an unreasonable 
exercise of the right to submit proposals at the expense of other 
shareholders and also may tend to obscure other material matters in the 
proxy statement. We believe this amendment to the rule text would more 
consistently apply the one-proposal limit to shareholders and 
representatives of shareholders.
    The amendment is not intended to prevent shareholders from seeking 
assistance and advice from lawyers, investment advisers, or others to 
help them draft shareholder proposals and navigate the shareholder-
proposal process. Providing such assistance to more than one 
shareholder would still be permissible. However, to the extent that the 
provider of such services submits a proposal, either as a proponent or 
as a representative, it would be subject to the one-proposal limit and 
would not be permitted to submit more than one proposal in total. We 
seek comment, however, on whether the proposed amendment would have 
unintended consequences on the practice of shareholders using 
representatives to submit shareholder proposals.
    We also are seeking comments on whether we should eliminate the 
practice of allowing natural-person shareholders to use a 
representative to submit a proposal. We request comment on whether the 
concerns raised by a shareholder's use of a representative would be 
better addressed with an amendment to the rule text, as proposed, or by 
prohibiting such use of a representative for the purpose of Rule 14a-8.
Request for Comment
    29. We are proposing to amend Rule 14a-8(c) to explicitly state, 
``Each person may submit no more than one proposal, directly or 
indirectly, to a company for a particular shareholders' meeting. A 
person may not rely on the securities holdings of another person for 
the purpose of meeting the eligibility requirements and submitting 
multiple proposals for a particular shareholders' meeting.'' Should we 
amend the rule as proposed?
    30. Would the proposed amendment have unintended consequences on 
shareholders' use of representatives or other types of advisers, such 
as lawyers or investment advisers, and, if so, what are those 
consequences?
    31. Alternatively, should we amend Rule 14a-8 to explicitly state 
that a proposal must be submitted by a natural-person shareholder who 
meets the eligibility requirements and not by a representative? If so, 
should we clarify that although a shareholder may hire someone to draft 
the proposal and advise on the process, the shareholder must be the one 
to submit the proposal?
    32. Alternatively, should we require the shareholder-proponent to 
disclose to the company how many proposals it has submitted in the past 
to that company? For example, should we require disclosure of the 
number of proposals the shareholder has submitted directly, through a 
representative, or as a representative to the company in the last five 
years? Should companies be required to disclose this information in the 
proxy statement? Would this information be material to other 
shareholders when considering how to vote on the proposal?
    33. If adopted, would the proposed informational requirements 
discussed in Section II.B alleviate the concerns addressed in this 
section such that the proposed amendments to Rule 14a-8(c) would be 
unnecessary?
    34. In lieu of, or in addition to, limiting the number of proposals 
a shareholder would be able to submit directly or as a representative 
for other shareholders, should we adopt a total limit on the number of 
proposals allowed to be submitted per company per meeting? If so, what 
numerical limit would be appropriate, and how should such a limit be 
imposed?
    35. As an alternative or in addition to limiting the number of 
proposals a shareholder would be able to submit directly or as a 
representative for other shareholders, should we adopt a limit on the 
aggregate number of shareholder proposals a person could submit in a 
particular calendar year to all companies? If so, what would be an 
appropriate limit, and how would such a limit be imposed?
    36. Should we require companies to disclose how many proposals were 
withdrawn and therefore not included in the proxy statement, and how 
many were excluded pursuant to a no-action request?

E. Rule 14a-8(i)(12)--Resubmissions

1. Relevant History and Background of Rule 14a-8(i)(12)
    Since 1948, the Commission has not required a company to include a 
proposal in its proxy statement ``if substantially the same proposal 
was submitted to the security holders for action at the last annual 
meeting of security holders or at any special meeting held subsequent 
thereto and received less than three percent of the total number of 
votes cast in regard to the proposal.'' \74\ The Commission explained 
that the purpose of the provision was ``to relieve the management of 
the necessity of including proposals which have been previously 
submitted to security holders without evoking any substantial security 
holder interest therein.'' \75\ In 1954, the Commission observed that 
the ability to resubmit proposals that received 3 percent or more of 
the vote ``resulted in the repetition year after year of proposals 
which have evoked very modest stockholder interest,'' and amended the 
provision to add two additional resubmission thresholds; 6 percent if 
the matter had been previously voted on twice and 10 percent if the 
matter had been previously voted on three or more times.\76\ As a 
result from 1954 to until today, a shareholder proposal was excludable 
if substantially the same proposal, or substantially the same subject 
matter, had previously been submitted during the relevant lookback 
period and received less than 3, 6, or 10 percent of the vote the last 
time it was voted on if voted on once, twice, or three or more times, 
respectively.\77\
---------------------------------------------------------------------------

    \74\ See Adoption of Amendments to Proxy Rules, Release No. 34-
4185 (Nov. 5, 1948) [13 FR 6678 (Nov. 13, 1948)].
    \75\ See id.
    \76\ See 1954 Adopting Release, supra note 11.
    \77\ See id.

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[[Page 66469]]

    In 1983, the Commission raised the 3 and 6 percent thresholds to 5 
and 8 percent, respectively, but these new thresholds subsequently were 
vacated because a court found that the Commission had not provided 
adequate notice of its proposal to raise the thresholds. The Commission 
accordingly reinstated the 3 and 6 percent thresholds in 1985, and it 
elected not to propose new thresholds at that time.\78\
---------------------------------------------------------------------------

    \78\ See Proposals of Security Holders, Release No. 34-22625 
(Nov. 14, 1985) [50 FR 48180 (Nov. 22, 1985)]. The U.S. District 
Court for the District of Columbia held that there was inadequate 
notice of the proposed rulemaking under the Administrative Procedure 
Act, explaining that the Commission had requested comment on ``the 
appropriate levels for the percentage tests,'' but ``did not propose 
new percentage thresholds,'' did not ``reveal the theories that 
prompted the SEC to propose the change,'' and did not indicate 
``whether the agency proposed the percentages to be raised, lowered, 
or maintained.'' See United Church Bd. for World Ministries v. SEC, 
617 F. Supp. 837, 839 (D.D.C. 1985).
---------------------------------------------------------------------------

    In 1997, the Commission proposed increasing the resubmission 
thresholds to 6, 15, and 30 percent and, in doing so, stated that ``a 
proposal that has not achieved these levels of support has been fairly 
tested and stands no significant chance of obtaining the level of 
voting support required for approval.'' \79\ The Commission also 
explained that it ``propose[d] to increase the second and third 
thresholds by relatively larger amounts because the proposal will have 
had two or three years to generate support.'' \80\ While the Commission 
adopted other amendments (including increasing the share ownership 
threshold), it chose not to adopt this proposed amendment to the 
resubmission thresholds because ``many commenters from the shareholder 
community [had] expressed serious concerns.'' \81\ The resubmission 
thresholds have remained 3, 6, and 10 percent since 1954.
---------------------------------------------------------------------------

    \79\ See 1997 Proposing Release, supra note 36.
    \80\ See id. These new thresholds were introduced as part of a 
broader rulemaking that included other proposed revisions to Rule 
14a-8 that, if adopted, were expected to result in fewer excludable 
proposals under the rule, and one of the reasons the Commission gave 
for proposing these revised resubmission thresholds was that higher 
thresholds would ``counter-balance'' the effect the other revisions 
would have had on the excludability of proposals.
    \81\ See 1998 Adopting Release, supra note 8. Some commenters 
had expressed concern that the increases ``would operate to exclude 
too great a percentage of proposals--particularly those focusing on 
social policy issues which tend to receive lower percentages of the 
shareholder vote.'' Id.
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2. Public Views on Rule 14a-8(i)(12)
    Over the last several years, public interest in revisiting the 
resubmission thresholds has grown. For example, in April 2014, the 
Commission received a rulemaking petition in support of revising the 
thresholds (the ``Rulemaking Petition'').\82\ In response to the 
Rulemaking Petition, the Commission received twenty-three comment 
letters, expressing a range of views on possible changes to the 
thresholds.\83\ There have also been other calls for reform in this 
area,\84\ as well as congressional interest.\85\
---------------------------------------------------------------------------

    \82\ See Rulemaking Petition from the U.S. Chamber of Commerce, 
National Association of Corporate Directors, National Black Chamber 
of Commerce, American Petroleum Institute, American Insurance 
Association, The Latino Coalition, Financial Services Roundtable, 
Center on Executive Compensation, and Financial Services Forum, 
April 9, 2014, available at https://www.sec.gov/rules/petitions/2014/petn4-675.pdf.
    \83\ Comment letters received in response to the Rulemaking 
Petition are available at https://www.sec.gov/comments/4-675/4-675.shtml.
    \84\ See, e.g., BRT Report, supra note 43; Center for Capital 
Markets Competitiveness, Shareholder Proposal Reform: The Need to 
Protect Investors and Promote the Long-Term Value of Public 
Companies (2017), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/023270_CCMC-SEC-Shareholder-Proposal-Reform-Report_Online_Report.pdf 
(``CCMC Report''); Nasdaq Report, supra note 43; Treasury Report, 
supra note 43. At the Commission's 38th Annual Government--Business 
Forum on Small Business Capital Formation held on August 14, 2019, 
one of the forum participant recommendations was to amend the 
resubmission thresholds.
    \85\ See, e.g., Corporate Governance: Fostering a System That 
Promotes Capital Formation and Maximizes Shareholder Value: Hearing 
Before U.S. H.R. Subcomm. on Capital Markets and Government 
Sponsored Enterprises of the Committee on Financial Services, 114th 
Cong. (2016); Proxy Process and Rules: Examining Current Practices 
and Potential Changes: Hearing Before U.S. S. Comm. on Banking, 
Housing, and Urban Affairs, 115th Cong. (2018); H.R. 5756, 115th 
Cong. (2018); Financial CHOICE Act of 2017, H.R. 10, 115th Cong. 
Sec.  844 (2017).
---------------------------------------------------------------------------

    Some groups have expressed support for raising the resubmission 
thresholds because they believe the current thresholds no longer serve 
their intended purpose.\86\ These observers suggest that resubmitted 
proposals distract shareholders and their fiduciaries from potentially 
more important matters by requiring them to spend additional time and 
resources reconsidering issues that have already been rejected by a 
majority of shareholders.\87\
---------------------------------------------------------------------------

    \86\ See, e.g., CCMC Report, supra note 84; Rulemaking Petition, 
supra note 82.
    \87\ See, e.g., Rulemaking Petition, supra note 82, at 8-9.
---------------------------------------------------------------------------

    In contrast, other groups suggest that, while the process may take 
time, resubmitted proposals can increase interest in, and shareholder 
support for, issues that at least some shareholders consider 
important.\88\ In response to the Rulemaking Petition, one commenter 
cited as an example of an issue that took time to gain broader 
shareholder support, climate-change proposals, which averaged voting 
support of approximately 5 percent in 1999 and approximately 38 percent 
by 2017.\89\
---------------------------------------------------------------------------

    \88\ See Ceres Business Case, supra note 25; letter in response 
to the Proxy Process Roundtable from Dominican Sisters of 
Springfield Illinois dated December 3, 2018; letter in response to 
the Rulemaking Petition from The Nathan Cummings Foundation dated 
April 30, 2018.
    \89\ See letter in response to the Rulemaking Petition from The 
Nathan Cummings Foundation dated April 30, 2018.
---------------------------------------------------------------------------

    Some groups have suggested that a significant number of shareholder 
proposals are resubmissions of previously-submitted proposals. For 
example, one study indicates that 1,063 of 3,392 proposals that were 
included in the proxy statements of Fortune 250 companies between 2007 
and 2016 were resubmitted proposals.\90\ This report also states that 
100 proposals were resubmitted three or more times between 2006 and 
2013.\91\
---------------------------------------------------------------------------

    \90\ See James R. Copland & Margaret M. O'Keefe, An Annual 
Report on Corporate Governance and Shareholder Activism, Manhattan 
Institute for Policy Research (2016), available at https://media4.manhattan-institute.org/sites/default/files/pmr_2016.pdf.
    \91\ Id.
---------------------------------------------------------------------------

    A separate report states that one-third of proposals voted on 
between 2011 and 2018 were submitted two or more times at the same 
company.\92\ This report also finds that approximately 95 percent of 
proposals are eligible for resubmission after the first submission and 
90 percent are eligible after the second and third submission, and that 
``nearly all proposals that clear those thresholds and are submitted 
again remain eligible in subsequent submissions.'' \93\ In addition, 
the report indicates that the overwhelming majority of proposals that 
win majority support do so the first time they are submitted, and less 
than 9 percent of proposals that fail to win majority support the first 
time go on to pass in a subsequent attempt.\94\ It further notes that 
``[w]hen the SEC first adopted the [resubmission] thresholds, between 
one-half and three-quarters of proposals failed to win sufficient 
support for resubmission,'' and that ``the 3%, 6% and 10% resubmission 
thresholds preclude a much smaller proportion of shareholder proposals 
today than in the past.'' \95\
---------------------------------------------------------------------------

    \92\ See Brandon Whitehill, Clearing the Bar, Shareholder 
Proposals and Resubmission Thresholds, Council of Institutional 
Investors (Nov. 2018), available at https://docs.wixstatic.com/ugd/72d47f_092014c240614a1b9454629039d1c649.pdf (``CII Report''). For a 
discussion of our findings with respect to this data, see infra note 
197.
    \93\ Id.
    \94\ Id. at 8.
    \95\ Id.
---------------------------------------------------------------------------

    Members of other groups have indicated that ``[r]esubmissions for a

[[Page 66470]]

third or fourth time are very rare,'' stating that since 2010 (and 
presumably through the report's publication date in 2017), a total of 
35 environmental and social proposals that received less than 20 
percent of the shareholder vote for two or more years were 
resubmitted.\96\ According to this report, these 35 proposals were 
resubmitted to 26 companies.\97\
---------------------------------------------------------------------------

    \96\ See Jonas Kron, Trillium Asset Management & Brandon Rees, 
AFL-CIO Office of Investment and co-chair CII Shareholder Advocacy 
Committee, Frequently Asked Questions about Shareholder Proposals, 
Council of Institutional Investors (last visited Oct. 30, 2019), 
available at https://www.cii.org/files/10_10_Shareholder_Proposal_FAQ(2).pdf.
    \97\ Id.
---------------------------------------------------------------------------

    Some observers argue that the resubmission thresholds should be 
raised because companies incur significant expense as a result of 
receiving shareholder proposals, including resubmitted proposals, that 
are unlikely to win majority support.\98\ In response to the Proxy 
Process Roundtable, some commenters expressed views that: Resubmitted 
shareholder proposals often take a disproportionate amount of time 
compared to annual management proposals; \99\ resubmitted proposals 
exacerbate the costs of shareholder proposals; \100\ the cost in terms 
of corporate resources spent to deal with resubmitted proposals is 
significant; \101\ resubmitted proposals divert management time and 
resources; \102\ and all shareholders bear the costs associated with 
resubmitted shareholder proposals.\103\ Others contend that the costs 
are much lower.\104\ It has also been suggested that the inability to 
resubmit shareholder proposals may drive shareholders to pursue 
alternative strategies that would be more costly and time-consuming for 
companies.\105\ We are interested in obtaining, and request comment on, 
additional data about the costs incurred as a result of receiving 
shareholder proposals, including resubmitted proposals.
---------------------------------------------------------------------------

    \98\ See, e.g., Rulemaking Petition, supra note 82, at 16; 
Statements of James R. Copland, Senior Fellow and Director, Legal 
Policy, Manhattan Institute for Policy Research and Darla C. 
Stuckey, President and CEO, Society for Corporate Governance, Before 
the H. Comm. on Financial Services Subcomm. on Capital Markets and 
Government Sponsored Enterprises, Sept. 21, 2016; see also letters 
in response to the Proxy Process Roundtable from American Securities 
Associations dated June 7, 2019; Exxon Mobil Corporation dated July 
26, 2019 (stating that the company's cost per shareholder proposal, 
including resubmitted proposals, is more than $100,000).
    \99\ See letter in response to the Proxy Process Roundtable from 
Investment Company Institute dated March 15, 2019.
    \100\ See letter in response to the Proxy Process Roundtable 
from Business Roundtable dated June 3, 2019.
    \101\ See letter in response to the Proxy Process Roundtable 
from U.S. Chamber of Commerce Center for Capital Markets 
Competitiveness dated December 20, 2018.
    \102\ See letter in response to the Proxy Process Roundtable 
from National Association of Manufacturers dated October 30, 2018.
    \103\ See letter in response to the Proxy Process Roundtable 
from Society for Corporate Governance dated November 9, 2018.
    \104\ See Adam M. Kanzer, The Dangerous ``Promise of Market 
Reform'': No Shareholder Proposals, Harvard Law School Forum on 
Corporate Governance and Financial Regulation (Jun. 15, 2017), 
available at https://corpgov.law.harvard.edu/2017/06/15/the-dangerous-promise-of-market-reform-no-shareholder-proposals/ 
(``Kanzer 2017''); letter in response to the Rulemaking Petition 
from the Shareholder Rights Group dated October 5, 2017, at 11.
    \105\ See, e.g., letters in response to the Rulemaking Petition 
from The McKnight Foundation dated June 11, 2018; Nathan Cummings 
Foundation dated April 30, 2018.
---------------------------------------------------------------------------

    Various alternatives have been suggested for addressing the 
concerns with resubmitted proposals. A number of those who support 
raising the resubmission thresholds have suggested that raising them to 
6, 15, and 30 percent would be appropriate.\106\ One commenter 
suggested thresholds of 10, 25, and 50 percent, where failure to 
achieve the thresholds would render a proposal excludable for an amount 
of time equal to the number of years the proposal had previously been 
included in the company's proxy statement.\107\
---------------------------------------------------------------------------

    \106\ See, e.g., BRT Report, supra note 43; CCMC Report, supra 
note 84; letters in response to the Proxy Process Roundtable from 
American Securities Association dated June 7, 2019; Braemer Hotels & 
Resorts dated January 4, 2019; U.S. Chamber of Commerce Center for 
Capital Markets Competitiveness dated November 12, 2018; Center on 
Executive Compensation dated November 12, 2018; Group 1 Automotive, 
Inc. dated January 11, 2019; Nareit dated November 12, 2018; Nasdaq, 
Inc. et al. dated February 4, 2019; Society for Corporate Governance 
dated November 9, 2018; Tyler Technologies, Inc. dated September 20, 
2019.
    \107\ See letter in response to the Proxy Process Roundtable 
from Exxon Mobil Corporation dated July 26, 2019.
---------------------------------------------------------------------------

3. Need for Proposed Amendments
    We continue to believe, as the Commission stated when it first 
proposed a resubmission threshold for shareholder proposals in 1948, 
that resubmission thresholds are appropriate to ``relieve the 
management of the necessity of including proposals that have been 
previously submitted to security holders without evoking any 
substantial security holder interest therein.'' \108\
---------------------------------------------------------------------------

    \108\ See 1948 Proposing Release, supra note 6.
---------------------------------------------------------------------------

    Having considered the feedback discussed above, and recognizing the 
range of views expressed, we are concerned that the current 
resubmission thresholds may allow proposals that have not received 
widespread support from a company's shareholders to be resubmitted--in 
some cases, year after year--with little or no indication that support 
for the proposal will meaningfully increase or that the proposal 
ultimately will obtain majority support. Companies and their 
shareholders bear the burdens associated with management's and 
shareholders' repeated consideration of these proposals and/or their 
recurrent inclusion in the proxy statement. While we recognize that 
some proposals may necessitate resubmission to obtain majority support, 
we do not believe shareholders whose proposals are unlikely ever to 
obtain or at least without a significant change in circumstances obtain 
such support--and thus to reflect the interests of a majority of 
shareholders--should be permitted to require companies and other 
shareholders to bear the costs associated with their proposals. If a 
proposal fails to generate meaningful support on its first submission, 
and is unable to generate significantly increased support upon 
resubmission, it is doubtful that the proposal will earn the support of 
a majority of shareholders in the near term or without a significant 
change in circumstances.\109\ In light of these concerns, we are 
proposing to increase the resubmission thresholds to allow companies to 
exclude resubmitted proposals that have not received broad support and 
appear less likely to be on a sustainable path toward achieving 
majority shareholder support. In these circumstances, we believe a 
``cooling-off'' period may be warranted to help ensure that the 
inclusion of such proposals does not result in unjustified burdens on 
companies and shareholders.
---------------------------------------------------------------------------

    \109\ Based on our review of shareholder proposals that received 
a majority of the votes cast between 2011 and 2018, approximately 
90% received such support on the first submission. Of the remaining 
10%, 60% received 40% or more of the votes cast on the initial 
submission. See discussion infra Section IV.B.3.iv.

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[[Page 66471]]

    Under the current rule, proposals that are not supported by up to 
approximately 97 percent of votes cast on the first submission, 94 
percent on the second submission, and 90 percent on the third or 
subsequent submissions remain eligible for resubmission. We recognize 
that initially lower levels of shareholder support do not always 
indicate how shareholders will vote on an issue in the future. 
Nevertheless, we are concerned that thresholds of 3, 6, and 10 percent 
may not demonstrate sufficient shareholder support to warrant 
resubmission, or adequately distinguish between proposals that 
ultimately are more likely to obtain majority support upon resubmission 
and those that are not. As one commenter has noted, ``the current 
thresholds leave no less than 90% of proposals eligible for 
resubmission.'' \110\ These resubmitted proposals are permitted despite 
the fact that, according to the commenter, less than 9 percent of 
proposals that fail to win majority support the first time go on to 
pass in a subsequent attempt.\111\ Thus, it appears that under the 
current thresholds the vast majority of shareholder proposals are 
eligible for resubmission regardless of their likelihood of gaining 
broader shareholder support or, ultimately, garnering a majority of the 
votes cast, at least in the near term.
---------------------------------------------------------------------------

    \110\ See CII Report, supra note 92, at 16. Based on our 
analysis, approximately 94% of proposals remain eligible for 
resubmission after the initial submission, 90% after the second 
submission, and 94% after the third or subsequent submission under 
the current resubmission thresholds. In total, approximately 93% of 
proposals remain eligible for resubmission under the current 
resubmission thresholds. Of these eligible proposals that were 
submitted from 2011 to 2018, approximately 6.5% garnered majority 
support at some point during that period following initial 
submission. See discussion infra Section IV.B.3.iv.
    \111\ See CII Report, supra note 92, at 8. Based on our analysis 
of proposals submitted between 2011 and 2018, 6.5% of resubmitted 
proposals that failed to win majority support on the first 
submission went on to pass in a subsequent attempt.
---------------------------------------------------------------------------

    In addition, the current resubmission thresholds may not have the 
same effect today on resubmissions as they did when they were initially 
adopted. According to one commenter, the percentage of shareholder 
proposals eligible for resubmission today is considerably higher than 
at the time the thresholds were first introduced, when ``between one-
half and three-quarters of proposals failed to win sufficient support 
for resubmission.'' \112\ It has been suggested that this difference 
may be due to a number of factors, including the role proxy advisory 
firms now play in the shareholder voting process,\113\ and greater 
participation by institutional investors in that process.\114\ 
Consequently, we are concerned that the current thresholds may not be 
functioning effectively to alleviate companies and their shareholders 
of the obligation to consider, and spend resources on, matters that 
have previously been voted on and rejected by shareholders without 
sufficient indication that a proposal will gain traction among the 
broader shareholder base in the near future.
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    \112\ See CII Report, supra note 92, at 6 (citing Lewis D. 
Gilbert, Dividends and Democracy 108 (1956) (noting that ``[b]etween 
half and three quarters of the proposals being submitted would be 
banned'' by the Commission's proposed thresholds of 3%, 7%, and 
10%)). We note that the Commission ultimately adopted thresholds of 
3%, 6%, and 10%.
    \113\ Cf. Rulemaking Petition, supra note 82, at 6-7.
    \114\ See CII Report, supra note 92, at 6.
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4. Proposed Amendments
    To address these concerns, we are proposing revisions to Rule 14a-
8(i)(12) that would replace the current resubmission thresholds of 3, 
6, and 10 percent with new thresholds of 5, 15, and 25 percent, 
respectively, and add an additional provision to the rule that would 
allow companies to exclude proposals that have been submitted three or 
more times in the preceding five years if they received more than 25 
percent, but less than 50 percent, of the vote and support declined by 
more than 10% the last time substantially the same subject matter was 
voted on compared to the immediately preceding vote. We believe these 
proposed amendments would allow proposals to receive due consideration 
without imposing on companies and their shareholders the burden of 
having to repeatedly consider matters on which they have already 
indicated a lack of interest, or where interest has waned.
(i) Proposed Resubmission Thresholds
    Under proposed Rule 14a-8(i)(12), a shareholder proposal may be 
excluded from a company's proxy materials if it deals with 
substantially the same subject matter as a proposal,\115\ or proposals, 
previously included in a company's proxy materials within the preceding 
five calendar years if the most recent vote occurred within the 
preceding three calendar years and that vote was:
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    \115\ The condition in Rule 14a-8(i)(12) that the shareholder 
proposals deal with ``substantially the same subject matter'' does 
not mean that the previous proposal(s) and the current proposal must 
be identical. In 1983, the Commission amended the language in the 
exclusion from ``substantially the same proposal'' to 
``substantially the same subject matter.'' See 1983 Adopting 
Release, supra note 6. In doing so, the Commission explained that 
the purpose of amending the exclusion was to ``counter the abuse of 
the security holder proposal process by certain proponents who make 
minor changes in proposals each year so that they can keep raising 
the same issue despite the fact that other shareholders have 
indicated by their votes that they are not interested in that 
issue.'' Id. When considering whether proposals deal with 
substantially the same subject matter, the staff has focused on 
whether the proposals share the same ``substantive concerns'' rather 
than the ``specific language or actions proposed to deal with those 
concerns.'' Id. We are not proposing changes to the ``substantially 
the same subject matter'' standard, but seek comment on whether such 
a change would be appropriate or necessary in light of the proposed 
amendments.
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     Less than 5 percent of the votes cast if previously voted 
on once;
     Less than 15 percent of the votes cast if previously voted 
on twice; or
     Less than 25 percent of the votes cast if previously voted 
on three times or more.\116\
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    \116\ Only votes for and against a proposal would be included in 
the calculation of the shareholder vote. Abstentions and broker non-
votes would not be included in the calculation.
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    We are proposing a modest increase to the initial resubmission 
threshold of 2 percent, and more significant increases to the second 
and third thresholds of 9 and 15 percent, respectively. As a result, 
there will be a 10 percent spread between the first and second 
threshold and the second and third threshold. We believe that more 
significant revisions to the second and third thresholds are 
appropriate due to the fact that a proposal will have already been 
considered by shareholders two or three times before becoming subject 
to these thresholds.
    Currently, 90 percent or more of all proposals are eligible for 
resubmission at each threshold.\117\ Under the current thresholds, many 
of these proposals fail to obtain meaningful, or majority, support upon 
resubmission. From 2011 to 2018, there were 864 unique proposals that 
were resubmitted.\118\ Of these, only 54 (6.5%) ultimately garnered 
majority support (as noted in Table 9 in Section IV.C.2.iii below, only 
one of these would have been excludable under the proposed resubmission 
thresholds). The proposed increases in the resubmission thresholds to 
5, 15, and 25 percent reflect our experience with shareholder proposals 
and are intended to reduce the number of proposals eligible for 
resubmission that have little or no chance of gaining meaningful, or 
majority, shareholder support while still providing

[[Page 66472]]

shareholders with the opportunity to build support for their proposals.
---------------------------------------------------------------------------

    \117\ See supra note 110.
    \118\ The number of unique proposals that were resubmitted 
refers to the count of proposals that were resubmitted and voted on 
at least once during the sample period 2011 to 2018. The number of 
proposals (864) differs from the number referred to in the tables in 
Section IV.B.3.iv (1,442) because the latter is not limited to 
unique proposals.
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    In particular, our proposed increase for the initial resubmission 
threshold from 3 to 5 percent would exclude proposals that are very 
unlikely to earn majority support upon resubmission, but would still 
permit a very large percentage of proposals to be resubmitted.\119\ We 
believe that a cooling-off period is warranted if a matter is unable to 
garner the support of at least 1 in 20 shareholders upon its initial 
submission. Based on our analysis of the proposals that ultimately 
garnered majority support from 2011 to 2018, 90 percent did so on the 
first submission, and more than half of the proposals that were 
resubmitted garnered more than 40 percent on the first submission.\120\ 
Of the remaining proposals, nearly all garnered support of at least 5 
percent on the first submission.\121\ While we recognize that there 
have been a few instances in which proposals that have failed to 
receive at least 5 percent of the votes cast have gone on to garner 
significantly greater shareholder support, these instances appear to be 
infrequent and may be the result of factors other than or in addition 
to the resubmission.\122\
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    \119\ Of the proposals resubmitted between 2011 and 2018, we 
estimate that approximately 85% would have been eligible for 
resubmission under the proposed resubmission thresholds. See infra 
Table 9 in Section IV.C.2.iii.
    \120\ See infra Section IV.B.3.iv.
    \121\ Id.
    \122\ Based on our review of shareholder proposals that received 
a majority of the votes cast on a second or subsequent submission 
between 2011 and 2018, only 2% of the proposals that have failed to 
receive at least 5% of the votes cast have gone on to garner 
majority support. See infra Section IV.B.3.iv.
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    The proposed increase for the second and third resubmission 
thresholds to 15 and 25 percent are also intended to provide a better 
indicator of proposals that are more likely to ultimately obtain 
majority support than the current thresholds. We believe that proposals 
receiving these levels of support will have better demonstrated a 
sustained level of shareholder interest to warrant management and 
shareholder consideration upon resubmission, subject to the discussion 
in Section II.E.4.ii below. As indicated in Section IV.B.3.iv below, 
these thresholds are below the average and median support for initial 
submissions of 34 and 30 percent, respectively. Of the resubmitted 
proposals that ultimately obtain majority support, the overwhelming 
majority garner more than 15 percent on their second try and more than 
25 percent on their third submission.\123\ As with the initial 
resubmission threshold, these thresholds would exclude proposals that 
are unlikely to earn majority support, but would still permit a 
significant number of proposals to be resubmitted.\124\ We believe that 
a cooling-off period also is warranted if, after three or more 
submissions, more than 75 percent of the votes cast have not supported 
the matter.
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    \123\ Based on our review of shareholder proposals that received 
a majority of the votes cast on a second or subsequent submission 
between 2011 and 2018, 95% received support greater than 15% on the 
second submission, and 100% received support greater than 25% on the 
third or subsequent submission. In addition, of the 22 proposals 
that obtained majority support on their third or subsequent 
submissions, approximately 95% received support of over 15% on their 
second submission, and 100% received support of over 25% on their 
third or subsequent submission. See infra Section IV.B.3.iv.
    \124\ See infra Section IV.B.3.iv.
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    We recognize, as discussed in Section IV below, that raising the 
resubmission thresholds would be expected to result in the exclusion of 
more proposals than currently. Our analysis in Table 9 in Section 
IV.C.2.iii indicates that under the proposed 15%/25% thresholds, there 
would be 14%/27% more proposals that would be excludable than under the 
current rules. While these are increases in the overall number of 
excludable proposals, we believe these thresholds would better 
distinguish those excludable proposals that are on a path toward more 
meaningful shareholder support from those that are not. In other words, 
we believe that, under the proposed resubmission thresholds, any 
increase in the number of excludable proposals that would have been on 
a path toward more meaningful shareholder support would be small.
    We also believe that the proposed resubmission thresholds would 
reduce the costs associated with management's and shareholders' 
repeated consideration of these proposals and their recurrent inclusion 
in the proxy statement while still maintaining shareholders' ability to 
submit proposals, and engage with companies, on matters of interest to 
shareholders. We believe that the proposed resubmission thresholds may 
lead to the submission of proposals that will evoke greater shareholder 
interest in, and foster more meaningful engagement between, management 
and shareholders, as the proposed thresholds would incentivize 
shareholders to submit proposals on matters that resonate with the 
broader shareholder base to avoid exclusion under Rule 14a-8(i)(12).
    We believe that the proposed resubmission thresholds strike an 
appropriate balance between reducing the costs to companies of 
responding to proposals that do not garner significant shareholder 
support and may be unlikely to do so in the future, with preserving 
shareholders' ability to engage with a company and other shareholders 
through the shareholder-proposal process. In addition, as is currently 
the case, the resubmission thresholds would not act as a permanent bar 
and, thus, shareholders would be able to resubmit substantially similar 
proposals after a three-year cooling-off period. We recognize, however, 
that there may be alternative thresholds that could also achieve this 
balance, and we seek public comment on whether the proposed thresholds 
strike the correct balance.
    We also considered whether to propose any changes to the vote-
counting methodology. For example, we considered whether votes by 
insiders should be excluded from the calculation of votes cast for 
purposes of determining whether the resubmission thresholds have been 
satisfied. In addition, we considered whether to apply a different 
vote-counting methodology for companies with dual-class voting 
structures.\125\ We elected not to propose alternative vote-counting 
methodologies, however, because we believe that including these votes 
in the voting calculation more accurately captures the sentiment of all 
shareholders, including insiders and controlling shareholders. 
Nevertheless, we seek comment on whether changes to the current vote-
counting methodology are necessary. We also considered whether to adopt 
an exception to the rule that would allow an otherwise excludable 
proposal to be resubmitted if there are material developments that 
suggest a resubmitted proposal may garner significantly more votes than 
when previously voted on. We elected not to propose such an exception, 
however, because we believe it would be difficult in many cases to 
determine how the intervening developments would affect shareholders' 
voting decisions. We seek

[[Page 66473]]

comment on whether such an exception should be added to the rule.
---------------------------------------------------------------------------

    \125\ Cf. letter in response to the Proxy Process Roundtable 
from CtW Investment Group dated January 16, 2019 (noting that 
increasing the resubmission thresholds will make it more difficult 
to satisfy the resubmission thresholds at companies with dual-class 
voting structures); letter in response to the Rulemaking Petition 
from the Shareholder Rights Group dated October 5, 2017 (``When one 
considers dual class share ownership, insider ownership and the non-
involvement of passive investors, the percent of support for a 
proposal reflected by the Rule's counting methods may reflect a 
sharp underestimate of the support by those investors known to 
actively consider shareholder proposals.'').
---------------------------------------------------------------------------

Request for Comment
    37. Should we maintain the current approach of three tiers of 
resubmission thresholds but increase the thresholds to 5, 15, and 25 
percent, as proposed? Would alternative thresholds such as 5, 10, and 
15 percent, or 10, 25, and 50 percent, be preferable? If so, what 
should the thresholds be? Should we instead adopt the thresholds that 
were proposed by the Commission in the 1997 Proposing Release (i.e., 6, 
15, and 30 percent)? Do the proposed resubmission thresholds better 
distinguish those proposals that are on a path to meaningful 
shareholder support from those that are not?
    38. Alternatively, should we remove resubmission thresholds for the 
first two submissions and, instead, allow for exclusion if a matter 
fails to receive majority support by the third submission within a 
certain number of years? Under such an approach, what would be an 
appropriate lookback period and how long should the cooling-off period 
be (e.g., three years, five years, or some other period of time)?
    39. What are the estimated costs companies incur as a result of 
receiving resubmitted proposals? Are the costs different for 
resubmitted proposals than for initial submissions? In particular, 
which specific costs incurred (e.g., printing costs, staff time, fees 
paid to external parties such as legal advisors or proxy solicitors, 
management time, board time, etc.) may differ between resubmitted 
proposals and initial submissions?
    40. Is there a voting threshold that, if not achieved initially, a 
proposal is unlikely to surpass in subsequent years? Conversely, is 
there a voting threshold that, if achieved, a proposal is unlikely to 
fall below in subsequent years?
    41. Should we shorten or lengthen the relevant five-year and three-
year lookback periods? If so, what should the lookback periods be?
    42. Should the vote-counting methodology under Rule 14a-8(i)(12) be 
revised? For example, should shares held by insiders be excluded from 
the voting calculation, or should broker non-votes and/or abstentions 
count as votes ``against''? Should there be a different vote-counting 
methodology for companies with dual-class voting structures? If so, 
what should that methodology be?
    43. Would the proposed changes in resubmission thresholds 
meaningfully affect the ability of shareholders to pursue initiatives 
for which support may build gradually over time? Do legal or logistical 
impediments to shareholder communications affect the ability of 
shareholders to otherwise pursue such longer horizon initiatives? If 
so, how? Are there ways to mitigate any potential adverse effects of 
the proposed resubmission thresholds while limiting costs to companies 
and shareholders?
    44. When considering whether proposals deal with substantially the 
same subject matter, the staff has focused on whether the proposals 
share the same ``substantive concerns'' rather than the ``specific 
language or actions proposed to deal with those concerns.'' Should we 
consider adopting this standard, or its application? Should we consider 
changing this standard, or its application? For example, should we 
adopt a ``substantially the same proposal'' standard?
(ii) Momentum Requirement for Proposals Addressing Substantially the 
Same Subject Matter as Those Previously Voted on Three or More Times in 
the Preceding Five Calendar Years
    In addition to raising the resubmission thresholds to 5, 15, and 25 
percent, we are proposing to amend Rule 14a-8(i)(12) to allow companies 
to exclude proposals dealing with substantially the same subject matter 
as proposals previously voted on by shareholders three or more times in 
the preceding five calendar years that would not otherwise be 
excludable under the 25 percent threshold if (i) the most recently 
voted on proposal received less than a majority of the votes cast and 
(ii) support declined by 10 percent or more compared to the immediately 
preceding shareholder vote on the matter (the ``Momentum 
Requirement''). For example, under such a requirement, a proposal would 
be excludable where proposals dealing with substantially the same 
subject matter had previously been voted on three times in the 
preceding five calendar years and received 26 percent of the votes cast 
on the third submission compared to 30 percent on the second 
submission. In this case, the percentage of votes cast on the third 
submission (26 percent) declined by more than 10 percent compared to 
the percentage of votes cast on the second submission (30 percent) and, 
thus, proposals dealing with substantially the same subject matter 
would be excludable during the relevant lookback period.
    The purpose of this requirement would be to relieve management and 
shareholders from having to repeatedly consider, and bear the costs 
related to, matters for which shareholder interest has declined. We 
note that it would apply only to matters that have been previously 
voted on three or more times in the preceding five years, giving 
shareholder-proponents a number of years to advocate for, and the 
broader shareholder base ample opportunity to consider, the matters 
raised. We further believe that a 10 percent decline in the percentage 
of votes cast may demonstrate a sufficiently significant decline in 
shareholder interest to warrant a cooling-off period. Nevertheless, we 
seek comment on whether 10 percent is an appropriate figure, or whether 
some other method or figure would be more appropriate, to gauge 
shareholder interest.
    The Momentum Requirement would not apply where the previously voted 
on proposal(s) received a majority of the votes cast at the time of the 
most recent shareholder vote, even if shareholder support had declined 
by 10 percent or more compared to the immediately preceding vote.\126\ 
We believe proposals that receive a majority of the votes cast have 
demonstrated a sufficient level of shareholder interest to qualify for 
resubmission. In addition, it is our understanding that companies 
frequently act on proposals, including non-binding proposals, that 
receive a majority of the votes cast, which can reduce the likelihood 
of resubmitted proposals.
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    \126\ If, after receiving a majority of the votes cast, a matter 
receives less than a majority of the votes cast upon a subsequent 
submission, the Momentum Requirement would apply. We believe that 
the same rationale underlying the Momentum Requirement applies where 
shareholder support declines below a majority of the votes cast, but 
we seek comment on this point.
---------------------------------------------------------------------------

Request for Comment
    45. Should we adopt the Momentum Requirement, as proposed? If so, 
should we adopt this requirement instead of, rather than in addition 
to, the proposed resubmission thresholds? Would this requirement be 
difficult to apply in practice?
    46. As proposed, a proposal that receives a majority of the votes 
cast at the time of the most recent shareholder vote would not be 
subject to the Momentum Requirement. Is there a voting threshold below 
a majority of the votes cast that demonstrates a sufficient level of 
shareholder interest in the matter to warrant resubmission regardless 
of whether future proposals addressing substantially the same subject 
matter gain additional shareholder support? If so, what is an 
appropriate threshold?
    47. As proposed, a proposal that receives a majority of the votes 
cast at

[[Page 66474]]

the time of the most recent vote would not be excludable under the 
Momentum Requirement. Should this exception to the Momentum Requirement 
be limited to the most recent shareholder vote, or should it apply to a 
different lookback period such as three years or five years?
    48. Should the Momentum Requirement apply to all resubmitted 
proposals, not just those that have been resubmitted three or more 
times? For example, assuming adoption of the proposed resubmission 
thresholds, should a proposal be excludable if proposals addressing 
substantially the same subject matter received 19 percent on the first 
submission and 16 percent on the second submission, even though 16 
percent exceeds the relevant proposed threshold of 15 percent for a 
second submission?
    49. Does a 10 percent decline in the percentage of votes cast 
demonstrate a sufficiently significant decline in shareholder interest 
to warrant a cooling-off period for any proposal receiving less than 
majority support? Would a different percentage--such as 20, 30, or 50 
percent--or an alternative threshold, be more appropriate?
    50. Should the cooling-off period for proposals that fail the 
Momentum Requirement be shorter than the cooling-off period for 
proposals that fail to satisfy the existing resubmission thresholds? If 
so, what would be an appropriate cooling-off period?
    51. Are there other mechanisms we should consider that would 
demonstrate that a proposal has lost momentum? For example, should 
there be a separate basis for exclusion if the level of support has not 
increased by more than 10 percent in the last two votes in the previous 
five years? Or, should there be a separate basis for exclusion if the 
level of support does not reach 50 percent within 10 years of first 
being proposed? If so, what would be an appropriate cooling-off period?

III. General Request for Comment

    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might have an impact 
on the proposed amendments, and any suggestions for additional changes. 
With respect to any comments, we note that they are of greatest 
assistance to our rulemaking initiative if accompanied by supporting 
data and analysis of the issues addressed in those comments and by 
alternatives to our proposals where appropriate.

IV. Economic Analysis

A. Introduction

    We are proposing to amend certain procedural requirements and the 
provision relating to resubmitted proposals under the shareholder-
proposal rule. We are sensitive to the economic effects that may result 
from the proposed rule amendments, including the benefits, costs, and 
the effects on efficiency, competition, and capital formation. Section 
3(f) of the Exchange Act, Section 2(b) of the Securities Act of 1933, 
and Section 2(c) of the Investment Company Act require us, when 
engaging in rulemaking that requires us to consider or determine 
whether an action is necessary or appropriate in (or, with respect to 
the Investment Company Act, consistent with) the public interest, to 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation. 
Additionally, Section 23(a)(2) of the Exchange Act requires us, when 
making rules or regulations under the Exchange Act, to consider, among 
other matters, the impact that any such rule or regulation would have 
on competition and states that the Commission shall not adopt any such 
rule or regulation which would impose a burden on competition that is 
not necessary or appropriate in furtherance of the Exchange Act.
    We discuss the potential effects of the proposed rule amendments as 
well as possible alternatives to the proposed amendments below. Where 
possible, we have attempted to quantify the costs, benefits, and 
effects on efficiency, competition, and capital formation expected to 
result from the proposed rule amendments. In some cases, however, we 
are unable to quantify the economic effects because we lack the 
information necessary to provide a reasonable and reliable estimate. 
Where we are unable to quantify the economic effects of the proposed 
rule, we provide a qualitative assessment of the potential effects and 
encourage commenters to provide data and information that would help 
quantify the benefits, costs, and the potential impacts of the proposed 
rule amendments on efficiency, competition, and capital formation.

B. Economic Baseline

    The baseline against which the costs, benefits, and the impact on 
efficiency, competition, and capital formation of the proposed rule 
amendments are measured consists of the current regulatory framework 
and the current practices for shareholder proposal submissions.
1. Current Regulatory Framework
    State laws, corporate bylaws, and federal securities laws jointly 
govern the shareholder-proposal process. Under state law, a shareholder 
generally has the right to appear in person at an annual or special 
meeting and put forth a resolution to be voted on by the shareholders. 
Such resolutions can include, for example, proposals to adopt, amend, 
or repeal bylaws or to request the board to take certain actions. State 
law also governs shareholders' ability to submit a proposal through a 
representative.\127\ Company bylaws can limit shareholders' ability to 
attend or present at shareholder meetings. Federal securities law 
governs communications in advance of shareholder meetings, including 
solicitation of proxies for items to be voted on at the meeting. 
Federal securities law also requires companies to allow shareholders to 
vote by proxy at shareholder meetings and requires companies to include 
a shareholder's proposal in the company's proxy statement unless a 
ground for exclusion is met. Most shareholders currently vote in 
advance of shareholder meetings through the proxy process.
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    \127\ See supra Section II.B.
---------------------------------------------------------------------------

    Rule 14a-8 addresses when a company must include a shareholder 
proposal in its proxy statement at an annual or special meeting of 
shareholders.\128\ Rule 14a-8 also sets forth procedural and 
substantive bases upon which a company can exclude a shareholder 
proposal from its proxy statement. Under Rule 14a-8(b), to be eligible 
to submit a proposal, a proponent ``must have continuously held at 
least $2,000 in market value, or 1%, of the company's securities 
entitled to be voted on the proposal at the meeting for at least one 
year by the date [the proponent] submit[s] the proposal.'' The 
Commission currently allows investors to aggregate their securities 
with other investors to meet the applicable minimum ownership 
thresholds to submit a Rule 14a-8 proposal. The rule does not currently 
require a shareholder-proponent to provide information specific to the 
use of a representative in the shareholder-proposal process, or state 
when he or she is able to meet with the company to discuss the 
proposal.
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    \128\ A shareholder may alternatively solicit proxies by filing 
its own proxy statement that complies with the federal proxy rules.
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    Rule 14a-8(c) provides that a shareholder may submit no more than

[[Page 66475]]

one proposal to a company for a particular shareholders' meeting.
    Rule 14a-8(i)(12) allows companies to exclude a shareholder 
proposal that ``deals with substantially the same subject matter as 
another proposal or proposals that has or have been previously included 
in the company's proxy materials within the preceding 5 calendar 
years'' if the matter was voted on at least once in the last three 
years and did not receive: (i) 3 percent of the vote if previously 
voted on once; (ii) 6 percent of the vote if previously voted on twice; 
or (iii) 10 percent of the vote if previously voted on three or more 
times.
2. Affected Entities
    The proposed amendments to Rule 14a-8(b), Rule 14a-8(c), and Rule 
14a-8(i)(12) could affect all companies subject to the federal proxy 
rules that receive shareholder proposals, the proponents of these 
proposals, and other non-proponent shareholders of these 
companies.\129\ Companies that have a class of equity securities 
registered under Section 12 of the Exchange Act are subject to the 
federal proxy rules, including Rule 14a-8.\130\ In addition, there are 
certain registered companies that voluntarily file proxy materials. 
Finally, Rule 20a-1 under the Investment Company Act subjects all 
management companies to the federal proxy rules.\131\
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    \129\ The proposed amendments could also have second-order 
effects on providers of administrative and advisory services related 
to proxy solicitation and shareholder voting.
    \130\ We are not aware of any asset-backed issuers that have a 
class of equity securities registered under Section 12 of the 
Exchange Act. Most asset-backed issuers report pursuant to under 
Section 15(d) of the Exchange Act and thus are not subject to the 
federal proxy rules. Nine asset-backed issuers had a class of debt 
securities registered under Section 12 of the Exchange Act as of 
December 2018. As a result, these asset-backed issuers are not 
subject to the federal proxy rules.
    Foreign private issuers are exempt from the federal proxy rules 
under Rule 3a12-3(b) of the Exchange Act. 17 CFR 240.3a12-3(b).
    \131\ Rule 20a-1 of the Investment Company Act requires 
management companies to comply with regulations adopted pursuant to 
Section 14(a) of the Exchange Act that would be applicable to a 
proxy solicitation if it were made in respect of a security 
registered pursuant to Section 12 of the Exchange Act. See 17 CFR 
270.20a-1.
    ``Management company'' means any investment company other than a 
face-amount certificate company or a unit investment trust. See 15 
U.S.C. 80a-4.
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    As of December 31, 2018, there were 5,746 companies that had a 
class of securities registered under Section 12 of the Exchange Act 
(including 98 Business Development Companies (``BDCs'')).\132\ As of 
the same date, there were 120 companies that did not have a class of 
securities registered under Section 12 of the Exchange Act that 
voluntarily filed proxy materials.\133\ As of August 31, 2019, there 
were 12,718 management companies that were subject to the federal proxy 
rules: (i) 12,040 open-end funds, out of which 1,910 were Exchange 
Traded Funds (``ETFs'') registered as open-end funds or open-end funds 
that had an ETF share class; (ii) 664 closed-end funds; and (iii) 14 
variable annuity separate accounts registered as management investment 
companies.\134\ The summation of these estimates yields 18,584 
companies where there is a possibility of being affected by the 
proposed rule amendments.\135\
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    \132\ We estimate the number of companies with a class of 
securities registered under Section 12 of the Exchange Act by 
reviewing all Forms 10-K filed during calendar year 2018 with the 
Commission and counting the number of unique companies that identify 
themselves as having a class of securities registered under Section 
12(b) or Section 12(g) of the Exchange Act. Foreign private issuers 
that filed Forms 20-F and 40-F and asset-backed issuers that filed 
Forms 10-D and 10-D/A during calendar year 2018 with the Commission 
are excluded from this estimate. See supra note 130.
    BDCs are all entities that have been issued an 814-reporting 
number. Our estimate includes BDCs that may be delinquent or have 
filed extensions for their filings, and it excludes 6 wholly owned 
subsidiaries of other BDCs.
    \133\ We identify registered companies that voluntarily file 
proxy materials as companies reporting pursuant to Section 15(d) of 
the Exchange Act but not registered under Section 12(b) or Section 
12(g) of the Exchange Act that filed any proxy materials during 
calendar year 2018 with the Commission. The proxy materials we 
consider in our analysis are Forms DEF14A, DEF14C, DEFA14A, DEFC14A, 
DEFM14A, DEFM14C, DEFR14A, DEFR14C, DFAN14A, N-14, PRE 14A, PRE 14C, 
PREC14A, PREM14A, PREM14C, PRER14A and PRER14C. Form N-14 can be a 
registration statement and/or proxy statement. We manually review 
all Forms N-14 filed during calendar year 2018 with the Commission 
and we exclude from our estimates Forms N-14 that are exclusively 
registration statements.
    To identify companies reporting pursuant to Section 15(d) but 
not registered under Section 12(b) or Section 12(g) of the Exchange 
Act, we review all Forms 10-K filed in calendar year 2018 with the 
Commission and count the number of unique companies that identify 
themselves as reporting pursuant to Section 15(d) of the Exchange 
Act and not registered under Section 12(b) or Section 12(g) of the 
Exchange Act.
    \134\ We estimate the number of unique management companies by 
reviewing all Forms N-CEN filed between June 2018 and August 2019 
with the Commission. Open-end funds are series of trusts registered 
on Form N-1A. Closed-end funds are trusts registered on Form N-2. 
Variable annuity separate accounts registered as management 
companies are trusts registered on Form N-3.
    The number of potentially affected Section 12 and Section 15(d) 
reporting companies is estimated over a different time period (i.e., 
January 2018 to December 2018) than the number of potentially 
affected management companies (i.e., June 2018 to August 2019) 
because there is no complete N-CEN data for the most recent full 
calendar year (i.e., 2018). Management companies started submitting 
Form N-CEN in September 2018 for the period ended on June 30, 2018 
with the Commission.
    \135\ 18,584 = 5,746 companies with a class of securities 
registered under Section 12 of the Exchange Act + 120 companies 
without a class of securities registered under Section 12 of the 
Exchange Act that voluntarily filed proxy materials + 12,718 
management companies.
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    The above mentioned estimates are an upper bound of the number of 
potentially affected entities because a substantial portion of these 
entities would not be expected to file proxy materials or receive a 
shareholder proposal in a given year. Out of the 18,584 potentially 
affected entities mentioned above, 5,690 filed proxy materials with the 
Commission during calendar year 2018.\136\ Out of the 5,690 companies, 
4,758 (84%) were Section 12 or Section 15(d) reporting companies and 
the remaining 932 (16%) were management companies.\137\
---------------------------------------------------------------------------

    \136\ See supra note 133 for details on the estimation of 
companies that filed proxy materials with the Commission during 
calendar year 2018.
    \137\ According to data from Forms N-CEN filed with the 
Commission between June 2018 and August 2019, there were 965 
management companies that submitted matters for its security 
holders' vote during the reporting period: (i) 729 open-end funds, 
out of which 86 were ETFs registered as open-end funds or open-end 
funds that had an ETF share class; (ii) 235 closed-end funds; and 
(iii) one variable annuity separate account (see Form N-CEN Item 
B.10). The discrepancy in the estimated number of management 
companies using proxy filings (i.e., 932) and Form N-CEN data (i.e., 
965) likely is attributable to the different time periods over which 
the two statistics are estimated.

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[[Page 66476]]

    Proponents of shareholder proposals also could be affected by the 
proposed rule amendments. We estimate that there were 170 proponents--
38 individual proponents and 132 institutional proponents--that 
submitted a shareholder proposal that was included in a proxy statement 
and was subsequently voted on as lead proponent or co-proponent during 
calendar year 2018.\138\
---------------------------------------------------------------------------

    \138\ Data is retrieved from proxy statements (see infra note 
182). See infra Section IV.C.2.i for a discussion of limitations of 
the proxy statement data.
    We also estimate that there were 278 proponents that submitted a 
voted, omitted, or withdrawn proposal as lead proponent or co-
proponent during calendar year 2018. Data is retrieved from ISS 
Analytics. See infra Section IV.B.3.i for a discussion of 
limitations of the ISS Analytics data.
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    Non-proponent shareholders of companies also could be affected by 
the proposed rule amendments. As broad context, we note that the ratio 
of the number of estimated proponents whose proposals appeared in proxy 
statements during 2018 (170) to the number of direct and indirect 
investors in companies subject to the proxy rules is extremely small. 
According to a recent study based on the 2016 Survey of Consumer 
Finances, approximately 65 million households owned stocks directly or 
indirectly (through other investment instruments).\139\ Our analysis of 
institutional investor data also shows that there were 4,558 unique 
institutional investors during 2018.\140\ The ratio is roughly three 
proponent shareholders per million investors.
---------------------------------------------------------------------------

    \139\ See Jesse Bricker et al., Changes in U.S. Family Finances 
from 2013 to 2016: Evidence from the Survey of Consumer Finances, 
103 Fed. Res. Bull., Sept. 2017, at 20, 39, available at https://www.federalreserve.gov/publications/files/scf17.pdf (51.9% of the 
126.0 million families represented owned stocks). This is a 
triennial survey, and the latest data available as of this time is 
from the 2016 survey.
    Based on industry data provided by a proxy services provider, we 
estimate that there were 22.2 million retail accounts that directly 
held shares of U.S. public companies during calendar year 2017. The 
number of retail accounts is an approximation of the number of 
retail investors because each retail investor can hold multiple 
accounts and multiple retail investors can hold a single account. 
Further, the data covers a subset of all retail accounts (i.e., 
approximately 80% of all retail accounts).
    \140\ Data is retrieved from the Thomson Reuters Institutional 
(13f) Holdings dataset. Unique institutional investors are the 
unique Manager Numbers that filed a Form 13F at least for one 
quarter during calendar year 2018 with the Commission. The estimated 
number of institutional investors is a lower bound of the actual 
number of institutional investors because only institutional 
investors that exercise discretion over $100 million or more in 
Section 13(f) securities must file Form 13F with the Commission.
---------------------------------------------------------------------------

3. Current Practices

i. General Discussion
    In this section, we provide descriptive statistics on shareholder 
proposals to understand the baseline against which we compare the 
effects of the proposed amendments, informing the analysis of the 
potential effects of the proposed amendments to Rule 14a-8 in later 
sections. In particular, we provide descriptive statistics on all 
proposals and descriptive statistics by proposal outcome over time 
(i.e., voted, omitted, and withdrawn proposals). We provide these 
statistics to understand how the number of proposals has changed over 
time, including because, from the perspective of a company, the costs 
and benefits of a shareholder proposal may vary with the outcome of the 
proposal.
    Similarly, we provide descriptive statistics by the type of company 
that receives the proposal (i.e., large versus small companies), by 
proposal topic (i.e., governance, environmental, and social proposals), 
and by proponent type (i.e., institutions versus individuals). These 
factors are relevant to our analysis of the proposed amendments to the 
ownership and resubmission thresholds because the economic effects of 
the proposed amendments may depend on company size, proposal topic, and 
proponent type.\141\ Further, we provide descriptive statistics on the 
concentration of proposals to better understand how the proposal 
submission is distributed across the various proponents.\142\
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    \141\ These statistics are also relevant in light of commenters' 
concerns that the proposed amendments may affect certain proposals 
and proponents differently. See, e.g., letter in response to the 
Proxy Process Roundtable from Shareholder Rights Group dated October 
25, 2019.
    \142\ These statistics are also relevant in light of commenters' 
concerns that a few shareholders submit the majority of the 
proposals. See infra note 166.
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    Finally, we provide descriptive statistics on the voting support 
and the probability of obtaining majority support for all proposals, by 
proposal topic, and by proponent type. This analysis allows us to 
provide some evidence on the effects of the proposed amendments on 
proposals that may garner high and/or majority shareholder support, and 
to examine whether the proposed amendments to the resubmission 
thresholds may have larger effects for some types of proposals and 
proponents than for others.
    To understand current and historical practices for shareholder 
proposals, we study a sample of submitted shareholder proposals to 
Russell 3000 companies that were either (i) included in companies' 
proxy statements; (ii) identified by companies for exclusion through 
the SEC staff no-action process (whether ultimately voted on by 
shareholders, excluded by the company, or withdrawn by the proponent); 
or (iii) submitted by the proponents (based on information provided by 
the proponents) but never appeared on the company's proxy 
statement.\143\ The study of a sample of submitted shareholder 
proposals allows us to establish a baseline against which we will 
compare effects of the proposed amendments. Figure 1 shows the number 
of shareholder proposals submitted to Russell 3000 companies between 
1997 and 2018. The dashed line in Figure 1 shows the number of 
submitted shareholder proposals between 1997 and 2003, and the solid 
line shows the number of submitted proposals from 2004 to 2018. Data on 
submitted proposals prior to 2004 is incomplete. Hence, our economic 
analysis focuses on shareholder proposals submitted between 2004 and 
2018. Nevertheless, to provide an understanding of longer term trends 
in the number of submitted proposals, we use data prior to 2004 for the 
purposes of Figure 1 only.
---------------------------------------------------------------------------

    \143\ Unless stated otherwise, all data in this section is 
retrieved from ISS Analytics. ISS Analytics identifies proposals 
that were withdrawn based on whether the proponent had submitted a 
withdrawal letter to the company as part of the no-action process, 
or whether the proponent had informed ISS or otherwise made known 
(for example, through its website) that it had withdrawn the 
proposal. To the extent that a proponent did not submit a withdrawal 
letter to the company or did not inform ISS Analytics or otherwise 
make known that it had withdrawn the proposal, our sample may not 
include all withdrawn proposals.
    We exclude from our analysis shareholder proposals related to 
proxy contests for the election of directors because these proposals 
are usually included in shareholders' (as opposed to companies') 
proxy statements and thus are not subject to Rule 14a-8.
---------------------------------------------------------------------------

    Between 1997 and 2018, shareholders submitted a total of 20,804 
proposals to Russell 3000 companies. Out of the 20,804 proposals, 
14,860 were submitted in the 2004 to 2018 period. Shareholders 
submitted 831 proposals to Russell 3000 companies in 2018, representing 
a 4 percent decrease relative to the number of shareholder proposals 
submitted in 2017. As Figure 1 shows, the number of submitted 
shareholder proposals has fluctuated from a low of 745 in 2001 to a 
high of 1,136 in 2008, with an average of 946 submitted shareholder 
proposals between 1997 and 2018. Our analysis shows no discernible 
trend in the number of submitted shareholder proposals in the 1997 to 
2018 period.\144\
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    \144\ In this and all subsequent analyses, to examine if there 
is a statistically significant time trend in the data, we regress 
the variable of interest to a year trend variable, and we test 
whether the coefficient on the trend variable is statistically 
different from zero. We use a two-tailed t-test and a 90% confidence 
interval. See, e.g., William H. Greene, Econometric Analysis (6th 
ed. 2007) (``Greene (2007)'').
    The p-value on the trend variable is equal to 0.35.

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[[Page 66477]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.006

    Figure 2 shows the percentage of voted, omitted, and withdrawn 
shareholder proposals for Russell 3000 companies between 2004 and 2018. 
We study the percentage of voted, omitted, and withdrawn proposals 
separately because each of these categories of proposals may impose 
different burdens on--and also provide different benefits to--companies 
and their shareholders. Voted proposals are those that went to a 
shareholder vote. Omitted proposals are those that were omitted 
following an issuance of a no-action letter by Commission staff.\145\ 
Withdrawn proposals are primarily those that the proponent voluntarily 
withdrew after reaching an agreement with management or without 
reaching an agreement.\146\
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    \145\ A proposal may be omitted without a no-action letter from 
the Commission staff. In particular, a company may give notice to 
the Commission that it will exclude the proposal or give notice to 
the Commission that it plans to exclude the proposal and seek relief 
from a court. Those proposals likely are captured in the withdrawn 
proposals category in our ISS Analytics dataset because ISS 
Analytics only classifies proposals for which the Commission staff 
has issued a no-action letter as omitted proposals.
    \146\ We classify as ``withdrawn'' proposals that: (i) Were 
withdrawn by the proponent (3,292 or 76.8% of all withdrawn 
proposals); (ii) were not found in the company's proxy materials and 
for which it is yet to be determined whether they were withdrawn or 
omitted (802 or 18.7% of all withdrawn proposals); (iii) were on the 
ballot but never came to a vote because the proponent did not appear 
at the meeting to present the proposal (120 or 2.8% of all withdrawn 
proposals); (iv) the proponent indicated it intended to submit but 
that were never actually submitted (52 or 1.2% of all withdrawn 
proposals); (v) were not voted on because the meeting was cancelled, 
usually due to a merger, acquisition, bankruptcy, or calling of a 
special meeting (18 or 0.4% of all withdrawn proposals); and (vi) 
were not voted on because the meeting was postponed, usually due to 
a merger, acquisition, bankruptcy, or calling of a special meeting 
(4 or 0.1% of all withdrawn proposals). The above mentioned proposal 
categories are available through ISS Analytics.
---------------------------------------------------------------------------

    As Figure 2 shows, out of all proposals submitted to Russell 3000 
companies between 2004 and 2018, 56 percent went to a shareholder vote, 
15 percent were omitted following a no-action letter issued by 
Commission staff, and 29 percent were withdrawn. The percentage of 
voted, omitted, and withdrawn proposals has largely remained stable 
during our sample period.\147\
---------------------------------------------------------------------------

    \147\ Untabulated analysis shows no statistically significant 
trend in the number of voted, omitted, and withdrawn proposals over 
time (p-values are equal to 0.93, 0.37, and 0.34, respectively).

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[[Page 66478]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.007

    Out of the 831 proposals submitted in 2018, 447 were voted, 123 
were omitted, and 261 were withdrawn.\148\ The proposed rule amendments 
would enhance disclosure requirements for proposals submitted through a 
representative. To understand how frequently proposals are submitted 
through a representative, we manually collect information on the 
identity of the proponents and representatives from the proxy 
statements, and we estimate that from the 447 voted proposals submitted 
for inclusion in a company's proxy materials for 2018 shareholder 
meetings, 363 provided some information related to the identity of the 
proponents, out of which 67 (or 18% = 67/363) were submitted by a 
representative.\149\
---------------------------------------------------------------------------

    \148\ A few proposals were submitted to companies outside of the 
Russell 3000 index. Using FactSet's corporate governance database, 
SharkRepellent (available at https://sharkrepellent.net), we 
estimate that in 2018, there were 19 voted shareholder proposals at 
11 companies outside of the Russel 3000 index. Our analysis focuses 
on proposals submitted to companies within the Russell 3000 index 
because this sample represents the vast majority of submitted 
shareholder proposals.
    \149\ We potentially underestimate the percentage of proposals 
submitted by a representative because companies might provide 
information on the identity of the proponent but might not mention 
that the proposal was submitted via a representative in the proxy 
statement.
---------------------------------------------------------------------------

    In all subsequent analysis in this section (except for the analysis 
that relates to voting support), we examine all submitted proposals 
(rather than focusing on just one of voted, omitted, or withdrawn 
proposals) to determine the potential impact of the proposed amendments 
because Rule 14a-8 applies to all submitted proposals.
    Next, we compare the average number of proposals submitted to large 
and small companies because the frequency of submitted proposals, and 
thus the effects of the proposed amendments, may vary with company 
size. In particular, Figure 3 compares the average number of proposals 
submitted to large companies relative to our universe of companies 
(i.e., Russell 3000 companies). Large companies are represented by the 
S&P 500 constituents.\150\ As Figure 3 shows, S&P 500 companies (i.e., 
solid line in Figure 3) received on average 1.56 proposals each year, 
and Russell 3000 companies (i.e., dashed line in Figure 3) received on 
average 0.33 proposals each year during our sample period. The average 
number of proposals submitted to S&P 500 companies is statistically 
significantly higher than the average number of proposals submitted to 
Russell 3000 companies during our sample period.\151\ The average 
number of proposals submitted to S&P 500 companies has decreased from 
1.85 in 2004 to 1.24 in 2018, representing a 33 percent decrease during 
our sample period, and the average number of proposals submitted to 
Russell 3000 companies has decreased from 0.38 in 2004 to 0.28 in 2018, 
representing a 26 percent decrease during our sample period.\152\ 
Results are qualitatively similar when we compare voted rather than all 
submitted shareholder proposals for S&P 500 and Russell 3000 
companies.\153\
---------------------------------------------------------------------------

    \150\ The median market capitalization of Russell 3000 
constituents was $1.7 billion as of May 10, 2019 and the median 
market capitalization of S&P 500 constituents was $22 billion as of 
August 30, 2019. See Market Capitalization Ranges, FTSE Russell 
Market, https://www.ftserussell.com/research-insights/russell-reconstitution/market-capitalization-ranges (last visited Sept. 23, 
2019); S&P 500, S&P Dow Jones Indices, https://us.spindices.com/indices/equity/sp-500 (last visited Sept. 23, 2019).
    We retrieve data on whether a proposal was submitted to an S&P 
500 and/or a Russell 3000 company from ISS Analytics.
    The ISS Analytics data only covers Russell 3000 companies. S&P 
500 companies usually are a subset of the Russell 3000 companies. To 
the extent that some S&P 500 companies are not part of the Russell 
3000 index, our analysis underestimates the average number of 
proposals submitted to S&P 500 companies, because those proposals 
are missing from our data.
    \151\ In this and all subsequent analysis, we use a two-tailed 
t-test and a 90% confidence interval to compare differences in means 
across groups.
    The p-value is equal to zero.
    \152\ Untabulated analysis shows a statistically significant 
downward trend in the average number of proposals submitted to S&P 
500 and Russell 3000 companies during our sample period (p-values 
are equal to zero).
    \153\ Untabulated analysis shows that the average number of 
voted proposals for S&P 500 companies has decreased from 0.99 in 
2004 to 0.70 in 2018, representing a 29% decrease during our sample 
period, and the average number of voted proposals for Russell 3000 
companies has decreased from 0.20 in 2004 to 0.15 in 2018, 
representing a 26% decrease during our sample period.
---------------------------------------------------------------------------

    Overall, our analysis shows that larger companies receive more 
proposals than smaller companies, and the number of proposals received 
by both large and small companies has decreased over time.

[[Page 66479]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.008

    We also examine the frequency of submitted proposals by proposal 
topic because the effects of the proposed amendments may vary by 
proposal topic. More specifically, the effects of the proposed 
amendments to the resubmission thresholds may vary by proposal topic 
because the topic of a proposal may be related to the voting support of 
a proposal as well as the time it may take for a proposal to garner 
majority support. However, we also recognize that the garnering of 
support over time may be the result of a variety of factors other than 
or in addition to the continued inclusion of the proposal in the proxy. 
In addition, the effects of the proposed amendments to the ownership 
thresholds may vary by proposal topic to the extent that the proposed 
amendments have a disproportionate effect on different types of 
proponents and the type of proposal varies by proponent type.
    Figure 4 shows the percentage of all submitted shareholder 
proposals by proposal topic over time. ISS Analytics classifies 
proposals into three categories: Governance, environmental, and social 
proposals.\154\ The results of any analysis that involves 
classification of proposals into various categories should be 
interpreted with caution for various reasons, including because there 
is a level of subjectivity involved in the classification of the 
proposals to the various categories. For example, proposals on board 
diversity could be considered either governance or social proposals. In 
addition, each proposal category includes a wide range of proposals. 
For example, governance proposals can include proposals related to 
executive compensation as well as proposals related to the sale of 
company assets.
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    \154\ We retrieve data on the topic of the shareholder proposal 
from ISS Analytics. In this dataset, proposals are classified in 
three categories: Governance, environmental, and social. Governance 
proposals include, among others, proposals related to audits, board 
issues, compensation, voting, proxy matters, and shareholder 
meetings. Environmental proposals include, among others, proposals 
related to sustainability, greenhouse gas emissions, climate change, 
community/environmental impact, and renewable energy. Social 
proposals include, among others, proposals related to political 
contributions, sexual orientation, political lobbying disclosure, 
human rights, and board diversity. We manually classify 250 
proposals with missing shareholder proposal topics into one of the 
three above-mentioned topics by reviewing the description of the 
shareholder proposal in the ISS Analytics dataset. We do not 
reclassify other proposals in the ISS Analytics dataset to ensure 
the replicability of our analysis. We exclude from this analysis 33 
proposals with missing shareholder proposal topics and missing 
descriptions of the shareholder proposal because we lack the 
necessary information to classify these proposals into one of the 
three above-mentioned categories.
---------------------------------------------------------------------------

    Our analysis shows that, during our sample period, 59 percent of 
the submitted shareholder proposals (i.e., 8,829 proposals) regarded 
governance issues, 11 percent (i.e., 1,601 proposals) regarded 
environmental issues, and 30 percent (i.e., 4,397 proposals) regarded 
social issues. The percentage of governance proposals relative to all 
submitted proposals has decreased from 70 percent in 2004 to 44 percent 
in 2018, with a corresponding increase in the percentage of 
environmental proposals from 5 percent in 2004 to 16 percent in 2018 
and an increase in the percentage of social proposals from 25 percent 
in 2004 to 39 percent in 2018.\155\ Results are qualitatively similar 
when we examine voted (rather than submitted) shareholder proposals by 
topic.\156\
---------------------------------------------------------------------------

    \155\ Untabulated analysis shows a statistically significant 
downward trend in the percentage of governance proposals (p-value is 
equal to zero) and a statistically significant upward trend in the 
percentage of environmental and social proposals over time (p-values 
are equal to zero).
    \156\ Untabulated analysis shows that the percentage of voted 
governance proposals relative to all voted proposals has decreased 
from 69% in 2004 to 62% in 2018, with a corresponding increase in 
the percentage of voted environmental proposals from 3% in 2004 to 
11% in 2018, and a small decrease in the percentage of voted social 
proposals from 28% in 2004 to 27% in 2018.
---------------------------------------------------------------------------

    Overall, our analysis shows an increase in the frequency of social 
and environmental proposals and a decrease in the frequency of 
governance proposals during our sample period.

[[Page 66480]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.009

    Next, we analyze the frequency of submitted proposals by proponent 
type because the effects of the proposed amendments may vary with the 
type of proponent. This is because the level and duration of holdings, 
as well as chosen proposal topics, may vary with proponent type. Figure 
5 shows the percentage of submitted shareholder proposals by proponent 
type over time. We classify proponents into three categories: 
Individuals, institutions, and unknown.\157\ As Figure 5 shows, the 
average percentage of proposals submitted by individuals (i.e., gray-
shaded area in Figure 5) was 31 percent during our sample period, and 
it ranged from a low of 26 percent in 2011 to a high of 39 percent in 
2018. Further, as Figure 5 shows, the average percentage of proposals 
submitted by institutions (i.e., line-patterned area in Figure 5) was 
67 percent during our sample period, and it ranged from a low of 59 
percent in 2018 to a high of 71 percent in 2011. Our analysis shows no 
significant time-series trends in the percentage of proposals submitted 
by individuals and institutions.\158\ Institutions submitted 
approximately twice the number of proposals submitted by individuals, 
and the difference in the number of proposals submitted by institutions 
and individuals was statistically significant.\159\ The percentage of 
proposals with missing proponent information (i.e., black-shaded area 
in Figure 5) has decreased from 6 percent in 2004 to 2 percent in 2018, 
but this decrease is statistically insignificant.\160\ Our results are 
qualitatively similar when we examine the percentage of voted rather 
than submitted shareholder proposals by proponent type over time.\161\
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    \157\ We retrieve data on proponent types from ISS Analytics. 
Whenever there are multiple proponents submitting a proposal, the 
proponent type corresponds to the type of the lead proponent. 
Whenever the proponent type is missing, we manually classify the 
proponent into one of the three categories (i.e., individual, 
institution, or unknown) using the proponent name. Individual 
proponents are all retail investors. Institutional proponents 
comprise: (i) Asset managers (25% of all institutional proposals); 
(ii) unions (25% of all institutional proposals); (iii) pension 
funds (20% of all institutional proposals); (iv) religious 
organizations (12% of all institutional proposals); (v) nonprofit 
organizations (11% of all institutional proposals); and (vi) others 
(8% of all institutional proposals). An institutional proponent is 
classified as ``other'' whenever the proponent does not fall into 
any of the other institutional proponent categories. ``Unknown'' 
proponents are those with missing identities. The identity of the 
proponent presumably is missing in the ISS Analytics dataset because 
companies are not required to disclose the identity of the proponent 
in the proxy statements. See 17 CFR 240.14a-8(l) (Rule 14a-8(l)).
    \158\ The p-values are equal to 0.19 and 0.64, respectively.
    \159\ The p-value is equal to zero.
    \160\ Untabulated analysis shows a statistically significant 
downward trend in the percentage of proposals submitted by 
proponents with missing identity over time (the p-value is equal to 
0.17).
    \161\ The average percentage of voted proposals that were 
submitted by individuals was 32% during our sample period, and it 
ranged from a low of 25% in 2011 to a high of 49% in 2018. The 
average percentage of voted proposals that were submitted by 
institutions was 64% during our sample period, and it ranged from a 
low of 48% in 2018 to a high of 71% in 2011.
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    Overall, our analysis shows that institutions submitted proposals 
more frequently than individuals, and the percentage of proposals 
submitted by institutions and individuals has not changed significantly 
during our sample period.

[[Page 66481]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.010

    We also study the number of unique proponents and average number of 
proposals submitted by each proponent to shed some light on the 
concentration of shareholder proposals across proponents. Figures 6A, 
6B, and 6C show the number of unique proponents (i.e., gray bars) and 
the average number of proposals submitted by each proponent over time 
(i.e., black line) for all proponents, for proponents that are 
individuals, and for proponents that are institutions, respectively. 
For this analysis, we count separately proposals submitted by 
proponents and proposals submitted by co-proponents. We exclude 
proposals with missing proponent identity. To avoid over-counting the 
number of unique proponents and undercounting the average number of 
proposals submitted by each proponent, we review and manually correct 
the proponent names whenever ISS Analytics uses variations of the same 
name for a proponent (e.g., ``CalPERS'' and ``California Public 
Employees' Retirement System''). Nevertheless, to the extent that the 
same proponent appears with a slightly different name in our dataset, 
our analysis potentially overestimates the number of unique proponents 
and underestimates the average number of proposals submitted by each 
proponent.
    As Figure 6A shows, the average number of unique proponents was 228 
during our sample period, and it ranged from a low of 181 in 2011 to a 
high of 286 in 2004. The average number of proposals submitted by each 
proponent was 4.9 during our sample period, and it ranged from a low of 
3.9 in 2004 to a high of 6.7 in 2015. Untabulated analysis shows no 
time-series trends in the number of unique proponents and the average 
number of proposals submitted by each proponent during our sample 
period.\162\
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    \162\ The p-values are equal to 0.84 and 0.45, respectively.
---------------------------------------------------------------------------

    A different picture emerges when splitting the observations into 
proposals submitted by individuals (Figure 6B) and institutions (Figure 
6C).\163\ As Figure 6B shows, the average number of unique proponents 
that were individuals was 90 during our sample period, and it ranged 
from a low of 64 in 2012 to a high of 155 in 2004. The average number 
of proposals submitted by each individual proponent was 3.9 during our 
sample period, and it ranged from a low of 2.3 in 2004 to a high of 5.2 
in 2017. Untabulated analysis shows a statistically significant 
downward trend in the number of unique individual proponents and a 
statistically significant upward trend in the average number of 
proposals submitted by each individual proponent.\164\
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    \163\ For proposals that are submitted through a representative, 
when classifying proponents into institutions and individuals, ISS 
takes into account the identity of the shareholder rather than the 
identity of the representative that submitted the proposal.
    \164\ The p-values are equal to zero.
---------------------------------------------------------------------------

    As Figure 6C shows, the average number of unique proponents that 
were institutions was 143 during our sample period, and it ranged from 
a low of 107 in 2006 to a high of 207 in 2017. The average number of 
proposals submitted by each institutional proponent was 5.7 during our 
sample period, and it ranged from a low of 3.7 in 2017 to a high of 7.6 
in 2007. Untabulated analysis shows a statistically significant upward 
trend in the number of unique institutional proponents and a 
statistically significant downward trend in the average number of 
proposals submitted by each institutional proponent.\165\
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    \165\ The p-values are equal to zero and 0.04, respectively.
---------------------------------------------------------------------------

    Overall, the results of our analysis suggest that there has been an 
increase (decrease) in the concentration of proposals submitted by 
individuals (institutions) during our sample period.
BILLING CODE 8011-01-P

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[GRAPHIC] [TIFF OMITTED] TP04DE19.012


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[GRAPHIC] [TIFF OMITTED] TP04DE19.013

BILLING CODE 8011-01-C
    Relatedly, an academic study, using a sample of shareholder 
proposals submitted to S&P 1500 companies between 2003 and 2014, shows 
that five individual proponents submitted 78 percent of all proposals 
submitted by individuals and 27 percent of all proposals submitted by 
all proponents.\166\
---------------------------------------------------------------------------

    \166\ Nickolay Gantchev & Mariassunta Giannetti, The Costs and 
Benefits of Shareholder Democracy 8-9, 37 (European Corporate 
Governance Institute, Working Paper No. 586/2018, 2018) (``Gantchev 
& Giannetti (2018)''). 27% = (290 + 222 + 157 + 133 + 125)/3,384. 
These statistics are estimated using the identity of the proponents 
rather than the identity of the representatives, in cases where a 
representative submitted a proposal on behalf of a proponent.
    For related statistics, see letters in response to the Proxy 
Process Roundtable from U.S. Chamber of Commerce Center for Capital 
Markets Competitiveness dated November 12, 2018, at 11 (``[D]uring 
2017, just three individuals . . . sponsored 25% of proposals 
submitted at the Fortune 250.''); Ceres dated November 13, 2018, at 
6 (``From 2004-2017, the Chevedden, Steiner, and McRitchie families 
submitted 14.5% of the 11,706 proposals filed.''); Mercy Investment 
Services, Inc. dated December 3, 2018, at 2 (same); Investment 
Company Institute dated November 14, 2018, at 1-3 of attachment.
---------------------------------------------------------------------------

    Finally, we examine voting outcomes for all proposals, by proposal 
topic, and by proponent type to inform analysis of the effects of the 
proposed amendments on proposals that may garner high shareholder 
support. In addition, the level of voting support may determine which 
shareholder proposals would be affected by the proposed amendments to 
Rule 14a-8(i)(12). Figures 7A, 7B, and 7C show the average voting 
support for all proposals, by proposal topic, and by type of proponent, 
respectively. Voting support is defined as the ratio of ``for'' votes 
divided by the sum of ``for'' and ``against'' votes.\167\ As Figure 7A 
shows, the average voting support was 33 percent in 2018, and it ranged 
from a low of 27.8 percent in 2004 to a high of 37.5 percent in 2009, 
with an average of 33.4 percent during our sample period.\168\
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    \167\ We define voting support as the ratio of ``for'' divided 
by the sum of ``for'' and ``against'' votes because this is how 
voting support is defined for the purposes of Rule 14a-8(i)(12). See 
supra note 116. Abstentions and broker non-votes are excluded from 
the calculation of voting support for the purposes of Rule 14a-
8(i)(12). See supra note 116.
    \168\ Untabulated analysis shows no statistically significant 
trend in the average voting support for all proposals during our 
sample period (the p-value is equal to 0.40).
---------------------------------------------------------------------------

    As Figure 7B shows, the average voting support for governance 
proposals (i.e., solid line in Figure 7B) has remained stable during 
our sample period at an average of 42.1 percent, while there has been 
an upward trend in the average voting support for environmental and 
social proposals (i.e., dotted and dashed lines in Figure 7B).\169\ In 
particular, the average voting support for environmental proposals 
increased from a low of 11.8 percent in 2004 to a high of 28.9 percent 
in 2018, with an average of 21.9 percent during our sample period. The 
average voting support for social proposals increased from a low of 9.3 
percent in 2005 to a high of 24.6 percent in 2018, with an average of 
17.4 percent during our sample period. Untabulated analysis also shows 
that the average voting support for governance proposals is 
statistically significantly higher than the average voting support for 
environmental and social proposals, and the average voting support for 
environmental proposals is statistically significantly higher than the 
average voting support for social proposals.\170\
---------------------------------------------------------------------------

    \169\ Untabulated analysis shows a statistically significant 
upward trend in the average voting support for environmental and 
social proposals (p-values are equal to zero) and no statistically 
significant trend in the average voting support for governance 
proposals during our sample period (the p-value is equal to 0.83).
    \170\ The p-values are equal to zero.
---------------------------------------------------------------------------

    Finally, as Figure 7C shows, the average voting support for 
proposals submitted by institutions (i.e., solid line) has remained 
stable during our sample period at an average of 35.4 percent during 
our sample period, and the average voting support submitted by 
individuals (i.e., dashed line) has remained stable during our sample 
period at an average of 32.2 percent.\171\ Untabulated analysis also 
shows that the average voting support for proposals submitted by 
institutions is statistically significantly higher than the average 
voting support for proposals submitted by individuals.\172\
---------------------------------------------------------------------------

    \171\ Untabulated analysis shows no statistically significant 
trend in the average voting support for proposals submitted by 
institutions and individuals during our sample period. The p-values 
are equal to zero 0.22 and 0.97 respectively.
    \172\ The p-value is equal to 0.01.
---------------------------------------------------------------------------

    In sum, our analysis shows that the average voting support of all 
proposals has remained stable during our sample period, but there is an 
increase in the average voting support for environmental and social 
proposals over the sample period.
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BILLING CODE 8011-01-C
    Figures 8A, 8B, and 8C show the percentage of proposals that 
received majority support for all proposals, by proposal topic, and by 
proponent type, respectively. Majority support is defined as more than 
50 percent of the ``for'' votes divided by the sum of ``for'' and 
``against'' votes.\173\ We examine the percentage of proposals that 
received majority support as opposed to some other voting threshold 
because studies show that the probability of implementation of a 
shareholder proposal increases significantly once the proposal receives 
majority support.\174\
---------------------------------------------------------------------------

    \173\ See supra note 167.
    \174\ For example, a 2010 study by Ertimur et al. shows that 
``proposals that won at least one majority vote in the past are more 
likely to be implemented (34.2% versus 22.9%).'' See Yonca Ertimur, 
Fabrizio Ferri, & Stephen R. Stubben, Board of Directors' 
Responsiveness to Shareholders: Evidence from Shareholder Proposals, 
16 J. Corp. Fin. 53 (2010) (``Ertimur et al. (2010)''). Similarly, a 
2017 study by Bach and Metzger showed that ``when the 50%-threshold 
is passed, there is a very sizeable jump of about 20% of the 
implementation likelihood.'' See Laurent Bach & Daniel Metzger, How 
Do Shareholder Proposals Create Value? (Working Paper, Mar. 2017) 
(``Bach & Metzger (2017)''). However, only crossing the management-
defined majority threshold (as opposed to the simple majority 
threshold defined as the ratio of ``for'' votes divided by the sum 
of ``for'' and ``against'' votes) has an effect of the probability 
that the proposal is implemented. Id. The management-defined 
majority threshold may differ from a simple majority threshold. Id. 
In 43% of their sample, the management threshold is the same as the 
simple majority threshold. See id. In our analysis, we define 
majority support as the simple majority threshold because we lack 
data on the management-defined majority threshold.
---------------------------------------------------------------------------

    As Figure 8A shows, there is a statistically significant downward 
trend in the percentage of proposals that received majority support 
during our sample period.\175\ In particular, the percentage of 
proposals that received majority support ranged from a high of 27.7 
percent in 2009 to a low of 11.9 percent in 2018, with an average of 
20.6 percent during our sample period.
---------------------------------------------------------------------------

    \175\ The p-value is equal to zero.
---------------------------------------------------------------------------

    As Figure 8B shows, few environmental and social proposals received 
majority support during our sample period, while one out of three 
governance proposals received majority support.\176\ More specifically, 
the percentage of governance proposals that received majority support 
(i.e., solid line in Figure 8B) ranged from a high of 37.7 percent in 
2009 to a low of 14.9 percent in 2018, with an average of 30.6 percent 
during our sample period. The percentage of environmental proposals 
that received majority support (i.e., dotted line in Figure 8B) ranged 
from a low of 0 percent in 2004 to a high of 16.3 percent in 2018, with 
an average of 2.6 percent during our sample period. The percentage of 
social proposals that received majority support (i.e., dashed line in 
Figure 8B) ranged from a low of zero percent in 2010 to a high of 4.5 
percent in 2016, with an average of 1.8 percent during our sample 
period. Untabulated analysis shows that there is a statistically 
significant downward trend in the percentage of governance proposals 
that received majority support, and a statistically significant upward 
trend in the percentage of environmental and social proposals that 
received majority support during our sample period.\177\ Interpretation 
of these results should be undertaken with caution due to various 
factors, including the uncertainties inherent in categorization and the 
evolution of voting support for proposals over time.
---------------------------------------------------------------------------

    \176\ Untabulated analysis shows that the percentage of 
governance proposals that received majority support is statistically 
significantly higher than the percentage of environmental and social 
proposals that received majority support (the p-values are equal to 
zero), and the percentage of environmental proposals that received 
majority support is not statistically significantly different than 
the percentage of social proposals that received majority support 
(the p-value is equal to 0.23).
    \177\ The p-values are equal to 0.01, 0.02, and 0.05, 
respectively.
---------------------------------------------------------------------------

    As Figure 8C shows, there is a statistically significant downward 
trend in the percentage of proposals submitted by individuals that 
received majority support, while the percentage of proposals submitted 
by institutions that received majority support has not changed 
significantly during our sample period.\178\ In particular, the 
percentage of proposals submitted by individuals that received majority 
support (i.e., dashed line in Figure 8C) ranged from a high of 35 
percent in 2009 to a low of 12.3 percent in 2014, with an average of 
23.7 percent during our sample period. In addition, the percentage of 
proposals submitted by institutions that received majority support 
(i.e., solid line in Figure 8C) ranged from a high of 24.3 percent in 
2013 to a low of 11.1 percent in 2018, with an average of 18.7 percent 
during our sample period. The percentage of proposals submitted by 
individuals that received majority support is statistically 
significantly higher than the percentage of proposals

[[Page 66486]]

submitted by institutions that received majority support.\179\
---------------------------------------------------------------------------

    \178\ The p-values are equal to zero and 0.48, respectively.
    \179\ The p-value is equal to 0.02.
---------------------------------------------------------------------------

    In sum, our analysis shows that there is a decrease in the number 
of proposals that received majority support during our sample period 
and this decrease is primarily attributable to governance proposals and 
proposals submitted by individuals.
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BILLING CODE 8011-01-C
    Because many proposals are non-binding, not all proposals that 
garner majority support are implemented. Using a sample of governance-
related proposals for S&P 1500 companies between 1997 and 2011, 
previous studies have shown that between 31 percent and 56 percent of 
the shareholder proposals that received majority support were 
implemented by management, and this percentage has increased over 
time.\180\ These studies have also shown that the probability of a 
proposal being implemented depends on the influence of the proponent, 
the type of proposal, the past performance of the company, and whether 
voting support exceeds majority support as defined by a company's 
governing documents.\181\
---------------------------------------------------------------------------

    \180\ Bach and Metzger use a sample of governance-related 
proposals for S&P 1500 companies between 1997 and 2011 and find that 
56% of the proposals that received majority support were implemented 
by management, and this percentage increased from 29% in 1997 to 70% 
in 2011. Bach & Metzger (2017), supra note 174. Ertimur et al. use a 
sample of governance-related proposals for S&P 1500 companies 
between 1997 and 2004 and find that 31% of the proposals that 
received majority support were implemented by management, and this 
percentage increased from 16% in 1997 to 40% in 2004. Ertimur et al. 
(2010), supra note 174. The differences in the statistics of the two 
cited papers is likely due to the different definition of 
implemented proposals. Bach and Metzger consider a proposal to be 
implemented ``if management adopts the content of the proposal 
within two years after the shareholder meeting,'' while Ertimur et 
al. consider a proposal to be implemented if ``the board takes a 
significant step toward a partial or full implementation within one 
year from the majority vote.'' See Bach & Metzger (2017), supra note 
174; Ertimur et al. (2010), supra note 174. A 2007 study by Thomas 
and Cotter provide similar rates of implementation of shareholder 
proposals that received majority support as Ertimur et al. (2010). 
See Randall S. Thomas & James F. Cotter, Shareholder Proposals in 
the New Millennium: Shareholder Support, Board Response, and Market 
Reaction, 13 J. Corp. Fin. 368 (``Thomas & Cotter (2007)'').
    \181\ See Thomas & Cotter (2007), supra note 180; Ertimur et al. 
(2010), supra note 174; Bach & Metzger (2017), supra note 174.
---------------------------------------------------------------------------

ii. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and 
Rule 14a-8(c)
    To provide insight into the distribution of ownership across 
proponents, we perform two sets of analysis. First, we review 
proponents' ownership information as disclosed in companies' proxy 
statements for proposals to be considered at shareholder meetings held 
in 2018.\182\ Companies have discretion in the type of information they 
must include in the proxy statements regarding proponents.\183\ In 
particular, the company's proxy statement must either include the name 
and address of the proponents as well as the number of the voting 
securities that the proponent holds, or alternatively, a statement that 
this information will be provided to shareholders upon request. 
Whenever the company discloses the identity of the proponents, the 
company may disclose the identity of all or a subset of the proponents. 
Whenever the company discloses proponents' ownership information, the 
company may disclose the actual dollar value, the actual number of 
shares, a minimum dollar value, or a minimum number of shares held by 
the proponent. In addition, whenever the company discloses proponents' 
ownership information, the company may disclose ownership information 
for a subset of the proponents submitting a proposal, and the company 
may disclose actual holdings information for some of the proponents and 
minimum holdings information for the rest of the proponents submitting 
the same proposal. The type of ownership information the company 
discloses (i.e., actual holdings versus minimum holdings and dollar 
value versus number of shares) frequently depends on the type of 
information provided in the proof-of-ownership letter furnished by the 
proponent. In particular, proponents also have discretion in the type 
of information they must provide in the proof-of-ownership 
letters.\184\ Proponents may disclose the exact duration and level of 
their holdings or they may confirm that they meet the minimum ownership 
thresholds. For these reasons, data on proponent ownership from proxy 
statements may not be representative of the overall distribution of 
proponent ownership.
---------------------------------------------------------------------------

    \182\ Proxy statements filed with the Commission are available 
at https://www.sec.gov/edgar/searchedgar/companysearch.html.
    \183\ See Rule 14a-8(l).
    \184\ See Rule 14a-8(b).
---------------------------------------------------------------------------

    Table 1 summarizes the distribution of proponents' ownership in our 
sample of proposals.\185\ There were 447 unique voted proposals for 
shareholder meetings held in 2018. Out of the 447 proposals, 287, or 64 
percent, contained information on proponents' actual and/or minimum 
holdings, whereas the remaining 160, or 36 percent, did not

[[Page 66488]]

contain information on proponents' ownership. In our sample of proxy 
statements, there were 198 proponents that submitted 150 unique 
proposals for which the proxy statements mentioned the proponents' 
actual holdings, and 159 proponents that submitted 139 unique proposals 
for which the proxy statements mentioned the proponents' minimum 
holdings.\186\
---------------------------------------------------------------------------

    \185\ There is some information on proponents' duration of 
ownership in only 5 out of the 447 reviewed proposals. Because the 
sample is small, we do not provide descriptive statistics on 
proponents' duration of ownership using information from the proxy 
statements.
    \186\ Multiple proponents may submit a single proposal. Hence, 
the number of proponents in Table 1 can be higher than the number of 
proposals. Also, for the same reason, within each panel, the sum of 
proposals for the various ownership ranges can be higher than the 
total number of proposals. For example, in the Actual Holdings 
panel, the sum of proposals for the various ownership ranges (i.e., 
158 = 2 + 75 + 16 + 65) is higher than the total number of proposals 
in the panel (i.e., 150).
    Further, companies may disclose information on actual holdings 
for some proponents and information on minimum holdings for other 
proponents submitting the same proposal. Hence, in Table 1, the sum 
of the proposals with (i) information on proponents' actual holdings 
(i.e., 150 proposals); (ii) information on proponents' minimum 
holdings (i.e., 139 proposals); and (iii) no information on 
proponents' holdings (i.e., 160 proposals) is higher than the number 
of unique proposals in our sample (i.e., 447).
    The proxy statements provide information on the identity of the 
proponents for a subset of the proposals with no holdings 
information.
---------------------------------------------------------------------------

    From the 198 proponents with actual holdings information, (i) 3 
proponents, or 2 percent, held less than $2,000 worth of shares, and 
those proponents submitted 2 unique proposals; (ii) 85 proponents, or 
43 percent, held more than or equal to $2,000 but less than $15,000 
worth of shares, and those proponents submitted 75 unique proposals; 
(iii) 16 proponents, or 8 percent, held more than or equal to $15,000 
but less than $25,000 worth of shares, and those proponents submitted 
16 unique proposals; and (iv) 94 proponents, or 47 percent, held more 
than or equal to $25,000 worth of shares, and those proponents 
submitted 65 unique proposals.\187\ The median ownership for proponents 
with actual holdings information was $16,758 and the average ownership 
was $17.4 million.\188\
---------------------------------------------------------------------------

    \187\ In cases where the company reports the number of shares 
rather than the dollar amount of the proponent's holdings, we 
convert the number of shares to dollars using the average of the bid 
and ask prices during a 60-day period before the filing date of the 
proxy statement. We use the filing date of the proxy statement 
rather than the date that the proponent submitted the proposal (see 
supra note 57) because proxy statements do not report the date of 
the shareholder proposal submission. Stock prices are retrieved from 
CRSP.
    \188\ In untabulated analysis, we examine whether the 
probability that a proposal would receive majority support depends 
on the proponents' ownership level. To measure voting support, we 
use the ISS Analytics data for the sample of proposals that were 
voted on in 2018 shareholder meetings. We only use data on 
proponents with information on their exact holdings. We compare the 
probability that the proposal would receive majority support for 
proposals submitted by proponents with above and below median dollar 
ownership levels and we find a negative and statistically 
significant relation between the probability that a proposal would 
receive majority support and the level of proponents' ownership (p-
value equal to 0.06), but we find no relation between the level of 
the voting support and the level of proponents' ownership (p-value 
equal to 0.14). The results of this analysis should be interpreted 
with caution because of the small sample used for this analysis.
---------------------------------------------------------------------------

    From the 159 proponents with minimum holdings information, (i) all 
of the proponents held at least $2,000 worth of shares, and those 
proponents submitted 139 unique proposals; (ii) 23 proponents, or 14 
percent, held at least $15,000 worth of shares, and those proponents 
submitted 23 unique proposals; and (iv) 16 proponents, or 10 percent, 
held at least $25,000 worth of shares, and those proponents submitted 
16 unique proposals.
    As mentioned above, in our sample, there were three proponents 
(i.e., one percent of all proponents with ownership information), whose 
individual holdings were below the current $2,000 ownership threshold, 
and those proponents submitted two unique proposals (i.e., one percent 
of all proposals submitted by proponents with ownership information in 
the proxy statements). For one of the two proposals, there were two co-
proponents, whose both aggregate and individual holdings did not meet 
the $2,000 current ownership threshold.\189\ For the other of the two 
proposals, there were four co-proponents, whose aggregate holdings met 
the $2,000 current threshold and the individual holdings of one of the 
co-proponents did not meet the $2,000 current ownership threshold.
---------------------------------------------------------------------------

    \189\ The dollar value of proponents' ownership may be measured 
with error in cases where we use the filing date of the proxy 
statement to estimate the dollar value of proponents' ownership (see 
supra note 187). Hence, the aggregate holdings of the proponents 
that submitted the abovementioned proposal may be higher than or 
equal to $2,000.
---------------------------------------------------------------------------

    Further, in our sample, two entities submitted more than one 
proposal, directly or indirectly, to a company for a particular 
shareholders' meeting. In particular, one entity submitted two 
proposals to one company and another entity submitted two proposals to 
each one of six different companies, resulting in a total of 14 
submitted proposals.

         Table 1--Proponents' Ownership (From Proxy Statements)
------------------------------------------------------------------------
                                             Number of       Number of
                                            proponents       proposals
------------------------------------------------------------------------
Actual Holdings.........................             198             150
    Holdings <$2,000....................               3               2
    Holdings >=$2,000, but <$15,000.....              85              75
    Holdings >=$15,000, but <$25,000....              16              16
    Holdings >=$25,000..................              94              65
Minimum Holdings........................             159             139
    Holdings >$0........................             159             139
    Holdings >=$2,000...................             159             139
    Holdings >=$15,000..................              23              23
    Holdings >=$25,000..................              16              16
No Holdings Information.................             156             160
------------------------------------------------------------------------
Sources: CRSP, ISS Analytics, Proxy Statements from EDGAR.

    Second, we review proponents' ownership information from the proof-
of-ownership letters submitted in connection with the proposal that can 
be found as an attachment to the Commission staff's no-action letters 
issued under Rule 14a-8 during calendar year 2018.\190\ Our sample 
comprises 254 unique shareholder

[[Page 66489]]

proposals submitted by 242 unique proponents, yielding 485 proponent-
proposal pairs. For 433, or 89 percent of all proponents that submitted 
a proposal for which the company submitted a no-action request, there 
is information on proponents' actual and/or minimum holdings. For the 
remaining 52 proponents, or 11 percent, there is no information on 
proponents' actual or minimum holdings. Further, there are 284 
proponents that submitted 155 unique proposals, for whom there is 
information on their actual holdings, and 149 proponents that submitted 
99 unique proposals, for whom there is only information on proponents' 
minimum holdings.\191\
---------------------------------------------------------------------------

    \190\ The no-action letters that include the proof-of-ownership 
letters are available at https://www.sec.gov/divisions/corpfin/cf-noaction/2019_14a-8.shtml and https://www.sec.gov/investment/investment-management-no-action-letters#P87_900. We analyze a sample 
(rather than the universe) of all proof-of-ownership letters 
attached to no-action letters available on the Commission's website 
because ownership data in proof-of-ownership letters are 
unstructured, and thus information must be manually collected.
    \191\ Multiple proponents may submit a single proposal. Hence, 
the number of proponents in Table 2 can be higher than the number of 
proposals. Also, for the same reason, within each panel, the sum of 
proposals for the various ownership ranges can be higher than the 
total number of proposals in the corresponding panel. For example, 
in the Actual Holdings panel, the sum of proposals for the various 
ownership ranges (i.e., 199 = 6 + 98 + 16 + 79) is higher than the 
total number of proposals in the panel (i.e., 155).
    In Table 2, the sum of the proposals with (i) information on 
proponents' actual holdings (i.e., 155 proposals); (ii) information 
on proponents' minimum holdings (i.e., 99 proposals); and (iii) no 
information on proponents' holdings (i.e., 34 proposals) is higher 
than the number of unique proposals in our sample (i.e., 254) 
because for the same proposal, the proof-of-ownership letters 
submitted by the proponents can provide information on proponents' 
actual and/or minimum holdings.
---------------------------------------------------------------------------

    From the 284 proponents with actual holdings information, (i) eight 
proponents, or three percent, held less than $2,000 worth of shares, 
and those proponents submitted six unique proposals; (ii) 140 
proponents, or 49 percent, held more than or equal to $2,000 but less 
than $15,000 worth of shares, and those proponents submitted 98 unique 
proposals; (iii) 19 proponents, or seven percent, held more than or 
equal to $15,000 but less than $25,000 worth of shares, and those 
proponents submitted 16 unique proposals; and (iv) 117 proponents, or 
41 percent, held more than or equal to $25,000 worth of shares, and 
those proponents submitted 79 unique proposals.\192\ The median 
ownership for proponents with actual holdings information is $13,076, 
and the average ownership is $11.8 million.
---------------------------------------------------------------------------

    \192\ Data on proponent ownership from proof-of-ownership 
letters may not be representative of the overall distribution of 
proponent ownership because companies do not seek to omit every 
shareholder proposal. Companies sought to omit proposals by 
requesting a no-action letter from the Commission staff for 31% of 
shareholder proposals during the calendar year 2018. The percentage 
of proposals that companies sought to omit in 2018 is estimated as 
the number of unique proposals for which the Commission received a 
no-action request in 2018--see supra note 190--divided by the number 
of all unique proposals (i.e., voted, omitted, and withdrawn 
proposals) to be considered in 2018 shareholder meetings from ISS 
Analytics. Hence, this percentage is an approximation of the actual 
percentage of proposals that companies sought to omit in 2018 
because some of the no-action requests received by the Commission in 
2018 regarded 2019 shareholder meetings.
    In addition, data on proponent ownership from proof-of-ownership 
letters is limited because proponents are not required to disclose 
in the proof-of-ownership letter their exact stock ownership but 
only to confirm that they meet the minimum ownership thresholds. See 
Rule 14a-8(b).
    In cases where the proponent reports the number of shares rather 
than the dollar amount of his/her holdings, we convert the number of 
shares to dollars using the average of the bid and ask prices during 
the 60 calendar days before the date the shareholder submitted the 
proposal. See supra note 57. In cases where the no-action letter 
does not contain the date that the proposal was mailed or emailed, 
we use the date that the company received the proposal to estimate 
the highest of the average of the bid and ask prices during a 60-day 
period. In cases where the no-action letter does not contain the 
date that the proposal was mailed or emailed or the date that the 
company received the proposal, we use the date that the proposal was 
signed by the proponent. Stock prices are retrieved from CRSP.
---------------------------------------------------------------------------

    From the 149 proponents with minimum holdings information, (i) 148 
proponents, or 99 percent, hold at least $2,000 worth of shares, and 
those proponents submitted 98 unique proposals; (ii) 18 proponents, or 
12 percent, hold at least $15,000 worth of shares, and those proponents 
submitted 18 unique proposals; and (iii) 12 proponents, or eight 
percent, hold at least $25,000 worth of shares, and those proponents 
submitted 12 unique proposals.
    As Table 2 shows, in our sample, there are nine proponents with 
individual holdings below the current $2,000 ownership threshold (i.e., 
eight proponents with exact holdings information and one proponent with 
minimum holdings information below the $2,000 threshold) and those 
proponents submitted seven unique proposals. For one of the seven 
proposals, there were two co-proponents, whose aggregate holdings met 
the $2,000 current ownership threshold. For another one of the seven 
proposals, there was only one proponent whose holdings did not meet the 
$2,000 threshold.\193\ For the remaining five proposals, there was at 
least one other co-proponent whose share ownership met the current 
$2,000 threshold.
---------------------------------------------------------------------------

    \193\ Commission staff issued a no-action letter for this 
proposal following the company's request because the proponent did 
not satisfy the minimum ownership requirement under Rule 14a-8(b).

    Table 2--Proponents' Ownership (From Proof-of-Ownership Letters)
------------------------------------------------------------------------
                                             Number of       Number of
                                            proponents       proposals
------------------------------------------------------------------------
Actual Holdings.........................             284             155
    Holdings <$2,000....................               8               6
    Holdings >=$2,000, but <$15,000.....             140              98
    Holdings >=$15,000, but <$25,000....              19              16
Holdings >=$25,000......................             117              79
Minimum Holdings........................             149              99
    Holdings <$2,000....................             149              99
    Holdings >=$2,000...................             148              98
    Holdings >=$15,000..................              18              18
    Holdings >=$25,000..................              12              12
No Holdings Information.................              52              34
------------------------------------------------------------------------
Sources: CRSP, Proof-of-Ownership Letters attached to no-action letters
  found on Commission's website.

    Data on proponent ownership from proxy statements and proof-of-
ownership letters cannot inform the analysis of shareholder-proponents' 
duration of holdings in excess of one year.\194\ One commenter has 
provided an estimate of average holding period of four to eight months 
across all types of

[[Page 66490]]

shareholders.\195\ We solicit public comment on the duration of 
ownership for all shareholders, and specifically for shareholders 
likely to submit shareholder proposals, in Section IV.E below.
---------------------------------------------------------------------------

    \194\ See supra note 185 and accompanying text. Because under 
current eligibility requirements, shareholder-proponents are 
required to have held shares for at least one year, we can 
reasonably assume a minimum of one year ownership duration for 
proponents' reported holdings unless the proposal was challenged on 
the basis of not satisfying the ownership eligibility requirements.
    \195\ See letter in response to the Proxy Process Roundtable 
from the Shareholder Rights Group dated December 4, 2018, at 9 
(noting ``[t]he average time an investor held a share holding a 
stock [sic] in the 1960s when the rule was passed was eight years, 
today it is between four and eight months'').
    There is limited academic research on share ownership duration, 
primarily due to data limitations. Some studies infer average 
duration of holdings for all shareholders (rather than just 
proponents) from data on aggregate share trading volumes. In 
particular, one white paper has looked at share turnover for NYSE 
listed securities to estimate an average duration of holdings of 
less than two years in 2014. See Michael W. Roberge et al., 
Lengthening the Investment Time Horizon (2016), available at https://www.pionline.com/article/20161101/WHITE_PAPERS/161109903. Any such 
analysis inferring average duration of holdings across all investors 
masks potential heterogeneity of holding periods across different 
types of investors. In particular, because some of the trading 
volume may come from high-frequency traders, these average 
statistics may underestimate the holding duration of institutional 
and individual investors likely to submit shareholder proposals.
    Other academic research has relied on information on holdings 
for specific types of shareholders. In particular, one strand of 
literature has looked at daily trading records of 78,000 households 
from January 1991 to December 1996 from a U.S. discount brokerage 
house. A survey article notes that the estimated average holding 
period for individuals in this sample is 16 months. See Brad M. 
Barber & Terrance Odean, The Behavior of Individual Investors, 2 
Handbook of the Economics of Finance, 1533, 1539 (2013). Another 
paper finds that the median holding period of individual investors 
in this dataset is 207 trading days. See Deniz Anginer, Snow Xue 
Han, & Celim Yildizhan, Do Individual Investors Ignore Transaction 
Costs? 6 (Working Paper, 2018), available at https://ssrn.com/abstract=2972845. Another strand of literature uses information from 
13F filings with the Commission to estimate statistics of duration 
of holdings for a subset of institutional investors. For example, 
one paper documents that the value-weighted composition of long-term 
institutional investors with securities holdings in public U.S. 
companies has nearly doubled from approximately 35 percent since the 
early 2000s to 65 percent in 2017. Long-term institutional investors 
are defined as those with an implied average holding period of 
longer than three years. See Wei Jiang, Who Are the Short-Termists?, 
J. Applied Corp. Fin., Fall 2018, at 19 (2018). A second paper 
documents a median duration of holdings of approximately two years 
in 2015 among this set of investors. See K.J. Martijn Cremers & 
Simone M. Sepe, Institutional Investors, Corporate Governance, and 
Firm Value, 41 Seattle U.L. Rev. 387, 403 (2018).
    Lastly, we provide some evidence on holding periods using data 
on reported sales of corporate stocks retrieved from individual tax 
returns. See Janette Wilson & Pearson Liddell, Sales of Capital 
Assets Data Reported on Individual Tax Returns, 2007-2012, IRS 
Statistics of Income Bull., Winter 20167, at 58, available at 
https://www.irs.gov/pub/irs-soi/soi-a-inca-id1604.pdf (Table 4B). In 
2012 (the last year with available data), we estimate that among all 
transactions with reported holding duration, 46% were for corporate 
stocks held for a period longer than one year, 27% were for stocks 
held longer than 2 years, and 18% were for stocks held longer than 3 
years. Estimates of holdings duration from reported sales may not be 
representative of the overall distribution of duration of 
stockholdings because the propensity to sell a stock may be 
dependent on the amount of time the stock has been held. See Zoran 
Ivkovi[cacute], James Poterba, & Scott Weisbenner, Tax-Motivated 
Trading by Individual Investors, 95 Amer. Econ. Rev. 1605 (2005).
---------------------------------------------------------------------------

iii. Discussion Specific to Proposals Submitted on Behalf of 
Shareholders
    As mentioned in Section IV.B.3.i above, from the 447 proposals 
submitted for a vote at a shareholder meeting in 2018, 363 provided 
information related to the identity of the proponents. Out of those 363 
proposals, 67 (or 18 percent) were submitted by a representative. The 
documentation that would be mandated by the proposed amendments is 
generally non-public. We are able to verify if the proponent provided 
the documentation that would be mandated by the proposed amendments 
only in cases where the company submitted a no-action request for the 
proposal at issue, and thus submitted to the Commission the necessary 
supporting documentation, including the shareholder proposal and 
related disclosures. Companies submitted a no-action request for 12 out 
of the 67 proposals submitted by a representative.\196\ In eight out of 
the 12 requests, the proponent provided all documentation that would be 
mandated by the proposed amendments. In the remaining four cases, the 
shareholder proposal attached to the no-action letter posted on the 
Commission's website was signed by the representative rather than the 
proponent.
---------------------------------------------------------------------------

    \196\ See supra note 190 (providing links to no-action letters).
---------------------------------------------------------------------------

iv. Discussion Specific to Rule 14a-8(i)(12)
    To understand current practices for shareholder proposal 
resubmissions, we study a sample of shareholder proposal resubmissions 
for Russell 3000 companies from 2011 to 2018.\197\ Out of the 3,620 
proposals that went to a vote between 2011 and 2018, 2,168 (60 percent) 
were a first submission, 678 (19 percent) were a second submission, and 
the remaining 774 (21 percent) were a third or higher submission (see 
Table 3 below).\198\ During the same time period, the average support 
for first time proposals was 34 percent and the median support was 30 
percent. The average support for second and third or higher submissions 
was slightly lower than first-time proposals, each receiving 
approximately 30 percent and 32 percent, on average.\199\
---------------------------------------------------------------------------

    \197\ See CII Report, supra note 92. Because the CII Report does 
not use data on shareholder proposal submissions prior to 2011, the 
analysis in the report is conducted under the assumption that all 
proposals submitted in the earlier years are first-time submissions. 
Nevertheless, some proposals in the earlier years are actually 
resubmissions from previous years. As a result, the CII Report 
underestimates the number of resubmitted proposals in the sample and 
overestimates the number of proposals eligible for resubmission in 
the following year. To correct for these biases, we supplement data 
in the CII Report with data on voted shareholder proposals from ISS 
Analytics during the years 2006 to 2010. We apply the CII Report's 
methodology to identify resubmitted proposals for years 2011 to 2013 
using the description of the shareholder proposal in the ISS data. 
As a result, we identify 1,442 shareholder proposals as 
resubmissions compared to 1,314 in the CII Report. Therefore, some 
of the statistics on resubmitted proposals in our analysis differ 
from those presented in the CII Report.
    When considering eligibility for resubmission, we only consider 
whether the proposal is eligible for resubmission in the following 
year, and not whether the proposal is eligible for resubmission at 
some other point in the future. This distinction is important 
because, under the current resubmission thresholds, all proposals 
are eligible for resubmission following a three-year cooling-off 
period. Of all the proposals resubmitted during 2011 to 2018, 84% 
were voted on in the previous year and 12% (5%) were not voted in 
the previous year, but were voted on two (three) years prior.
    Statistics on resubmitted shareholder proposals are subject to 
measurement error because ISS Analytics' classification of 
resubmitted shareholder proposals is not always the same as what the 
Commission's staff or courts might deem to be a proposal on 
``substantially the same subject matter.''
    Lastly, the total number of voted shareholder proposals in the 
CII Report is slightly lower than the counts in the ISS Analytics 
data. For example, there are 423 shareholder proposals that appear 
as first-time submissions or resubmissions in the CII Report during 
2018, while we estimate that 447 shareholder proposals were voted on 
during the same period using the ISS Analytics data. See supra 
Section IV.B.3.i.
    \198\ A proposal is categorized as first submission if it has 
not been voted on in the preceding three calendar years. A proposal 
is categorized as second (third or greater) submission if it has 
been voted on within the preceding three calendar years and it has 
been voted on once (two or more times) in the past five calendar 
years.
    \199\ Throughout the analysis in this section, when comparing 
estimates across subsamples of the data (e.g., average support for 
first time and second time proposals, or the propensity to resubmit 
proposals across proposal types, etc.), we verify that the estimates 
are statistically different from one another. In particular, we test 
whether the difference in a particular pair of estimates is 
statistically significant using hypothesis tests for continuous and 
discrete random variables and a p-value of 10%. See, e.g., Greene 
(2007), supra note 144.
    The median support for second-time submissions, 29 percent, was 
slightly lower than first-time submissions, while the median support 
for third-time or subsequent submissions, 31 percent, was slightly 
higher. While the difference in median voting support between first-
time and second-time submissions is statistically significant, the 
difference in the median voting support between first-time and third 
or subsequent submissions is not.

[[Page 66491]]



                       Table 3--Shareholder Proposals by Number of Submissions, 2011-2018
----------------------------------------------------------------------------------------------------------------
                                                                                                  % of proposals
                                     Number of                       Average %       Median %      eligible for
                                     proposals    % of proposals      support         support      resubmission
                                                                                                     next year
----------------------------------------------------------------------------------------------------------------
First...........................           2,168              60              34              30              94
Second..........................             678              19              30              29              90
Third or subsequent.............             774              21              32              31              94
                                 -------------------------------------------------------------------------------
    Total.......................           3,620             100              32              30              93
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    Some types of proposals are more likely to be resubmitted than 
others and thus, the effect of proposed amendments to the resubmission 
thresholds may vary with proposal type. Therefore, what follows is a 
discussion of how the likelihood of shareholder proposal resubmission 
is related to: (i) Prior voting support; (ii) proposal topic; (iii) 
firm size; (iv) dual-class structure of shares; and (v) proponent type.
    Shareholders' propensity to resubmit previously voted proposals 
depends on the voting support a proposal has previously received. Using 
a sample of voted shareholder proposals from 2011 to 2018, we find that 
a shareholder proposal was more likely to be resubmitted in the 
following year if it has garnered greater than 10 percent, but less 
than majority, support (see Table 4 below).\200\ In particular, among 
proposals that were eligible to be resubmitted in the following year 
under the current resubmission thresholds, 32 percent of proposals that 
received less than 10 percent of votes in favor were actually 
resubmitted in the following year, as compared to 44 percent of 
proposals that received between 10 percent and 50 percent of votes in 
favor. We assume that because shareholder proposals garnering majority 
support are more likely to be implemented than those receiving lower 
levels of support, these proposals are less likely to be 
resubmitted.\201\
---------------------------------------------------------------------------

    \200\ For this analysis, we look at proposals submitted during 
the calendar years 2011 to 2017 and whether they were resubmitted in 
the following year using data from 2012 to 2018. Because we do not 
have data on whether these proposals were resubmitted in 2019, we 
exclude proposals submitted in 2018.
    The analysis shows that, in our sample, 10 shareholder proposals 
submitted to nine companies were resubmitted and voted on despite 
being eligible for exclusion under the current resubmission 
thresholds. Five of these proposals were resubmitted in the year 
following a previous vote during 2011 to 2017. Thus, these five 
proposals are included in the results presented in Table 4.
    \201\ See supra note 180 and accompanying text.

              Table 4--Shareholder Proposals Support and Resubmissions by Proposal Topic, 2011-2017
----------------------------------------------------------------------------------------------------------------
                   % Vote for                          <10%           10%-50%          >=50%           Total
----------------------------------------------------------------------------------------------------------------
All Proposals:
    Number of proposals.........................             648           1,997             552           3,197
    Eligible for resubmission...................             418           1,997             552           2,967
        (% of proposals)........................           (65%)          (100%)          (100%)           (93%)
    Resubmitted.................................             133             878              65           1,076
        (% of eligible proposals)...............           (32%)           (44%)           (12%)           (36%)
Governance Proposals:
    Number of proposals.........................             176           1,196             522           1,894
    Eligible for resubmission...................             117           1,196             522           1,835
        (% of proposals)........................           (66%)          (100%)          (100%)           (97%)
    Resubmitted.................................              28             453              62             543
        (% of eligible proposals)...............           (24%)           (38%)           (12%)           (30%)
Environmental Proposals:
    Number of proposals.........................             152             301               9             462
    Eligible for resubmission...................             105             301               9             415
        (% of proposals)........................           (69%)          (100%)          (100%)           (90%)
    Resubmitted.................................              36             132               2             170
        (% of eligible proposals)...............           (34%)           (44%)           (22%)           (41%)
Social Proposals:
    Number of proposals.........................             320             500              21             841
    Eligible for resubmission...................             196             500              21             717
        (% of proposals)........................           (61%)          (100%)          (100%)           (85%)
    Resubmitted.................................              69             293               1             363
        (% of eligible proposals)...............           (35%)           (59%)            (5%)           (51%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    The tendency to resubmit shareholder proposals differs by proposal 
topic (see Table 4 above). Because governance-related shareholder 
proposals received greater voting support than environmental and social 
shareholder proposals, on average, governance-related proposals were 
more likely to be eligible for resubmission in the following year.\202\ 
Despite more proposals being eligible for resubmission, governance-
related

[[Page 66492]]

proposals were less likely to be resubmitted than environmental and 
social proposals. In particular, among proposals that received less 
than 10 percent support, 24 percent of governance-related shareholder 
proposals eligible for resubmission in the following year were actually 
resubmitted, as compared to 34 percent of environmental and 35 percent 
of social shareholder proposals eligible for resubmission. Among 
proposals that received between 10 percent and 50 percent support, 38 
percent of governance-related shareholder proposals eligible for 
resubmission in the following year were actually resubmitted, as 
compared to 44 percent of environmental and 59 percent of social 
shareholder proposals eligible for resubmission.
---------------------------------------------------------------------------

    \202\ See Section IV.B.3.i for an analysis of voting support by 
shareholder proposal topic. We rely on the proposal categorization 
from the CII Report, supra note 92, to group proposals into 
governance, environmental, and social categories.
---------------------------------------------------------------------------

    The tendency to resubmit shareholder proposals also differs by the 
type of company. In particular shareholder proposals received by S&P 
500 companies were more likely to be resubmitted in the following year 
than shareholder proposals received by those companies not in the S&P 
500 (see Table 5 below). For example, among shareholder proposals 
receiving less than 10 percent support, 33 percent of eligible 
shareholder proposals were resubmitted at S&P 500 companies, as 
compared to 22 percent at non-S&P 500 companies. Among shareholder 
proposals receiving between 10 percent and 50 percent support, 47 
percent of eligible shareholder proposals were resubmitted at S&P 500 
companies, as compared to 31 percent at non-S&P 500 companies.

               Table 5--Shareholder Proposals Support and Resubmissions by Company Size, 2011-2017
----------------------------------------------------------------------------------------------------------------
                   % Vote for                          <10%           10%-50%          >=50%           Total
----------------------------------------------------------------------------------------------------------------
S&P 500:
    Number of proposals.........................             556           1,663             337           2,556
    Eligible for resubmission...................             359           1,663             337           2,359
        (% of proposals)........................           (65%)          (100%)          (100%)           (92%)
    Resubmitted.................................             120             774              47             941
        (% of eligible proposals)...............           (33%)           (47%)           (14%)           (40%)
Non S&P 500:
    Number of proposals.........................              92             334             215             641
    Eligible for resubmission...................              59             334             215             608
        (% of proposals)........................           (64%)          (100%)          (100%)           (95%)
    Resubmitted.................................              13             104              18             135
        (% of eligible proposals)...............           (22%)           (31%)            (8%)           (22%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    Fewer shareholder proposals were eligible for resubmission in the 
following year in companies with dual-class shares as compared to those 
without such shares (see Table 6 below).\203\ Among shareholder 
proposals that received less than 10 percent in voting support, only 50 
percent were eligible for resubmission the following year for companies 
with dual-class shares, as compared to 66 percent for companies without 
dual-class shares. However, eligible shareholder proposals at dual-
class companies were more likely to be resubmitted in the following 
year. Among proposals eligible for resubmission in the following year, 
71 percent were resubmitted at dual-class companies, while only 29 
percent were resubmitted at non-dual class companies.
---------------------------------------------------------------------------

    \203\ To identify firms with two or more classes of common 
shares, we use the classification of dual-class firms in the ISS 
Governance dataset.

          Table 6--Shareholder Proposals Support and Resubmissions by Type of Company Shares, 2011-2017
----------------------------------------------------------------------------------------------------------------
                   % Vote for                          <10%           10%-50%          >=50%           Total
----------------------------------------------------------------------------------------------------------------
Companies with dual-class shares:
    Number of proposals.........................              48             116               4             168
    Eligible for resubmission...................              24             116               4             144
        (% of proposals)........................           (50%)          (100%)          (100%)           (86%)
    Resubmitted.................................              17              69               0              86
        (% of eligible proposals)...............           (71%)           (59%)            (0%)           (60%)
Companies without dual-class shares:
    Number of proposals.........................             600           1,881             548           3,029
    Eligible for resubmission...................             394           1,881             548           2,823
        (% of proposals)........................           (66%)          (100%)          (100%)           (93%)
    Resubmitted.................................             116             809              65             990
        (% of eligible proposals)...............           (29%)           (43%)           (12%)           (35%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    The tendency to resubmit shareholder proposals also differs by the 
type of proponent (see Table 7 below). In particular shareholder 
proposals submitted by individual proponents receiving between 10 
percent and 50 percent of the votes in support were less likely to be 
resubmitted than proposals submitted by other proponent types.\204\
---------------------------------------------------------------------------

    \204\ Shareholder proposals with individual proponents were less 
likely to be resubmitted than proposals with non-individual 
proponents for all three proposal types: Governance-related, 
environmental, and social. However, the difference is most 
pronounced for social proposals, for which individuals were five 
times less likely to resubmit eligible proposals.

[[Page 66493]]



            Table 7--Shareholder Proposals Support and Resubmissions by Type of Proponent, 2011-2017
----------------------------------------------------------------------------------------------------------------
                   % Vote for                          <10%           10%-50%          >=50%           Total
----------------------------------------------------------------------------------------------------------------
Individual proponents:
    Number of proposals.........................             171             725             182           1,078
    Eligible for resubmission...................              97             725             182           1,004
        (% of proposals)........................           (57%)          (100%)          (100%)           (93%)
    Resubmitted.................................              29             266              11             306
        (% of eligible proposals)...............           (30%)           (37%)            (6%)           (30%)
Non-individual proponents:
    Number of proposals.........................             477           1,272             370           2,119
    Eligible for resubmission...................             321           1,272             370           1,963
        (% of proposals)........................           (67%)          (100%)          (100%)           (93%)
    Resubmitted.................................             104             612              54             770
        (% of eligible proposals)...............           (32%)           (48%)           (15%)           (39%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    We also analyze how voting support changes with the number of times 
a particular proposal is submitted. Fifty-two percent of resubmitted 
shareholder proposals saw an increase in voting support relative to the 
last time they were voted on (see Table 8 below). Shareholder proposals 
that got less than 10 percent voting support in the past were more 
likely to see increases in voting support as compared to proposals 
receiving between 10 percent and 50 percent of votes in favor. For 
those proposals for which voting support increased, the average 
increase in voting support is approximately six percent for all 
proposals, six percent for governance-related proposals, and five 
percent for environmental and social proposals.

                     Table 8--Change in Voting Support for Resubmitted Proposals, 2011-2018
----------------------------------------------------------------------------------------------------------------
                   % Vote for                          <10%           10%-50%          >=50%           Total
----------------------------------------------------------------------------------------------------------------
All Proposals:
    Number of proposals.........................             178           1,165             109     \205\ 1,452
    % Proposals with increase in voting.........             55%             52%             47%             52%
    Average increase in voting support..........              7%              5%              6%              6%
Governance Proposals:
    Number of proposals.........................              42             657             106             805
    % Proposals with increase in voting.........             52%             50%             48%             50%
    Average increase in voting support..........             17%              6%              6%              6%
Environmental Proposals:
    Number of proposals.........................              47             157               2             206
    % Proposals with increase in voting.........             62%             55%              0%             56%
    Average increase in voting support..........              4%              5%             N/A              5%
Social Proposals:
    Number of proposals.........................              89             351               1             441
    % Proposals with increase in voting.........             53%             54%              0%             53%
    Average increase in voting support..........              5%              5%             N/A              5%
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    Lastly, we analyze the extent to which initial support for 
shareholder proposals is related to the likelihood of the shareholder 
proposal ultimately obtaining majority support.\206\ During 2011 to 
2018, 533 unique shareholder proposals have garnered majority support, 
of which 479 (90 percent) obtained majority support on their initial 
submission.\207\ Of the remaining 54 shareholder proposals that 
received majority support following a resubmission, 32 (60 percent) 
obtained majority support on their second submission and 22 (40 
percent) obtained majority support on their third or subsequent 
submissions. Figure 9 below shows the distribution of first submission 
voting support for the 54 shareholder proposals that garnered majority 
support following a resubmission. Of these, approximately 60 percent 
started with support of over 40 percent in their first submission, and 
98 percent started with support of over 5 percent in their first 
submission. Of the 22 proposals that obtained majority support on their 
third or subsequent submissions, approximately 95 percent received 
support of over 15 percent on their second submission, and 100 percent 
received support of over 25 percent on their third or subsequent 
submission.
---------------------------------------------------------------------------

    \205\ The total number of proposals in Table 8 represents the 
total number of proposals that were resubmitted (not first time 
submissions) in the years 2011 to 2018, which differs from the total 
number of proposals in Tables 4, 5, 6, and 7 (i.e., 3,197 
proposals). This is because the analysis on the propensity to 
resubmit shareholder proposals excludes proposals resubmitted in 
2011 and those that were resubmitted after a period longer than one 
year. See supra note 200.
    \206\ Note that in this analysis, we may be underestimating the 
likelihood of proposals ultimately obtaining majority support, 
especially for proposals toward the end of our sample that could get 
majority support following a future resubmission. For example, if a 
new proposal fails to garner majority support in 2018, but is 
resubmitted in 2019, our data does not allow us to see whether such 
a proposal would garner majority support following a resubmission in 
a year after 2018. See supra note 200.
    \207\ Note that this number is lower than 552 proposals 
receiving majority support in Table 4. This is because the former 
measure counts unique proposals while the latter counts each time a 
proposal is submitted and receives over 50% support. Therefore, in 
some instances, the latter measure will count twice a proposal that 
receives majority support, is resubmitted, and receives majority 
support again.

---------------------------------------------------------------------------

[[Page 66494]]

[GRAPHIC] [TIFF OMITTED] TP04DE19.020

    The results of the analyses in Tables 3-8, Figure 9, and 
accompanying text should be interpreted with caution--our analysis of 
shareholder proposal resubmissions is subject to selection bias because 
the data only includes resubmissions that appeared in proxy materials. 
The data does not capture resubmissions that were withdrawn because 
proponents reached an agreement with management or because proponents 
decided to withdraw the resubmission for other reasons, and it does not 
capture resubmissions that were excluded pursuant to one of the 
substantive bases under Rule 14a-8.\208\
---------------------------------------------------------------------------

    \208\ For a similar discussion, see the letter in response to 
the Proxy Process Roundtable from the Shareholder Rights Group dated 
December 4, 2018, at 13.
---------------------------------------------------------------------------

C. Benefits and Costs and Effects on Efficiency, Competition, and 
Capital Formation of Proposed Rule Amendments

    Below we discuss the anticipated economic effects of the proposed 
rule amendments. Section IV.C.1 discusses economic considerations 
relevant to shareholder proposals generally, Section IV.C.2 discusses 
the general economic effects of the proposed rule amendments, Section 
IV.C.3 discusses the specific benefits and costs of each proposed 
amendment, and Section IV.C.4 discusses the effects of the proposed 
amendments on efficiency, competition, and capital formation.
1. General Economic Considerations Relevant to Shareholder Proposals
    As mentioned in Section IV.B above, Rule 14a-8 was designed to 
facilitate shareholders' ability under state law to appear in person at 
an annual or special meeting and, subject to certain requirements 
governed by state law and the company's governing documents, present 
their own proposals for a vote by shareholders at that meeting. By 
giving proponents the ability to have their proposals included 
alongside management's in the company's proxy statement, Rule 14a-8 
allows shareholders to consider and vote on matters raised by other 
shareholders for consideration at an annual or special meeting of 
shareholders.
    A shareholder proposal could be value enhancing not only because it 
could motivate a value-enhancing change,\209\ but also because it could 
limit insiders' entrenchment \210\ and provide management with 
information about the views of shareholders.\211\ On the other hand, a 
shareholder proposal may not be value enhancing, and companies may bear 
direct costs associated with the consideration of a proposal and/or its 
inclusion in the proxy statement and these costs may be passed down to 
shareholders. A shareholder proposal may not be value enhancing if it 
serves the interests of a minority rather than the majority of 
shareholders.\212\ Shareholders may also bear costs associated with 
their own consideration of a proposal. Our economic analysis does not 
speak to whether any particular shareholder proposal or type of 
proposals are value enhancing, whether the proposed amendments would 
exclude value-enhancing proposals, or whether the proposed amendments 
would have a disproportionate effect on proposals that are more or less 
value enhancing.
---------------------------------------------------------------------------

    \209\ See, e.g., Vicente Cu[ntilde]at, Mireia Gine, & Maria 
Guadalupe, The Vote Is Cast: The Effect of Corporate Governance on 
Shareholder Value, 67 J. Fin. 1943 (2012) (``Cu[ntilde]at et al. 
(2012)'').
    \210\ See, e.g., Bach & Metzger (2017), supra note 174.
    \211\ See, e.g., J. Robert Brown, Jr., Corporate Governance, 
Shareholder Proposals, and Engagement Between Managers and Owners 
(University of Denver Sturm College of Law, Legal Research Paper 
Series, Working Paper No. 17-15, 2017) (``Brown (2017)'').
    \212\ For a related argument, see the letter in response to the 
Proxy Process Roundtable from Business Roundtable dated November 9, 
2018.
---------------------------------------------------------------------------

    In addition, companies and their shareholders may bear opportunity 
costs associated with considering proposals that are ultimately not 
supported by a majority of shareholders or implemented by a company 
instead of engaging in other value-enhancing activities.\213\ 
Therefore, the value of a shareholder proposal depends fundamentally on 
the tradeoff between the potential for value-creation and the cost 
borne by companies and their shareholders. Furthermore, the value of 
shareholder proposals is limited by the

[[Page 66495]]

extent to which shareholders participate in the voting process and the 
extent to which management implements those proposals.
---------------------------------------------------------------------------

    \213\ See, e.g., CCMC Report, supra note 84; Rulemaking 
Petition, supra note 82, at 8-9; Roundtable Transcript, supra note 
13, comments of Ning Chiu, Counsel, Capital Markets Group, Davis 
Polk & Wardwell LLP, at 127; Tom Quaadman, Executive Vice President, 
U.S. Chamber of Commerce Center for Capital Markets Competitiveness, 
at 136; Dannette Smith, Secretary to the Board of Directors and 
Senior Deputy General Counsel, UnitedHealth Group, at 148-49; 
letters in response to the Proxy Process Roundtable from Blackrock, 
Inc. dated November 16, 2018; Business Roundtable dated November 9, 
2018; Society for Corporate Governance dated November 9, 2018 
(discussing costs associated with shareholder proposals).
---------------------------------------------------------------------------

    Some empirical literature has examined whether proposals are value 
enhancing by studying the stock price reaction around announcements 
associated with shareholder proposals, and finds that shareholder 
proposals are, on average, associated with small or negligible changes 
in target companies' market value.\214\ More specifically, a literature 
review of prior studies in this area shows that shareholder proposals 
are associated, with an average 0.06 percent short-window stock price 
reaction.\215\ These results, however, mask significant cross-sectional 
variation in the valuation effects of shareholder proposals. In 
particular, literature finds significant stock market reaction to 
shareholder proposals that pass by a small margin relative to proposals 
that fail by a small margin on the day of the vote. For example, one 
study found a 1.3 percent higher increase in stock price on the day of 
the vote for proposals that pass by a small margin compared to 
proposals that fail by a small margin.\216\
---------------------------------------------------------------------------

    \214\ The majority of prior studies find no long-term effects of 
shareholder proposals on companies' returns, earnings, operations, 
and corporate governance. See, e.g., Matthew R. Denes, Jonathan M. 
Karpoff, & Victoria B. McWilliams, Thirty Years of Shareholder 
Activism: A Survey of Empirical Research, 44 J. Corp. Fin. 405 
(2017) (``Denes et al. (2017)''). We focus our discussion on short-
term market reactions to shareholder proposals because findings on 
the long-term effects are less reliable than the findings on the 
short-term effects as it can be hard to attribute the long-term 
effects to the shareholder proposals.
    \215\ See Denes et al. (2017), supra note 214. The results of 
these studies should be interpreted with caution because they do not 
identify a clean announcement date for proposals by which to gauge 
the market reaction. For example, companies frequently include 
multiple proposals in the same proxy statement and they announce 
other news, such as dividends, at shareholder meetings. For related 
arguments, see Thomas & Cotter (2007), supra note 180.
    \216\ See Cu[ntilde]at et al. (2012), supra note 209. One reason 
why the market reaction is concentrated in proposals that pass by a 
small margin is that for proposals that pass or fail by a large 
margin, the stock price may already reflect the voting outcome 
because it is largely anticipated. For proposals that fail by a 
small margin, there is typically negligible or no stock price 
reaction because proposals that fail even by a small margin are 
significantly less likely to be implemented than proposals that pass 
by a small or large margin. See also Bach & Metzger (2017), supra 
note 174.
    Nevertheless, Bach & Metzger also argue that the estimates of 
stock price reaction around majority support thresholds likely are 
biased because of the ability of management to sway the outcome of 
the vote, although the direction of this bias is difficult to 
estimate. Laurent Bach & Daniel Metzger, How Close Are Close 
Shareholder Votes?, 32 Rev. Fin. Stud. 3183 (2019) (``Bach & Metzger 
(2019)'').
---------------------------------------------------------------------------

    The market reaction can differ with the topic of the shareholder 
proposal. For example, one study finds more positive market reaction 
for shareholder proposals related to eliminating poison pills and 
proposals seeking the adoption of cumulative voting relative to other 
types of governance proposals.\217\ Another study finds larger market 
reaction for shareholder proposals that reduce antitakeover protection 
than other types of governance-related proposals.\218\ Some literature 
provides evidence that environmental and social proposals that pass by 
a small margin elicit a positive stock market reaction on the day of 
the shareholder meeting.\219\
---------------------------------------------------------------------------

    \217\ Stuart L. Gillan & Laura T. Starks, Corporate Governance 
Proposals and Shareholder Activism: The Role of Institutional 
Investors, 57 J. Fin. Econ. 275 (2000) (``Gillan & Starks (2000)''). 
This study examines a sample of proposals submitted between 1987 and 
1994. Hence, the generalizability of some of the findings of this 
study could be limited.
    \218\ See Cu[ntilde]at et al. (2012), supra note 209.
    \219\ Caroline Flammer, Does Corporate Social Responsibility 
Lead to Superior Financial Performance? A Regression Discontinuity 
Approach, 61 Mgmt. Sci. 2549 (2015). Nevertheless, the study also 
notes that ``although [the] results imply that adopting close call 
[environmental and social] proposals is beneficial to companies, 
they do not necessarily imply that [environmental and social] 
proposals are beneficial in general.'' Id. In particular, the study 
finds that shareholder proposals on social and environmental issues 
receive low shareholder support, on average, and only a small and 
unrepresentative sample of shareholder proposals on social and 
environmental issues is associated with positive stock market 
reactions. Id.
---------------------------------------------------------------------------

    Market reaction to shareholder proposals also can depend on the 
type of the proponent. For example, Gillan and Starks (2000) find that 
market reaction is higher for proposals sponsored by individuals than 
institutions, whereas Cu[ntilde]at et al. (2012) show that market 
reaction is higher for proposals submitted by institutions than 
individuals.\220\ Gantchev and Giannetti (2018) show that market 
reaction is higher for proposals submitted by individuals that submit 
proposals infrequently.\221\ Matsusaka et al. (2019) find a negative 
market reaction to shareholder proposals submitted by labor unions in 
years that a new labor contract must be negotiated.\222\
---------------------------------------------------------------------------

    \220\ The different findings of the cited papers likely are 
attributable to different samples and methodologies used.
    \221\ Gantchev & Giannetti (2018), supra note 166.
    \222\ John G. Matsusaka, Oguzhan Ozbas, & Irene Yi, 
Opportunistic Proposals by Union Shareholders, 32 Rev. Fin. Stud. 
3215 (2019). For similar evidence of stock market reaction to union-
sponsored proposals, see Jie Cai & Ralph A. Walkling, Shareholders' 
Say on Pay: Does it Create Value?, 46 J. Fin. & Quantitative 
Analysis 299 (2011) and Andrew K. Prevost, Ramesh P. Rao, & Melissa 
A. Williams, Labor Unions as Shareholder Activists: Champions or 
Detractors?, 47 Fin. Rev. 327 (2012).
---------------------------------------------------------------------------

    Finally, the market reaction to shareholder proposals typically is 
higher for firms that would benefit the most from the changes sought by 
the shareholder proposal. For example, Renneboog and Szilagyi (2011) 
find that the market reaction around the dates the proposals were first 
announced is higher for firms with poor governance quality,\223\ and 
Cu[ntilde]at et al. (2012) show that market reaction to governance-
related proposals on the day of the shareholder meeting is higher for 
firms with a large number of antitakeover provisions in place.\224\
---------------------------------------------------------------------------

    \223\ Luc Renneboog & Peter G. Szilagyi, The Role of Shareholder 
Proposals in Corporate Governance, 17 J. Corp. Fin. 167 (2011). The 
dates the proposals were first announced were (i) the mailing dates 
of the definitive proxy statements; (ii) the dates of a preliminary 
statement released by the target firm; or (iii) the dates that the 
proxy materials were filed by the proponent in the event of a proxy 
contest. Governance quality is measured using two separate indices: 
(i) An index that tracks 24 antitakeover provisions and (ii) an 
index that tracks the following six provisions: Staggered boards, 
limits to shareholder bylaw amendments, poison pills, golden 
parachutes, and supermajority requirements for mergers and charter 
amendments.
    \224\ Cu[ntilde]at et al. (2012), supra note 209, use a sample 
of shareholder proposals that Riskmetrics classifies as governance-
related. These proposals are broadly classified into the following 
six categories: (i) Antitakeover proposals, (ii) compensation, (iii) 
voting, (iv) auditors, (v) board structure, and (vi) other.
---------------------------------------------------------------------------

    As mentioned above, companies may bear both direct and opportunity 
costs associated with the consideration of a proposal, and these costs 
may be passed down to shareholders.\225\ In particular, to the extent 
applicable, companies incur costs to: (i) Review the proposal and 
address issues raised in the proposal; (ii) engage in discussions with 
the proponent(s); (iii) print and distribute proxy materials, and 
tabulate votes on the proposal; (iv) communicate with proxy advisory 
firms and shareholders (e.g., proxy solicitation costs); (v) if they 
intend to exclude the proposal, file a notice with the Commission; and 
(vi) prepare a rebuttal to the submission.
---------------------------------------------------------------------------

    \225\ Costs would not be passed down to shareholders if managers 
absorbed some of these costs by decreasing their compensation or by 
offsetting the cost increases by decreasing other types of costs.

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[[Page 66496]]

    There is disagreement among commenters regarding the costs 
associated with processing shareholder proposals.\226\ Based on data 
from a 1996 SEC questionnaire, the average cost for a company to 
determine whether to place a proposal on a ballot was $58,309 and the 
average cost to print and distribute proxy materials, and tabulate 
votes on the proposal was $78,795.\227\ Commenters, however, have 
expressed concerns that these cost estimates likely are unreliable 
because: (i) They likely cover the cost of all proposals received by a 
company in a year, not the cost of a single proposal; (ii) they are 
averages, based on a wide range of responses from companies; (iii) 
printing and mailing costs have decreased in recent years due to the 
increased use of electronic dissemination of proxy materials; \228\ and 
(iv) they capture the overall cost of printing and distributing proxy 
materials, not the cost of an additional shareholder proposal.\229\ 
More recently, a representative from an industry group estimated a cost 
of $50,000 per proposal.\230\ In response to the Proxy Process 
Roundtable, one commenter also stated that the company's cost per 
shareholder proposal, including resubmitted proposals, is more than 
$100,000,\231\ while another commenter cited to a House Report that 
estimated the cost associated with shareholder proposals to be 
$150,000.\232\ In addition, the Commission has previously estimated 
that companies spend, on average, $11,600 to file with the Commission a 
notice that they intend to exclude a shareholder proposal, which is 
equivalent to $13,602 today.\233\ We lack data to estimate the dollar 
cost of the remaining activities associated with shareholder proposal 
submissions, but we request comment and data on these costs in Section 
IV.E below.
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    \226\ See supra notes 21-25 and accompanying text.
    \227\ The cumulative rate of inflation between May 1998 and 
August 2019 is 157.6%. See Consumer Price Index (CPI) Inflation 
Calculator, U.S. Dep't of Labor, Bureau of Labor Statistics (last 
visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906. The average 
costs to companies were $37,000 and $50,000, respectively. See 1998 
Adopting Release, supra note 8.
    $58,309 = $37,000 x 1.576.
    $78,795 = $50,000 x 1.576.
    \228\ The processing fee for the electronic dissemination of 
proxy materials cannot exceed 50 cents per set of proxy materials. 
See NYSE Rule 451.90. Automatic Data Processing Inc. estimated that 
``the average cost of printing and mailing a paper copy of a set of 
proxy materials during the 2006 proxy season was $5.64.'' See 
Shareholder Choice Regarding Proxy Materials, Release No. 34-56135, 
(Jul. 26, 2007) [72 FR 42221 (Aug. 1, 2007)]. There is also a 
processing fee for the dissemination of proxy materials via mail. 
The processing fee for the dissemination of proxy materials via mail 
can be lower than the processing fee for the dissemination of proxy 
materials via email. See letter from the Investment Company 
Institute (Jan. 17, 2019), at 3, available at https://www.ici.org/pdf/18_ici_nysefees_ltr.pdf (noting that ``[e]very beneficial 
account pays the NYSE schedule maximum fee of 15 cents in processing 
fees to receive a paper shareholder report in the mail. . . . Every 
beneficial account pays the NYSE schedule maximum fee of 25 cents 
(15 cents plus 10 cents) to receive a shareholder report by 
email.''). The letter from the Investment Company Institute refers 
to processing fees to disseminate a shareholder report, but we 
expect that the processing fees to disseminate proxy materials would 
be comparable. Nevertheless, the cost of printing and mailing the 
proxy materials would offset any cost savings arising from lower 
processing fees for proxy materials disseminated via mail compared 
to proxy materials disseminated via email. See, e.g., Broadridge, 
2019 Proxy Season Key Statistics and Performance Rating (2019), 
available at https://www.thecorporatecounsel.net/member/Memos/Broadridge/09_19_2019.pdf (estimate of cost savings as a result of 
the increased electronic dissemination of proxy materials).
    \229\ See, e.g., letter in response to the Proxy Process 
Roundtable from the Shareholder Rights Group dated December 4, 2018; 
Kanzer (2017), supra note 104, at 2-3; Brown (2017), supra note 211.
    \230\ See Statement of Darla C. Stuckey, President and CEO, 
Society for Corporate Governance, Before the H. Comm. on Financial 
Services Subcomm. on Capital Markets and Government Sponsored 
Enterprises, Sept. 21, 2016, at 8 (noting ``a lower legal cost 
estimate based on anecdotal discussions with [the Society for 
Corporate Governance] members of $50,000 per proposal'').
    \231\ See letter in response to the Proxy Process Roundtable 
from Exxon Mobil Corporation dated July 26, 2019.
    \232\ See letter in response to the Proxy Process Roundtable 
from the American Securities Association dated June 7, 2019, at 4.
    \233\ See Facilitating Shareholder Director Nominations, Release 
No. 34-62764 (Aug. 25, 2010) [75 FR 56668 (Sept. 16, 2010)], at 
56742 n. 797. $11,600 = 116 hours/notice x 0.25 time of outside 
professionals x $400 hourly wage of outside professionals; $13,602 = 
$11,600 x 1.173 cumulative rate of inflation between November 2010 
and August 2019. See Consumer Price Index (CPI) Inflation 
Calculator, U.S. Dep't of Labor, Bureau of Labor Statistics (last 
visited Oct. 31, 2019), https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=11%2C600.00&year1=201011&year2=201906.
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    We note that the cost of processing a resubmission may be lower 
than the cost of processing a first-time proposal.\234\ Further, some 
of the above mentioned costs, such as the expenses to draft a no-action 
request or campaigning to increase retail voters' participation, 
involve a degree of management discretion as to the level of expenses 
incurred, and there is disagreement about the level of such expenses 
that is value-enhancing.\235\
---------------------------------------------------------------------------

    \234\ See, e.g., letter in response to the Proxy Process 
Roundtable from the Shareholder Rights Group dated December 4, 2018, 
at 14 (noting ``[o]ur experience as proponents of proposals leads us 
to believe that companies expend less resources on proposals that 
are resubmitted. If resources are expended in opposition to 
proposals, the lion's share of those resources and board attention 
to a proposal are most likely expended in the first effort to oppose 
the proposal''). In certain instances, however, resubmissions could 
be costlier than initial submissions. For example, companies might 
decide to challenge a resubmission and incur the associated costs 
following low support for the initial submission.
    \235\ See, e.g., Brown (2017), supra note 211, at 21; Kanzer 
(2017), supra note 104, at 2; James McRitchie, SRI Funds & Advisors 
Send Open Letters on Lawsuits Against Shareholders, CorpGov.net 
(Mar. 24, 2014), https://www.corpgov.net/2014/03/sri-funds-advisors-send-open-letters-on-lawsuits-against-shareholders/; see also letter 
in response to the Proxy Process Roundtable from Investor Voice, SPC 
dated November 14, 2018, at 3.
---------------------------------------------------------------------------

    Shareholder proposals also impose opportunity costs on companies 
and their shareholders because management, the board, and the voting 
shareholders could spend the time spent on processing a shareholder 
proposal and voting on the proposal to engage in other value-enhancing 
activities. We are unable to estimate the dollar amount of some of the 
direct administrative costs and opportunity costs associated with 
shareholder proposals because we lack the necessary data. Thus, we seek 
comment on these costs, and any corresponding cost savings of the 
proposed amendments, in Section IV.E below.
    As mentioned above, in addition to the costs to companies that may 
be passed down to shareholders, individual shareholders may bear costs 
associated with their own consideration and voting on a proposal. 
Although these costs may be difficult to quantify, many investment 
advisers (among others) retain proxy advisory firms to perform a 
variety of services to reduce the burdens associated with proxy voting 
determinations, including determinations on shareholder proposals.
2. General Economic Effects of the Proposed Amendments
i. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule 
14a-8(c)
    The proposed amendments to the ownership thresholds in Rule 14a-
8(b) would allow companies to exclude the following additional 
proposals relative to the proposals that can be excluded under the 
current ownership thresholds: \236\ (i) Proposals submitted by 
shareholders that hold at least $2,000 and less than $15,000 worth of 
shares for a period between one and three years and (ii) proposals 
submitted by shareholders that hold at least $15,000 and less than 
$25,000 worth of shares for a period between one and two

[[Page 66497]]

years.\237\ The proposed amendments to Rule 14a-8(b) would not allow 
shareholders to aggregate their holdings, and, therefore, companies 
would be able to exclude proposals submitted by shareholders that do 
not individually meet the minimum ownership thresholds under Rule 14a-
8. In addition, the proposed amendments to Rule 14a-8(b) would require 
a shareholder-proponent to provide contact information as well as 
availability to discuss the proposal with the company, and, where a 
representative is used, documentation authorizing the representative to 
submit the proposal on the shareholder-proponent's behalf. Lastly, the 
proposed amendments to 14a-8(c) would allow companies to exclude 
proposals where the proponent, either individually or serving as a 
representative, has submitted more than one proposal for the same 
meeting. As a result, the proposed amendments could increase the number 
of excludable shareholder proposals because they could discourage 
proponents from submitting proposals that would not satisfy the 
requirements of the proposed amendments to Rule 14a-8(b) and Rule 14a-
8(c) and they could allow issuers to exclude proposals that do not 
satisfy the requirements of the proposed amendments to Rule 14a-8(b) 
and Rule 14a-8(c).\238\
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    \236\ As of August 2019, the $2,000 threshold as adopted in May 
1998 would be equal to $3,152 after adjusting for inflation, see 
supra note 55, and it would be equal to $8,379 after adjusting for 
the growth in Russell 3000 index, see supra note 56.
    \237\ Proposals submitted by shareholders that hold less than 
$2,000 worth of shares or hold the shares for less than one year are 
excludable under the current rule, and thus are not listed as 
additional excludable proposals under the proposed amendments to the 
ownership thresholds.
    \238\ The effect of the proposed rule amendments on proponents' 
willingness to submit proposals is distinct from the effect of the 
proposed rule amendments on company's ability to exclude certain 
proposals because companies occasionally allow proposals that do not 
meet the current eligibility thresholds to be voted on. At the same 
time, companies may expend additional time and resources to exclude 
proposals that are submitted despite not being eligible for 
submission. Hence, to the extent that the proposed rule amendments 
would discourage proponents from submitting certain proposals, the 
proposed rule amendments would have an effect that may be different 
than and incremental to the effect of companies' ability to exclude 
certain proposals.
---------------------------------------------------------------------------

    To estimate the number of proponents and proposals that could be 
excludable as a result of the proposed amendments to Rule 14a-8(b) and 
Rule 14a-8(c), we analyze proponents' ownership information using data 
from proxy statements (see Table 1 above). With respect to any dollar 
ownership category, the data does not indicate whether the proponents 
in that category held their shares for more than one year. Assuming all 
proponents held the shares for at least three years, the proposed 
amendments to the ownership thresholds would not result in the 
exclusion of any additional proponents or proposals to be considered in 
shareholder meetings held in 2018 relative to the current 
threshold.\239\ On the other hand, if one were to assume (again, 
without any data to support the assumption) that all proponents bought 
the shares one year in advance of the shareholder submission and plan 
to hold those shares only through the date of the meeting, we find that 
the increase in the ownership threshold from $2,000 with a one-year 
holding period to $25,000 with a one-year holding period could result 
in the exclusion of 51 percent of the proponents and 56 percent of the 
proposals that were submitted to be considered at shareholder meetings 
held in 2018, assuming also that none of those proponents would 
increase their holdings to meet the new thresholds in order to be able 
to file a proposal.\240\
---------------------------------------------------------------------------

    \239\ We have data that shows which shareholder-proponents held 
varying minimum holdings, based on information the companies 
provided in the proxy statements. However, we have not prepared 
estimates of excludable proposals under the proposed amendments 
based on that data since it is not clear how much each shareholder-
proponent actually holds and why the company selected the specific 
minimum that they decided to report.
    \240\ 51% = 43% + 8%. We estimate that the total number of 
excludable proponents is 101. Eighty-five proponents, or 43 percent, 
held between $2,000 and $15,000, while 16 proponents, or 8 percent, 
held between $15,000 and $25,000 worth of shares.
    56% = (84 excludable proposals)/(150 proposals with exact 
information on proponents' ownership). Note that the number of 
proposals that would be excludable is different from the summation 
of the proposals from the ``# of proposals'' column in Table 1 above 
because the latter double-counts proposals that were submitted by 
multiple proponents.
    In estimating the number of excludable proposals, we make the 
following assumptions about proposals that are submitted by multiple 
proponents. First, we assume that a proposal would still be 
submitted if at least one of the co-proponents met the proposed 
dollar ownership threshold. Assuming that a proposal with multiple 
proponents would be excludable if at least one proponent does not 
meet the proposed eligibility requirements, the number of excludable 
proposals would be 90 or 60 percent.
    Second, in cases where we have data on exact ownership for some 
proponents and minimum ownership for the remaining proponents 
submitting a joint proposal (there are two such proposals), we 
assume proponents reporting minimum holdings would continue to be 
eligible to submit the proposal under proposed amendments. Assuming 
that a proposal would be submitted only in cases where the 
proponents reporting minimum holdings have reported minimum holdings 
in excess of $25,000, the number of excludable proposals would be 84 
or 56 percent.
---------------------------------------------------------------------------

    The proposed rule amendments also would prohibit shareholders from 
aggregating their holdings to meet the applicable minimum ownership 
thresholds to submit a Rule 14a-8 proposal. As shown in Table 1 above, 
there are three proponents that submitted two unique proposals, whose 
individual holdings were below the $2,000 threshold. One of the two 
proposals was submitted by two co-proponents, whose both aggregate and 
individual holdings did not meet the $2,000 current ownership 
threshold, and this proposal is excludable under the current rules. For 
the other of the two proposals, there were four co-proponents, whose 
aggregate holdings met the $2,000 threshold, but the individual 
holdings of one of the co-proponents did not meet the $2,000 threshold. 
Assuming that a proposal would be submitted if at least one of the co-
proponents met the ownership threshold and assuming no change in the 
ownership threshold, the proposed amendments to proponents' ability to 
aggregate their holdings would not result in the exclusion of any 
proposals relative to the current requirements.
    Finally, our analysis of proxy statements suggests that 7, or 2 
percent of, additional proposals would be excludable under the proposed 
amendments to Rule 14a-8(c) (i.e., one-proposal limit).\241\
---------------------------------------------------------------------------

    \241\ 2% = (7 excludable proposals)/(363 proposals with 
proponents' identity information in the proxy statements submitted 
to be considered in 2018 shareholder meetings).
    Our analysis assumes that persons that submitted multiple 
proposals to the same company and for the same shareholder meeting, 
either directly or indirectly, would withdraw all but one proposal.
---------------------------------------------------------------------------

    We also analyze proponents' ownership information using data from 
proof-of-ownership letters that have been made available as part of no-
action requests submitted to the staff during calendar year 2018 (see 
Table 2 above). With respect to any dollar ownership category, the data 
does not indicate whether the proponents in that category held their 
shares for more than one year. Assuming proponents held the shares for 
three years, the proposed amendments to the ownership thresholds would 
not result in the exclusion of any additional proponents or proposals 
to be considered in shareholder meetings held in 2018 relative to the 
current threshold.\242\ On the other hand, if one were to assume 
(again, without any data to support that assumption) that all 
proponents bought the shares one year in advance of the shareholder 
submission and plan to hold those shares only through the date of the 
meeting, we find that the increase in the ownership threshold from 
$2,000 with a one-year holding period to $25,000 with a one-year 
holding period could result in the exclusion of 56 percent of the 
proponents and 40 percent of the proposals, for which the

[[Page 66498]]

company submitted a no-action request to Commission staff, assuming 
also that none of those proponents would increase their holdings to 
meet the new thresholds in order to be able to file a proposal.\243\
---------------------------------------------------------------------------

    \242\ See supra note 239.
    \243\ 56% = 49% + 7%. We estimate that the total number of 
excludable proponents is 159. One hundred and forty proponents, or 
49 percent, held between $2,000 and $15,000, while 19 proponents, or 
7 percent, held between $15,000 and $25,000.
    40% = (62 excludable proposals)/(155 proposals for which the 
proof-of-ownership letters provided exact information on proponents' 
ownership). Note that the number of proposals that would be 
excludable is different from the summation of the proposals from the 
``# of proposals'' column in Table 2 above because the latter 
double-counts proposals that were submitted by multiple proponents.
    In estimating the number of excludable proposals, we make the 
following assumptions about proposals that are submitted by more 
than one proponent. First, we assume that a proposal would still be 
submitted if at least one of the co-proponents met the proposed 
dollar ownership threshold. Assuming that a proposal with multiple 
proponents would be excludable if at least one proponent does not 
meet the proposed eligibility requirements, the number of excludable 
proposals would be 102 or 66 percent.
    Second, in cases where we have data on exact ownership for some 
proponents and minimum ownership for the remaining proponents 
submitting a joint proposal (there are 27 such proposals), we assume 
proponents reporting minimum holdings would continue to be eligible 
to submit the proposal under proposed amendments. Assuming that a 
proposal would be submitted only in cases where the proponents 
reporting minimum holdings have reported minimum holdings in excess 
of $25,000, the number of excludable proposals would be 72 or 46 
percent.
---------------------------------------------------------------------------

    The proposed rule amendments also would prohibit shareholders from 
aggregating their holdings to meet the applicable minimum ownership 
thresholds to submit a Rule 14a-8 proposal. As shown in Table 2, there 
are nine proponents that submitted seven unique proposals, whose 
individual holdings were below the $2,000 threshold. For one of the 
seven proposals, there were two co-proponents, whose aggregate holdings 
met the $2,000 current ownership threshold. For another one of the 
seven proposals, there was only one proponent whose holdings did not 
meet the $2,000 threshold, and this proposal is excludable under the 
current threshold. For the remaining five proposals, there was at least 
one other co-proponent, whose share ownership met the current $2,000 
threshold. Hence, assuming that a proposal would be submitted if at 
least one of the co-proponents met the ownership threshold and assuming 
no change in the ownership thresholds, the proposed amendments could 
result in the exclusion of one unique proposal, or 0.4 percent of the 
proposals with ownership information for which the company submitted a 
no-action request to the Commission staff.\244\
---------------------------------------------------------------------------

    \244\ 0.4% = (1 excludable proposal under the proposed 
prohibition to aggregation of holdings)/(227 proposals with 
proponents' ownership information attached to the no-action 
letters).
---------------------------------------------------------------------------

    The results of the analysis of the proponents' ownership 
information using data from proxy statements and proof-of-ownership 
letters should be interpreted with caution for several reasons. First, 
we are unable to estimate the number of excludable proponents taking 
into account the proposed amendments to both the dollar and the 
duration thresholds because we lack data on proponents' duration of 
ownership, but, as noted above, there would be no impact to long-term 
shareholders who have held their shares for three years or more.\245\ 
While we have limited data on duration of ownership from proxy 
statements or proof-of-ownership letters, we recognize that there may 
be a relation between duration of ownership and the propensity of a 
shareholder to submit a proposal. In particular, longer ownership 
duration could be an indicator that a shareholder has sufficient 
interest in engaging with the company and is therefore more likely to 
submit a shareholder proposal. On the other hand, we may observe 
shareholders buying and holding on to their shares for long periods of 
time because they are following a passive investment strategy and are 
therefore less likely to engage with management or other shareholders. 
We hypothesize that these types of shareholders would be less likely to 
submit shareholder proposals. Depending on whether the former or the 
latter effect is more prevalent, the effect of the proposed amendments 
to the ownership thresholds could be closer to the lower or higher end 
of the range of excludable proposals discussed above, respectively.
---------------------------------------------------------------------------

    \245\ Staff received some non-public retail share ownership data 
from a market participant who requested confidential treatment for 
the data. Those data provide some information about level and 
duration of ownership but do not allow us to identify those 
shareholders that have submitted or are likely to submit shareholder 
proposals. Additional challenges posed by the data include that the 
sample spans a limited time period and information about holdings 
cannot be aggregated to the shareholder level. We would welcome 
empirical data to assist in estimating the number of excludable 
proponents under the proposed thresholds, and we encourage 
commenters to submit data to the public comment file that allow us 
to aggregate holdings to the shareholder level, identify 
shareholders likely to submit shareholder proposals, and that span a 
sufficiently long time period.
---------------------------------------------------------------------------

    Second, our analysis is subject to sample selection bias because 
the ownership data in the proof-of-ownership letters only concerns 
proponents whose proposals were the subject of a no-action request, and 
the ownership data in the proxy statements only concerns proposals that 
ultimately were included in the proxy statement and went to a 
vote.\246\
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    \246\ In particular, it is difficult to draw inferences about 
the total effect of proposed amendments to the eligibility 
requirements on precluding shareholders from submitting proposals or 
on the number of excludable submitted proposals using ownership data 
from proxy statements or proof-of-ownership letters included with 
no-action requests. For example to the extent that companies may be 
more likely to choose to request no-action relief for proposals of 
certain types of proponents or topics, our results may not be 
generalizable for the full set of submitted proposals. We estimate 
that of the proposals for which companies have requested no-action 
relief, 51% were submitted by individual proponents. Therefore, 
compared to the number of total submissions by individual proponents 
in 2018 (39% estimated in Section IV.B.3.i above), our analysis may 
be over-representative of the proposals submitted by individuals.
---------------------------------------------------------------------------

    Third, our analysis is subject to self-reporting bias because the 
proof-of-ownership letters are not required to disclose the proponents' 
exact holdings but only need to affirm that proponents meet the minimum 
ownership requirements.\247\ Relatedly, companies are not required to 
disclose the holdings of the proponents in their proxy statements. In 
fact, 34 percent of the proof-of-ownership letters only state that the 
proponents meet the minimum ownership requirements rather than report 
the proponents' exact holdings.\248\ In addition, there is information 
on ownership for only 70 percent of the proponents found in proxy 
statements and there is information on minimum ownership for 45 percent 
of the proponents with ownership information in the proxy 
statements.\249\ Hence, the

[[Page 66499]]

generalizability of the results of our analysis to all proponents that 
potentially could be affected by the proposed rule amendments is 
limited.
---------------------------------------------------------------------------

    \247\ In particular, of the 433 proposal-proponent pairs for 
which we collected information on ownership from proof-of-ownership 
letters, these letters disclosed exact, as opposed to minimum, 
holdings information for 53 percent of individual proponents and 72 
percent of non-individual proponents, and this difference is 
statistically significant at the 1 percent level. Hence, our results 
using only information on exact holdings may under-represent 
individual proponents relative to non-individual ones.
    \248\ 34% = 149/(149 + 284) from Table 2 above.
    \249\ 70% = (198 + 159)/(198 + 159 + 156) from Table 1 above.
    45% = 159/(198 + 159) from Table 1 above.
    In particular, of the 348 proposal-proponent pairs for which 
companies reported proponent identity and ownership information, the 
proxy statements disclosed exact, as opposed to minimum, holdings 
information for 41 percent of individual proponents and 69 percent 
of non-individual proponents, and this difference is statistically 
significant at the 1 percent level. Hence, our results using only 
information on exact holdings may under-represent individual 
proponents relative to non-individual ones.
    The number of proposal-proponent pairs (i.e., 348) for which 
companies reported proponent identity and ownership information is 
lower than the sum of proponents with ownership information in Table 
1 above (i.e., 357 = 198 + 159) because companies occasionally 
provide the count and ownership of the proponents but do not provide 
information on the identity of the proponents.
---------------------------------------------------------------------------

    We expect that more proposals would be excludable with increases in 
share turnover. Literature documents a general upward trend in share 
turnover over time.\250\ As share turnover increases and thus investors 
hold shares for a shorter period of time, it becomes less likely that 
investors would meet the ownership duration thresholds of the proposed 
rule amendments.\251\ Further, the proposed increase in the ownership 
requirements would become more difficult to satisfy with decreases in 
the issuers' stock prices to the extent investors' holdings are at or 
near the ownership thresholds. The reason is that proponents' holdings 
are more likely to fall below the ownership dollar thresholds as the 
market value of the company decreases.
---------------------------------------------------------------------------

    \250\ See, e.g., Tarun Chordia, Richard Roll, & Avanidhar 
Subrahmanyam, Recent Trends in Trading Activity and Market Quality, 
101 J. Fin. Econ. 243 (2011).
    \251\ Proponents have discretion in how frequently they trade 
shares, and thus they may decide to hold shares for a longer period 
of time to satisfy the proposed ownership duration thresholds.
    See supra note 198 for a discussion of changes in investors' 
holding period over time.
---------------------------------------------------------------------------

    We do not expect the proposed amendments to the ownership 
thresholds to affect all types of shareholders and companies in the 
same way. First, the proposed amendments could have a greater effect on 
retail investors compared to institutional investors because the 
average holdings of retail investors are typically lower than the 
average holdings of institutional investors. Second, to the extent that 
investors with smaller holdings are more likely to submit proposals on 
certain topics, by reducing the number of such investors who are 
eligible to submit proposals, the proposed rule amendments could 
decrease the number of proposals on those topics more than other types 
of proposals. For example, individual investors are more likely to 
submit governance proposals than institutional investors. Untabulated 
analysis shows that 86 percent of the proposals submitted by individual 
investors are governance proposals, whereas 47 percent of the proposals 
submitted by institutional investors are governance proposals.\252\ 
Hence, the proposed rule amendments could decrease the number of 
governance proposals more than environmental and social proposals, but 
this effect may be mitigated to the extent that institutional 
proponents submit a larger fraction of shareholder proposals.\253\ 
Third, the proposed rule amendments could affect companies with smaller 
market capitalization more than those with larger market 
capitalization. The reason is that, for firms with smaller market 
capitalization, proponents' holdings are more likely to be below the 
proposed ownership thresholds, assuming that investors hold stocks 
proportionately to the companies' market capitalization (i.e., 
investors hold the market portfolio).\254\ Fourth, the proposed 
amendments could decrease the number of proposals received by companies 
that have been public for fewer than three years more than the number 
of proposals received by seasoned companies because the average 
duration of investors' holdings would be, by their nature, shorter for 
those firms.\255\
---------------------------------------------------------------------------

    \252\ Data is retrieved from ISS Analytics for Russell 3000 
companies between 2004 and 2018. See CII Report, supra note 92 
(showing that retail investors largely focus on governance 
proposals).
    \253\ See supra Section IV.B.3.i.
    \254\ See, e.g., John Y. Campbell, Household Finance, 61 J. Fin. 
1553 (2006) (discussing households' stock holdings).
    We note that smaller companies currently receive proposals less 
frequently than larger companies, and thus, while there may be a 
greater reduction in eligible proponents under the proposed 
amendments at smaller companies, the overall impact of the proposed 
increase in the ownership thresholds might be less pronounced for 
smaller companies.
    \255\ We note that newly-listed companies currently receive 
proposals less frequently than seasoned companies, and thus the 
overall impact of the proposed increase in the ownership thresholds 
might be less pronounced for newly-listed companies. See Kron & 
Rees, supra note 96, at 1; see also Roundtable Transcript, supra 
note 13, comments of Jonas Kron, Senior Vice President and Director 
of Shareholder Advocacy, Trillium Asset Management, at 142 (``Less 
than 9 percent of Russell 3000 companies that have had an IPO since 
2004 have received a shareholder proposal.''); Ning Chiu, Counsel, 
Capital Markets Group, Davis Polk & Wardwell LLP, at 147 
(acknowledging that ``IPO companies don't always get a lot of 
proposals'').
---------------------------------------------------------------------------

    The proposed rule amendment would also eliminate the alternative 
one-percent ownership threshold. The one-percent ownership threshold 
currently is rarely utilized in light of the $2,000/one-year threshold. 
In particular, none of the proxy statements and proof-of-ownership 
letters we reviewed refer to the one-percent ownership threshold as 
evidence that the proponents met the current ownership thresholds (see 
Section IV.B.3.ii above). Further, as of December 2018, there were no 
companies for which the one-percent ownership threshold would be 
relevant (i.e., the one-percent threshold would result in an ownership 
requirement of less than $2,000).\256\ Hence, we believe that the 
proposed elimination of the one-percent ownership threshold would not 
have a significant economic effect.
---------------------------------------------------------------------------

    \256\ We estimate the number of companies with market 
capitalization below $200,000 as of December 2018. Data is retrieved 
from CRSP.
---------------------------------------------------------------------------

ii. Discussion Specific to Proposed Amendments for Proposals Submitted 
on Behalf of Shareholders
    The majority of shareholders that submit a proposal through a 
representative already provide the documentation that would be mandated 
by the proposed amendments, consistent with existing staff 
guidance.\257\ In particular, as discussed in Section IV.B.3.iii above, 
67 percent of the proposals that were submitted through a 
representative (67% = \8/12\) included the documentation that would be 
mandated by the proposed amendments. For the remaining 33 percent of 
the proposals that were submitted through a representative and provide 
only some of the documentation mandated by the proposed amendments, we 
expect that the cost of providing the proposed additional documentation 
would be small because the information that would be required is 
readily available to the proponents and the proposed disclosure is not 
lengthy. Hence, we expect that the economic effects of this aspect of 
the proposed amendments likely would be minimal.
---------------------------------------------------------------------------

    \257\ See SLB 14I, supra note 65.
---------------------------------------------------------------------------

iii. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
    The proposed amendments to Rule 14a-8(i)(12) comprise (i) the 
proposed amendments to the resubmission thresholds and (ii) the 
proposed Momentum Requirement. Relative to the current thresholds, the 
proposed amendments to the resubmission thresholds would allow 
companies to exclude the following additional resubmitted proposals: 
(i) Those that received shareholder support between 3 and 5 percent on 
a first submission; (ii) those that received shareholder support 
between 6 and 15 percent on a second submission; and (iii) those that 
received shareholder support between 10 and 25 percent on a third or 
subsequent submission. In addition to the proposed amendments to the 
resubmission thresholds, the proposed Momentum Requirement would allow 
companies to exclude proposals previously voted on by shareholders 
three or more times in the preceding five calendar years if the most 
recent vote occurred within the preceding three calendar years and, at 
the time of the most recent shareholder

[[Page 66500]]

vote, the proposal did not receive a majority of the votes cast and 
support declined by 10 percent or more compared to the immediately 
preceding shareholder vote on the same subject matter. As a result, the 
proposed amendments to Rule 14a-8(i)(12) could increase the number of 
excludable shareholder proposals because they could (i) decrease 
proponents' willingness to submit proposals on matters for which it may 
be difficult to garner sufficient support in the future or matters that 
did not receive sufficient support to qualify for resubmission when 
previously voted on and (ii) allow companies to exclude such proposals.
    Using the 2011 to 2018 data on shareholder proposals for Russell 
3000 companies, we estimate that the proposed amendments to the 
resubmission thresholds would result in an additional 212 resubmitted 
proposals being excludable (15 percent of the total resubmitted 
proposals in this timeframe) (see Table 9 below).\258\ The largest 
increase in the number of excludable proposals would result from the 
increase in the third submission threshold. In particular, raising that 
threshold from 10 percent to 25 percent would result in the 
excludability of 27 percent of proposals that have been submitted three 
or more times. Approximately 48 percent (i.e., 101 out of the 212) of 
the newly excludable proposals saw no increase in support from the 
previous time they were voted on. The other 52 percent (i.e., 111 out 
of 212) saw increases in support, averaging 5 percent more votes in 
favor of the proposal compared with the proposal's prior submission. 
However, almost all of these newly excludable proposals (i.e., 211 of 
212 proposals) ultimately failed to generate majority support.
---------------------------------------------------------------------------

    \258\ This analysis assumes that shareholders' voting behavior 
and proponents' proposal submission behavior would not change as a 
result of the proposed amendments to the resubmission thresholds. 
Also, we exclude from this analysis 10 shareholder proposals that 
were resubmitted but were eligible for exclusion under the old 
resubmission thresholds. See supra note 200.

   Table 9--Resubmitted Shareholder Proposals Ineligible for Resubmission Under Proposed Thresholds, 2011-2018
----------------------------------------------------------------------------------------------------------------
                                                                                     Third or
               Resubmitted after:                      First          Second        subsequent         Total
                                                    submission      submission      submission
----------------------------------------------------------------------------------------------------------------
All Proposals:
    Resubmitted proposals.......................             677             322             443           1,442
    Excludable proposals under proposed
     amendments:
        Number (%)..............................         47 (7%)        45 (14%)       120 (27%)       212 (15%)
        Number (%) with support increase........         20 (3%)         29 (9%)        62 (14%)        111 (8%)
        Average increase in support.............              7%              4%              5%              5%
        Number (%) with majority support........          1 (0%)          0 (0%)          0 (0%)          1 (0%)
Governance Proposals:
    Resubmitted proposals.......................             355             191             255             801
    Excludable proposals under proposed
     amendments:
        Number (%)..............................         14 (4%)         12 (6%)        60 (24%)        86 (11%)
        Number (%) with support increase........          5 (1%)         10 (5%)        37 (15%)         52 (6%)
        Average increase in support.............             21%              7%              5%              7%
        Number (%) with majority support........          1 (0%)          0 (0%)          0 (0%)          1 (0%)
Environmental Proposals:
    Resubmitted proposals.......................             118              43              42             203
    Excludable proposals under proposed
     amendments:
        Number (%)..............................         10 (8%)        15 (35%)        12 (29%)        37 (18%)
        Number (%) with support increase........          8 (7%)         9 (21%)         5 (12%)        22 (11%)
        Average increase in support.............              3%              1%              3%              2%
        Number (%) with majority support........          0 (0%)          0 (0%)          0 (0%)          0 (0%)
Social Proposals:
    Resubmitted proposals.......................             204              88             146             438
    Excludable proposals under proposed
     amendments:
        Number (%)..............................        23 (11%)        18 (20%)        48 (33%)        89 (20%)
        Number (%) with support increase........          7 (3%)        10 (11%)        20 (14%)         37 (8%)
        Average increase in support.............              1%              4%              5%              4%
        Number (%) with majority support........          0 (0%)          0 (0%)          0 (0%)          0 (0%)
----------------------------------------------------------------------------------------------------------------
Sources: CII Report, ISS Analytics.

    Further, we estimate that the proposed Momentum Requirement would 
result in an additional 57 (4 percent) resubmitted proposals being 
excludable. Of these 57, 42 are governance proposals, 12 are social 
proposals and 3 are environmental and all would be excludable following 
a third or subsequent submission. Overall, the proposed amendments to 
rule 14a-8(i)(12) could result in 269 (19 percent) additional 
excludable proposals relative to the current resubmission 
thresholds.\259\
---------------------------------------------------------------------------

    \259\ The proposed amendments to rule 14a-8(i)(12) could result 
in 30 additional excludable proposals in 2018.
---------------------------------------------------------------------------

    We do not expect the proposed amendments to Rule 14a-8(i)(12) to 
affect all types of shareholder proposals in the same way. First, the 
proposed amendments to Rule 14a-8(i)(12) could have a greater impact on 
shareholder proposals relating to environmental and social issues 
compared to shareholder proposals on governance issues for the 
following reasons. Shareholder proposals on environmental and social 
issues tend to receive lower support than those on governance issues, 
on average. In particular, as Figure 7B above shows, the average voting 
support for governance proposals was 42.1 percent, the average voting 
support for environmental proposals was 21.9 percent, and the average 
voting support for social proposals was 17.4 percent during our sample 
period, and the difference in the voting support between

[[Page 66501]]

governance and environmental and social proposals is statistically 
significant.\260\ Further, proposals on environmental and social issues 
are more likely to be resubmitted compared to proposals on governance 
issues, and thus would be more likely to be affected by the changes in 
the resubmission thresholds. In particular, as Table 4 above shows, 30 
percent of the governance proposals that were eligible for resubmission 
were actually resubmitted, while 41 percent of the environmental and 51 
percent of social proposals that were eligible for resubmission were 
actually resubmitted.
---------------------------------------------------------------------------

    \260\ See supra note 154 for details on the classification of 
shareholder proposals into environmental, social, and governance 
proposals. Also see letters in response to the Proxy Process 
Roundtable from AEquo, et al. dated May 14, 2019; Canadian Coalition 
for Good Governance dated May 15, 2019; Shareholder Rights Group 
dated December 4, 2018.
---------------------------------------------------------------------------

    In addition, as shown by our analysis in Figure 10 (below), 
shareholder proposals on social and environmental issues generally take 
longer to gain support than proposals on governance issues.\261\ More 
specifically, we analyze all of the shareholder proposals submitted to 
Russell 3000 companies during 2011 to 2018 that received more than 25 
percent of voting support at some point. Our analysis shows that while 
more than 97 percent of the governance-related proposals received more 
than 25 percent of the voting support in the first submission, only 83 
percent of the social proposals and 90 percent of the environmental 
proposals received more than 25 percent of the voting support in the 
first submission. Almost all of the governance and environmental 
proposals had received more than 25 percent of the voting support by 
the third submission, whereas it took more than five submissions for 
the social proposals to receive more than 25 percent of the voting 
support.\262\ The results of the analysis in Figure 10 (below) suggest 
that environmental and social proposals take longer to gain support 
than proposals on governance issues. However, it is not clear how much 
of the increased support for certain resubmitted environmental and 
social proposals is attributable to proposals gaining traction through 
the resubmission process as opposed to other factors, such as changing 
opinions on environmental and social issues. In particular, various 
proposals in each proposal category evolve over time as a result of 
various factors, including shareholder engagement. For example, we 
would expect that proponents would be incentivized to adjust their 
proposals over time based on interactions with companies and other 
shareholders with an eye toward garnering more support.
---------------------------------------------------------------------------

    \261\ See, e.g., letter in response to the Proxy Process 
Roundtable from CtW Investment Group dated January 16, 2019.
    \262\ The conclusions are qualitatively similar if we analyze 
shareholder proposals that receive majority support at some point. 
Out of all governance-related shareholder proposals that garnered 
majority support, 91% did so in the first submission, while only 61% 
of the environmental proposals and 60% of the social proposals did 
so in the first submission.
[GRAPHIC] [TIFF OMITTED] TP04DE19.021

    Our analysis above suggests that the increase in the resubmission 
thresholds could have a greater effect on shareholder proposals 
relating to environmental and social issues compared to shareholder 
proposals on governance issues. Out of the 269 additional excludable 
proposals under the proposed rule amendments, 128 were related to 
governance issues and 40 were related to environmental issues and 101 
were related to social issues. Therefore, although environmental and 
social proposals made up 44 percent (= 641/1,442) of all resubmitted 
proposals in Russell 3000 firms during 2011 to 2018, these types of 
proposals made up 52 percent (= 141/269) of newly excludable proposals 
under the proposed amendments to the resubmission thresholds and the 
Momentum Requirement.
    Second and relatedly, the proposed amendments to Rule 14a-8(i)(12) 
could have a greater effect on shareholder proposals submitted by non-
individual proponents because these proponents tend to submit 
environmental and social proposals at a higher frequency than do 
individual investors.\263\ In particular, the proposed increase in the 
resubmission thresholds could increase the number of excludable 
proposals

[[Page 66502]]

resubmitted by non-individual proponents by 186 (19 percent).\264\ In 
contrast, the proposed increase in the thresholds could increase the 
number of excludable proposals resubmitted by individual proponents by 
92 (17 percent).
---------------------------------------------------------------------------

    \263\ See supra note 252 and accompanying text.
    \264\ Data is retrieved from the CII Report for shareholder 
proposals submitted to Russel 3000 companies between 2011 and 2018. 
See supra note 197.
    Numbers of newly excludable proposals under proposed 
resubmission thresholds are computed relative to the total 
resubmitted proposals during the sample period by each type of 
proponent.
---------------------------------------------------------------------------

    Third, the proposed amendments to Rule 14a-8(i)(12) could have a 
greater effect on larger companies because larger companies are more 
likely to receive shareholder proposals.\265\ In particular, we find 
that 20 percent of resubmitted shareholder proposals at S&P 500 
companies would be excludable under the proposed resubmission 
thresholds, as compared to 12 percent of proposals resubmitted to non-
S&P 500 firms.\266\
---------------------------------------------------------------------------

    \265\ See supra Figure 3.
    \266\ Data is retrieved from ISS Analytics and the CII Report 
for shareholder proposals submitted to Russel 3000 companies between 
2011 and 2018. See supra note 197.
---------------------------------------------------------------------------

    Fourth, the proposed amendments to Rule 14a-8(i)(12) could have a 
greater effect on companies with dual-class voting shares for which 
insiders hold the majority of the voting shares.\267\ In particular, we 
find that 32 percent of resubmitted shareholder proposals at companies 
with dual-class shares would be newly excludable under the proposed 
resubmission thresholds, as compared to 18 percent in companies without 
dual-class shares.\268\ For these companies, shareholder proposals 
generally receive lower levels of support than in other companies, 
because insiders usually oppose shareholder proposals.\269\
---------------------------------------------------------------------------

    \267\ Shareholder proposals are less likely to exceed the 
resubmission thresholds whenever insiders hold a large percentage of 
the voting stock. Nevertheless, commenters have expressed concerns 
particularly in cases in which insiders hold a large percentage of 
the voting stock through dual-class shares. See letters in response 
to the Proxy Process Roundtable from the City of New York Office of 
the Comptroller dated January 2, 2019; CtW Investment Group dated 
January 16, 2019; see also letter in response to the Rulemaking 
Petition from the Shareholder Rights Group dated October 5, 2017. 
This is because dual-class shares result in the separation of voting 
and cash flow rights, giving insiders disproportionate voting power 
relative to their cash flow rights.
    \268\ Data is retrieved from ISS Analytics and the CII Report 
for shareholder proposals submitted to Russell 3000 companies 
between 2011 and 2018. See supra note 197. Our analysis of proposals 
submitted to companies with dual-class shares should be interpreted 
with caution because our data does not allow us to identify 
companies for which insiders hold the majority of dual-class shares. 
Our data also does not allows us to distinguish companies for which 
the dual-class shares provide differential voting rights as opposed 
to other types of rights, such as dividend payments, to 
shareholders.
    \269\ Literature provides some evidence that insider holdings of 
voting rights are larger in firms with dual-class voting shares, and 
that in companies for which insiders hold the majority of the voting 
shares, insiders are more likely to vote against shareholder 
proposals. See Rob Bauer, Robin Braun, & Michael Viehs, Industry 
Competition, Ownership Structure and Shareholder Activism (Working 
Paper, Sept. 2010), available at https://ssrn.com/abstract=1633536.
---------------------------------------------------------------------------

3. Benefits and Costs of the Proposed Amendments
i. Benefits
a. General Discussion of Benefits
    As a result of the proposed amendments, companies could exclude 
more proposals and shareholders could be discouraged from submitting 
proposals that likely would be excluded based on the proposed 
amendments. Consequently, companies could experience cost savings 
because they would be required to process fewer proposals (see Section 
IV.B.3.i above for a detailed discussion of the costs associated with 
shareholder proposals).\270\ Shareholders of these companies also could 
benefit from the potential decrease in proposals to the extent that any 
potential costs savings would be passed down to them in the form of 
higher returns on their investment.
---------------------------------------------------------------------------

    \270\ To the extent that proponents would continue submitting 
proposals that would be excludable under the proposed rule 
amendments, companies would incur costs to exclude those proposals 
(e.g., issuers would need to file a notice with the Commission that 
they intend to exclude the proposal). These costs would partially 
offset any cost savings arising from the proposed rule amendments.
    Any potential cost savings arising from the proposed rule 
amendments could be limited by the extent to which proponents change 
their behavior. For example, proponents could (i) alter their 
portfolio allocation to meet the ownership thresholds; (ii) rotate 
proposals on similar topics among different companies; or (iii) 
submit proposals to the same company but on a different topic.
---------------------------------------------------------------------------

    Shareholders also could benefit from the decrease in the number of 
proposals because they could spend fewer resources reviewing and voting 
on shareholder proposals. Relatedly, the decrease in the number of 
proposals could result in more efficient use of shareholder 
resources.\271\ More specifically, the decrease in the number of 
proposals could allow shareholders to focus on the processing of 
proposals that are more likely to garner majority support and be 
implemented by management, which ultimately could benefit shareholders 
because it would result in more efficient use of their resources.
---------------------------------------------------------------------------

    \271\ See letter in response to the Proxy Process Roundtable 
from Business Roundtable dated June 3, 2019, at 5 (noting 
``shareholders can lose sight of matters of true economic 
significance to the company if they are spending time considering 
one, or even numerous, immaterial proposals. The resources and 
attention expended in addressing shareholder proposals cost the 
company and its shareholders in absolute dollars and management time 
and, perhaps worse, divert capital resources to removal of an 
immediate distraction and away from investment in value-adding 
allocations, such as research and development and corporate 
strategy.'').
---------------------------------------------------------------------------

b. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule 
14a-8(c)
    As discussed in Section IV.C.3.i.a above, the proposed amendments 
to Rule 14a-8(b) and Rule 14a-8(c) could decrease the number of 
proposals that companies must process, and thus could decrease the 
costs associated with processing shareholder proposals. We estimate 
that, as a result of the proposed amendments to Rule 14a-8(b) and Rule 
14a-8(c), all Russell 3000 companies together could experience annual 
cost savings associated with a decrease in the number of voted 
proposals of up to $70.6 million per year.\272\ In addition,

[[Page 66503]]

the decrease in the number of proposals could free up resources so that 
companies and their shareholders could pursue other value-enhancing 
activities.
---------------------------------------------------------------------------

    \272\ $70.6 million = $150,000 (i.e., cost estimate provided by 
the American Securities Association in their letter in response to 
the Proxy Process Roundtable dated June 7, 2019 (see supra note 
232)) x 471 (i.e., maximum number of excludable proposals as a 
result of the proposed amendments to Rule 14a-8(b) and Rule 14a-
8(c)). 471 = [84 (i.e., maximum number of excludable proposals as a 
result of the proposed amendments in Rule 14a-8(b) using only data 
for proposals with exact information on proponents' ownership in 
proxy statements, see supra note 240) + 1 (i.e., incremental number 
of excludable proposals as a result of the proposed amendments to 
14a-8(c) using only data for proposals with exact information on 
proponents' ownership)] x 831 (i.e., all proposals submitted to be 
considered in 2018 shareholders' meetings)/150 (i.e., proposals with 
exact information on proponents' ownership in proxy statements).
    The following caveats apply to our cost savings estimates. Our 
analysis assumes that the distribution of ownership for proponents 
with exact ownership information in the proxy statements is the same 
as the distribution of ownership for proponents with minimum or no 
ownership information in the proxy statements and the distribution 
of ownership for proponents that submitted proposals that were 
ultimately withdrawn or omitted. Our analysis also applies the same 
per-proposal cost estimate (i.e., $150,000) to voted, omitted, and 
withdrawn proposals and it applies the same per-proposal cost 
estimate to operating companies and management companies. Lastly, 
our analysis assumes that companies will not reallocate the time and 
resources that would free up as a result of the reduction in 
proposals to process the remaining proposals.
    On the other hand, the lower bound of cost savings would be $1.4 
million. $1.4 million = $50,000 (i.e., cost estimate provided by 
Darla Stuckey in her 2016 testimony before the House Committee on 
Financial Services Subcommittee on Capital Markets and Government 
Sponsored Enterprises, see supra note 230) x 28 (i.e., minimum 
number of excludable proposals as a result of the proposed 
amendments to 14a-8(b) and 14a-8(c)). 28 = [0 (i.e., minimum number 
of excludable proposals as a result of the proposed amendments to 
14a-8(b) using only proposals with exact information on proponents' 
ownership in proxy statements, see supra Section IV.C.2.i) + 5 
(i.e., incremental number of excludable proposals as a result of the 
proposed amendments to 14a-8(c) using only proposals with exact 
information on proponents' ownership in proxy statements)] x 831 
(i.e., all proposals submitted to be considered in 2018 
shareholders' meetings)/150 (i.e., proposals with exact information 
on proponents' ownership).
---------------------------------------------------------------------------

    As a result of the proposed increase in the ownership thresholds, 
proponents could bear a larger percentage of the total cost that 
companies and their shareholders incur to process a shareholder 
proposal. For example, a shareholder that owns $25,000 worth of stock 
in a company would bear a larger percentage of the costs associated 
with processing a shareholder proposal relative to a proponent that 
owns $2,000 worth of stock in a company. As a result of bearing a 
larger percentage of the total costs, proponents could be less willing 
to submit proposals that are less likely to garner majority support and 
be implemented by management.
    In addition, by eliminating shareholders' ability to aggregate 
their holdings with those of other shareholders, the proposed 
amendments would require each proponent to have a sufficient economic 
stake or investment interest in the company to justify the costs 
associated with a shareholder proposal.
    Further, by providing that a person, directly or indirectly, may 
submit only one proposal for a shareholder's meeting, the proposed 
amendments would prohibit shareholders from imposing disproportionate 
costs on the company and other shareholders by submitting multiple 
proposals for the same meeting.
    Finally, by requiring a statement from the proponent that he or she 
is willing to meet with the company after submission of the shareholder 
proposal, the proposed amendments could encourage direct communication 
between the proponent and the company, which could promote more 
frequent resolution of the proposals outside the voting process. Such 
resolutions could decrease the costs that companies and their 
shareholders incur to process shareholder proposals.
c. Discussion Specific to Proposed Amendments for Proposals Submitted 
on Behalf of Shareholders
    To the extent that the practices of certain proponents are not 
consistent with the proposed amendments related to proposals submitted 
through a representative, the proposed amendments could benefit 
companies and other shareholders because they could demonstrate the 
existence of a principal-agent relationship and could provide assurance 
that the shareholder supports the proposals. Further, the proposed 
amendments could result in cost savings to companies that would no 
longer be required to expend resources to obtain some of the 
information that is not provided by the proponents but would be 
required under the proposed amendments.
d. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
    As discussed in Section IV.C.3.i.a above, the proposed increase in 
the resubmission thresholds and the proposed Momentum Requirement could 
benefit companies and their shareholders because it could decrease the 
number of proposals for companies and shareholders to consider. As a 
result of the proposed amendments, we estimate that all Russell 3000 
companies together could experience annual cost savings associated with 
a decrease in the number of voted proposals of up to $8.9 million per 
year.\273\
---------------------------------------------------------------------------

    \273\ $8.9 million = $150,000 (i.e., cost estimate provided by 
the American Securities Association in their letter in response to 
the Proxy Process Roundtable, see supra note 232) x 59 (i.e., number 
of excludable proposals as a result of the proposed amendments to 
14a-8(i)(12)). 59 = 30 (i.e., number of excludable proposals as a 
result of the proposed amendments to 14a-8(i)(12) that were included 
in proxy statements to be considered in 2018 shareholder meetings) x 
831 (i.e., proposals submitted to be considered in 2018 
shareholders' meetings)/423 (i.e., voted proposals in the CII Report 
in 2018). The following caveats apply to our cost savings estimates. 
Our analysis applies the same per-proposal cost estimate (i.e., 
$150,000) to voted, omitted, and withdrawn proposals and to 
operating companies and management companies. In addition, our 
analysis assumes that the proposed amendments to 14a-8(i)(12) will 
have the same effect on proposal eligibility of voted, withdrawn, 
and omitted proposals. Lastly, our analysis assumes that companies 
will not reallocate the time and resources that would free up as a 
result of the reduction in proposals to process the remaining 
proposals.
    On the other hand, the lower bound of cost savings would be $3.1 
million. $3.1 million = $50,000 (i.e., cost estimate provided by 
Darla Stuckey in her 2016 testimony before the House Committee on 
Financial Services Subcommittee on Capital Markets and Government 
Sponsored Enterprises, see supra note 230) x 63 (i.e., number of 
excludable proposals as a result of the proposed amendments to 14a-
8(i)(12)).
---------------------------------------------------------------------------

    In addition, the decrease in the number of proposals could free up 
resources so that companies and their shareholders could pursue other 
value-enhancing activities. Relatedly, the proposed amendments to the 
resubmission thresholds and the Momentum Requirement could exclude 
proposals that have historically garnered low levels of support and 
thus would allow shareholders to focus on the processing of proposals 
that may garner higher levels of voting support and may be more likely 
to be implemented by management.
    The proposed amendments to the resubmission thresholds could also 
benefit companies and their shareholders to the extent that they change 
proponents' behavior. In particular, due to the higher thresholds, 
proponents may spend more resources to more carefully prepare proposals 
that are more likely to garner sufficient levels of shareholder 
support. In addition, proponents may spend more resources to market 
their proposal to other shareholders to increase support for their 
proposal. As a result, companies and their shareholders could benefit 
from the submission of shareholder proposals that are more likely to 
receive higher levels of support and thus are more likely to be 
implemented by management.
    Similarly, the proposed resubmission thresholds may discourage the 
submission of proposals that are less likely to garner majority voting 
support.\274\ Similarly, the Momentum Requirement may discourage the 
submission of proposals that garner significant but not majority 
support and recently have experienced a decrease in shareholder 
support, which may indicate waning shareholder interest in the 
proposal.
---------------------------------------------------------------------------

    \274\ Proponents incur costs to submit proposals, which may 
already deter some proponents from resubmitting proposals that have 
a low likelihood of receiving sufficient levels of shareholder 
support.
---------------------------------------------------------------------------

ii. Costs
a. General Discussion of Costs
    The proposed amendments could result in the exclusion of certain 
proposals that would have otherwise been included in the proxy 
statement and voted on. To the extent that such shareholder proposals 
would be value enhancing, the potential exclusion of value-enhancing 
proposals could be detrimental to companies and their 
shareholders.\275\ One way the exclusion of certain proposals could be

[[Page 66504]]

detrimental is by limiting or slowing the adoption of potential 
improvements.
---------------------------------------------------------------------------

    \275\ See supra Section IV.C.I for a detailed discussion of 
literature that examines the value of shareholder proposals.
    The potential decrease in the number of shareholder proposals 
also could be costly to the various providers of administrative and 
advisory services related to shareholder voting because the demand 
for the services of these providers could decrease. Examples of 
these service providers include proxy advisory firms, tabulators of 
voting, and proxy solicitors.
---------------------------------------------------------------------------

    Shareholder proposals are one way for shareholders to communicate 
with management and other shareholders. The proposed amendments would 
alter the eligibility requirements in a manner that could increase 
companies' ability to exclude certain proposals, which could restrict 
shareholders' ability to use this avenue of communication with other 
shareholders. In addition to increasing companies' ability to exclude 
certain proposals, the proposed amendments could decrease shareholders' 
willingness to submit certain proposals, which could further inhibit 
communication between shareholders and also inhibit shareholders' 
engagement with management.\276\
---------------------------------------------------------------------------

    \276\ See supra note 48; see also letter in response to the 
Proxy Process Roundtable from American Federation of Labor & 
Congress of Industrial Organizations dated November 9, 2018.
---------------------------------------------------------------------------

    By limiting the shareholder proposals channel of communication, the 
proposed amendments could lead to proponents seeking alternative 
avenues of influence, such as public campaigns, litigation over the 
accuracy of proxy materials, or demands to inspect company documents. 
As a result, companies could confront greater uncertainty in their 
interaction with shareholders.\277\
---------------------------------------------------------------------------

    \277\ See Brown (2017), supra note 211, at 24-25; see also 
letter to Jeb Hensarling, Chairman, and Maxine Waters, Ranking 
Member, House Financial Services Committee, from Jeffrey P. Mahoney, 
General Counsel, Council of Institutional Investors, dated April 24, 
2017, available at https://democrats-financialservices.house.gov/uploadedfiles/letter_-_cii_04.27.2017.pdf (stating that the proposed 
rule amendments are ``likely to have unintended consequences, 
including shareowners more often availing themselves of the blunt 
instrument of votes against directors, and increased reliance on 
hedge fund activists to push for needed corporate changes.''); Ceres 
Business Case, supra note 25, at 11 (noting that ``[a]lternatives to 
shareholder proposals include voting against directors, lawsuits, 
books and records requests, and requests for additional regulations. 
Each of these is more onerous and adversarial than including a 500-
word proposal in the proxy statement for the consideration of 
shareholders''); letters in response to the Proxy Process Roundtable 
from Council of Institutional Investors dated January 31, 2019; Los 
Angeles County Employees Retirement Association dated October 30, 
2018; MFS Investment Management dated November 14, 2018; US SIF 
dated November 9, 2018.
---------------------------------------------------------------------------

    Any negative effects of the proposed amendments would be more 
pronounced for shareholders that follow passive index strategies 
because those shareholders are more limited in their ability to sell 
shares of an underperforming stock and thus might be more likely to 
rely on the proxy proposal process to encourage value-enhancing 
changes.\278\
---------------------------------------------------------------------------

    \278\ See letter in response to the Proxy Process Roundtable 
from the City of New York Office of the Comptroller dated January 2, 
2019, at 1 (noting that ``[b]ecause of our long-term investment 
horizon, and the fact that we allocate more than 80% of the funds' 
investments in U.S. public equity through passive index strategies, 
we cannot readily sell shares in a company when we have concerns 
about the company's performance, board composition and quality, 
management, executive compensation, workplace practices or 
management of risks, including those related to climate change''); 
Ceres Business Case, supra note 25, at 10 (noting that ``[w]hile 
active investors have the option of selling shares of companies 
whose management they do not trust to add value, passive investors' 
options are more limited'').
    At the same time, passive investors are more likely to hold 
shares for a long period of time than active investors, and thus are 
less likely to be affected by the proposed amendments to Rule 14a-
8(b).
---------------------------------------------------------------------------

b. Discussion Specific to Proposed Amendments to Rule 14a-8(b) and Rule 
14a-8(c)
    In addition to the costs discussed in Section IV.C.3.ii.a above, 
the proposed amendments to 14a-8(b) and 14a-8(c) could impose certain 
costs on shareholder-proponents. These costs could arise from: (i) 
Shareholder-proponents' efforts to reallocate shareholdings in their 
portfolio to satisfy the proposed dollar ownership thresholds; (ii) 
decreased diversification of shareholder-proponents' portfolio because 
a larger portion of their wealth may be invested in a particular 
company; (iii) shareholder-proponents holding the shares for longer 
periods of time to satisfy the proposed duration thresholds; and (iv) 
shareholder-proponents making themselves available to communicate with 
management after submitting a proposal. The latter costs to 
shareholder-proponents consist of the direct costs of meeting with 
management, and the opportunity costs associated with spending time to 
meet with management instead of engaging in other activities. There are 
also costs associated with disclosing the times the proponents would be 
available to communicate with management but we believe that any such 
costs likely are minimal.
    Further the proposed change from a single-tier to three-tiered 
ownership thresholds could increase compliance complexity because 
companies and proponents would be required to consider multiple 
thresholds to establish whether a proposal is eligible for exclusion.
    The proposed increase in the ownership thresholds and the 
prohibition of aggregation of shareholdings could disproportionately 
affect certain types of shareholder-proponents. In particular, the 
proposed amendments could disproportionately affect individuals.\279\ 
This disproportionate effect would be more costly if individuals submit 
more value-enhancing proposals than institutions. Two academic papers 
suggest that proposals submitted by individual investors elicit a 
stronger market reaction than proposals submitted by institutional 
investors,\280\ while one suggests otherwise.\281\ The potentially 
negative consequences of this disproportionate effect on individuals 
could be amplified by the fact that (i) institutional investors 
generally may have more direct channels of communication with companies 
than individual investors who rely more on the shareholder-proposal 
process to communicate with management and other shareholders \282\ and 
(ii) larger shareholders have, on average, greater success in seeing 
their contested proposals ultimately included in the proxy.\283\
---------------------------------------------------------------------------

    \279\ See supra Section IV.C.2.i.
    \280\ See, e.g., Gillan & Starks (2000), supra note 217; 
Gantchev & Giannetti (2018), supra note 166. Gillan and Starks 
(2000) interpret the more positive stock market reaction to 
proposals submitted by individuals compared to institutions as 
consistent with the idea that the market views shareholder proposals 
submitted by an institution as evidence of management's 
unwillingness to negotiate with such investors. See Gillan & Starks 
(2000).
    \281\ See Cu[ntilde]at et al. (2012), supra note 209.
    \282\ See, e.g., letters in response to the Proxy Process 
Roundtable from MFS Investment Management dated November 14, 2018, 
at 2 (noting ``[a]s a large institutional investor, we generally 
have access to management teams and directors that smaller 
shareholders may not have''); Pax World Funds dated November 9, 
2018, at 2 (noting ``[w]hile some asset managers or owners with 
hundreds of billions in assets can often engage with management and 
boards as often as they wish, smaller investors' inquiries to 
companies often die in investor relations departments.''); and the 
Shareholders Right Group dated December 4, 2018, at 8-9 (noting 
``larger investors often do not need the shareholder proposal 
process in order to persuade companies to engage with them on their 
concerns. In contrast, the shareholder proposal process provides an 
appropriate avenue through which all shareholders, including Main 
Street's shareholders, as well as their chosen representatives, can 
raise issues and elicit consideration and support from their fellow 
shareholders''); see also Ceres Business Case, supra note 25, at 9 
(noting that ``[a] system that allows shareholders to file proposals 
is needed in part because individual investors and smaller 
shareholders nearly always lack large enough holdings to get the 
board and management's attention in any other way''); Eugene Soltes, 
Suraj Srinivasan, & Rajesh Vijayaraghavan, What Else do Shareholders 
Want? Shareholder Proposals Contested by Firm Management (Working 
Paper, July 2017) (``Soltes et al. (2017)'') (finding that the level 
of shareholder ownership is positively associated with the 
probability that a contested proposal is withdrawn, which is 
consistent with the idea that large shareholders ``are more 
influential and are more likely to have dialogue with managers that 
would facilitate implementation of their proposal prior to a 
shareholder vote'').
    \283\ See Soltes et al. (2017), supra note 282.
---------------------------------------------------------------------------

    As explained above, the proposed amendments could 
disproportionately affect smaller companies that receive

[[Page 66505]]

proposals.\284\ This is because investors' holdings in smaller 
companies are more likely to be below the proposed ownership thresholds 
than investors' holdings in larger companies, assuming investors hold 
the market portfolio.\285\ As a result, to the extent that the 
proposals excluded as a result of the proposed amendments would be 
value enhancing, any negative effects of the proposed amendments on 
smaller companies could be larger than the effects on larger companies. 
At the same time, however, smaller companies would enjoy larger cost 
savings as a result of the potentially larger increase in the number of 
excludable proposals. Hence, the net effect of the proposed rule 
amendments on smaller relative to larger companies is unclear.
---------------------------------------------------------------------------

    \284\ See supra Section IV.C.2.i.
    \285\ See supra note 254.
---------------------------------------------------------------------------

    Any effects of the proposed amendments would be, at least 
partially, mitigated by the fact that companies can elect to include in 
their proxy materials proposals of proponents that do not meet the 
proposed eligibility requirements, if the companies believe that those 
proposals would benefit shareholders.\286\
---------------------------------------------------------------------------

    \286\ Our analysis of proponents' ownership information from 
proxy statements shows that there was one proposal submitted by two 
co-proponents whose aggregate holdings did not meet the $2,000 
current ownership threshold. This proposal is excludable under the 
current ownership threshold, but nevertheless appeared in the 
company's proxy statement. See supra note 189 for caveats related to 
this analysis.
---------------------------------------------------------------------------

c. Discussion Specific to Proposed Amendments for Proposals Submitted 
on Behalf of Shareholders
    Shareholders that submit a proposal through a representative could 
incur minimal costs to ensure that their practices are consistent with 
the proposed amendments. In addition, to the extent that the practices 
of certain proponents are not consistent with the proposed amendments, 
the proposed amendments could impose minimal costs on proponents to 
provide this additional documentation. We lack data to quantify these 
costs but we request comment on these costs in Section IV.E below.
d. Discussion Specific to Proposed Amendments to Rule 14a-8(i)(12)
    The proposed amendment to the resubmission thresholds and the 
proposed Momentum Requirement could impose costs on proponents because 
they could spend more resources in preparing a proposal to seek to 
garner sufficient levels of support to satisfy the proposed 
requirements.
    The proposed amendments also could increase the complexity of the 
shareholder proposal eligibility requirements because the Momentum 
Requirement would be a new requirement.
    Literature also shows that management may spend resources to 
influence the success rate of shareholder proposals.\287\ The Momentum 
Requirement would allow companies to exclude proposals that do not meet 
but are close to the majority threshold. Hence, the Momentum 
Requirement could provide further incentives to management to expend 
resources to influence the voting outcome of a shareholder proposal 
because the benefit of influencing the voting outcome (i.e., three year 
exclusion of the proposal) could be greater than under current rules.
---------------------------------------------------------------------------

    \287\ Management may influence the voting outcome either by 
encouraging shareholders that would favor them to vote or by 
encouraging shareholders to vote in line with management. See Bach & 
Metzger (2019), supra note 216.
---------------------------------------------------------------------------

    As discussed in Section IV.C.2 above, the proposed amendments to 
the resubmission thresholds and the proposed Momentum Requirement could 
have a larger effect on certain types of proposals and companies. In 
particular, the proposed amendments could have a larger effect on 
larger companies because larger companies are more likely to receive 
shareholder proposals.\288\ To the extent that the proposals excluded 
as a result of the proposed amendments would be value enhancing, larger 
companies could be more negatively affected by the proposed amendments 
than smaller firms. The disproportionate effect on larger companies 
could be amplified by the fact that larger companies are less likely to 
be the target of hedge fund activism and thus experience improvements 
through alternative forms of activism,\289\ and larger companies are 
more likely to contest shareholder proposals.\290\ At the same time, 
any negative effects could be at least partially mitigated by the fact 
that larger companies would enjoy larger cost savings as a result of 
the decrease in the number of proposal resubmissions.
---------------------------------------------------------------------------

    \288\ See supra Section IV.B.3.i.
    \289\ Alon Brav, Wei Jiang, Frank Partnoy, & Randall Thomas, 
Hedge Fund Activism, Corporate Governance, and Firm Performance, 63 
J. Fin. 1729 (2008).
    \290\ Soltes et al. 2017, supra note 282.
---------------------------------------------------------------------------

    The proposed amendments to the resubmission thresholds and the 
proposed Momentum Requirement also could have a larger effect on 
companies with dual-class voting shares for which insiders hold the 
majority of the voting shares.\291\ At such controlled companies, it 
may be difficult to get support for a shareholder proposal above the 
proposed thresholds. While shareholder proposals may be less likely to 
gain majority support and be implemented at these companies,\292\ they 
may still provide a valuable communication mechanism between 
shareholders. We note that the non-voting stock of companies for which 
the majority of voting stock is held by insiders could trade at a 
discount to compensate the owners of the non-voting stock for the 
reduced ability of shareholder proposals to garner sufficient support 
for those companies. In addition, literature suggests that the 
probability of a proposal being implemented is negatively related to 
insider ownership. Hence, the decrease in the number of resubmitted 
proposals as a result of the proposed rule amendments for firms with 
dual-class voting stock for which insiders hold the majority of the 
voting shares likely would be limited because the probability of a 
proposal being implemented in those firms would be already low.\293\
---------------------------------------------------------------------------

    \291\ See supra Section IV.B.3.iv.
    \292\ See Roundtable Transcript, supra note 13, comments of 
Brandon Rees, Deputy Director of Corporations and Capital Markets, 
American Federation of Labor and Congress of Industrial 
Organizations, at 167; CII Report, supra note 197, at 21; Ceres 
Business Case, supra note 25, at 14; letter in response to the Proxy 
Process Roundtable from the City of New York Office of the 
Comptroller dated January 2, 2019, at 11.
    \293\ See, e.g., Ertimur et al. (2010), supra note 174.
    A commenter also suggested that an increase in the resubmission 
thresholds could provide stronger incentives to some proponents to 
submit proposals on certain topics with the intent of obtaining low 
levels of support for certain subject matters, and thus rendering 
proposals on the same subject matter excludable for three years. 
Nevertheless, we believe that any such activity is unlikely to be 
widespread. See letter in response to the Proxy Process Roundtable 
from the City of New York Office of the Comptroller dated January 2, 
2019, at 11 (noting ``we have seen efforts to pre-empt proposals in 
a given year urging stronger policies on climate change by a group 
submitting a proposal to go in the opposite direction. With high 
resubmission thresholds, that kind of mischief-making would be 
encouraged on a broader scale as long as the SEC policy refers to 
`the same subject matter' rather than `the same proposal' ''). For 
related discussion, see also the letter in response to the Proxy 
Process Roundtable from Sustainable Investments Institute dated 
November 12, 2018, at 13 (noting ``[n]ew this year were proposals 
from the free market activist group the National Center for Public 
Policy Research (NCPPR) that used precisely the same resolved clause 
as the one used in the main campaign on lobbying. In two instances, 
because they were filed first, these resolutions pre-empted 
proposals filed later from the disclosure advocates, on lobbying at 
Duke Energy and about election spending at General Electric, where 
the question turned on third-party spending groups. The NCPPR 
proposals went to votes in each case and while the presenters argued 
against disclosure in their support statement, investors appeared to 
vote on the basis of what was in the resolved clause and support 
levels were comparable to those filed by disclosure proponents--34.6 
percent at Duke (33.3 percent last year) and 21.2 percent at GE (no 
previous election proposals but 28.6 percent on a traditional 
lobbying resolution in 2017).'').

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[[Page 66506]]

    The potential costs of the proposed rule amendments would be more 
pronounced in instances where material developments could change 
shareholder support for the proposal but the proposal is otherwise 
ineligible for resubmission under the proposed rule for a period of 
time.\294\
---------------------------------------------------------------------------

    \294\ See letter in response to the Proxy Process Roundtable 
from the City of New York Office of the Comptroller dated January 2, 
2019.
---------------------------------------------------------------------------

    Any negative effects of the proposed amendments would be, at least 
partially, mitigated by the fact that companies would be able to 
exclude only proposals for which there is an observable measure of low 
shareholder interest (i.e., low voting support among shareholders and 
lack of momentum toward achieving a more substantial level of 
shareholder support). In addition, any negative effects of the proposed 
rule amendments would be mitigated by the fact that companies could 
elect to include in their proxy materials resubmissions that would 
otherwise be excludable if they believed that those resubmissions would 
benefit shareholders.\295\ Also, companies' ability to exclude certain 
resubmissions would be limited to a three-year cooling-off period 
regardless of the level of support the proposal last received.
---------------------------------------------------------------------------

    \295\ Among shareholder proposals resubmitted to Russell 3000 
companies during 2011 to 2018, 10 proposals appeared in company 
proxies and were voted on despite receiving low voting support in 
prior submissions and being eligible for exclusion under the current 
resubmission thresholds. See supra note 200.
---------------------------------------------------------------------------

    Finally, any potential effects of the proposed amendments would be 
moderated by changes in proponent behavior, such as submitting a 
proposal on a different topic when the initial proposal is ineligible 
for resubmission or submitting a proposal on the same topic but at a 
different company to continue investor conversations on that topic.
4. Effects of Proposed Amendments on Efficiency, Competition, and 
Capital Formation
    To the extent that the proposed amendments could reduce the costs 
of processing shareholder proposals and could free up management 
resources for more valuable activities, the proposed amendments could 
result in efficiency improvements. Any improvements in efficiency could 
be offset by the costs associated with the exclusion of shareholder 
proposals that could have resulted in changes that would have enhanced 
efficiency.
    Further, to the extent that the proposed amendments would permit 
shareholders to focus on the processing of proposals that are more 
likely to receive majority support and be implemented, the proposed 
amendments could result in more efficient use of shareholder resources.
    In addition, to the extent that the proposed amendments could 
reduce costs to companies associated with the shareholder-proposal 
process, the proposed amendments could be a positive factor in the 
decision of firms to go public, which could positively affect capital 
formation on the margin.\296\ Nevertheless, we believe that any such 
effects likely would be minimal because most firms receive only few 
proposals each year and the costs of responding to proposals likely are 
a small percentage of the costs associated with being a public 
company.\297\ In addition, companies that have recently had an initial 
public offering infrequently receive shareholder proposals.\298\
---------------------------------------------------------------------------

    \296\ See, e.g., letter in response to the Proxy Process 
Roundtable from Center for Capital Markets Competitiveness dated 
December 20, 2018, at 7 (noting ``[t]he decline in public companies 
is a multifaceted issue with no single solution. . . . Those issues 
include proxy advisory firm reforms as discussed earlier as well as 
shareholder resubmission thresholds.'').
    \297\ Between 1997 and 2018 for Russell 3000 companies that 
received a proposal, the median number of proposals was one per 
year. See Roundtable Transcript, supra note 13, comments of Brandon 
Rees, Deputy Director of Corporations and Capital Markets, American 
Federation of Labor and Congress of Industrial Organizations, at 
140, 142 (noting ``the average publicly listed company in the United 
States can expect to receive a shareholder proposal once every 7.7 
years, and the median number of proposals received is one. . . . 
[S]hareholder proposals make up less than 2 percent of the total 
number of ballot items. Less than 4 percent of shareholder proposals 
were filed at companies with under $1 billion in market 
capitalization. Less than 9 percent of Russell 3000 companies that 
have had an IPO since 2004.''); see also letters in response to the 
Proxy Process Roundtable from Ceres dated November 13, 2019; Mercy 
Investment Services, Inc. dated December 3, 2018, at 3; Presbyterian 
Church U.S.A. dated November 13, 2018, at 3-4.
    \298\ See supra note 297.
---------------------------------------------------------------------------

    To the extent that the proposed amendments would have 
disproportionate effects on U.S. relative to foreign firms because 
foreign firms are not subject to federal proxy rules,\299\ the proposed 
amendments could improve competition. Further, to the extent that the 
proposed amendments to the ownership (resubmission) thresholds would 
have disproportionate effects on smaller (larger) companies, the 
proposed amendments could harm competition. Nevertheless, we expect 
that any such effects likely would be minimal because the cost of 
processing shareholder proposals likely is a small percentage of 
companies' total cost of operations.
---------------------------------------------------------------------------

    \299\ See supra note 130.
---------------------------------------------------------------------------

    Finally we do not expect that the proposed amendments for proposals 
submitted by a representative would have a meaningful effect on 
efficiency, competition, and capital formation.

D. Reasonable Alternatives

1. Shareholder Ownership Thresholds
i. Alternative Ownership Thresholds
    We considered a number of alternative approaches to the ownership 
thresholds. First, we considered whether to simply increase the $2,000/
one-year threshold in the current requirement to a $50,000/one-year 
threshold without providing additional eligibility options. Using 
proponents' exact ownership information from the proxy statements and 
assuming no change in proponents' ability to aggregate their holdings 
to submit a joint proposal, such an increase would have resulted in the 
excludability of 96 proposals, or 65 percent of the proposals with 
exact proponents' ownership information to be considered at 2018 
shareholder meetings.\300\ The advantage of increasing only the dollar 
amount in the current threshold is that the rule would be easier to 
implement and monitor. The disadvantage of such an approach would be 
that shareholders would not have the flexibility to become eligible to 
submit shareholder proposals by either increasing their holdings or 
holding the shares of a company for a longer period of time as under 
the proposed approach.
---------------------------------------------------------------------------

    \300\ 65% = 97 (excludable proposals under a $50,000/one-year 
threshold)/150 (proposals with exact proponents' ownership 
information in proxy statements). For proposals that are submitted 
by more than one proponent, these estimates assume that the 
proposals would still be submitted if the aggregate ownership of the 
co-proponents met the alternative dollar ownership threshold. For 
proposals that are submitted by multiple proponents, some of which 
provide exact and others provide minimum holdings information, we 
assume that the ownership of the proponents with minimum holdings 
information is equal to the lowest end of the ownership range.
---------------------------------------------------------------------------

    Alternatively, we considered using a tiered approach, as proposed, 
but with different combinations of minimum dollar amounts and holding 
periods. For example, we considered $2,000 for five years, $15,000 for 
three years and $25,000 for one year or $2,000 for three years, $10,000 
for two years, and $50,000 for one year. We are unable to estimate the 
incremental effects of the former alternative (i.e., $2,000 for five 
years, $15,000 for three years, and $25,000 for one year) relative to 
the

[[Page 66507]]

effects of the proposed amendments discussed in Section IV.C.2.i above 
because we lack data on proponents' ownership duration. Assuming all 
proponents held the shares for only one year, the increase in the 
dollar ownership thresholds from $2,000 to $50,000 (i.e., third tier of 
the alternative ownership threshold) could result in the exclusion of 
97 proposals, or 65 percent of the proposals with exact proponents' 
ownership information related to 2018 shareholder meetings.\301\ On the 
other hand, assuming all proponents held the shares for at least three 
years, the proposed ownership thresholds would not result in a change 
in the number of excludable proposals relative to the current 
thresholds.
---------------------------------------------------------------------------

    \301\ See supra note 300.
---------------------------------------------------------------------------

    Different thresholds could result in the exclusion of more or fewer 
proposals, depending on the threshold. While we believe that the 
proposed tiers would appropriately balance the interests of 
shareholders who seek to use the company's proxy statement to advance 
their own proposals, on the one hand, with the interests of companies 
and other shareholders who bear the burdens associated with the 
inclusion of such proposals, on the other hand, we solicit comment as 
to whether any refinements of those thresholds would strike a better 
balance.
    We also considered whether to index the proposed ownership 
thresholds for inflation. The benefit of such an approach would be that 
thresholds would adjust over time without the need for additional 
rulemaking. The disadvantage of such an approach would be that 
compliance with the rule could be more cumbersome as companies and 
proponents would have to monitor periodically evolving ownership 
thresholds.
ii. Percent-of-Ownership Threshold
    We considered whether to propose an ownership requirement based 
solely on the percentage of shares owned. For example, we considered 
eliminating the dollar ownership threshold and retaining the one-
percent ownership threshold. Using proponents' exact ownership 
information from the proxy statements and assuming no change in 
proponents' ability to aggregate their holdings to submit a joint 
proposal, we estimate that using a one-percent ownership threshold and 
removing the $2,000/one-year threshold would have resulted in 149 
proposals, or 99 percent of the proposals to be considered in 2018 
shareholder meetings that provide exact proponents' ownership 
information, being excludable under the proposed amendments.\302\
---------------------------------------------------------------------------

    \302\ 99% = 149 (number of excludable proposals under a 1% 
threshold)/150 (proposals with exact proponents' ownership 
information in proxy statements). For proposals that are submitted 
by more than one proponent, these estimates assume that the 
proposals would still be submitted if the aggregate ownership of the 
co-proponents met the alternative percent-of-ownership threshold. 
For proposals that are submitted by multiple proponents, some of 
which provide exact and others provide minimum holdings information, 
we assume that the ownership of the proponents with minimum holdings 
information is equal to the lowest end of the ownership range.
---------------------------------------------------------------------------

    The advantage of a percentage-of-ownership threshold is that it 
would permit shareholders owning the same proportion of a larger 
company as of a smaller company to submit a proposal. The percentage-
of-ownership threshold, however, would be marginally harder to 
implement because of changes in the stock price of the company over 
time. We also believe that a percentage-of-ownership threshold of one 
percent would prevent the vast majority of shareholders from submitting 
proposals,\303\ which, in turn, could have a chilling effect on 
shareholder engagement. In addition, the types of investors that hold 
more than one percent of a company's shares are more likely to be able 
to communicate directly with management, and thus do not typically use 
shareholder proposals.\304\
---------------------------------------------------------------------------

    \303\ See supra note 302.
    \304\ See supra note 282.
---------------------------------------------------------------------------

2. Shareholder Resubmission Thresholds
i. Alternative Resubmission Thresholds
    We considered proposing different resubmission thresholds, 
including raising the thresholds to 5/10/15 percent, 6/15/30 percent, 
or 10/25/50 percent. All three alternatives threshold levels would 
increase the number of proposals eligible for exclusion relative to the 
baseline, with the first expected to have smaller effects relative to 
the proposed amendments and second and third expected to have larger 
effects relative to the proposed amendments. We estimate that 92 (6 
percent), 328 (23 percent), and 668 (46 percent) additional proposals 
that were resubmitted between calendar years 2011 and 2018 would have 
fallen below the 5/10/15 percent, 6/15/30 percent, and 10/25/50 percent 
thresholds, respectively. In addition, we are requesting comment on 
whether the rule should remove resubmission thresholds for the first 
two submissions and, instead, allow for exclusion if a matter fails to 
receive majority support by the third submission. Under this 
alternative, no proposal would be eligible for exclusion on its first 
two submissions, allowing shareholder proposals at least two years to 
gain traction. We estimate that 418 (29 percent) additional proposals 
that were resubmitted between calendar years 2011 and 2018 would have 
failed to garner majority support by third submission.\305\ We also are 
requesting comment on the appropriate cooling-off periods under this 
approach, such as three and five years.
---------------------------------------------------------------------------

    \305\ This estimate is an upper bound of the number of 
excludable proposals under this alternative because it would allow 
all proposals following first and second submissions to be 
resubmitted. We cannot identify all proposals that would have been 
resubmitted but were not because they were eligible for exclusion 
under the current resubmission thresholds for first and second 
submissions.
---------------------------------------------------------------------------

ii. Different Vote-Counting Methodologies
    We considered whether to propose changes to how votes are counted 
for purposes of applying the resubmission thresholds. For example, we 
considered whether votes by insiders should be excluded from the 
calculation of the fraction of votes that a proposal received. We also 
considered whether to apply a different vote-counting methodology for 
companies with dual-class voting structures. One commenter has 
highlighted how the presence of a subset of shareholders with special 
voting rights could make the voting threshold requirement difficult to 
satisfy.\306\ The advantage of applying different kind of vote-counting 
methodologies for votes by insiders and for companies with dual-class 
shares is that it would make it easier for shareholder proposals to 
meet the resubmission thresholds and thus potentially could mitigate 
management entrenchment for those firms.\307\ The disadvantage of such 
an approach is that companies and their shareholders would continue to 
incur costs associated with processing proposals that are less likely 
to garner majority support and be implemented by management.
---------------------------------------------------------------------------

    \306\ See letter in response to the Proxy Process Roundtable 
from City of New York Office of the Comptroller dated January 2, 
2019.
    \307\ See supra note 267.
---------------------------------------------------------------------------

iii. Exception to the Rule if Circumstances Change
    We considered whether to propose an exception to the proposed rule 
amendments that would allow an otherwise excludable proposal to be 
resubmitted if there were material developments that suggest a 
resubmitted proposal may garner significantly more votes than when it 
was previously voted

[[Page 66508]]

on. Several commenters pointed out the possibility of an unpopular 
proposal gaining popularity in subsequent years following changes in 
company circumstances or other market developments.\308\ We expect that 
such an exception would lower the number of proposals eligible for 
exclusion under the proposed amendments, but the magnitude of the 
decrease would depend on what types of developments qualify for the 
exception and how many companies experience these particular types of 
developments. We expect the additional costs of such an exception would 
include those associated with determining whether changes in 
circumstances qualify for the exception. On the other hand, 
shareholders may benefit from being able to submit proposals on matters 
that would otherwise be excludable under Rule 14a-8(i)(12) and may have 
gained popularity among shareholders following a material development 
at the company.
---------------------------------------------------------------------------

    \308\ See letters in response to the Proxy Process Roundtable 
from the Shareholder Rights Group dated December 4, 2018; Teachers 
Insurance and Annuity Association of America (TIAA) dated June 10, 
2019; City of New York Office of the Comptroller dated January 2, 
2019.
---------------------------------------------------------------------------

E. Request for Comment

    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed amendments 
and alternatives thereto, and whether the amendments, if adopted, would 
promote efficiency, competition, and capital formation. In addition, we 
request comments on our selection of data sources, empirical 
methodology, and the assumptions we have made throughout the analysis. 
Commenters are requested to provide empirical data, estimation 
methodologies, and other factual support for their views, in 
particular, on costs and benefits estimates. In addition, we request 
comment on the following:
    1. Are there any entities affected by the proposed rule amendments 
that are not discussed in the economic analysis? In which ways are 
those entities affected by the proposed amendments? Please provide an 
estimate of the number of any additional affected entities.
    2. Are there any costs or benefits of the proposed rule amendments 
that are not discussed in the economic analysis? If so, please describe 
the types of costs and benefits and provide a dollar estimate of these 
costs and benefits.
    3. What would be the effects of the proposed rule amendments, 
including any effects on efficiency, competition, and capital 
formation? Would the proposed rule amendments be beneficial or 
detrimental to proponents, companies, and the companies' shareholders, 
and why in each case?
    4. What is the dollar cost for companies to engage with proponents, 
process, and manage a shareholder proposal (including up to or after a 
vote on the proposal)? In particular, what is the dollar cost for 
companies to: (i) Review the proposal and address issues raised in the 
proposal; (ii) engage in discussion with the proponent; (iii) print and 
distribute proxy materials and tabulate votes on the proposal; (iv) 
communicate with proxy advisory firms and shareholders (e.g., proxy 
solicitation costs); (v) if they intend to exclude the proposal, file 
with the Commission a notice that they intend to exclude the proposal; 
and (vi) prepare a rebuttal to the proposal? Do these costs vary with 
the issue raised in the proposal? Do these costs vary with the type of 
shareholder-proponent (i.e., institutional versus retail investor)? Are 
these costs different for first-time submissions relative to 
resubmissions? Do these costs vary with the number of resubmissions? Do 
these costs vary with the number of proposals received by the company? 
Do these costs vary with company size? Do these costs differ in cases 
in which a no-action request is prepared and in other cases, such as 
where a proposal's exclusion is challenged in court? Do managers have 
discretion with respect to these costs?
    5. In response to a questionnaire the Commission made available in 
1997, some respondents indicated that costs associated with determining 
whether to include or exclude a shareholder proposal averaged 
approximately $37,000 (which figure may have included estimates for 
considering multiple proposals). The Commission also sought information 
about the average printing cost and 67 respondent companies reported 
that the average cost was approximately $50,000. How do these costs 
compare with costs today? Has ``notice and access'' or other 
technological advancements had an effect on the costs associated with 
disseminating proxy materials? If so, what are those effects?
    6. What are the differences in cost incurred by companies with 
respect to proposals for which a no-action request is prepared and 
submitted to the staff and those for which a no-action request is not 
prepared? What are the specific costs incurred?
    7. In general, how do costs differ for proposals that are submitted 
during shareholder meetings and not presented in the proxy and those 
that are presented in the proxy?
    8. What are the costs, if any, associated with shareholders' 
consideration and voting on a shareholder proposal? Do these costs 
differ depending on the shareholder proposal topic? Do these costs 
differ depending on whether the shareholder proposal is a first-time 
submission or a resubmission?
    9. How likely is it that market practices would change in response 
to the proposed rule amendments? What type of market practices that are 
not discussed in the economic analysis would change in response to the 
proposed rule amendments? For example, would larger shareholders become 
more likely to submit proposals in cases where smaller shareholders 
would no longer be eligible to submit proposals on their own? Are there 
frictions associated with this type of reallocation? To what extent 
would these changes in market practice or other effects mitigate the 
potential effects of the proposed amendments?
    10. To what extent would the proposed amendments affect incentives 
for shareholders to engage with companies prior to and/or following the 
submission of a shareholder proposal? What are the costs to 
shareholders and companies associated with such engagement? To what 
extent would the proposed amendments affect the outcome of such 
engagement? Would the requirement that the proponent provide a 
statement that he or she is willing to meet with the company after 
submission of the shareholder proposal promote more frequent resolution 
of the proposals outside the voting process? What would be the cost 
savings, if any, to proponents and companies associated with such 
resolutions? Do answers to the above questions differ when considering 
individual or institutional shareholder-proponents?
    11. Relatedly, would the proposed amendments affect shareholder 
engagement outside of the shareholder-proposal process? Would the 
possible reduction in the number of shareholder proposals allow company 
resources to be directed towards alternative engagement efforts? What 
are the costs associated with alternative types of shareholder 
engagement to companies and shareholders?
    12. What are the opportunity costs to companies and shareholders of 
shareholder proposal submissions? Please provide a dollar estimate per 
proposal for these opportunity costs. Do these opportunity costs vary 
with the type of proposal, the type of proponent, or the type of 
company? Please provide an estimate of the hours the board of directors 
and management spend to

[[Page 66509]]

review and process each shareholder proposal.
    13. Is the distribution of the dollar value and the duration of 
firm-specific holdings different for institutional and individual 
investors? Are there distributional differences when comparing the 
subsets of individual and institutional shareholders likely to submit 
shareholder proposals? Please provide any relevant data or summary 
statistics of the holdings of retail and institutional investors 
recently and over time.
    14. Does the majority of shareholders that submit a proposal 
through a representative already provide the documentation that would 
be mandated by the proposed rule amendments? To the extent that the 
practices of certain proponents are not consistent with the proposed 
amendments, would the costs to proponents to provide this additional 
documentation be minimal? Are there any costs and benefits of providing 
the additional disclosures that we haven't identified in the economic 
analysis? If so, please provide a dollar estimate for these costs and 
benefits. Would the proposed amendments related to proposals submitted 
by a representative have any effect on efficiency, competition, or 
capital formation?
    15. What is the relation, if any, between the level and duration of 
proponent's ownership and the likelihood of submitting shareholder 
proposals? What is the relationship, if any, between the level and 
duration of proponents' ownership and the likelihood of submitting 
shareholder proposals that are more likely to garner majority support 
and be implemented by management? Do answers to the above questions 
vary based on the shareholder type or proposal topic?
    16. What are the concerns, if any, associated with drawing 
inferences about the effects of the proposed amendments from analysis 
of data on proponents' ownership from proxy statements and proof-of-
ownership letters?
    17. To what extent are there additional costs to companies and 
shareholders associated with applying a three-tiered ownership 
threshold instead of a single-tier threshold in determining a 
shareholder's eligibility to submit shareholder proposals?
    18. We have observed instances of shareholder proposals going to a 
vote despite being eligible for exclusion under Rule 14a-8. What are 
the costs and benefits to companies of including such proposals in the 
proxy statement? To what extent may these practices change if proposed 
amendments are adopted?

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules and schedules that would be 
affected by the proposed amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\309\ We are submitting the proposed 
amendments to the Office of Management and Budget (``OMB'') for review 
in accordance with the PRA.\310\ The hours and costs associated with 
preparing, filing, and sending the schedules, including preparing 
documentation required by the shareholder-proposal process, constitute 
paperwork burdens imposed by the collection of information. An agency 
may not conduct or sponsor, and a person is not required to comply 
with, a collection of information unless it displays a currently valid 
OMB control number. Compliance with the information collection is 
mandatory. Responses to the information collection are not kept 
confidential and there is no mandatory retention period for the 
information disclosed. The title for the affected collection of 
information is: ``Regulation 14A (Commission Rules 14a-1 through 14a-21 
and Schedule 14A)'' (OMB Control No. 3235-0059).
---------------------------------------------------------------------------

    \309\ 44 U.S.C. 3501 et seq.
    \310\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    We adopted the existing regulations and schedule pursuant to the 
Exchange Act. The regulations and schedule set forth the disclosure and 
other requirements for proxy statements filed by issuers and other 
soliciting parties. A detailed description of the proposed amendments, 
including the need for the information and its proposed use, as well as 
a description of the likely respondents, can be found in Section II 
above, and a discussion of the expected economic effects of the 
proposed amendments can be found in Section IV above.

B. Summary of the Proposed Amendments' Effects on the Collections of 
Information

    The following table summarizes the estimated effects of the 
proposed amendments on the paperwork burdens associated with Regulation 
14A.

[[Page 66510]]

     
---------------------------------------------------------------------------

    \311\ See supra Section IV.C.2.i. We estimate that the decrease 
in the number of shareholder proposals could range from 0 to 56%, 
depending on shareholders' holding periods. For purposes of the PRA, 
we assume an estimated decrease of 28%.
    \312\ In response to the Proxy Process Roundtable, commenters 
provided several cost estimates associated with a company's receipt 
of a shareholder proposal. These estimates are $87,000 (see letters 
in response to the Proxy Process Roundtable from Blackrock, Inc. 
dated November 16, 2018; Society for Corporate Governance dated 
November 9, 2018); more than $100,000 (see letter in response to the 
Proxy Process Roundtable from Exxon Mobil Corporation dated July 26, 
2019); and approximately $150,000 (see letter in response to the 
Proxy Process Roundtable from the American Securities Association 
dated June 7, 2019). In addition, one observer estimated a cost of 
approximately $50,000 ``based on anecdotal discussions with [members 
of the Society for Corporate Governance].'' See Statement of Darla 
C. Stuckey, President and CEO, Society for Corporate Governance, 
Before the H. Comm. on Financial Services Subcomm. on Capital 
Markets and Government Sponsored Enterprises, Sep. 21, 2016. At an 
estimated hourly cost of $400 per hour, these estimated costs would 
correspond to the following estimated burden hours: 125 hours 
($50,000 / $400 = 125), 218 hours ($87,000 / $400 = 218), 250 hours 
($100,000 / $400 = 250), and 375 hours ($150,000 / $400 = 375).
    A July 2009 survey of Business Roundtable companies, in which 67 
companies responded, indicated that the average burden associated 
with preparing a no-action request related to a shareholder proposal 
is approximately 47 hours with associated costs of $47,784. The 
survey also indicated that the average burden for a company 
associated with printing and mailing a single shareholder proposal 
is 20 hours with associated costs of $18,982. See letter in response 
to Facilitating Shareholder Director Nominations, Release No. 34-
60089 (Jun. 10, 2009) [74 FR 29024 (Jun. 18, 2009)] from Business 
Roundtable dated August 17, 2009, available at https://www.sec.gov/comments/s7-10-09/s71009-267.pdf. Thus, based on the Business 
Roundtable's survey, the combined effect of these two aspects of 
processing a shareholder proposal was estimated at 67 hours with 
associated costs of $66,766.
    Informed by the range of estimates provided, we estimate that 
the burden hours for a company associated with considering and 
printing and mailing a shareholder proposal (not including burdens 
associated with the no-action process) would be 100 hours (80 hours 
associated with activities unrelated to printing and mailing, and 20 
hours associated with printing and mailing). In addition, we 
estimate that the burden hours associated with seeking no-action 
relief would be 50 hours.
    We further estimate that 40% of proposals are included in the 
proxy statement without seeking no-action relief, 16% are included 
after seeking no-action relief, 15% are excluded after seeking no-
action relief, and 29% are withdrawn. Thus, we estimate 107 burden 
hours associated with a company's receipt of a shareholder proposal, 
calculated as follows:

     PRA Table 1--Estimated Paperwork Burden Effects of the Proposed
                               Amendments
------------------------------------------------------------------------
             Proposed amendments                    Estimated effect
------------------------------------------------------------------------
Rule 14a-8(b)(1)(i):
     Revise the ownership              28% decrease in the
     requirements that shareholders must        number of shareholder
     satisfy to be eligible to submit           proposal
     proposals to be included in an issuer's    submissions,\311\
     Schedule 14A proxy statement to the        resulting in a reduction
     following levels:                          in the average burden
    [cir] >=$2K to <$15K for at least 3         per response of 5.08
     years;.                                    hours.\312\
        [cir] >=$15K to <$25K for at least 2
         years; or
        [cir] >=$25K for at least 1 year.
Rule 14a-8(b)(1)(iii):
     Require shareholders to provide   Increase in the average
     the company with a written statement       burden per response of
     that they are able to meet with the        0.04 hours.\313\
     company in person or via teleconference
     no less than 10 calendar days nor more
     than 30 calendar days after submission
     of the shareholder proposal, and to
     provide contact information as well as
     business days and specific times that
     they are available to discuss the
     proposal with the company.
Rule 14a-8(b)(1)(iv):
     Require shareholders to provide   Increase in the average
     certain written documentation to           burden per response of
     companies if the shareholder appoints a    0.01 hours.\314\
     representative to act on its behalf in
     submitting a proposal under the rule.
Rule 14a-8(b)(1)(v):
     Disallow aggregation of holdings  0.2% decrease in the
     for purposes of satisfying the ownership   number of shareholder
     requirements.                              proposal
                                                submissions,\315\
                                                resulting in a reduction
                                                in the average burden
                                                per response of 0.04
                                                hours.\316\
Rule 14a-8(c):
     Provide that shareholders and     2% decrease in the number
     other persons cannot submit, directly or   of shareholder proposal
     indirectly, more than one proposal for     submissions,\317\
     the same shareholders' meeting.            resulting in a reduction
                                                in the average burden
                                                per response of 0.36
                                                hours.\318\
Rule 14a-8(i)(12):
     Increase the prior vote           7% reduction in the
     thresholds for resubmission of a           number of shareholder
     proposal that addresses substantially      proposals by reducing
     the same subject matter as a proposal      the number of
     previously included in company's proxy     resubmissions,\319\
     materials within the preceding 5           resulting in a reduction
     calendar years if the most recent vote     in the average burden
     occurred within the preceding 3 calendar   per response of 1.26
     years to:                                  hours.\320\
    [cir] Less than 5% of the votes cast if
     previously voted on once;.
        [cir] less than 15% of the votes cast
         if previously voted on twice; or
        [cir] less than 25% of the votes cast
         if previously voted on three or more
         times.
    Permit exclusion of proposals that
     addresses substantially the same subject
     matter as proposals that have been
     previously voted on three or more times
     in the last five years, notwithstanding
     having received at least 25% of the
     votes cast on the most recent
     submission, if the most recently voted
     on proposal (i) received less than 50%
     of the votes cast and (ii) experienced a
     decline in shareholder support of 10% or
     more of the votes cast compared to the
     immediately preceding vote.
                                              --------------------------
        Total................................  Net decrease in the
                                                average burden per
                                                response of 6.69
                                                hours.\321\
------------------------------------------------------------------------


[[Page 66511]]

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed 
Amendments
---------------------------------------------------------------------------

     100 hours for 40% of proposals (i.e., proposals that 
are included in the proxy statement without seeking no-action 
relief);
     150 hours for 16% of proposals (i.e., proposals that 
are included in the proxy statement after seeking no-action relief);
     130 hours for 15% of proposals (i.e., proposals that 
are excluded from the proxy statement after seeking no-action 
relief); and
     80 hours for 29% of proposals (i.e., proposals that are 
withdrawn).
    The reduction in the average burden per response of 5.08 hours 
is calculated by multiplying the expected reduction in proposals 
(28%) by the average number of proposals received between 1997 and 
2018 (946) for a reduction in the total number of proposals of 265. 
This reduction in the number of proposals (265) is then multiplied 
by the estimated burden hours per proposal (107) for a total of 
28,355 burden hours. This total number of burden hours (28,355) is 
then divided by the total number of responses (5,586) for a 
reduction in the average burden per response of 5.08 hours.
    \313\ The increase in the average burden per response of 0.04 
hours is calculated by multiplying the expected amount of time to 
provide this information (20 minutes) by the expected average number 
of expected proposals after taking account of the total reduction in 
proposals submitted as a result of the proposed amendments (615) for 
a total increase of 205 hours. This increase in burden hours (205 
hours) is then divided by the total number of responses (5,586) for 
an increase in the average burden per response of 0.04 hours.
    \314\ The increase in the average burden per response of 0.01 
hours is calculated by multiplying the expected amount of time to 
provide this information (20 minutes) by the expected number of 
proposals submitted by a representative. We estimate that 
approximately 18% of proposals are submitted by a representative; 
thus, we multiply the average number of expected proposals after 
taking into account the reduction in proposals as a result of the 
proposed amendments (615) by 18% for a total of 111 proposals 
submitted by a representative. The number of proposals (111) is 
multiplied by the estimated amount of time to provide this 
information (20 minutes) for a total of 37 hours. This increase in 
burden hours (37 hours) is then divided by the total number of 
responses (5,586) for an increase in the average burden per response 
of 0.01 hours.
    \315\ See supra Section IV.C.2.i. We estimate that the decrease 
in the number of proposals could range from 0 to 0.4%. For purposes 
of the PRA, we assume an estimated decrease of 0.2%.
    \316\ The reduction in the average burden per response of 0.04 
hours is calculated by multiplying the expected reduction in 
proposals (0.2%) by the average number of proposals received between 
1997 and 2018 (946) for a reduction in the total number of proposals 
of 2. This reduction in the number of proposals (2) is then 
multiplied by the estimated burden hours per proposal (107) for a 
total of 214 burden hours. This total number of burden hours (214) 
is then divided by the total number of responses (5,586) for a 
reduction in the average burden per response of 0.04 hours.
    \317\ See supra Section IV.C.2.i.
    \318\ The reduction in the average burden per response of 0.36 
hours is calculated by multiplying the expected reduction in 
proposals (2%) by the average number of proposals received between 
1997 and 2018 (946) for a reduction in the total number of proposals 
of 19. This reduction in the number of proposals (19) is then 
multiplied by the estimated burden hours per proposal (107) for a 
total of 2,033 burden hours. This total number of burden hours 
(2,033) is then divided by the total number of responses (5,586) for 
a reduction in the average burden per response of 0.36 hours.
    \319\ See supra Section IV.C.2.iii, Table 9 for a discussion 
regarding the estimated decrease in resubmitted proposals. That 
discussion estimates that there would have been 269 additional 
excludable resubmitted proposals (212 attributable to the revised 
resubmission thresholds of 5%, 15%, and 25% and 57 attributable to 
the Momentum Requirement) between 2011 and 2018 out of a total of 
1,442 resubmitted proposals under the proposed amendments. A total 
of 3,620 proposals were included in proxy statements during that 
period. Thus, the estimated reduction in the number of shareholder 
proposals is estimated by dividing 269 by 3,620, which yields 7%.
    \320\ The reduction in the average burden per response of 1.26 
hours is calculated by multiplying the expected reduction in 
proposals (7%) by the average number of proposals received between 
1997 and 2018 (946) for a reduction in the total number of proposals 
of 66. This reduction in the number of proposals (66) is then 
multiplied by the estimated burden hours per proposal (107) for a 
total of 7,062 burden hours. This total number of burden hours 
(7,062) is then divided by the total number of responses (5,586) for 
a reduction in the average burden per response of 1.26 hours.
    \321\ (5.08 + 0.04 + 0.36 + 1.26)-(0.04 + 0.01) = 6.69 hours 
decrease in average burden per response.
---------------------------------------------------------------------------

    The paperwork burden estimate for Regulation 14A includes the 
burdens imposed by our rules that may be incurred by all parties 
involved in the proxy process leading up to and associated with the 
filing of a Schedule 14A. This would include both the time that a 
shareholder-proponent spends to prepare its proposals for inclusion in 
a company's proxy statement, as well as the time that the company 
spends to respond to such proposals. Our incremental and aggregate 
reductions in paperwork burden as a result of the proposed amendments 
represent the average burden for all respondents, including 
shareholder-proponents and large and small registrants. In deriving our 
estimates, we recognize that the burdens would likely vary among 
individual proponents and registrants based on a number of factors, 
including the propensity of a particular shareholder-proponent to 
submit proposals, or the number of shareholder proposals received by a 
particular company, which may be related to its line of business or 
industry or other factors.

[[Page 66512]]

    As shown in PRA Table 1, the burden estimates were calculated by 
estimating the number of parties expected to expend time, effort, and/
or financial resources to generate, maintain, retain, disclose or 
provide information required by the proposed amendments and then 
multiplying by the estimated amount of time, on average, each of these 
parties would devote in response to the proposed amendments. For 
purposes of the PRA, the burden is to be allocated between internal 
burden hours and outside professional costs. For Regulation 14A we 
estimate that 75% of the burden is carried by the company or the 
shareholder-proponent internally and that 25% of the burden of 
preparation is carried by outside professionals retained by the company 
or the shareholder-proponent at an average cost of $400 per hour.\322\
---------------------------------------------------------------------------

    \322\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several issuers, law firms, and other 
persons who regularly assist issuers in preparing and filing reports 
with the Commission.

           PRA Table 2--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                           Burden hour
 Number of estimated      reduction per      Reduction in burden   Reduction in internal hours   Reduction in professional    Reduction in professional
      responses             response         hours for responses          for responses             hours for responses          costs for responses
(A) \323\                           (B)                     (C) = (A) x (B)         (D) = (C) x 0.75             (E) = (C) x 0.25    (F) = (E) x $400
                                                        \324\
--------------------------------------------------------------------------------------------------------------------------------------------------------
            5,586                  6.69                37,370                        28,027                        9,343                   $3,737,200
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The following table summarizes the requested paperwork burden, 
including the estimated total reporting burdens and costs, under the 
proposed amendments.
---------------------------------------------------------------------------

    \323\ The number of estimated affected responses is based on the 
number of responses in the Commission's current OMB PRA filing 
inventory. The OMB PRA filing inventory represents a three-year 
average. We do not expect that the proposed amendments will 
materially change the number of responses in the current OMB PRA 
filing inventory.
    \324\ The estimated reductions in Columns (C), (D) and (E) are 
rounded to the nearest whole number.
    \325\ From Column (D) in PRA Table 2.
    \326\ From Column (F) in PRA Table 2.

                                          PRA Table 3--Requested Paperwork Burden Under the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 Current burden                                   Program change                                Requested change in burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
   Current                                         Number of     Reduction in     Reduction in
    annual        Current        Current cost       affected       internal       professional       Annual         Burden hours         Cost burden
  responses     burden hours        burden         responses        hours            costs          responses
(A)                    (B)                  (C)          (D)      (E) \325\          (F) \326\      (G) = (A)        (H) = (B)-(E)              (I) = (C)-(F)
--------------------------------------------------------------------------------------------------------------------------------------------------------
      5,586        551,101        $73,480,012          5,586         28,027         $3,737,200          5,586              523,074          $69,742,812
--------------------------------------------------------------------------------------------------------------------------------------------------------

Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
     Evaluate the accuracy and assumptions and estimates of the 
burden of the proposed collection of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the U.S. Securities 
and Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy to, Vanessa A. Countryman, 
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File No. S7-23-19. 
Requests for materials submitted to OMB by the Commission with regard 
to the collection of information should be in writing, refer to File 
No. S7-23-19 and be submitted to the U.S. Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this proposed rule. Consequently, a comment to OMB is best assured of 
having its full effect if the OMB receives it within 30 days of 
publication.

VI. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \327\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act, to consider the impact of those rules on 
small entities. The Commission has prepared this Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with Section 603 of the

[[Page 66513]]

RFA.\328\ This IRFA relates to proposed amendments to Rule 14a-8 of the 
Exchange Act.
---------------------------------------------------------------------------

    \327\ 5 U.S.C. 601 et seq.
    \328\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    Rule 14a-8 facilitates the proxy process for shareholders seeking 
to have proposals considered at a company's annual or special meeting; 
however, the burdens associated with this process are primarily borne 
by issuers. The proposed amendments are intended to balance 
shareholders' ability to submit proposals with the attendant burdens 
for companies and other shareholders associated with the inclusion of 
such proposals in a company's proxy statement. The reasons for, and 
objectives of, the proposed amendments are discussed in more detail in 
Sections I and II, above.

B. Legal Basis

    We are proposing amendments to the rules under the authority set 
forth in Sections 3(b), 14 and 23(a) of the Securities Exchange Act of 
1934, as amended.

C. Small Entities Subject to the Proposed Rules

    The proposed amendments would affect some small entities that are 
either: (i) Shareholder-proponents that submit Rule 14a-8 proposals, or 
(ii) issuers subject to the federal proxy rules that receive Rule 14a-8 
proposals. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization'' or ``small governmental jurisdiction.'' \329\ 
The definition of ``small entity'' does not include individuals. For 
purposes of the RFA, under our rules, an issuer of securities or a 
person, other than an investment company, is a ``small business'' or 
``small organization'' if it had total assets of $5 million or less on 
the last day of its most recent fiscal year.\330\ We estimate that 
there are approximately 881 issuers that are subject to the federal 
proxy rules, other than investment companies, that may be considered 
small entities. We are unable to estimate the number of potential 
shareholder-proponents that may be considered small entities; \331\ 
therefore, we request comment on the number of these small entities.
---------------------------------------------------------------------------

    \329\ 5 U.S.C. 601(6).
    \330\ 17 CFR 240.0-10(a).
    \331\ For the purposes of our Economic Analysis, we have 
estimated that there were 22,162,828 retail accounts that held 
shares of U.S. public companies during calendar year 2017. There 
were 170 unique proponents that submitted proposals that were 
included in a company's proxy statement as lead proponent or co-
proponent during calendar year 2018. See supra Section IV.B.2. Out 
of these 170 unique proponents, 38 were individuals and 132 were 
non-individuals. Thus, no more than 132 of these unique proponents 
would be considered small entities.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    As noted above, the primary purpose of the proposed amendments is 
to balance shareholders' ability to submit proposals with the attendant 
burdens for companies and other shareholders associated with the 
inclusion of such proposals. If adopted, the proposed amendments would 
likely reduce the number of proposals required to be included in the 
proxy statements of issuers subject to the federal proxy rules, 
including small entities. In turn, the proposed amendments would likely 
reduce the costs to these issuers of complying with Rule 14a-8. If 
adopted, the proposed amendments may reduce the number of proposals 
that shareholder-proponents that are small entities would be permitted 
to submit to issuers for inclusion in their proxy statements. In turn, 
these small entities may experience an increase in shareholder-
engagement costs to the extent these small entities elect to increase 
their investment to meet the eligibility criteria or pursue 
alternatives methods of engagement, such as conducting their own proxy 
solicitation. The proposed amendments that would require shareholder-
proponents to provide written documentation regarding their ability to 
meet with the issuer and relating to the appointment of a 
representative would slightly increase the compliance burden for 
shareholder-proponents, including those that are small entities.\332\ 
Compliance with the proposed amendments may require the use of 
professional skills, including legal skills. The proposed amendments 
are discussed in detail in Section II, above. We discuss the economic 
impact, including the estimated costs and benefits, of the proposed 
rule to all affected entities, including small entities, in Section IV 
and Section V, above.
---------------------------------------------------------------------------

    \332\ See supra Section V.B.
---------------------------------------------------------------------------

E. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that the proposed amendments would not duplicate, 
overlap or conflict with other federal rules.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed amendments, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    Rule 14a-8 generally does not impose different standards or 
requirements based on the size of the issuer or shareholder-proponent. 
We do not believe that establishing different compliance or reporting 
obligations in conjunction with the proposed amendments or exempting 
small entities from all or part of the requirements is necessary. We 
believe the proposed amendments are equally appropriate for 
shareholder-proponents of all sizes seeking to engage with issuers 
through the Rule 14a-8 process. While we do anticipate a moderate 
increase in burden for shareholder-proponents, we do not believe that 
imposing different standards or requirements based on the size of the 
shareholder-proponent will accomplish the purposes of the proposed 
amendments, and may result in additional costs associated with 
ascertaining whether a particular shareholder-proponent may avail 
itself of such different standards. For issuers, the proposed 
amendments would not impose any significant new compliance obligations. 
To the contrary, the proposed amendments would reduce the compliance 
costs of affected issuers, including small entities, by decreasing the 
number of shareholder proposals that may be submitted. For these 
reasons, we are not proposing differing compliance or reporting 
requirements or timetables for issuers that are small entities, or an 
exception for small entities. However, we seek comment on whether and 
how the proposed amendments could be modified to provide differing 
compliance or reporting requirements or timetables for small entities 
and whether such separate requirements would be appropriate.
    We believe that the proposed amendments do not need further 
clarification, consolidation or simplification for small entities, 
although we solicit comment on how the proposed amendments could be 
revised to reduce the burden on small entities.

[[Page 66514]]

    The proposed amendments generally use design standards rather than 
performance standards in order to promote uniform submission 
requirements for all shareholder-proponents. We solicit comment as to 
whether there are aspects of the proposed amendments for which 
performance standards would be appropriate.

G. Request for Comment

    We encourage the submission of comments with respect to any aspect 
of this IRFA. In particular, we request comments regarding:
     How the proposed rule and form amendments can achieve 
their objective while lowering the burden on small entities;
     The number of small entities, including shareholder-
proponents, that may be affected by the proposed amendments;
     The existence or nature of the potential impact of the 
proposed amendments on small entities discussed in the analysis; and
     How to quantify the impact of the proposed amendments.
    Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\333\ the Commission must advise OMB as to whether 
the proposed amendments constitute a ``major'' rule. Under SBREFA, a 
rule is considered ``major'' where, if adopted, it results or is likely 
to result in:
---------------------------------------------------------------------------

    \333\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or 
more (either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether the proposed amendments would be a 
``major rule'' for purposes of SBREFA. In particular, we request 
comment on the potential effect of the proposed amendments on the U.S. 
economy on an annual basis; any potential increase in costs or prices 
for consumers or individual industries; and any potential effect on 
competition, investment or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

VIII. Statutory Authority

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 3(b), 14 and 23(a) of the Exchange 
Act, as amended.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    In accordance with the foregoing, the Commission is proposing to 
amend title 17, chapter II of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec.  240.14a-8 as follows:
0
a. Revise paragraphs (b)(1) and (2);
0
b. Revise paragraph (c); and
0
c. Revise paragraph (i)(12).
    The revisions read as follows:


Sec.  240.14a-8   Shareholder proposals.

* * * * *
    (b) * * *
    (1) To be eligible to submit a proposal, you must satisfy the 
following requirements:
    (i) You must have continuously held:
    (A) At least $2,000 in market value of the company's securities 
entitled to vote on the proposal for at least three years; or
    (B) At least $15,000 in market value of the company's securities 
entitled to vote on the proposal for at least two years; or
    (C) At least $25,000 in market value of the company's securities 
entitled to vote on the proposal for at least one year; and
    (ii) You must provide the company with a written statement that you 
intend to continue to hold the requisite amount of securities, 
determined in accordance with Sec.  240.14a-8(b)(1)(i)(A) through (C), 
through the date of the shareholders' meeting for which the proposal is 
submitted; and
    (iii) You must provide the company with a written statement that 
you are able to meet with the company in person or via teleconference 
no less than 10 calendar days, nor more than 30 calendar days, after 
submission of the shareholder proposal. You must include contact 
information as well as business days and specific times that you are 
available to discuss the proposal with the company; and
    (iv) If you use a representative to submit a shareholder proposal 
and/or otherwise act on your behalf in connection with the shareholder 
proposal, you must provide the company with written documentation that:
    (A) Identifies the company to which the proposal is directed;
    (B) Identifies the annual or special meeting for which the proposal 
is submitted;
    (C) Identifies you as the proponent and identifies the person 
acting on your behalf as your representative;
    (D) Includes your statement authorizing the designated 
representative to submit the proposal and/or otherwise act on your 
behalf;
    (E) Identifies the specific proposal to be submitted;
    (F) Includes your statement supporting the proposal; and
    (G) Is signed and dated by you.
    (v) For purposes of paragraph (b)(1)(i)(A) through (C), you may not 
aggregate your holdings with those of another shareholder to meet the 
requisite amount of securities.
    (2) The following methods may be used to demonstrate eligibility to 
submit a proposal:
    (i) If you are the registered holder of your securities, which 
means that your name appears in the company's records as a shareholder, 
the company can verify your eligibility on its own, although you will 
still have to provide the company with a written statement that you 
intend to continue to hold the requisite amount of securities, 
determined in accordance with Sec.  240.14a-8(b)(1)(i)(A) through (C), 
through the date of the meeting of shareholders.
    (ii) If, like many shareholders, you are not a registered holder, 
the company likely does not know that you are a shareholder, or how 
many shares you own. In this case, at the time you submit your 
proposal, you must prove your

[[Page 66515]]

eligibility to the company in one of two ways:
    (A) The first way is to submit to the company a written statement 
from the ``record'' holder of your securities (usually a broker or 
bank) verifying that, at the time you submitted your proposal, you 
continuously held at least $2,000, $15,000, or $25,000 in market value 
of the company's securities entitled to vote on the proposal for at 
least three years, two years, or one year, respectively. You must also 
include your own written statement that you intend to continue to hold 
the requisite amount of securities, determined in accordance with Sec.  
240.14a-8(b)(1)(i)(A) through (C), through the date of the meeting of 
shareholders; or
    (B) The second way to prove ownership applies only if you were 
required to file, and filed, a Schedule 13D (Sec.  240.13d-101), 
Schedule 13G (Sec.  240.13d-102), Form 3 (Sec.  249.103 of this 
chapter), Form 4 (Sec.  249.104 of this chapter), and/or Form 5 (Sec.  
249.105 of this chapter), or amendments to those documents or updated 
forms, demonstrating that you meet at least one of the share ownership 
requirements under Sec.  240.14a-8(b)(1)(i)(A) through (C). If you have 
filed one or more of these documents with the SEC, you may demonstrate 
your eligibility to submit a proposal by submitting to the company:
    (1) A copy of the schedule(s) and/or form(s), and any subsequent 
amendments reporting a change in your ownership level;
    (2) Your written statement that you continuously held at least 
$2,000, $15,000, or $25,000 in market value of the company's securities 
entitled to vote for at least three years, two years, or one year, 
respectively; and
    (3) Your written statement that you intend to continue to hold the 
requisite amount of securities, determined in accordance with Sec.  
240.14a-8(b)(1)(i)(A) through (C), through the date of the company's 
annual or special meeting.
    (c) Question 3: How many proposals may I submit? Each person may 
submit no more than one proposal, directly or indirectly, to a company 
for a particular shareholders' meeting. A person may not rely on the 
securities holdings of another person for the purpose of meeting the 
eligibility requirements and submitting multiple proposals for a 
particular shareholders' meeting.
* * * * *
    (i) * * *
    (12)(i) Resubmissions. If the proposal addresses substantially the 
same subject matter as a proposal, or proposals, previously included in 
the company's proxy materials within the preceding five calendar years 
if the most recent vote occurred within the preceding three calendar 
years and the most recent vote was:
    (A) Less than 5 percent of the votes cast if previously voted on 
once;
    (B) Less than 15 percent of the votes cast if previously voted on 
twice; or
    (C) Less than 25 percent of the votes cast if previously voted on 
three or more times.
    (ii) A proposal that is not excludable under Sec.  240.14a-
8(i)(12)(i)(C) may nevertheless be omitted if it deals with 
substantially the same subject matter as proposals previously voted on 
by shareholders three or more times in the preceding five calendar 
years if, at the time of the most recent shareholder vote, the 
proposal:
    (A) Received less than 50 percent of the votes cast; and
    (B) The percentage of votes cast declined by 10 percent or more 
compared to the immediately preceding shareholder vote on substantially 
the same subject matter.
* * * * *

    By the Commission.

    Dated: November 5, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-24476 Filed 12-3-19; 8:45 am]
 BILLING CODE 8011-01-P

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